Qantas, China Eastern to review Jetstar Hong Kong after ruling

BEIJING (Bloomberg) - Qantas Airways Ltd. and its partners in the Jetstar Hong Kong budget airline will review the venture after authorities in the city rejected its application for an operating license.

Qantas, billionaire Stanley Ho's Shun Tak Holdings Ltd. and state-controlled China Eastern Airlines Corp. will examine the venture, the Sydney-based carrier said in a statement on its website. Hong Kong's Air Transport Licensing Authority ruled Thursday that the airline didn't comply with legal requirements to have its principal place of business in the city.

The ruling, more than two years after Jetstar Hong Kong first asked for a license, is a boost for Cathay Pacific Airways Ltd., a full-service airline that had opposed Jetstar's entry into its home market. Cathay controls about half of Hong Kong's air traffic, and Asia's biggest international carrier is seeking to defend that dominance as China's economic growth slows.

"This is a significant moral victory for Cathay," said Timothy Ross, Singapore-based head of Asia Pacific transport research at Credit Suisse Group AG. "Had Jetstar prevailed, it could have been seen as a backdoor means for other carriers to start a hub in Hong Kong."

According to Article 134 of Hong Kong's Basic Law, the local government can issue licenses to airlines that are incorporated in the city and use it as their principal place of business.

"There is no dispute that the day-to-day management would be conducted in Hong Kong and managed" in the city by Jetstar Hong Kong's CEO, but that's not enough to meet the criteria for principle place of business, the licensing authority said in its ruling.

The low-cost carrier was formed in 2012 as a joint venture between Australia's Qantas and Shanghai-based China Eastern. Shun Tak joined later as a local partner and has 51 percent of voting rights, with the three parties holding equal economic stakes. Seventy per cent of the board is from Hong Kong, according to the Qantas statement.

"The message from this decision is that Hong Kong appears closed to fresh aviation investment even when it is majority locally owned and controlled," Qantas chief executive officer Alan Joyce said in a statement. "Shutting the door to new competition can only serve the vested interests already installed in that market."

Qantas lost A$50 million on its investments in Jetstar Hong Kong and Jetstar Japan in the year ended June 2013 and a further A$70 million in the year ended June 2014, the company said in its annual results last year. It didn't break down how much of the losses were attributed to each unit.

The carrying value of the Jetstar Hong Kong investment was A$10 million (S$51.91 million) as of Dec. 31, 2014, Qantas said today.

The ruling "is the right decision for Hong Kong," James Tong, Cathay's director for corporate affairs, said in a statement Thursday night. The decision "ensures that important Hong Kong economic assets, its air traffic rights, are used for the benefit of the people and the economy of Hong Kong."

Jetstar Hong Kong chief executive Edward Lau said in a statement Thursday that the airline is "extremely disappointed" with the decision.