hand and East and West Australia on the other. The Hong Kong Government and CPA need time to examine the implications in greater depth. Their initial reaction when brought into the discussions with the Australians was as follows: they supported the aim of achieving cheaper fares, which would have the effect of increasing tourist revenue in Hong Kong. They thought the service to East Australia would probably not be much affected but the West Australia service would become unviable, unless the Australians agreed to intermediate traffic stops (with or without fifth freedom rights). This seemed unlikely. Hong Kong were especially concerned at the possibility of other countries, especially Japan, following the Australian precedent, thus jeopardising the carriage of the considerable intermediate traffic which (One third is in Hong Kong hands between Taiwan and Japan. of CPA's total earnings comes from intermediate traffic such as this.) The UK has appreciable leverage with Japan, however, on the UK-Japan trunk routes and we could probably protect Hong Kong's posiition, as we have done for the last four years. Nevertheless, until the Hong Kong Government and CFA have completed their examination, it is not possible to give the Australians a definitive answer in respect of the Australia/HK routes.
Alternatives to Australian Proposal
9 In theory these could be:
(a) the status quo
(b) one of the options in paragraph 3 above
(c) the current proposal for the trunk route, but with the
Australians doing a deal with (say) the Dutch, to bypass British objections
(d) some modification of the current proposal to make it more
palatable to Singapore and others.
ciple
10 The-Australians took the line that (a) would not permit low fares which were important to them for domestic political reasons and that (d) was impossible because they had researched exhaustively for a soft option and come up with none. They hinted that if HMG refused a commitment in prin- ciple to the present proposal, they would have to turn to (b) or (c). Neither of the options at (b) above would be satisfactory to us, both have serious deficiencies and it is doubtful if the Australians would be attracted to either. (c) above could be introduced without our concurrence and would inevitably lead to a serious deterioration in our air services relations with Australia. It would be seriously detrimental to BA's position. It is most unlikely, however, that the Australians would go to such lengths.