(a) the services Hong Kong to Peking and Shanghai
are not good. More capacity is needed. Following the standard practice with air services agreements, airlines at both ends of the route should have the chance to participate in any increase in capacity. Competition is also needed to improve the quality of the service (c.f. the results of CPA and BCal joining BA on the Hong Kong-London route);
(b) giving notice of termination of the CMU is pro-
cedurally the most appropriate way to attempt to bring CAAC to the negotiations in a more amenable mood;
(c) the 12 months period of notice of termination
should provide adequate time for the consultations, with the present arrangements for services to China continuing meanwhile;
(d) in the Peking Embassy's view, weakness in this area could have consequences in other more im- portant areas;
(e) the Hong Kong routes create substantial earn-
ings (air tickets at least $180 million with hotels and tourist receipts in addition) for China largely in foreign currencies (there is little traffic originating in China). Loss of tourist earnings may set provincial interests against CAAC. Taken together, these factors make it unlikely that CAAC will wish to see the services terminated. In other words, the con- sultations have some hope of success.
The arguments against are:
(a) because of the nature of the Hong Kong-China
relationship, the normal air services conven-- tions do not necessarily apply;
(b) if negotiations on a new RR CMU fail or if the
CAAC declines to negotiate:
either (i)
or
(ii)
Hong Kong could be left without any regional air services to or from China;
CAAC might attempt to maintain flights without authorisation.
In either event, there could be a serious con- frontation of one kind or another;
SECRET