TNAG-0864-FCO40-1074-Involvement-of-Hong-Kong-in-air-services-agreements-1980 — Page 32

149.

Traffic forecasting is not an exact science and the Authority normally accepts an applicant's own estimates within such fairly broad limits of No doubt credibility as the evidence and past experience will sustain. if the worst were to happen, BA's forecasts of Cathay's operating ratio might well be correct. However, the Authority sees no reason to believe that the most pessimistic assumption will prove to be correct and indeed sees no reason not to accept Cathay's traffic forecast as it was put forward. BA's knowledge of the route does however give weight to the view that Cathay's estimates of revenue and profitability may be too optimistic. Nonetheless the Authority is ready to accept that Cathay, an experienced and adaptable operator, should be able to serve the route profitably, though perhaps not reaching a sufficient level of profitability as quickly as it might hope. The Authority has however also to take account of the quality of the service proposed and in particular the fact that the 747 is by no means the best aircraft with which to start a second service on the route at the present stage of its development because its size is inimical to the rapid build-up of frequency to which the logic of the Hong Kong case points and which no doubt the consumers too are anxious to see. Demand is not at present sufficient to justify two full daily services but there is an urgent need to provide effective competition for BA and this can best be provided by an operator able and willing to offer as near as possible a daily competing flight. The Authority must therefore decide between a proposal which offers improved frequency against one which offers lower cost per seat kilometre.

150. BCal proposed to operate with DC10 aircraft, again with a wide fare range.

BCal would also prefer to be the only operator on the route, other than BA, but they recognised the cliams of Cathay as a Hong Kong based operator and

BCal believed were willing therefore to accept three carriers on the route. that if they alone were licensed to compete with BA, they would achieve an operating ratio of 115 by year three on the basis of seven DC10 services a week. BA again argued that BCal's traffic forecasts and revenue calculations were optimistic. The Authority recognises that BCal's traffic forecasts are marginally more optimistic than Cathay's, but not to an extent that exceeds credibility, and believes that BA's more pessimistic forecasts are less likely to be correct. So far as the revenue assumptions are concerned, BA's experience on the route must once again add weight to its criticisms but, all in all, the Authority believes that BCal's proposals, based on the assumption that it would be the only licensed carrier on the route apart from BA, are sufficiently likely to be viable to enable the Authority to grant BCal a licence.

151. The Authority has noted BA's estimate of the losses it would suffer if BCal

BA have or Cathay or both of them were licensed to operate on the route. accepted, and the evidence before the Authority makes it inevitable, that at

BA did not claim to have a right least one other carrier should be licensed.

to continue as the monopoly carrier on the route and, in view of the criticism of its present service, such a claim could not in any event have been sustained. The more effective the competition, the greater the loss BA will suffer, but if the Authority is to choose only one competitor it must choose the one which will serve the public best.

152. The evidence of BA, BCal and Cathay was that the route would not support three

carriers, although BCal were willing to live with the presence of two other The Authority agrees with carriers if this were decided for wider reasons. the evidence. Since there is no foreign competition on the route, the Authority has considered whether it should experiment by licensing both BCal and Cathay and leaving them, together with BA, to tailor their capacity to experienced demand. However, there must be a possibility that if the Authority were to choose this course, excess capacity would be provided from the outset, the regime would be unstable and one or two carriers would pull off the route. Given the importance of this route to Hong Kong, the Authority does not feel able to take this risk. It must be in the interests of Hong Kong that the future regime should be sufficiently stable to secure for it an adequate and reliable service.

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