TNAG-0938-FCO40-1157-Visit-of-John-Nott--Secretary-of-State-for-Trade--to-Hong-Ko-1980 — Page 72

BRIEF 9

BRIEF FOR MINISTER FOR TRADE'S VISIT TO HONG KONG

30 AUGUST 5 SEPTEMBER 1980

UK/PRC AIR SERVICES

BACKGROUND

1 After negotiations lasting ten weeks, UK and Chinese officials initialled an Air Services Agreement (ASA) in July 1979. They also signed two confidential memoranda (CMUs) setting out the arrangements for services between London and Peking and between Hong Kong and certain Chinese cities. The Agreement was signed by Ministers during Premier Hua's visit to the UK in November 1979.

2 Since signature, BA have been engaged in further protracted negotiations with the Chinese airline, CAAC. The main problems were the requirement for CAAC to operate to Gatwick, and the Chinese anxiety about the economics of their projected service to London. Chinese Ministers had accepted that CAAC would have to operate to Gatwick, before the ASA was signed. CAAC nevertheless showed continued opposition, mainly because they saw a loss of prestige in not being able to use Heathrow. After strong diplomatic pressure, they eventually accepted the inevitable but tried to exact a further commercial price from BA. The airlines finally reached a commercial agreement in early August, which allows each to operate one service a week initially instead of the two each provided for in the CMU.

BA's first service will be on 5 November. BA will fly via Hong Kong but can only pick up in Hong Kong those passengers whom they carried there on an earlier Peking service and who have made a stopover there. CAAC will make a one-stop flight via Frankfurt. Under the terms of the trunk route CMU, the start of the trunk route service will enable CAAC to commence a service between Peking and Hong Kong.

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3 The regional CMU provides for CAAC to operate services between Hong Kong and five PRC cities, other than Peking and including Shanghai. A Hong Kong-based airline may fly to Shanghai. It specifies, however, that this airline may not be one which operates between Hong Kong and London. After reaching agreement with CAAC, CPA started services to Shanghai on 21 June, operating twice a week to CAAC's six services. CPA commenced their Hong Kong-London service on 16 July and before then we designated their subsidiary Hong Kong Airways to operate the Shanghai service instead of them. Although we claimed that this was permissible under the CMU, it had not been finally resolved in the 1979 ASA negotiations and the Chinese refused to accept the designation. Both CPA and CAAC stopped the Shanghai service on 16 August. The Chinese have now suggested new negotiations in which they would be prepared to agree to CPA operating a Shanghai- Hong Kong-London service, in return for considerable additional concessions. Neither we nor the Hong Kong Government see much advantage in these proposals. We have however told the Chinese that we would be willing to explore them in discussions, but only after implementation of the existing agreement. We proposed a reconstituted Hong Kong Airways without a CPA controlling interest as the UK's designated airline for the Hong Kong-Shanghai service, but leasing CPA aircraft. e await the Chinese reply. Meanwhile, we have refused a Chinese application for services between Hong Kong and three Chinese cities, but allow CAAC to continue Canton-Hong Kong service.

Civil Aviation International Relations Division, Department of Trade, 28 August 1980