TNAG-0963-FCO40-1182-Air-services-between-China--Hong-Kong-and-the-UK-1980 — Page 21

CONFIDENTIAL

P.A.

U

Mr Willy (14.8

shared

Sir E Youde

184/2

HKKI

RECEIVED IN REGISTRY NO. 51ked X.

15 AUG 1980

SHANGHA fo RVF

INDEX

BEGISTRY Action Taken

A

Starghen)

HONG KONG

You asked about the current problem over Hong Kong Shanghai Air Services.

1.

2.

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When the Air Services Agreement was negotiated a year ago, one of the main points of contention was the Chinese insistence that the Hong Kong based airline we designated to operate between Hong Kong and Shanghai should not also operate between Hong Kong and London. The Chinese considered that this would in effect allow a British airline to provide a direct service between Shanghai and London which the Chinese airline CAAC could not match.

They also apparently feared that acceptance of UK/China services by a second British airline would weaken their negotiating hand with the Americans who could then claim there was no objection in principle to services to China by a number of US airlines. Although at the time of the negotiations CPA had no licence to operate between Hong Kong and London we argued strongly that it was not for one side to dictate to the other which airline could be designated on a particular route. We also gave assurances that we would not allow an airline to operate a through service from London to Shanghai. This was to no avail and in the end the point was conceded to the Chinese in the Confidential Memorandum of Understanding on the regional routes. We did however resist the Chinese proposal that a subsidiary of an airline operating between Hong Kong and London should also be banned from the Hong Kong/route, and there is nothing to this effect in the CMU.

3.

CPA were duly designated as the British airline in the Hong Kong Shanghai route. Because of the time taken by CAAC to get down to talks about practical details the two airlines did not however start operating the route until late June by which time CPA had won their appeal for a licence on the Hong Kong London route which planned to start operating on 15 July. We accepted that this meant that CPA could not continue on the Shanghai route after that date and proposed to the Chinese that we should instead designate CPA's wholly owned subsidiary, Hong Kong Airways (which has not operated for some time) which would wet-lease aircraft from CPA. The Chinese however maintained that a subsidiary was not acceptable and rejected our claim that they had in effect agreed to this solution by not insisting on spelling out their position on subsidiaries in the CMU. To allow time for further discussions they did however agree that CPA could continue on the route for a further month ie until 15 August.

4.

To overcome Chinese doubts we offered assurances that CPA would not sell through tickets from London to Shanghai. (At the Shanghai end, CAAC act as CPA's agent and can therefore easily control ticket sales). We also offered to change the ownership of Hong Kong Airways (HKA) so that it was no longer a subsidiary of CPA but was separately owned by the present shareholders in CPA. The Chinese are still considering their position but if they nevertheless reject our proposals the final concession we can offer is to change the name of the airline. Whatever the airline is called it would still have to wet lease CPA aircraft. It is just not practical in economic terms to contemplate the establishment of a new airline with

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