TNAG-1434-FCO40-1917-Hong-Kong-leading-personality-Sir-Yue-Kong-Pao--businessman-1986 — Page 246

Dear Charles,

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CONFIDENTIAL

711

Atk

Foreign and Commonwealth Officerched

London SW1A 2AH

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4.06571,

HKK 184/9

5 November 1985

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Letter from Sir Y K Pao to the Prime Minister about

Dragon Airlines

I attach a draft reply from the Prime Minister to Sir Y K Pao's message on Dragon Airlines as requested in your letter of 25 October. It is agreed with Hong Kong, Peking and the Department of Transport.

Dragonair was incorporated in Hong Kong in September 1984 following the conclusion of the Sino-British Joint Declaration. Its origins are shrouded in mystery but it appears that up to now it has been substantially owned and controlled by Chinese interests. It has therefore not hitherto met the requirement for designation to operate international scheduled services (resulting from most of our bilateral air services agreements) that it should be substantially owned and effectively controlled by HMG or by British (including Hong Kong) nationals. Sir Y K Pao appears to have been invited to take a 30% shareholding in Dragonair so that the airline can meet this requirement. It is not however yet clear whether the new arrangements will achieve this objective.

It has applied to the Hong Kong Air Transport Licensing Authority (ATLA) to operate scheduled services to 10 points in China. This application has been contested by Cathay Pacific Airways and must go to a public hearing, which will take place on 2 December. If ATLA decides to issue Dragonair with a licence to operate such scheduled services, the Hong Kong Government in consultation with HMG will have to decide whether and if so how we should seek to obtain Chinese agreement for the airline to operate such services.

Dragonair clearly has powerful backers in Peking, and we believe that disagreement between them and the Chinese airline CAAC, which appears to favour Cathay Pacific being the sole Hong Kong Airline to operate regional routes to China, may have contributed to the failure of the first round We shall of our consultations with the Chinese in September. be pressing Cathay's interests in serving: Beijing and Shanghai again during the second round of talks which is due to take place from 13-15 November but it seems unlikely that at that stage we shall be able to persuade the Chinese to allow any Hong Kong-based airline (whether Cathay Dragonair) to serve other Chinese cities.

CONFIDENTIAL

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