Hong Kong airlines vie for the China trade

With air traffic into China growing rapidly, Hong Kong has become the scene of a contentious battle among airlines eager to offer services to Peking, Shanghai, and other mainland cities. Three carriers -- two of them newly formed -- now have route applications pending with civil aviation authorities here and in China. A fourth is preparing to join them.

Only one, Cathay Pacific Airways, has much to lose. Although it is a subsidiary of London-based John Swire & Sons, Cathay has long been recognized as Hong Kong's unofficial flag carrier; it has operated without local competition since it was founded 39 years ago.

That is probably about to change. Last month a newly incorporated local carrier, Hong Kong Dragon Airlines, or Dragonair, received its operating license and began flying unscheduled charter flights to resorts in Southeast Asia. More significantly, it has applied to offer scheduled service between Hong Kong and eight Chinese cities.

Immediately after Dragonair's maiden flight, a more ambitious route-expansion program was announced by British Caledonian, a privately operated airline that has grown rapidly in the European and transatlantic markets. Without warning in late July, Caledonian Far East Airways, a new subsidiary of the London-based carrier, applied for a local operating license and proposed scheduled flights to 18 Asian destinations -- six on the mainland.

British Caledonian's only experience in Asia is its five-year-old service between Hong Kong and London's Gatwick Airport.

A fourth competitor, Oriental Pearl Airways, has yet to acquire its first aircraft. Industry executives say the venture is essentially a speculative exercise -- to be sold off once it is licensed and competition has driven up its value as an authorized carrier.

Cathay, which has long sought to expand its mainland service, maintained a discreet silence until recently. But in response to the Caledonian Far East announcement, it termed the proposed route plan ``ill-conceived.''

Caledonian Far East has countered that its medium-capacity aircraft are well suited for the short flights it has proposed -- many of them to secondary cities such as Pusan, South Korea; Nagoya, Japan; and Hangzhou in China.

Most of Cathay's fleet, by contrast, consists of jumbo jets and other wide-bodied aircraft, reflecting the carrier's place as a long-haul international airline. Last year Cathay earned $130 million before taxes, a gain of 44 percent, on revenues of $904 mmillion.

Last week, Hong Kong's Civil Aviation Department rejected Dragonair's request to begin flying charter flights to Peking and Shanghai. The decision was apparently related to aviation talks between Britain and China. Next month, a quasi-governmental panel here will review Dragonair's application to begin scheduled flights to the mainland. Both Cathay and Caledonian Far East are contesting the application.

Dragonair's owner, the HongKong Macau International Investment Company, was founded by a group of local executives a year ago, when negotiations between Britain and China on Hong Kong's future had damaged local morale. The company was to make investments demonstrating confidence in Hong Kong after 1997, when China is to reassert sovereignty.

Although it now owns only one aircraft, Dragonair has a distinct advantage over its rivals: Some 40 percent of its shares are controlled, directly or indirectly, by state-owned mainland enterprises, and Chinese civil aviation authorities are said to favor its operations.