Tuesday, June 30, 2015
Last week, the Hong Kong Air Transport Licensing Authority (ALTA) finally issued its decision rejecting Jetstar Hong Kong Airways Limited's (JHK) application for license to operate scheduled air services. This is a setback for Qantas which was attempting to add a Hong Kong-based LCC to its Jetstar Airways Group which includes subsidiaries in Australia, Vietnam, Singapore, and Japan. More broadly, the decision runs contrary to that airline groups business model that has become popular in Southeast Asia over the past decade, by which airlines such as Jetstar, AirAsia, and others have operated foreign subsidiaries through the use of local shareholders to satisfy regulatory requirements for airlines to be owned and controlled by citizens of the licensing State. While this model has largely been successful in appeasing regulators, its legality has been questioned and occasionally used by some countries as an excuse for denial of the necessary regulatory permission. Often these denials are believed to have protectionist motives and many believe that ALTA was acting to protect Cathay Pacific in this case. Even so, most prior refusals have lacked any formal administrative record to scrutinize so ALTA's issuance of a written decision in this case is at a minimum highly beneficial to the development of law in this area.
While Hong Kong lacks specific requirements about ownership and control, it has a similar requirement that airlines have their principal place of business in Hong Kong to receive an operating license from the ALTA. Principal place of business had never previously been defined in Hong Kong, so the ALTA decision cited to a handful of English and U.S. cases and adopted from those decisions the view that day-to-day operational control isn’t decisive with regard to principal place of business. Jetstar Hong Kong’s majority shareholder (in voting rights), CEO, and business operations are all located in Hong Kong, but certain decisions can’t be made without input from the two important shareholders in Australia (Qantas) and China (China Eastern). ALTA appeared especially concerned about the external influence on Jetstar Hong Kong’s route network and pricing, but other examples include important personnel actions such as appointing board members and hiring and dismissing the CEO. From the decision, it doesn’t appear that ALTA would approve any type of franchise or subsidiary arrangement as there was a lot of concern that Jetstar Hong Kong could not possibly operate independently as tied as it was to the overall Jetstar brand.
ALTA chose not to rely on ICAO guidelines in determining the principal place of business, which is as follows: "Evidence of principal place of business includes: the airline is established and incorporated in the territory of the designating Party in accordance with relevant national laws and regulations, has substantial amount of its operations and capital investment in physical facilities in the designating Party, pays income tax and registers its aircraft there, and employs a significant number of nationals in managerial, technical and operational positions." ALTA correctly observed that the ICAO definition was intended for designating and authorizing airlines to serve international routes, which is a distinct process from receiving an operational license from a national aviation authority. But ALTA never explains why Hong Kong’s reasons for adopting a principal place of business test for licensing would be any different than the reasons for having such a test for authorizing or designating carriers to serve foreign routes, which make it difficult to understand if the factors ALTA has chosen to apply successfully advance the objectives of the
principal place of business requirement.
In addition, it isn't clear that Jetstar Hong Kong has a principal place of business under the test ALTA has devised. Neither the Australian or Chinese shareholders appear to have independent enough control from each other or Hong Kong to qualify. ALTA is clearly aware of this criticism and asserts that it doesn’t need to determine where the principal place of business exists, just whether it is in Hong Kong. But more consideration should probably have been given to the possibility that while Hong Kong may not satisfy all prongs of the test, relative to any other location it is the most principal place of business.
Ultimately, the decision is a defeat for those pushing against ownership and control restrictions, unless more of these results can convince affected parties that the proper response is to seek repeal of these regulations, as opposed to relying on creative corporate arrangements to work around them.