China Aerospace Update

On 21 March, a TransAsia Airways Airbus A321 struck a construction vehicle on landing at Tainan Airport. The A321 suffered damage to its left main landing gear and a fuselage and 3 of the 169 passengers on board were injured. The Taiwan Aviation Safety Council is jointly investigating the accident with the airforce because the airport is a military airfield under military air traffic control. French authorities, already assisting with an investigation into the December 2002 TransAsia A372 freighter accident, are also acting as lead certificating authority representatives in the A321 investigation.

The Hong Kong Civil Aviation Department is investigating a turbulence incident involving a Dragonair Airbus A330 aircraft inbound from Kota Kinabalu, Malaysia. The incident took place on the 18th July while the aircraft was cruising at an altitude of 41,000 feet. Three passengers and six cabin crew members needed medical assistance.

The Airport Council International (ACI) is relocating its Pacific Regional Office to Hong Kong from Vancouver. The Association’s Pacific Branch represents 168 airports and 36 airports–related businesses in North and Southeast Asia, Australia, New Zealand, the South Pacific and the West Coast of North America.

The Airport Authority of Hong Kong has reported a more than 100% increase in profits for the year ending 31 March 2002. The net profit amounted to HK$502 million (US$64 million) for the financial year, up from HK$236 million the year earlier. Revenue increased to HK$5.4 billion from HK$5.3 billion, while operating costs were down slightly to HK$4.6 billion. The gains were due to improvements in staff productivity, low interest rates and reduced debts.

China is stepping up the pace of restructuring of its civil aviation sector this year by transferring the management rights of 93 airports to provincial governments. The management transfer will involve 40 billion yuan (US$4.82 billion with 1 US Dollar = 8.29 Chinese Yuan Renminbi (CNY) in assets and 50,000 employees. However, Beijing Capital Airport and airports in the Tibet Autonomous Region are excluded. The CAAC has already transferred its management rights in airports in central Hunan Province and western Qinghai Province. Most of China’s civil airports are running at a loss. In June, the State Auditing Office disclosed that nine of the mainland’s 12 major airports were operating at a loss. Hainan Airlines Group (HNA), China’s fourth largest airline is to purchase Sanya Phoenix International Airport in Hainan Province. Sanya International Airport is one of two major civil aviation airports in the Chinese island province. Haikou Meilan Airport, which was the first domestic airport to be listed in Hong Kong, is also controlled by HNA. HNA has set up a strategic partnership with Denmark-based Copenhagen Airports Corporation to improve management in line with international practices for domestic airports. Reports have suggested that HNA is also negotiating to purchase two airports on the mainland including one in North China’s Shanxi Province and another in Northwest China’s Xinjiang Uygur Autonomous Region.

A 4,800-meter-long runway is under construction at Golmud Airport, northwest China’s Qinghai Province, making it the country's longest civil airport runway on completion.

Xiamen International Airport Group Company Limited ("XIAGC") has taken over Fuzhou Changle International Airport ("FCIA"). A purchase plan for the loss making FCIA was announced in February, under which several investors, including Xiamen Airlines and the Fuzhou City Government would form a new company to take over the airport and assume it debts. Macau International Airport has confirmed its intention to extend the aircraft parking apron by 50,000m2. Costing US$6 million, the extended apron is expected to be completed within two years.

Beijing International Airport Company Limited purchased 203.7 million yuan (US$24.57 million) of assets from its parent Beijing Airport Group in March. The assets included passenger loading platforms and corridors within Terminals 1 and 2.

China Aviation Supplies Import and Export Group Corporation announced on 26 April that it has signed agreement with Airbus Industrie for the purchase of 30 Airbus aircraft, including four A3-30s, sixteen A319s and ten A320s. The aircraft are to be delivered to a number of different airlines including the Air China Group, China Eastern Airline Group, Hainan Airlines and Sichuan Airlines.

Shenzhen Airlines Company Limited has announced plans to acquire 10 new Boeing B737-900 aircraft over the next 3 years. Shenzhen Airlines currently operates 18 B737s and plans to operate 40 aircraft by 2008.

In July China Eastern Airlines took delivery of the first of five A340-600s, with two more A340-600s and seven A320s to be delivered later this year. Two A340-600s are scheduled for delivery in 2004.

Cathay Pacific reported a six-fold increase in net profits in 2002. Operating profit rose from HK$832 (US$106 million) million in 2001 to HK$4.8 billion in 2003 (US$615 million). Results exceeded market expectations and were attributed to a faster than expected recovery in passenger traffic after the September 11 attacks in 2001 and a buoyant freight market. However, in April, Cathay Pacific announced its first ever profits warning. In August, Cathay Pacific announced its interim results for the first six months of 2003. The Group reported a loss of HK$1.24 billion (US$159 million) compared to a profit of HK$1.41 billion (US$180 million) in 2002.

Air China has announced that it has completed its merger with China Southwest Airlines and Zhejiang Airlines – the first of the "big three" Chinese airline groups to complete the restructuring exercise.

China Eastern Airlines net profit plummeted by 84% to 86.36 million yuan (US$10 million) in 2002 despite growth in passenger and cargo volumes.

China Eastern Airlines Holdings, which is made up of China Eastern Airlines, China Northwest and Yunnan Airlines, is accelerating its consolidation plans. The integration of the three carriers’ marketing operations in Japan has been completed and the company is repeating the process in Beijing, Guangzhou, Korea and Singapore. The company expects to be able to absorb unlisted China Northwest and Yunnan Airlines once those airlines’ accounts meet legal listing requirements for public companies. This process is expected to be complete later this year.

China Southern Airlines reported a loss of US$26.5 million in the first four months of 2003. In July it issued 1 billion A-shares on the Shanghai and Shenzen exchanges and raised US$236 million.

Shanghai Airlines has reported a net loss of 197.4 million yuan (US$24 million) in the six months ending 30 June 2003, compared with a net profit of 44.0 million yuan in the previous corresponding period. The result was attributed to the effects of SARS and higher fuel costs. In July the carrier announced that it was selling two of its Boeing 737-700s to China United Airlines, a carrier controlled by the Chinese Airforce.

Hainan Airlines announced in July that it expects to report a loss for the first half of 2003.

In June, the Civil Aviation Department of Hong Kong presented CR Airways Limited with a varied Air Operator’s Certificate (AOC) for the operation of its first 50 seater Bombardier CRJ-200 regional jet. With the granting of this AOC variation, CR Airways becomes the third Hong Kongbased airline to operate commercial air transport using fixed-wing aircraft for passengers. The CRJ-200 has a range of about 3,700 kilometres which that puts most Mainland cities and some South East Asian destinations within its reach. The carrier is currently operating chartered services to the Philippines.

Tony Ryan’s investment vehicle, Irlandia, is considering making an investment in Air Macau fueling speculation that Air Macau may be converted into a low cost carrier.

The CAAC has announced a groundbreaking open skies policy for Hainan Island, under which the CAAC will: waive the right to reciprocal air rights in exchange for new services to Hainan; will not require existing bilateral airservices agreements to be renegotiated; will not restrict the country of origin of carriers flying to Hainan; and will allow both passenger and cargo operations. However, foreign carriers will not be allowed to land in Hainan and pick up passengers or cargo for flights to and from other mainland cities.

Dragonair has been granted licences from Hong Kong’s Air Transport Licensing Authority to operate services to Pusan and Cheju in South Korea, Penang and Langkawi in Malaysia; and Saipan in Guam. Of these destinations, Cathay Pacific only operates to Penang.

Australia and China have concluded a new Air Service Agreement that allows for many more flights between the two countries. All restrictions have been removed on the number of airlines from each side that can operate between the two countries, while available capacity for passenger services to and from Brisbane, Melbourne and Sydney has been more than doubled. Airlines from both sides will also have unrestricted rights to operate passenger services between China and regional points in Australia, while all restrictions have been lifted on the operation of freighters between and beyond the two countries. Air China, China Eastern Airlines and China Southern Airlines all serve Australia, while Qantas Airways codeshares on China Eastern flights.

The General Administration of Civil Aviation of China has granted Singapore Airlines Cargo permission to exercise fifth freedom rights between Singapore and Chicago via Xiamen in Fujian Province and Nanjing in Jiangsu Province. This is the first time that the Chinese mainland has granted fifth freedom rights to a foreign air carrier.

China Eastern Airlines announced plans in May to purchase a 45% shareholding of Eastern Aviation Import and Export Co (EAIEC) from its parent CEA Holdings for 43.8 million yuan. EAIEC imports and exports fuel and aviation equipment.

Travelsky Technology made a net profit of 453.2 million yuan (US$55 million) in 2002, a rise of 11%. The company specialises in electronic travel distribution and airport passenger processing systems.

The Airport Authority Hong Kong is reportedly considering acquiring Aviation Fuel Supply Company Limited (AFSC), as part of its strategy to diversify the authority revenue base, prior to a possible privatisation. AFSC is a joint venture of nine companies including Cathay Pacific, China Resources Enterprise Limited, China Petroleum and Chemical Corporation ("SINOPEC"), China National Aviation Co, Caltex Oil Hong Kong Limited, Esso Hong Kong Limited, Kuwait Petroleum Aviation (Hong Kong) Limited, Mobil Oil Hong Kong Limited and Shell Aviation Limited. In 1988, AFSC signed a franchise agreement with the Airport Authority to provide aircraft fuelling services. The contract gives the Authority the right to acquire the firm from the consortium after 5 years.

D’LONG International Strategic Investment of Shanghai has purchased the assets of the Fairchild Dornier 728 Jet programme.

Shanghai Aviation Industrial (Group) Corp has announced that it will begin production of the country’s first selfdesigned regional jet this year. The ARJ21 is expected to make its debut flight in three to four years. Approved by the State Council, China Aviation Industry Corporation I (CAIC I) has set aside five billion yuan (US$602 million) for research and development.

In May Boeing announced plans to establish an aircraft modification centre at Shanghai Pudong Airport in association with Shanghai Airport (Group) Co and Shanghai Airlines Co. The new company with specialize in passenger to freighter modifications. The new company will be called Boeing (Shanghai) Aviation Services Co Ltd. David Wang, President of Boeing China, has stated that the joint venture should be operational in 2005.

Shanghai Sikorsky Aircraft Corp, a joint venture between Sikorsky and Shanghai Little Eagle Science and Technology Co, has unveiled its three-seat S-300C helicopter.

Honeywell International has announced that it will move its Asia-Pacific Corporate Headquarters from Singapore to Shanghai, including its aerospace, aeronautics and control, avionics repair and overhaul businesses. Honeywell has 22 wholly-owned and joined-venture firms operating in the Chinese market.

Shandong Taikoo Aircraft Engineering Company has opened a new maintenance hanger in Ji’nan, Shandong Province. The new maintenance hanger can simultaneously overhaul three Boeing B737s or two Boeing B757s. Meanwhile, a second hanger is scheduled to open at the new Baiyun International Airport in Guangzhou at the end of 2003.

AMECO Beijing has expanded its international customer base, having signed agreements to provide maintenance services to Air Atlanta Icelandic, Asiana, European Travel and Chartered Company, Thomas Cook and Condor.

Swissair Techniques has signed a partnership agreement with Dragonair, to provide complete technical management to the airline’s 12 Airbus A320s.

ST AERO, part of the Singapore Technologies Engineering Group, and China Eastern Airlines have announced plans to invest US$98 million in a new commercial aircraft maintenance facility in Shanghai, which has yet to receive government approval. China Eastern will own 51% of the joint venture with ST Engineering owning the remaining 49%.

Rockwell Collins and China Eastern Airlines have launched a joint maintenance, repair and overhaul facility specialising in the overhaul and repair of avionics and IFE equipment.

HAECO has reported a 20% fall in net profits for the first half of 2003 because a drop in the number of aircraft movements during the SARS outbreak.

Belgian freight forwarder BX Logistics will become the third partner in Tradeport’s logistic centre at Hong Kong International Airport. The announcement comes after Tradeport struck deals with FedEx and DHL Danzas.

DHL has increased its stake in Air Hong Kong, the all freighter unit of Cathay Pacific Airways, from 30 to 40%.

Six United States carriers have been given permission to expand their global freight networks through Hong Kong, after the U.S. Department of Transport allocated traffic rights under a new air services agreement negotiated last October. UPS, FedEx, Polar Air Cargo, Evergreen International, Kalitta Air and Northwest Airlines have had initial fifth freedom rights confirmed.

Dragonair is looking at acquiring nine Boeing 747 long haul freighters. The carrier currently operates three Boeing 747- 300 freighters. The airlines’ freighter operations, which were first introduced in the summer of 2000, have been the key to expanding its horizons beyond the intra- Asian market. The carrier is currently operating 7-weekly all-cargo freights serving Dubai, Amsterdam and Manchester, while Osaka is served by two freighters a week, and Taipei by three. Services in the Mainland include Shanghai and Xiamen. In June, DHL Express and Dragonair launched an overnight cargo service on the Hong Kong-Shanghai route. The service operates 4 times a week with Airbus A330-300 equipment with a freight capacity of 22 tonnes.

China Airlines of Taiwan has purchased a 25% shareholding in Mainland Cargo carrier, China Cargo Airlines, following approval by the State Council. The other shareholders include China Eastern Airlines (55%) and COSCO (20%).

BAX Global has opened a new logistics facility at Xiamen.

Air China Cargo Company was officially launched in March, with Air China holding 51%, Hong Kong-listed Beijing Airport Company Limited owning 24% and CITIC Pacific Holdings owning 25%. Air China Cargo operates 4 Boeing B747- 200 freighters, but plans to acquire two B747-400Fs and three TU-204 freighters within two years. Eventually it will take over Air China’s existing cargo operations, whose network covers major Chinese cities and 29 cities in 19 countries.

In March, seven insurance companies on the Mainland began offering increased levels of insurance travel protection. For a premium of 20 yuan (US$2), passengers are able to obtain 400,000 yuan (US$48,350) in personal accident cover. The new scheme is managed by China Pacific Insurance Co Ltd, Ping An Insurance Co, Taikang Life Insurance Co, Taiping Insurance Co, China Life Insurance Co., the People’s Insurance Company of China, and American International Assurance.

In August, Yuan Jiajun, President of the China Space Research Institute, announced plans to send a manned space mission to the moon by 2020. Work has already commenced on the construction of a moon-orbiting satellite which is expected to be launched from the Xichang Space Centre in Sichuan in 2007. China’s space programme began in 1992, and the nation has spent 19 billion yuan on various projects.

China expects to launch its first manned mission to space on 1st October 2003 to celebrate the 54th anniversary of the founding of the People’s Republic.

In May the General Administration of Civil Administration of China (CAAC) announced that domestic airlines companies will be allowed to invest no more than 25 percent in airports in line with a new regulation being formulated.

In June, Yang Yuanyuan, the Director of the CAAC, formally launched the commencement of a program to establish an aviation police force designed to prevent and deal with hijacking and other illegal activity threatening flight safety.

China’s National Development and Reform Commission and the CAAC held a public hearing in July on proposals to allow domestic airlines to offer discounted airfares. Under the proposal, the government is to establish a base domestic fare rate from which airlines would be allowed to raise prices by 25% or reduce prices by up to 40%. Should the proposal be approved by the State Council it will allow airlines to legally offer discounts to passengers for the first time.

The Hong Kong Government is considering a proposal to reform the law relating to strict liability of aircraft owners in Hong Kong in relation to any loss and/or damage caused to a third party by an aircraft. Section 8 of the Civil Aviation Ordinance imposes strict liability on the person(s) holding legal title to the aircraft; and each person having management control of the aircraft (including the aircraft operator).

There is presently no exception given for passive owners such as an aircraft lessors or financiers who may have ownership interests in the aircraft. The present law therefore penalises passive owners of an aircraft for losses caused by the operator of that aircraft; exposes aircraft lessors/financiers to greater owner-related liabilities in Hong Kong than in other jurisdictions; and discourages aircraft lessors/financiers from adopting costeffective leasing structures which require them to be owner of the aircraft, thus increasing the total cost (in particular, to a Hong Kong-based airline) of arranging aircraft leasing.

The position is different in other jurisdictions like the UK, Mainland China and the United States where no strict liability is imposed on the "passive" owner of an aircraft where the aircraft is operated by another party.

The Hong Kong Government has announced that it will be amending the Airport Authority Ordinance later this year in order to provide a framework for privatisation of Hong Kong International airport.

On 1 June, the Administrative Punishment of China Civil Aviation which was promulgated on March 19, 2003 took effect. This imposes penalties (fines, confiscation of property, restricted and suspended operating licences etc) on any party that breaches any aviation laws and regulations. There are two ways of assigning administrative penalties. A 'Summary Procedure' involves handing out penalties on the spot where the facts are clear and not disputed. Citizens involved will be fined not more than 50 yuan (US$6), companies not more than 1,000 yuan. There is also an Ordinary Procedure, involving formal investigations and hearings, where the facts are complex or in dispute .

The CAAC has announced that it has completed a draft feasibility study on the deregulation of the air cargo industry.

Taiwan has proposed a three stage programme for direct air links: preparation, negotiation and realization. The third stage is supposed to be completed before the end of 2004.

On 29th June, Mainland China and Hong Kong concluded The Closer Economic Partnership Arrangement (CEPA). This trade agreement covers three main areas: trade and investment facilitation, trade in goods and trade in services.

CEPA provides for earlier access to Mainland China for Hong Kong companies in 17 sectors, ahead of China’s WTO timetable and, in certain areas, beyond China’s WTO existing commitments. These sectors include distribution services, logistics, freight forwarding agency services, storage and warehousing services, tourism and transport services. Hong Kong companies will be permitted under CEPA to establish wholly foreign owned businesses in most sectors. Notable exceptions include legal services and banking. Groups of Hong Kong insurance companies are permitted to enter the Chinese market through mergers and hold an equity interest of up to 15% in a Chinese insurance company, subject to certain conditions.

CEPA is perceived as beneficial as it gives Hong Kong companies and products a competitive edge: CEPA introduces zerotariffs on a large number of products, grants preferential treatment to Hong Kong companies and generally promotes an earlier liberalisation of existing WTO commitments vis-à-vis Hong Kong trade and investment. CEPA may also offer foreign companies, with no existing ties to Hong Kong, a back-door pass into the booming China market. This will depend in part upon the definition given to who the ultimate shareholders are or what the nationality of the owner is. No rules of origin have yet to be formulated, but Mainland China and Hong Kong have publicly committed to reach a consensus by 1 January 2004.

In March, the CAAC forwarded a proposal to the State Council to impose what has been described as "large" increases to the current domestic limits of liability in respect of personal injury and death, and the loss, damage and delay of registered baggage and cargo and cabin baggage. Currently, these are 70,000 yuan (US$8,444) for death and injury (Article 6 of the 1989 Interim Provisions Concerning Compensation for Bodily Injury); RM20 per kilo in respect of cargo (1996 Rules for Domestic Civil Aviation for Cargo Transportation); RMB50 per kilo for registered baggage and RMB2000 for cabin baggage (1996 Rules for Domestic Civil Aviation for Baggage Transportation). No date has been set for the consideration and implementation of these proposals.

On 17th April, the Air Transport Licensing Authority (‘ATLA’) of Hong Kong said that it would allow Cathay Pacific Airways to fly three times a day to Beijing and Shanghai and three times a week to Xiamen.

ATLA is an independent body, appointed by the Chief Executive, to resolve licensing disputes. Its activities are regulated by the Air Transport (Licensing of Air Services) Regulations, Cap.448A. Section 5 of these Regulations permits the grant by ATLA of a licence "to carry passengers, mail or cargo by air for hire or reward on such scheduled journeys, and subject to such conditions, as may be specified in the licence". Detailed provision is made both for applications for, and objections to, the grant of licences, whilst ATLA is mandated to hold public or private inquiries in the event (as here) of due objection to any licence application. Most significant, however, is Regulation 11, which provides that when exercising its discretion to grant a licence ATLA should have regard to a number of factors including the co-ordination and development of air services generally with the object of ensuring the most effective service to the public while avoiding uneconomical overlapping and generally to the interests of the public.

Cathay Pacific had filed an application for a licence to fly to Beijing, Shanghai and Xiamen. in August 2002. In September 2002, Dragonair filed a formal objection to such application. The narrative supporting the statement of objection submitted that the licensing of Cathay Pacific for the three China mainland points was not in the interest of the overall coordination and development of air services, that such entry into these routes would result in the "uneconomical overlapping of air services", and that entry of Cathay Pacific into the "lifeline markets" of Dragonair would threaten the survival of Dragonair, a result which would not be in the public interest.

The grounds of objection were then supplemented with a challenge to ATLA’s jurisdiction. The thrust of this argument, which throughout the case has been referred to as ‘the Basic Law point’, was that ATLA did not have authority to issue licences for routes to the mainland.

The public hearing of this application, and the objection thereto, took a total of eleven days. The hearing was unusual in that the parties to the dispute share a substantial common history, and their relationship involves a substantial shareholding by Cathay Pacific of Dragonair (25.5%), existing and past contractual arrangements and Cathay Pacific representation on Dragonair’s Board of Directors.

The core issue in this case was the potential financial impact upon Dragonair consequent upon entry of Cathay Pacific onto the Shanghai, Beijing and Xiamen routes. Dragonair had stated that the move would devastate its finances, with losses of as much as US$1 billion. The Tribunal ruled that Dragonair had overstated the financial impact. It also held that the data submitted in evidence failed to establish an "uneconomical overlapping" of services. In relation to the wider "public interest" context, the Tribunal held there was little room for cogent opposition to Cathay Pacific’s application since the entry of another reputable airline on these routes would benefit consumers, providing competitive air fares and greater choice.

The Tribunal was also asked to consider whether the requirement to "have regard to the co-ordination and development of air services generally" meant that there could be no such co-ordination and development absent regard to Government policy in this area and, in particular, the policy of ‘one route, one airline’ introduced by the Government of Hong Kong in 1985. This policy had been affirmed in 1996 when the then Secretary for Economic Services stated that "It would not be in Hong Kong’s trade and other economic interests to see interairline competition by Hong Kong airlines weakening their overall ability to compete against foreign airlines…". The Tribunal rejected Dragonair’s argument on the basis that ATLA is an independent statutory tribunal and has nothing to do with government policy.

Dragonair also challenged the jurisdiction, or authority, of the Tribunal to hear the application for and issue licences in terms of the Hong Kong/Shanghai and Hong Kong/Xiamen routes. This proposition was based on the distinction between international routes on the one hand and domestic routes on the other. Dragonair submitted that the exercise of ATLA’s power had always been related to international routes; the reason for this was clear, it said, since prior to 1997 there were no ‘domestic’ routes outbound from Hong Kong.

The grant of licences for international routes is governed by air services agreements entered into between governments, and within the international context Dragonair accepted that the position of ATLA today remains unchanged within that hierarchy of decisions which require to be made before an airline actually begins to operate upon any such international route. Such decision-making involves a ‘four step’ process : first, the technical evaluation involving the grant of an air operator’s certificate; second, consideration by ATLA of the statutory requirements underpinning the grant of a licence to fly that route; third, governmental designation of the relevant airline pursuant to the relevant bilateral air services agreement such as is in place; and fourth, obtaining an operating permit and provision of landing ‘slots’ within the airport at the place of destination.

It was submitted, however, that this traditional procedure and approach had no place within the present dispute, given that after 1997 Hong Kong became part of "one sovereign airspace", and thus the Shanghai and Xiamen routes the subject of the application should be considered as mainland domestic routes. In this instance, it was said, that which was required to be looked at were not inter-governmental air services agreements, but the air services arrangements which had been put in place by the Hong Kong SAR Government with the mainland authorities, an arrangement which fell solely within the purview of the Central People’s Government.

Article 131 of the Basic Law reads: "The Central People’s Government shall, in consultation with the Government of Hong Kong, make arrangements providing air services between the Region and other parts of the People’s Republic of China for airlines incorporated inHong Kong Special Administrative Region in Hong Kong and other airlines of the People’s Republic of China."

Dragonair argued that it was important to note here the use of the words "in consultation with" the SAR Government, as distinct from the use of the term "negotiate" as employed in Article 133, which dealt with the unquestioned authority delegated to the SAR Government under the Basic Law to "negotiate and conclude" air services agreements and provisional arrangements with foreign states and regions.

The position changed, it argued, when it came to considering Article 134 which states: "The Central People’s Government shall give the Government of Hong Kong the authority to : (1) negotiate and conclude with other authorities all arrangements concerning the implementation of the air services agreements and provisional arrangements referred to in Article 133 of this Law; (2) issue licences to airlines incorporated in Hong Kong; (3) designate such airlines under the air service arrangements and provisional arrangements referred to in Article 133 of this Law; and (4) issue permits to foreign airlines for services other than those to, from or through the mainland of China."

Dragonair argued that in contrast to the ‘wholesale delegation of authority’ from the Central People’s Government to the SAR Government for international agreements and provisional arrangements, there was clearly no delegation by the Central People’s Government to the Hong Kong SAR Government of the right to designate carriers for domestic routes covered by Article 131. It followed, therefore, that since there was no delegation of any such right, the generally-accepted ‘four step’ procedure simply did not apply to domestic routes within the PRC, and that so far as ATLA was concerned, when dealing with such routes, ATLA was in the position merely of implementing such arrangement as currently existed.

Dragonair therefore argued that ATLA can only exercise its powers in accordance with the air services arrangement regarding any such route or routes as such arrangement exists at that time. This submission was supported by the additional submission that should ATLA purport to grant the licences as now were sought, political damage inevitably would be caused. The objective behind the delegation of authority to issue licences on domestic routes was simply to implement the existing arrangement, it was asserted, and if this arrangement was now to be disregarded, in so doing ATLA would "undermine the authority and the national policy for domestic aviation of the Central People’s Government", for whom it would be "a slap in the face if ATLA were to issue licences to cities in mainland China in clear contravention of the arrangements". In addition, it was submitted that the relationship between the Hong Kong SAR Government and the Central People’s Government would also be "undermined" because the authority to issue licences has been delegated to the SAR Government, and not to ATLA.

The Tribunal accepted that the authority of ATLA could not exceed the authority of the Government under the Basic Law but rejected the suggestion that: "until such inter-governmental agreement takes place to vary any arrangement providing for but one Hong Kong carrier upon a particular route that ATLA’s essentially secondary function to oversee the grant of a licence for a proposed service on that route thereby is rendered nugatory by reason of lack of jurisdiction. Accordingly, ATLA ruled that the jurisdictional argument advanced lacked substance.

Since the ATLA ruling Cathay Pacific has taken the second step towards launching services by being formally designated by the Hong Kong Economic Development and Labour Bureau as a carrier on the Hong Kong-Beijing route.

Dragonair was granted leave to formally apply for a judicial review of the ATLA ruling. However, in a surprise development Dragonair has withdrawn the appeal.

The successful prosecution of MK Electronic (China) Ltd by the Civil Aviation Department of Hong Kong on 21st March serves as a useful reminder to everyone in the aviation community of the increasingly tough stance that regulators are taking to dangerous goods shipments.

MK Electronic (China) Ltd was convicted of breaching the Dangerous Goods (Consignment by Air) (Safety) Ordinance after it consigned a shipment of undeclared wet batteries from Hong Kong to Germany. Leakage of the alkaline batteries resulted in injury to a ground handler in Germany.

Under the Ordinance, shippers and freight forwarders must ensure all dangerous goods are properly classified, packed, marked, labelled and documented before they are offered for air transportation. A person who contravenes these provisions may commit an offence and be liable to a fine of HK$250,000 (approximately US$32,051) and to imprisonment for 2 years. Even directors and company officers can be convicted, irrespective of whether they have physically handled the shipment. Managers must therefore supervise their staff to prevent the commission of offences.

ICAO publishes the legal requirements for the safe transport of dangerous goods by air in their Technical Instructions every two years. These are based on the United Nations Orange Book which provides recommendations for intermodal transport regulations for dangerous goods. The new ICAO TI is effective from 1st January 2003.

Many in this industry rely upon the IATA Dangerous Goods Regulations. This is an easy to use manual based on the ICAO TI. It also incorporates additional operation requirements.

In addition to the Dangerous Goods (Consignment by Air) (Safety) Ordinance, the aviation community must comply with other relevant legislation including provisions of the Carriage by Air Ordinance, the Civil Aviation Ordinance and the Occupational Safety and Health Ordinance.

The practical consequences of breaches are obvious, including personal injury, loss of life and damage to property and equipment. International incidents have included major aircraft accidents, the constructive total loss of aircraft and hangar fires.

The legal consequences can be just as severe. Both individuals and companies are exposed to a range of criminal and civil penalties including: fines and custodial sentences arising from successful prosecutions by government departments including the Civil Aviation Department and the Labour Department; employees compensation claims and common law damages claims by employees injured in incidents; and third party claims in respect of personal injury, death and property. Third parties may not be part of the aviation community such as passengers who have been injured. There may also be claims from third parties in the aviation community who seek to enforce indemnity and liability provisions in their contracts (e.g. ground handlers passing on claims to carriers) or who seek to recover their losses from responsible parties.

In addition to custodial sentences, fines and awards for damages, companies need to factor in the financial cost of wasted man hours in handling claims, loss of use costs associated with Labour Department Suspension Notices and the like and the professional fees of lawyers and loss adjusters. Add to this the loss of reputation and, possibly, bankruptcy. Finally, Hong Kong’s image as an advanced safe transport hub may be tarnished.

The overriding objective is safety which can only be achieved by appropriate safety management systems giving rise to a safety culture throughout the organisation. The majority of incidents causing harm are attributable to either deception or human error. Less than one percent of the hundreds of incidents reported each year involve dangerous goods which have been properly declared, packaged, labelled and documented.

Companies should check that they are adequately protected against the range of exposures mentioned by ensuring that they have sufficient and appropriate insurance cover and by ensuring that they have controlled their liability exposures in their contracts with customers and third parties.