IATA: Focus on Competitiveness in HKIA Expansion

IATA has emphasized the need to focus on competitiveness as Hong Kong International Airport (HKIA) moves forward with the building of a third runway and associated infrastructure.

“The announcement by the Financial Secretary in his budget speech that the third runway will be built by 2023 should be greeted by everyone in Hong Kong as encouraging news. We commend the government on this important decision and everyone associated with the project especially the Hong Kong Airport Authority and the government for the thorough work to get us to this point including evaluating the environmental impacts and working out how to mitigate them,” said Tony Tyler, IATA’s Director General and CEO in a speech to the Foreign Correspondents Club of Hong Kong.

HKIA plays a crucial role as an economic catalyst. Hong Kong is home to some 3,500 regional headquarters and boasts a HK$250 billion tourism industry. Serving some 63 million travelers and processing 4.4 million tonnes of cargo makes HKIA a critical link in global connectivity.

“IATA has long been an advocate of the need for a third runway in Hong Kong. And it is in the interest of everyone in Hong Kong to see the aviation industry flourish. Aviation and aviation-related tourism account for 8.2% of the Hong Kong economy. Increasing HKIA’s capacity to be able to serve 100 million passengers and 9 million tonnes of cargo by 2030 will ensure that the airport continues to be a pillar of Hong Kong’s success—provided the expansion is built, financed and funded wisely,” said Tyler.

Establishing a three runway system at HKIA is estimated to cost HK$150 billion (US$19.3 billion). IATA outlined a framework that would allow this critical piece of infrastructure to be built without increasing airline charges, without placing a burden on taxpayers, without making it more expensive for travelers, without adding an extra burden to shippers and while increasing competitiveness of the hub’s air transport network.

HKIA is consistently profitable. For FY 2013/14 HKIA had a pre-tax profit of HK$7.8 billion which is about half of revenues. It also has very little debt—just about 10% of total capital. IATA proposes that the airport use its advantageous financial situation to fund its expansion through borrowing via commercial loans or bonds. The current level of charges (applied to both existing facilities and newly built infrastructure) and business model would provide sufficient revenue for loan repayment.

“Airlines fully back the user pays approach on infrastructure development. We are not asking for anyone to foot the bill for our growth. Airlines would pay for the infrastructure—through increased volumes, not increased charges. And that would apply to existing infrastructure as well as newly built facilities. The growth in traffic that the extra runway and terminal will bring will see the airport’s success over its first 17 years repeated all over again – provided its airport charges are kept competitive,” said Tyler.

“While the new facilities are being built, the airport’s dividend to the government will reduce. Any normal business faces the same situation when it makes a major capital expenditure to support its future success. No legitimate return ever comes without some up-front investment. And let’s remember that the airport’s value to Hong Kong was never intended to be only in the profits it generates. In fact, its role as a catalyst for economic activity makes a much broader contribution to the community and the government,” Tyler added.

IATA urged that the expansion must follow the well-established principles of the International Civil Aviation Organization (ICAO), particularly noting that proposals for advance payment of the construction costs must be avoided and encouraging ongoing consultation between the airport and the airlines.

No Advance Payments: “Airlines accept the user-pays principle, but the user should only start to pay when there is something to use! You cannot charge a toll for a bridge that is not yet built or for a tunnel that is yet to open. The same is true for airport infrastructure. Airlines and travelers cannot be expected to pay for a runway until they are able to benefit from its use,” said Tyler.

Advance payments for the cost of the third runway would mean increasing current airport charges which airlines reject. “Raising charges for advance payment of construction costs would be wrong in principle and unfair. Airlines and passengers using the airport today would be paying for those who use it tomorrow. And, most importantly for Hong Kong, it would be taking risks with a business model that’s been proven to work very well. Since the airport opened in 1998, Hong Kong’s airport charges have become competitive. As a result, airlines have wanted to come here, and the airlines already here—especially those based here—have added frequency and capacity,” said Tyler.

IATA estimates that a 10% increase in user charges could lead to annual reductions in passenger numbers by up to 80,000 and place some 600 jobs in jeopardy.

Consultation: The successful expansion of HKIA and fortifying its competitive position of its air transport network will require continued open and transparent consultation with airlines—on both funding and operational issues.

“Airlines are eager to be partners in developing the future of HKIA. Moving from a two-runway operation to three runways is complex. The master plan for the airport is clearly established and supported by the airlines. The devil may be in the details. Developing a satellite terminal and reconfiguring (and in some cases demolishing) existing infrastructure needs to be done in such a way as to enhance competitiveness. It would be a shame, for example if the expansion in capacity resulted in an increase in the minimum connection time,” said Tyler.

The competitiveness of Hong Kong’s air transport network is under pressure. Between 2005 and 2013 Hong Kong’s share of the market connecting China to the rest of the world shrank from 20% to 17%. It has stagnated with a 10% market share on the ASEAN to North America market. And its 3.3% share of ASEAN to Europe traffic has contracted to 2.4%.

“There are lots of reasons why these changes are happening. The Middle East airlines are proving to be strong competitors with efficient and affordable hubs being a central piece of their success. And hubs closer to Hong Kong continue to improve their offerings to enhance the competitiveness of their networks. This is putting pressure on Hong Kong. HKIA has a winning model of competitive charges and high quality. Funding the much-needed third runway must be done in a way that does not put it at risk and which secures HKIA’s role as an economic catalyst for years to come,” said Tyler.