HKCSI Fifth Position Paper on Travel, Tourism and Hospitality
February 1997

Chek Lap Kok user charges

1. In this the fifth position paper of the HKCSI on travel, tourism and hospitality, we wish to highlight the specific issue of user charges of the Chek Lap Kok new airport.

Travel industry's concern

2. Recent consultation by the HKCSI among travel-related industries including airlines, travel agents, hotels and tourism operators has revealed an expectation that there will be a substantial increase in user charges when the new airport at Chek Lap Kok opens in 1998. Already air cargo handling charges are set to become higher, while landing charges at two to four times the current rate have been mentioned.
3. This has presented a unsettling scenario for the travel and related industries and for users of the new airport in general. Their concerns can be summarised as follows.
   1. Higher charges will inevitably lead to their margin being squeezed. In a market which is already very competitive, there is a limit to which costs can be absorbed through further improvement in efficiency.
   2. As a result higher charges will have to be passed on to the end-user. According to estimates by the airline industry, the cost to a family of four flying out of Hong Kong and back could rise by as much as HK$1,700. This will inevitably dampen demand and lead to a further downward pressure in their business.
   3. Apart from the effect on consumers, the rise in end-user charges will not be welcomed by the service industries at large. There is already much complaint from the business sector about rising operating costs, the cost of business trips being one component. While the business traveller will take many other factors into account in deciding which port to travel through, an "expensive airport" perception will be created and perpetuated, the cumulative effect of which cannot be ignored.
   4. From a broader point of view, one of the key rationale for Chek Lap Kok has been to maintain Hong Kong's economic edge through strengthening its status as an aviation hub, thereby enhancing Hong Kong's competitiveness. Raising airport user charges to unrealistic levels will only have an opposite effect.

Prudence needed

4. While recognising the travel industry's concern, we do not see any reason to assume that government and the Airport Authority does not have the best interest of Hong Kong and of the aviation-related industries in mind in deciding user charges at Chek Lap Kok. One of the cardinal principles of the Chek Lap Kok project is that it will be run on prudent commercial principles. This is a principle which we continue to support. Having said that, from the point of view of prudence, there is a case for the Airport Authority to respond to the call of the travel industry for more careful consideration in deciding user charges.
5. It is our belief that nothing can be further from the Airport Authority's intention than to threaten Chek Lap Kok's competitiveness in any way. If any policy by the Airport Authority such as pricing were to have the effect of undermining Chek Lap Kok's competitiveness, the Airport Authority would be the first to take measures to alleviate it and to restore Chek Lap Kok's premier position. However, in view of the increasingly more competitive global and regional environment in aviation, it is important to get it right at the beginning without having to make costly adjustments to rectify any miscalculations. It follows that it would not be prudent to expose Chek Lap Kok to any risk that might undermine its competitive position.

Rate of return

6. Part of the concern over higher user charges has followed from government's policy of achieving full cost recovery with a 5 per cent real rate of return on Chek Lap Kok. This is calculated on the basis of a 3.5% real rate of return plus 1.5% "risk factor". While given Hong Kong's unique circumstances we appreciate the need for the full cost recovery policy, we wonder if the 5% real rate of return could not be more flexibly applied. In particular, the justification for the 1.5% "risk factor" will have to be balanced against the risk of an airport which is too expensive. On the other hand, lowering the rate of return even marginally will reduce the pressure considerably on airport user charges.
7. Even if the 5% rate of return, and hence the substantially higher user charges can be justified economically, there seems no compelling reason to have to apply the higher rate uniformly from day one. In order not to subject the travel industry to an impact of a sudden and radical nature, it would seem far better to implement it in stages.

More efficiency

8. Another alternative in shifting pressure from higher user charges is to increase the efficiency of the new airport through lower cost of operation of the airport itself, as well as raising revenue through non-aeronautical sources. The possibility of achieving greater revenue through a more aggressive commercial plan - without making the airport too expensive for retailers - should be explored.

Consultation

9. A cost-effective pricing is a key to the successful launch of Chek Lap Kok. To achieve that, the Airport Authority should be in constant touch with practitioners and users. To that end we call on government and the Airport Authority to conduct more regular consultation with industry on the operation of the new airport, including the structure and level of user charges.
10. There is a need for thorough consultation but at the same time, the issue should be settled as soon as possible in view of the fundamental nature of the changeover to Chek Lap Kok. In this connection we suggest that the discussion might be accelerated through involving the office of the Chief Executive of the SAR.

Conclusion

11. The HKCSI is not in a position to prejudge upon the effects of the new user charges. In the interest of the service industries as a whole, however, we call upon the travel industry - including the Airport Authority which we regard as a key player of the travel industry - to work together, not against each other, to make Chek Lap Kok the success that it promises to be. The government has a facilitating role which it should not refrain from.

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