Australia's Qantas says rethinking Jetstar Hong Kong after licence snub

* Regulator says business not based in HK

* HK "shutting the door" to new entrants, says Joyce

* Airlines struggle with Asian expansion (Recasts, adds analyst and Jetstar Hong Kong comment)

By Byron Kaye

SYDNEY, June 26 (Reuters) - Qantas Airways Ltd said it may quit its investment in budget carrier Jetstar Hong Kong after it failed to secure regulatory approval, dealing another blow to the Australian flagship carrier's ambitious Asian expansion strategy.

Three years after Qantas said the joint venture would give it access to "the world's largest, fastest-growing and most profitable aviation market", the territory's airline regulator rejected Jetstar Hong Kong's licence application on the grounds that Hong Kong was not its principal base of business.

The Australian carrier and its equal partners, China Eastern Airlines Corp Ltd and Shun Tak Holdings, the transport investment business of Hong Kong billionaire Stanley Ho, have yet to decide whether to appeal the decision. Qantas said the Hong Kong enterprise was now under review.

Qantas Chief Executive Officer Alan Joyce said Hong Kong appeared to be "closed to fresh aviation investment".

"Given the importance of aviation to global commerce, shutting the door to new competition can only serve the vested interests already installed in that market," he said in a statement.

Qantas said its investment in the joint venture was currently worth A$10 million ($7.73 million). The carrier's shares fell nearly 3 percent in line with the broader market.

The "Flying Kangaroo", which is also facing regulatory hurdles in Australia to a proposed joint co-ordination agreement with China Eastern, has made little progress so far in its strategy of tapping Asian's rapidly growing budget traveller market to offset increasing international competition and a domestic price war with Virgin Australia Holdings .

"In terms of bodily harm, it's probably not grievous, but they've torn up a big chunk of change trying to expand beyond the current (Jetstar Asia) businesses based in Vietnam, which is unprofitable, and Singapore, which occasionally flirts with profitability," said Timothy Ross, head of transport research for Credit Suisse in Asia.

He said airlines "systematically underestimate" the challenges of using minority shareholdings as vehicles for foreign expansion, noting that Malaysia's AirAsia Bhd has cut flights to Japan and Singapore's Tiger Airways Holdings Ltd sold its Australian unit.

In its ruling on Thursday, Hong Kong's Air Transport Licensing Authority said it was not convinced Jetstar Hong Kong complied with laws requiring its principal place of business to be in the Chinese territory.

It added that Cathay Pacific Airways Ltd, Hong Kong Dragon Airlines Ltd, Hong Kong Airlines Ltd and Hong Kong Express Airways Ltd had opposed Jetstar's application.

($1 = 1.2937 Australian dollars) (Editing by Stephen Coates)