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DE RUEHGZ #8105/01 1720842
ZNR UUUUU ZZH
R 210842Z JUN 06
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1447
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUWMDUA/FAA WESTERN PACIFIC RGN HQ LOS ANGELES CA
RUCPDOC/USDOC WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 03 GUANGZHOU 018105 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EBA/TRA/AN ENGLE, DEMARS 
STATE PASS USTR FOR STRATFORD/WINTER/ALTBACH 
BEIJING FOR CRAIG REILLY 
TOKYO FOR FAA 
DOT FOR OFFICE OF INTL AVIATION OPPLER, BLOCH, GLATZ 
COMMERCE FOR ITA/MAC - DAS LEVINE, MCQUEEN 
COMMERCE FOR ITA/TD - ALFORD 
 
E.O. 12958: N/A 
TAGS: EAIR ECON KTIA CH
SUBJECT: XIAMEN AIRLINES: LOYAL BOEING CUSTOMER LOOKS AHEAD 
TO FLIGHTS TO TAIWAN 
 
REF: GUANGZHOU 14846 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
PROTECT ACCORDINGLY. 
 
¶1. (SBU) Summary.  Xiamen Airlines, a regional airline whose 
biggest shareholder is China Southern Airlines, plans to add 
30 new Boeing aircraft to its fleet by 2010, augmenting its 
current all-Boeing fleet of 35.  The fleet's simple 
structure is credited in part for helping the airline 
confront rising fuel costs.  Most of the airline's 145 
routes serve Fujian, where it enjoys a 50% market share; its 
current expansion focuses on routes between Fujian and 
China's largest cities, as well as increasing its presence 
in the Yangtze River Delta.  Looking ahead, the airline's 
attention is firmly set on Taiwan and the eventual 
resumption of direct cross-straits flights.  Fujian enjoys 
close, long-standing ties to Taiwan, and Xiamen Air's 
stronghold in the former should allow it to capitalize once 
direct flights resume.  Curiously, and as opposed to other 
Chinese airlines, Xiamen Air does not have a preference for 
military aviators, looking instead for fresh university 
graduates.  End summary. 
 
Company profile 
--------------- 
 
¶2. (SBU) At a June 15 meeting in Xiamen, Xiamen Airlines 
officials Huang Guohui and Lin Yingru discussed the 
airline's situation.  The airline (also known as Xiamen Air 
and by its two-letter ICAO code: MF) started operations in 
¶1984.  China Southern Airlines is its majority shareholder 
(60%), with Xiamen C & D Company owning the remaining 40% of 
shares.  Xiamen Air's share of the Chinese market is between 
5% and 6%, and it has turned a profit for 19 consecutive 
years, although rising costs have recently taken a toll on 
its earnings.  The airline's after-tax net profit for 2005 
was roughly USD 9.5 million, down 56.51% year-on-year.  In 
the same year, the airline carried more than 6.92 million 
passengers, up 11.1% year-on-year. 
 
A loyal Boeing customer 
----------------------- 
 
¶3. (U) MF operates an all-Boeing fleet, composed of nine 
757s and 26 737s (one -800, 15 -700s, six -500s, and four - 
300s).  The average age of its aircraft is seven years.  MF 
is set to acquire six more 737-800s by the end of 2006, and 
plans to enlarge its fleet to 65 aircraft by 2010, 
purchasing Boeing jets exclusively. 
 
¶4. (SBU) Huang attributes part of the airline's relative 
financial success to its decision to only operate two kinds 
of aircraft (and then mostly 737s).  In particular, this 
simple structure makes it easier to implement fuel-saving 
measures across the fleet.  It also reduces the need for 
crew training, and allows greater flexibility in dispatching 
flight crews.  By contrast, China Southern's hodgepodge of a 
fleet has the opposite effect.  MF also saves on costs by 
handling its own maintenance and catering, and by offering 
financial rewards to flight crews that manage to save fuel. 
 
Fujian's airline 
---------------- 
 
¶5. (U) MF flies 145 routes, most of which serve the province 
of Fujian.  In addition to its main hub at Xiamen Gaoqi 
Airport, the airline has three other bases in Fujian: 
Fuzhou, Jinjiang-Quanzhou, and Wuyishan.  MF presently holds 
a 50% market share in Fujian, which it hopes will increase 
to 55% by 2010.  The airline also has a base in Nanchang, in 
the neighboring province of Jiangxi.  It expects to hold a 
30% market share in Nanchang by 2010. 
 
 
GUANGZHOU 00018105  002.2 OF 003 
 
 
Modest expansion plans 
---------------------- 
 
¶6. (SBU) The airline's current expansion efforts are modest 
by Chinese standards.  In addition to strengthening routes 
from the country's main cities to Fujian, the airline wants 
to increase its presence in the Yangtze River Delta (YRD). 
For this purpose, MF is setting up a new base in Hangzhou, 
112 miles southwest of Shanghai.  (Note:  The central 
government has already approved plans for a maglev, or 
magnetic levitation, train line between Shanghai and 
Hangzhou, which would connect the two cities in less than 30 
minutes.  A maglev line already connects Shanghai's Pudong 
district with the city's international airport.  End note.) 
The Hangzhou base only flies two planes at the moment, but 
MF hopes to increase the number to ten by 2010.  MF already 
has a 13.2% market share in Hangzhou, and hopes it will grow 
to 20% by 2010. 
 
Small international network 
--------------------------- 
 
¶7. (SBU) Xiamen Air's international presence is limited.  MF 
now flies from both Xiamen and Fuzhou to Macau, Kuala 
Lumpur, and Singapore, and it has flights to Hong Kong from 
all four of its Fujian bases.  From Xiamen the airline also 
flies to Bangkok, Penang, Tokyo, Osaka, and Seoul. 
Meanwhile, MF already flies to Macau and Bangkok from its 
budding base in Hangzhou.  Although the airline plans to 
seek out new international destinations in nearby Asian 
countries, the focus of its future expansion will be on 
domestic routes, and on Taiwan. 
 
Eyes set on Taiwan 
------------------ 
 
¶8. (SBU) As mentioned in paragraph 6, Xiamen Air's current 
expansion efforts are rather timid.  However, the airline is 
clearly holding its fire until the reestablishment of 
regular flights between Taiwan and the mainland.  As the 
strongest airline in Fujian, MF will be in an ideal position 
to cash in once cross-straits flights are once again 
possible.  Fujian and Taiwan have long-standing ties, which 
are being reinforced by streams of investment from Taiwan. 
MF is not shy about publicizing its hopes, and its officials 
view the airline's successful New Year flights to Taiwan as 
an auspicious sign.  (Note: Mainland and Taiwan authorities 
allow a limited number of direct flights during the Lunar 
New Year.  Last year, Xiamen Air Vice President Song 
Chengren flew the special season's first flight.  He 
declared that flying into Taipei had been "the greatest 
dream of [his] career".  End note.)  Xiamen Air has already 
established a partnership with a Taiwan airline, TransAsia 
Airways, allowing passengers to travel between destinations 
in the mainland and Taiwan via Xiamen and Jinmen, a Taiwan- 
controlled island near Xiamen (see reftel). 
 
Give us the nerds, not the jocks 
-------------------------------- 
 
¶9. (SBU) In contrast to some of its domestic competitors, MF 
does not prefer to recruit pilots from the ranks of the 
military.  Instead the airline focuses its recruitment 
efforts on universities, and was in fact the first Chinese 
airline to recruit fresh college graduates.  According to 
Huang, these graduates are more educated and intellectually 
capable than the pilots leaving the service.  In particular, 
he praised the English language skills of the college 
graduates.  This preference, combined with the airline's 
relatively small size, has allowed MF to bypass the effects 
of a nationwide pilot shortage. 
 
Low-cost threat? 
---------------- 
 
GUANGZHOU 00018105  003.2 OF 003 
 
 
 
¶10. (SBU) Referring to the airline start-ups that are being 
established across the country, Huang agreed that only a few 
are likely to survive an eventual stabilization of the 
market.  However, in the short term these airlines will 
inconvenience the more established carriers, by increasing 
competition for pilots and bringing down prices. 
 
Comment: Happy times ahead for the Egret? 
----------------------------------------- 
 
¶11. (SBU) It is hard to find an official in Fujian that will 
not insert the phrase "the western shore of the Taiwan 
Straits" in every other sentence, referring to the province 
and its government's plans to capitalize on improving cross- 
straits ties.  Having seen its progress hampered in the past 
because of tensions between Taiwan and the mainland (and the 
central government's fear of dropping economic resources in 
a potential war zone), Fujian is now keen on using its 
proximity to Taiwan's strong economy to spark its own 
economy.  Already a preferred destination for Taiwan 
investment dollars, Fujian stands to benefit greatly from 
more normal relations, and a consequent increase in trade, 
between the mainland and Taiwan.  The lack of direct flights 
between Fujian and Taiwan is one of the remaining anomalies 
in what has become a vibrant economic relationship, boosted 
of course by the profound historical ties between both 
provinces.  Once such flights become possible, a wildly 
promising market will open, and Xiamen Air will be ideally 
placed to tap it to its benefit. 
 
¶12. (SBU) At the same time, success in Taiwan may ironically 
spell the end for Xiamen Air, whose symbol is an egret.  In 
some ways, MF is already a subsidiary of its majority owner, 
China Southern.  The airlines do not really compete in the 
markets they both fly, instead complementing one another. 
At Guangzhou Baiyun Airport, MF shares China Southern's hub 
terminal, and China Southern's frequent flyer program gives 
credit for miles flown on MF.  A future switch from niche 
player to cross-straits star may make MF too much of an 
attractive takeover target for the Guangzhou-based giant. 
China Southern's financial situation is delicate, and the 
airline would probably welcome a larger take from the 
promising mainland-Taiwan market. 
 
DONG