VZCZCXRO4286
RR RUEHCN RUEHGH RUEHVC
DE RUEHIN #0246/01 0320213
ZNY CCCCC ZZH
R 010213Z FEB 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 3947
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEKJCS/SECDEF WASHINGTON DC
RUEAIIA/CIA WASHDC
RHHMUNA/USPACOM HONOLULU HI
RHEFDIA/DIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 000246 
 
SIPDIS 
 
SIPDIS 
 
 
STATE PASS USTR 
STATE FOR EAP/TC 
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT 
TREASURY FOR OASIA/LMOGHTADER 
USTR FOR STRATFORD, ALTBACH 
 
E.O. 12958: DECL: 01/25/2017 
TAGS: EAIR ECON PREL EINV ETRD TW CH
SUBJECT: CLOSING THE FINAL LINK - AVIATION (PART 2 OF 2) 
 
REF: A. TAIPEI 152 
 
     ¶B. TAIPEI 133 
     ¶C. 06 TAIPEI 4173 
     ¶D. 06 TAIPEI 3473 
     ¶E. 06 TAIPEI 3446 
     ¶F. 06 TAIPEI 3414 
     ¶G. 06 TAIPEI 2376 
     ¶H. 06 TAIPEI 323 
     ¶I. 05 TAIPEI 3717 
     ¶J. 05 TAIPEI 222 
     ¶K. 03 TAIPEI 219 
 
Classified By: AIT Deputy Director Robert S. Wang, Reason 1.4 b/d 
 
¶1. (C) Summary: The lack of direct air links between 
Taiwan and the Mainland causes considerable harm to 
Taiwan's economy.  Inconvenient passenger routes change 
how Taiwan businessmen and foreign investors do business. 
More expensive air cargo makes Taiwan exporters less 
competitive.  Direct air links would increase investment 
in Taiwan, foreign trade, the number of residents in 
Taiwan, and tourists.  Tentative progress on direct air 
links to date has produced an unsatisfactory situation 
for both sides.  AIT will continue to support American 
businesses in encouraging Taiwan to move forward on 
direct air links and include foreign passengers and 
carriers.  End summary. 
 
¶2. (U) Of the original three links (san tong) -- postal 
and telecommunications links (tong you), trade (tong 
shang), and transportation (tong hang) -- transportation 
still remains primarily indirect.  Ref A reported on the 
status of cross-Strait maritime links and their impact on 
the Taiwan economy.  This report will examine efforts to 
establish direct air links and the potential benefits for 
Taiwan. 
 
Wasting Time on Bad Connections 
------------------------------- 
 
¶3. (SBU) The lack of direct passenger flights to the 
Mainland China creates inconvenience, causing 
considerable harm to Taiwan's economy.  In 2005, more 
than 10 million passengers traveled on flights linking 
Taiwan to Hong Kong and Macau.  They accounted for 39 
percent of Taiwan's international air travelers.  Most of 
them had connecting PRC flights.  EVA Air estimates that 
60 percent of its Hong Kong passengers and 80 percent of 
its Macau passengers connect to the PRC flights.  In 
addition, Taiwan airlines also offer connections to 
Mainland flights through Okinawa, Japan, and Cheju, South 
Korea. 
 
¶4. (U) The inconvenience of stopping in Hong Kong, Macau 
or other connecting airports has a greater impact on 
Taiwan's economy than the added expense of indirect 
flights.  With a connection in Hong Kong, the average 
trip to Shanghai takes at least five hours from take-off 
in Taipei to arrival.  Direct charter flights only take 
three hours.  The stop in Hong Kong, Macau or elsewhere 
makes it impossible to fly to Shanghai in the morning, 
attend a meeting and get back the same day.  This can 
have a significant impact on how people run their 
businesses, especially for Taiwan investors in the PRC 
and foreign investors who want to better integrate their 
Taiwan and Mainland operations. 
 
Bound by More Cumbersome Supply Chains 
-------------------------------------- 
 
¶5. (C) For air cargo, cost savings could be much more 
substantial.  Michael Chu, Managing Director of FedEx 
Express in Taiwan, speculated to AIT that with daily 
cargo flights, the cost of general cargo air shipment 
could be 20 to 30 percent lower than currently.  For 
express mail with door-to-door service, he believes the 
savings will be smaller at 10 to 15 percent. 
 
¶6. (U) Air cargo plays an important role in Taiwan's 
 
TAIPEI 00000246  002 OF 004 
 
 
export industry.  Taiwan exported more than 567,000 
metric tons of goods by air in 2005.  Electronic 
equipment manufactured by Taiwan's powerful high-tech 
industries accounted for 62 percent of those exports by 
weight at 350,000 metric tons.  Of Taiwan's total exports 
shipped by air, Mainland China, including the PRC, Hong 
Kong and Macau, accounted for 30 percent.  The United 
States had the next highest percentage at 18 percent. 
 
¶7. (U) Cargo is particularly important to Taiwan's major 
airlines.  In 2005, China Airlines and EVA ranked seventh 
and ninth, respectively, for total scheduled freight 
flown by ton-kilometers.  If combined, they would rank 
second after FedEx and ahead of UPS.  While cargo 
generally accounts for about half of total revenue for 
the two airlines, it usually makes up a much higher 
portion of total profit. 
 
More, More, More 
---------------- 
 
¶8. (SBU) Direct cross-Strait flights would have few 
economic drawbacks for Taiwan.  Some of the many 
advantages include the following: 
 
--Domestic Investment - Direct air links would make 
Taiwan a more attractive investment environment.  The 
Taiwan government has long promoted the goal of making 
the island a regional operations and logistics center. 
These plans have been stuck on the runway in no small 
part because the lack of direct links eliminates one of 
Taiwan's main advantages -- its close proximity to China, 
the most rapidly growing economy in the region.  The 
American Chamber of Commerce in Taipei and other foreign 
business interests have repeatedly told Taiwan (and AIT) 
that with direct links, expatriates who might otherwise 
need to reside in the Mainland could opt to live in 
Taiwan.  They underscore Taipei's conveniences and high 
standard of living.  As an example, air quality, one of 
Taiwan's advantages has only improved with the migration 
of manufacturing to the Mainland.  At the same time, 
poorer air quality has hurt Hong Kong's attractiveness as 
a home for expatriate businessmen. 
 
--Foreign Trade - Less expensive air cargo costs would 
only increase the competitiveness of Taiwan's exports to 
the Mainland.  More rapid and efficient transportation 
could reduce pressure on some firms to move manufacturing 
operations to the Mainland in order to stay integrated in 
industry supply chains. 
 
--Residents - In addition to expatriate businessmen, 
direct links could allow some Taiwan investors now 
resident in the Mainland to move back to Taiwan.  By some 
accounts, Taiwan investors and their families total as 
many as one million residents in the PRC.  Some market 
observers believe that anticipation of direct flights has 
helped fuel recent strong performance in Taiwan's 
residential property market. 
 
--Tourists - Taipei and Beijing are currently discussing 
further opening Taiwan to PRC tourists.  Many hope that 
Taiwan can replicate the experience of Hong Kong, where 
PRC tourists have made a major contribution to recent 
growth.  Direct flights would facilitate PRC tourism to 
Taiwan. 
 
Moving Forward 
-------------- 
 
¶9. (SBU) Some of the important recent milestones in 
cross-Strait aviation include the following: 
 
--January 2003 First Lunar New Year (LNY) Charters - For 
the first time, Taiwan airlines carried passengers from 
Shanghai to Taiwan before the holiday with return flights 
to the Mainland afterwards.  The flights carried 
passengers in one direction only on each roundtrip 
flight.  The flights had to land in Hong Kong before 
 
TAIPEI 00000246  003 OF 004 
 
 
proceeding to Shanghai.  Passengers were limited to 
Taiwan investors in the PRC and their families.  In all, 
the six Taiwan airlines flew a total of 16 flights (ref 
K). 
 
--January 2005 Two-Way, Non-Stop LNY Charters - Taipei 
and Beijing were unable to reach agreement on charter 
flights for the LNY holiday in 2004.  However, for 2005, 
they agreed that Chinese airlines would participate in 
the flights.  Planes carried passengers in both 
directions on each roundtrip across the Strait.  In 
addition, planes did not have to land in Hong Kong en 
route.  Instead, they passed through Hong Kong airspace. 
PRC destinations were expanded to include Beijing and 
Guangzhou.  However, passengers were again limited to 
Taiwan investors and their families.  Taiwan and PRC 
airlines flew a total of 96 flights over the course of 
about 3 weeks (ref J). 
 
--August 2005 PRC Overflight - Taiwan announced in August 
2006 that it would permit Taiwan airlines to seek 
permission from the PRC to fly through Chinese airspace 
on routes to Europe and the Middle East.  PRC aviation 
authorities have generally approved these requests (ref 
I). 
 
--January 2006 LNY ChartersQurther Expansion - LNY 
holiday charters were expanded in 2006 to include Xiamen 
as an additional PRC destination.  In addition, passenger 
restrictions were relaxed to include any Taiwan passport 
holder with valid PRC entry documents, employees of 
Taiwan companies, and their family members.  A total of 
144 flights were operated over more than 3 weeks (ref H). 
 
--June 2006 Institutionalized Holiday Charter Flights - 
On June 14, 2006, Taipei and Beijing announced an 
agreement to implement charter flights during each of 
four major holidays -- LNY, Tomb Sweeping Festival, 
Dragon Boat Festival, and Mid-Autumn Festival.  Eligible 
passengers are still limited to the same restrictions for 
2006 LNY charter flights.  Airlines will fly 192 flights 
over 4 weeks during the LNY holiday and 48 flights over 2 
weeks during each of the other three holidays.  This 
expands charter flights to a total of 336 flights during 
10 weeks of the year.  The first round of holiday 
charters under the new agreement was conducted for the 
Mid-Autumn Festival in September and October 2006.  The 
next round for the Lunar New Year holiday will begin on 
February 5 (ref G). 
 
--June 2006 New Charter Flights - In addition, the two 
sides agreed in June to allow special cargo, medical 
emergency and humanitarian charters.  The special cargo 
charters are limited to flights chartered to carry the 
cargo of a single firm.  To date, the only cargo charters 
have been contracted by Taiwan Semiconductor 
Manufacturing Company (TSMC).  It chartered five flights 
to carry equipment to its factory in China.  Seven 
medical emergency charters have been conducted.  To date, 
there have been no humanitarian charters.  Some observers 
have commented that it is unclear what would be 
categorized as a humanitarian charter but fall outside 
the scope of medical emergency charters (ref G). 
 
Comment - Stopping Short 
------------------------ 
 
¶10. (C) These events show that the two sides have made 
significant progress, but the current situation still 
falls far short of what the business community seeks. 
Regularly scheduled, frequent, widely accessible cross- 
Strait air travel would help Taiwan, U.S. and other 
foreign businesses.  It could have a transformational 
effect on Taiwan's economy, assisting its efforts to 
become a regional operations and logistics center, 
develop the service sector and prevent economic 
marginalization.  Taipei and Beijing are currently 
engaged in industry-led discussions on a more extensive 
set of frequent cargo and weekend passenger charter 
 
TAIPEI 00000246  004 OF 004 
 
 
flights as reported refs B and C.  Nonetheless, political 
considerations on both sides continue to block more 
significant progress on direct air links.  AIT has 
publicly supported American businesses in encouraging 
Taiwan to move forward on this most important of cross- 
Strait economic initiatives.  End comment. 
YOUNG