VZCZCXRO6695
OO RUEHCN RUEHGH RUEHVC
DE RUEHIN #1704/01 2120932
ZNR UUUUU ZZH
O 310932Z JUL 07
FM AIT TAIPEI
TO RUEKJCS/SECDEF WASHINGTON DC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE
RUEHUL/AMEMBASSY SEOUL IMMEDIATE 8799
RUEHKO/AMEMBASSY TOKYO IMMEDIATE 8957
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UNCLAS SECTION 01 OF 02 TAIPEI 001704 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/TC,EEB/TRA 
 
E.O. 12958: N/A 
TAGS: EAIR ECON PREL EINV ETRD TW CH
SUBJECT: TAIWAN'S INTERNATIONAL AIRLINES THRIVE, BUT LOCAL 
AIRLINES SUFFER 
 
REF: TAIPEI 01095 
 
 SUMMARY 
 
¶1. (SBU) Faced with rising fuel costs, some of Taiwan's 
airlines are struggling to stay in business.  The two 
international carriers, China Airlines and EVA Airways, are 
expanding routes in Asia as a central component of their 
future growth, and the Taiwan to Hong Kong and Macau routes 
are extremely profitable. At the same time, Taiwan's four 
domestic airlines continue to lose money and customers, due 
in part to the impact of Taiwan's new high-speed rail (HSR) 
system.  A combination of political and domestic economic 
factors makes future prospects for these carriers uncertain, 
perhaps hinging on an agreement with China to allow direct 
cross-Strait flights.  End Summary. 
 
INTERNATIONAL AIRLINES DOING WELL 
 
¶2. (SBU) Business continues to be good for Taiwan's two 
international airlines, China Airlines (CAL), which is 
majority-controlled by the Ministry of Transportation and 
Communication (MOTC), and privately-owned EVA Airways (EVA). 
In 2006, CAL revenue grew 8 percent, and the company plans to 
purchase up to NTD 40 billion (USD 1.2 million) in new 
aircraft to expand its passenger fleet.  (Note: Boeing's 787 
is the leading contender.  A CAL source told us it is the 
preferred aircraft, based solely on commercial criteria, but 
acknowledged 'other factors' in the decision process.  CAL 
has made its recommendation to MOTC, but no final decision 
has been made.  End Note.)  EVA, although unwilling to 
provide specific figures, confirmed continued growth in 
revenue from passenger service.  For both carriers, passenger 
load factors (PLF), the indicator of how full flights are, 
remain high.  CAL claims average PLF on all passenger flights 
is among the top four in the Asia-Pacific Airline 
Association.  For EVA, PLF in June and July were up to 90 
percent. 
 
¶3. (SBU) Both airlines consider regional passenger service 
generally more profitable than long-haul routes.  This year 
CAL is opening new routes from Taipei to Osaka and Sapporo 
and from Kaohsiung to Nagoya, as well as from Taipei to 
Vietnam and Cambodia.  Similarly, flights between Taiwan and 
Japan are a major profit source for EVA, although a contact 
there predicted Taiwan's domestic carriers may seek Civil 
Aeronautics Administration (CAA) approval to begin running 
charter flights to Japan by late 2007, increasing competition 
for that share of the market. 
 
¶4. (SBU) Flights between Taiwan and Hong Kong and Macau, 
however, are a much more significant portion of both 
carriers' passenger business.  CAL operates more than 120 
flights per week between Taipei and Hong Kong.  EVA's flights 
to Hong Kong and Macau are very profitable, with PLF for 
those routes averaging 95 percent on weekends (and over 75 
percent on weekdays).  Both airlines market surveys show the 
majority of passengers are Taiwan residents doing business in 
China. 
 
DOMESTIC CARRIERS CONTINUE TO SUFFER 
 
¶5. (SBU) In contrast to Taiwan's international airlines, the 
four small domestic airlines continue to see declining 
revenue and PLF.  Far Eastern Air, TransAsia, UNI Air and 
Mandarin Airways have small fleets, each between 13 and 20 
aircraft.  Their profitability has been reduced by the 
increasing price of aviation fuel.  Between January 2005 and 
May 2007, for example, fuel prices have increased 49 percent. 
 One airline sources estimates that with oil prices over USD 
70 per barrel, fuel comprises over 40 percent of airlines' 
operational costs. 
 
¶6. (SBU) The negative impact of rising fuel prices is 
compounded by the continued decline in demand for local 
flights.  Taiwan's domestic carriers are authorized to 
operate only a limited number of routes.  On the island's 
main west coast routes, which account for 50 percent of 
revenue for domestic carriers, PLF were down to 49 percent of 
total capacity by May of this year.  Flights between Taipei 
and Taichung have been cancelled because of the steep drop in 
demand. 
 
TAIPEI 00001704  002 OF 002 
 
 
 
VARIOUS REASONS WHY 
 
¶7. (SBU) The divergence between Taiwan's international and 
domestic airlines is due to several factors, including 
improvements in road and rail infrastructure, shifts in 
domestic travel patterns, and slower growth of average 
household disposable income over the last seven years. 
 
¶8. (SBU) Industry observers and airline executives all agree 
that Taiwan's HSR system has hurt the domestic carriers 
(Reftel).  The impact will likely worsen in September when 
HSR service will increase to 60 roundtrips per day. 
 
¶9. (SBU) According to MOTC data, the volume of domestic 
travel has steadily declined, from 580 million travelers in 
1996 to 431 million travelers in 2005.  In that period, the 
number of people traveling by train increased by 11 million. 
Train travel represented 7 percent of total travel in 2005, 
versus 1.6 percent for air travel.  The data also indicate a 
decrease in the number of motor vehicle trips around Taiwan. 
Apparently, people are traveling less domestically, and when 
they do they are increasingly likely to take the train. 
 
¶10. (SBU) Some airline industry observers contend the decline 
in demand for domestic flights is related to slow growth of 
household disposable income.  Between 2000 and 2005, average 
disposable income per household increased overall by less 
than 1 percent.  Compared with the approximately 10 percent 
overall growth in the 1980s and 6 percent overall growth in 
the 1990s, recent growth seems trifling in Taiwan.  Since a 
higher proportion of international travel is 
business-related, Taiwan's lackluster household income growth 
may disproportionately affect local flights. 
 
CAN THE SMALL AIRLINES BE RESCUED? 
 
¶11. (SBU) On June 26, Taiwan's CAA announced it will extend 
for another year measures adopted in 2006 to support Taiwan's 
struggling local airlines.  These measures consist of 
reductions in landing fees and rent for airport space.  CAA 
estimates these measures will save the airlines NTD 230 (USD 
7 million).  Even with these savings, it is unclear how long 
the unprofitable domestic carriers can continue to operate. 
In the medium term, Taiwan's small airlines want to expand 
into providing regional service.  However, a CAA source told 
us that the agency is now not willing to allow domestic 
carriers to open regional routes.  This may be due to 
President Chen Shui-bian's reluctance to expand cross-Strait 
ties lest political opponents claim he has lessened the DPP's 
commitment to establishing Taiwan's 'identity'. 
 
12 (SBU) In the long term, Taiwan's local airlines are 
pinning their hopes on getting a piece of the market if or 
when direct cross-Strait flights become a reality.  The high 
level of demand for seats on cross-Strait charter flights 
during the four major Chinese holidays suggests that the 
market for regular cross-Strait passenger flights could be 
large enough to support many competing airlines.  There has 
not, though, been any breakthrough in talks on cross-Strait 
charter flights between the Taiwan Airline Association and 
China's Civil Aviation Association to signal regular direct 
flights could begin. 
 
COMMENT 
 
¶13. (SBU) Airline industry contacts hope that an agreement on 
cross-Strait flights could be negotiated quickly after Chen 
Shui-bian has left office.  Such an agreement might be the 
only means to sustain Taiwan's struggling local carriers. 
End Comment. 
YOUNG