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Cablegate: Taiwan's International Airlines Thrive, but Local

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
RHHMUNA/USPACOM HONOLULU HI IMMEDIATE
RHEFDIA/DIA WASHINGTON DC IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RULSDMK/DEPT OF TRANSPORTATION WASHDC IMMEDIATE

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

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