Overcapacity hampers airlines

The government must help coordinate consolidation of Taiwan's domestic airline sector and reduce the current four airlines to two if any are to survive excess flight capacity and future competition from the north-south high-speed railway, according to industry leaders and analysts.

Chang Jung-fa (張榮發), chairman of the Evergreen Group (長榮集團), told reporters in Japan on Monday that Taiwan has long faced over-capacity with four airlines operating in a market only large enough for two to survive.

Chang, whose group operates EVA Airways Corp (長榮航空) and Uni Airways Corp (立榮航空), said that while airlines appeared willing to merge if the government doesn't step up and coordinate merger activity, airlines could go out of business.

The government wouldn't have to wait for the arrival of the north-south high-speed railway, since the collapse of one airline would trigger a domino effect that could sweep the industry, Chang said.

The negative impact of such a scenario on the economy would be very hard to predict, he said.

The high-speed railway built by the Taiwan High-speed Rail Corp (台灣高鐵) is scheduled to be operational by 2005 to ferry passengers between Taipei and Kaohsiung in around 90 minutes at a cheaper fare, which constitutes a serious threat to airlines.

The main problem for the four domestic airlines -- Far Eastern Air Transport Corp (遠東航空), Uni Airways, Mandarin Airlines (華信航空) and TransAsia Airways (復興航空) -- is simply that too many airlines were awarded licenses when the sector was opened up in 1988, Chang said.

According to Peter Negline, a regional airline analyst at JP Morgan in Hong Kong, this problem has been compounded by over-investment and looming rail competition.

"Demand is very weak, and there's also been a lot of over-investment by airlines partly in anticipation of the opening up of cross-strait flights," Negline said. "Then there are issues such as the rail link and the competition that's going to provide."

The government had been attempting to promote merger activity under the stewardship of former Minister of Transportation and Communications Yeh Chu-lan (葉菊蘭), but consistent poor financial performance among virtually all airlines and a host of other technical issues seriously hampered the initiative.

Out of the nation's six airlines, only China Airlines Co (華航) recorded a profit last year, according to Alex Shih (施建華), secretary-general of the Taipei Airline Association, with the situation unlikely to improve this year.

There was a general consensus among industry observers with Chang's assertion that airlines are willing to consolidate, but are simply looking for a workable method -- or indeed some government aid to expedite merger activity -- to initiate such plans.

"All the airlines agree with Chang and are willing to merge," Shih said. "But the actual `how to do it' remains a big problem with serious technical issues such as what to do with excess aircraft, employees, market share and fair trade issues needing resolution," he said.

JP Morgan's Negline said there was a general understanding of a need for "rationalization of capacity" through downsizing on mergers but that working out the nut and bolts of such activities is a tough task.

"The problem in all of that is how do you execute the downsizing and who is going lead that? People get concerned about market share and currently aircraft prices are quite weak," he said. "Clearly there's going to be a lot of people taking book losses."