Domestic carriers fighting for air

SAFETY IN NUMBERS: These are difficult days for the nation's aviation firms as plans for mergers begin to take shape. But even this may not be enough

By Jessie Ho  /  STAFF REPORTER

Mon, Nov 06, 2006 - Page 11

Barely coping with declining passenger numbers and high fuel costs, the nation's four airlines operating domestic routes have a still tougher challenge ahead when the Taiwan High Speed Rail Corp's (THSRC, 台灣高鐵) west coast service begins at the end of the year.

With cheaper seats, the bullet train is expected to snatch passengers away from the domestic airlines. According to a Civil Aeronautics Administration (CAA) evaluation, domestic air traffic in the western corridor will fall by two-thirds after the high-speed railway launches.

In preparation for the pending crisis, the four domestic airlines -- Mandarin Airlines (華信航空), Uni Airways Corp (立榮航空), TransAsia Airways (復興航空) and Far Eastern Air (遠東航空) -- will jointly operate the Taipei-Kaohsiung and Taipei-Tainan routes after gaining approval from the Fair Trade Commission for the combined strategy last month.

Taipei-Kaohsiung flights account for 50 percent of all domestic air traffic, and business for this route is expected to be hit the hardest by the high-speed railway.

According to the deal, passengers on the two routes can board any flight that is available regardless of the airline that sells the tickets and without extra charge.

The four airlines have agreed on a way of splitting the bill that is incurred from switching flights, but they refuse to reveal the details.

Even so, the joint operation will not be enough to sustain the four airlines.

Domestic air traffic has been declining over the past 10 years. According to CAA statistics, a high of 37.4 million passengers traveled domestically by air in 1997. This figure slid to 19.29 million passengers last year.

And despite cutting the number of flights, the load factor -- the ratio of paid passenger seats to total seating capacity -- reached only 65.5 percent now, the statistics showed.

The nation's lackluster economy and industry migration, which has reduced vitality in business travel, have resulted in the downturn, said Janet So (湛華生), public relations manager at TransAsia Airways.

High oil prices further inflicted damage upon the four fragile airlines, So said.

Against this backdrop, Evergreen Group (長榮集團) chairman Chang Jung-fa (張榮發) said last week that the four carriers operating domestic flights should consider consolidation. Evergreen Group owns Uni Airways and EVA Airways (長榮航空), the nation's second largest carrier.

Uni Airways, for example, could be merged with EVA Airways, while Mandarin Airlines could be merged with parent company China Airlines (華航), the nation's largest carrier, Chang suggested.

To ease the impact brought by the bullet train, Chang called on the government to waive taxes for the four airlines for five years.

His remarks came after he took the high-speed train during a test ride. Praising it as smooth and safe, he said he believed that the high-speed railway would make a profit within six months of operation.

Chen Tien-shih (陳天識), director of the CAA's Air Transport Division, said the administration was drafting measures for the consolidation and would announce them soon.

While the airlines understand that consolidation is essential, they hesitate to do so because of future distribution of traffic rights, particularly in regard to China, Chen said.

According to aviation regulations, each airline operates a quota for certain regions, and mergers and acquisitions (M&As) would result in a reduction of the quota, he said.

China Airlines chairman Philip Wei (魏幸雄) agreed that there were too many airlines in a small market, but he said that market forces should be allowed to eliminate weak players rather than a government-led consolidation.

Unlike M&As in the banking industry, in which parties only need to take assets and liabilities into account, airlines need to integrate fleets, which is a huge cost, Wei said. The cost includes parts purchasing, maintenance and staffing, and that is why most airlines try to streamline their fleets to save money, he said.

"The combined airlines may lose a big amount of money before the synergy is created," Wei said.

A five-year tax waiver would not help the airlines, either, he said, because "the airlines already don't need to pay tax when they're in the red."

Without rich parent firms like Mandarin Airlines and Uni Airways to compensate losses, Far Eastern Air saw a loss of NT$50 million (US$1.52 million) in the first three quarters of the year, Far Eastern manager Jason Chen (陳進勇) said.

Although TransAsia Airways earned NT$14 million in the January-September period, profits may be eroded by a slack fourth quarter, So said.

Acknowledging the difficulties with consolidation, Chen said that all four airlines were trying to boost revenues in international routes. Far Eastern Air currently operates flights from Taipei to Palau, Jeju and Angkor, and from Kaohsiung to Inchon, Laoag, Hanoi and Ho Chi Minh City, as well as a number of charter flights.

After a series of promotions, the carrier's international flights have contributed to half of its revenue, Chen said.

"We are not that pessimistic about the post-bullet train era," he said.

The key to long-term survival for the carriers is still liberalization of cross-strait transportation, Chen said.

With a sizeable number of Taiwanese businesspeople traveling frequently between Taiwan and China, the new market would be a shot in the arm for the four carriers, he said.