Thu, Mar 22, 2001 page18

• Local carriers face gray skies

  Five years ago Taiwan had nine airlines successfully serving domestic routes. But times have changed as falling passenger numbers and other challenges have caused unexpected turbulence for the four survivors

  • By Brent Hannon / CONTRIBUTING REPORTER
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  Despite the competition -- six airlines once flew the Taipei-Kaohsiung route -- most of the domestic carriers posted healthy profits in the mid-1990s. Taiwan was considered a shining success airline deregulation, and was held forth as an example for other Asian countries to follow.

  Today the situation is very different. Just four airlines fly domestic routes, and all of them are struggling to make money. The four carriers -- UNI Air (立榮航空), Mandarin Airlines (華信航空), TransAsia Airways (復興航空), and Far East Air Transport (遠東航空) -- cut a combined 47 flights per week in February, yet their airplanes remain just half full. According to the Civil Aeronautics Administration (CAA, 民航局), the number of passengers on domestic flights fell from 16.1 million in 1999 to 13.1 million in 2000, an 18.6 percent drop. In 1997, the first year the aeronautics administration kept records, 18.6 million passengers flew domestic flights -- 30 percent more than in 2000.

  The prospects for 2001 look just as bleak, with all four airlines predicting losses on domestic routes. Taiwan is a troubled market, said Daniel Pierce, director of Asia Pacific sales for Bombardier Aerospace. Passenger traffic is stagnant or dropping, the airlines have excess capacity, and now the high-speed train is being built, and its fares will be 25 percent lower than the air fares. Several factors caused the decline in domestic air traffic. Costs increased as the airlines switched from cheap and efficient propeller-driven airplanes to gas-guzzling jets, which are more expensive to buy, maintain and operate. Ticket prices rose -- last year the airlines raised fares 20 to 30 percent on key routes, and up to 50 percent on secondary routes -- and customers found other travel options. The north-south highway has been expanded and is faster than it was five years ago, and train and bus services have also improved. Taiwan's slowing economy and depressed stock market contributed to the decline, and a long series of accidents has also taken a toll. From 1993 to 1999, Taiwan's airlines suffered seven fatal accidents that killed 500 people. China Airlines (華航) had four wrecks in the 1990s, causing 469 deaths and destroying four airplanes, and Formosa Airlines (國華航空) crashed a Dornier 228 in Matsu in 1997, killing 16 people.

  

  Taiwan currently has four airlines flying domestic routes and all of them are struggling to make money. The prospects for 2001 look no better, with all four airlines predicting further losses.

  PHOTO: GEORGE TSORNG, TAIPEI TIMES

  Another Formosa Airlines Dornier 228 crashed in Matsu in April 1996, two months before China Airlines bought its controlling stake, causing five deaths, while a third Formosa Dornier 228 plunged into the sea near Green Island in 1993, taking six lives. A TransAsia Airways ATR 72 wreck in 1995 killed four more.

  As passenger numbers declined, the airlines were slow to cut routes and sell aircraft, a standard industry practice that reduces costs and provides quick income. The carriers are reluctant to prune their fleets because they are waiting for direct flights from Taiwan to China. Rather than sell aircraft now, and then buy or lease more planes when direct flights begin, they are choosing to retain their current fleets in anticipation of a cross-strait breakthrough.

  The airlines also have limited freedom to cut services. They must apply for government approval to reduce frequencies or eliminate routes, and such approval is seldom given. On Feb. 1, CAA did allow the airlines to drop 47 frequencies per week, and each carrier cancelled several routes. "We would like to cut flights further to save money, but we cannot because of the government pressure," said Mandarin Airlines spokesman Vincent Chen.

  Into the red

  The resulting overcapacity, combined with the drop in passenger traffic, rising fuel costs, and a weakening NT dollar, has plunged three of the four carriers into the red. Far East Air remains profitable, but its after-tax profit of NT$10 million (US$300,000) in 2000 is a far cry from the US$30 to US$50 million annual profits it posted in the mid-1990s. The airline foresees another tough year in 2001. "This year we hope we can make a little money, but we haven't seen any improvement in our load factors," said a Far East Air manager. Far East Air's load factor in 2000 was 56 percent.

  Like its competitors, Far East Air flies a handful of overseas routes and charters, including Bali, Rangoon, Guam, Saipan, Cebu, and Chiang Mai, but competition from China Airlines and EVA Air limits the number of profitable regional routes that are available.

  Far East Air remains the largest domestic carrier -- in 2000 its domestic market share was 38 percent, followed by TransAsia with 29 percent, UNI Air with 24 percent, and Mandarin Airlines with 9 percent.

  TransAsia lost NT$53 million in 2000, says spokesman Janet So, a dramatic improvement from its NT$1.75 billion (US$55 million) loss in 1999. TransAsia is kept afloat by its lucrative Taiwan-Macau routes, which enjoy load factors of 80 percent, and contributed 40 percent of the airline's 2000 revenue. When the Macau airport opened in 1995, the CAA awarded the route to EVA and TransAsia, but not China Airlines, and it has since become a popular destination and gateway to China. TransAsia has eight daily flights from Chiang Kai-shek International Airport to Macau, and four daily flights from Kaohsiung Hsiaokang International Airport to Macau. Unlike Far East Air and TransAsia, UNI Air and Mandarin are subsidiary airlines, and don't compete directly with the two majors on overseas routes. EVA allows its subsidiary UNI to fly regional charters and thin scheduled routes, and China Airlines does the same with its subsidiary Mandarin. Mandarin's overseas routes are profitable, said Chen. The airline posted a NT$10 million profit in 2000, but that was due to the one-time sale of a Boeing 747-400. In 2001, the carrier projects a loss of NT$100 million. China Airlines wants to sell half of its 90 percent stake in Mandarin, but no offers are imminent as China Airlines asking price remains too high. Mandarin's overseas routes include Pattaya, Phnom Penh, Chiang Mai, and Kuantan in eastern Malaysia.

  UNI Air is in poor shape. Its load factor in 2000 was 55 percent, and this year so far it is just 56 percent. UNI would not comment on its finances, but sources say the airline lost about NT$1 billion in 2000 as it struggled with high interest rates on its debt, which stood at NT$17 billion at the end of 1999. Parent company EVA is not expected to support UNI indefinitely.

  UNI Air has postponed delivery of six Bombardier Dash 8-Q400s that were originally due to arrive in early 1999. "We didn't cancel the order, but we postponed it while we consider the market," said UNI airport manager Mandy Yu (游敏鈴). UNI must make a final decision on the aircraft by June.

  Reducing the fleet

  Unlike its competitors, Mandarin is shrinking its fleet. It plans to sell its two Fokker 100s, and is considering returning one or more of its three leased Boeing 737-800s. Far East Air is keeping its 16 aircraft, and is looking for more charter business, while TransAsia will take delivery of another ATR 72-500 later this year. TransAsia is also trying to sell and lease back one or more of its three older ATR72-300s.

  The carriers originally ramped up their jet fleets in anticipation of direct flights to China, and as a result they are stuck with aircraft that are ill-suited for the 30 to 50-minute hops that predominate in Taiwan. Far East has an all-jet fleet of MD-80s and Boeing 757s. The other three carriers have mixed turboprop and jet fleets, but none of them fly the efficient new 50 to 70-seat regional jets that dominate the short-haul markets in the US. Instead they have larger jet aircraft that are slow to load and unload, and expensive to operate. "Those MD-90s are killing UNI," said Pierce.

  The domestic airlines also must worry about the high-speed rail that is scheduled for completion in 2006. The train will make the trip from Taipei to Kaohsiung in 90 minutes, with stops in 12 cities, and will cost less than an air ticket. Evergreen Corp (長榮), parent company of EVA and UNI, is hedging its bets as it is part of a five-company consortium that is building the high-speed rail.

  As always, the possibility of direct flights to China creates optimism. The CAA favors competition, and has a reputation for fairness in dividing up overseas routes. The domestic carriers believe the aeronautics administration will award Beijing, Shanghai, and other major cities to China Airlines and EVA, and will allow the smaller carriers to serve China's secondary cities. Direct flights to China seem likely to occur after China and Taiwan join the WTO in the next year or two. The ban on direct flights is illegal under WTO rules. Taiwan can invoke a special exclusion to maintain the ban, but the government has indicated that it will not invoke the exclusion. China flights would give a boost to the struggling airlines -- if they can hold out that long.

  For your information

  Taiwan's changing carriers

  * In 1995, a construction company bought China Asia Airlines, and changed its name to U-Land (瑞聯航空). Despite marketing innovations that included NT$1 fares, and using betel-nut girls as vendors, U-Land was grounded by the Civil Aeronautics Administration last year due to maintenance violations and unpaid fees. * In 1996, China Airlines bought a controlling stake in Formosa Airlines, and later merged Formosa with its international subsidiary, Mandarin Airlines. Mandarin was launched to fly to politically sensitive destinations, but it became superfluous when China Airlines re-painted its airplanes in 1995, replacing the provocative Republic of China flag with an innocuous plum blossom. * In 1998, EVA merged subsidiaries Great China (大華航空), Taiwan Airlines (台灣航空) and Makung (馬公航空) into a single carrier called UNI Air. * TransAsia and Far East Air are still flying, and China Airlines and EVA gave all local routes to their subsidiaries. That leaves the current four airlines: TransAsia, Far East Air, UNI and Mandarin.
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