Taiwan airlines in the red, need China
routes By David Fullbrook
HONG KONG and TAIPEI - While airlines in other
parts of Asia bask in higher revenues and improving
profits thanks to strong economic growth, deregulation
and falling prices, Taiwan's regional carriers face a
tough future competing against bullet trains as they
wait - in vain most likely - for permission to fly to
mainland China.
Direct flights to China are
against Taiwan's law, but that could change one day.
A day of reckoning is approaching fast. Late
next year bullet trains will smash into the market,
zooming along shiny new steel rails at more than 400
km/h. The Japanese Shinkansen bullet trains will zip
between Taipei and Kaohsiung along a specially designed
viaduct now under construction in 90 minutes, against
the four hours or so taken by the fastest trains now.
"The high-speed railway will start service most
likely next October. The railway travels north to south
on the west side in 90 minutes. Our flights take 45
minutes. But there is still room to compete," says
Michael Lo, president of Mandarin Airlines and chairman
of the Taipei Airlines Association, an industry body.
There certainly is. Unlike high-speed trains in
Europe that take passengers right into the heart of
cities, capturing much of the traffic between such
places as London and Paris from airlines stuck with
out-of-town airports, Taiwan's Shinkansen uses
purpose-built stations no closer to downtown than the
airports against which it is competing.
Lo
doubts the Shinkansen will be able to undercut airline
fares for long. "I wonder how much they will charge -
they have invested heavily. If the fare is too high, we
are safe. If it is too low, they cannot afford it," he
told Asia Times Online.
That may in part depend
on how the Shinkansen lines' debts are structured. If
most of the loans are long-term, repayments will be low,
reducing monthly overheads. Shinkansen trains have one
advantage over aircraft in these days of sky-high oil
prices: they run on electricity, not aviation fuel.
Jet fuel more costly than bullet train
fuel Electricity prices fluctuate less than those
of aviation fuel since generators can adjust the mix of
coal, gas and oil. By contrast, aviation-fuel prices
will continue to rise higher and faster, tracking the
underlying petroleum price. Jet fuel by the barrel
typically costs a third more than crude oil.
Long-term oil prices are unlikely to fall
sharply. China's red-hot economy just cannot get enough.
India's economy is also becoming increasingly greedy as
its economy heats up, unlocking the potential of a
billion-plus people. Meanwhile the Saudi-led oil cartel
OPEC (Organization of Petroleum Exporting Countries) is
keeping supplies tight. Iraq's vast reserves could
temper prices, but its wells are unlikely to be pumping
at full tilt for a year or two at least.
Politics also distorts the market. Can Taiwan's
leaders afford to let a high-profile, massive investment
such as the Shinkansen fail? Consolidation has been a
dirty word for too long among Taiwan's airlines.
Shinkansen will force them to confront reality.
"High-speed rail is going to eat into the market - it
may be the catalyst that forces consolidation," says
Ravindran Devagunam, aviation expert at Deloitte
Consulting in Singapore.
Taiwan has a similar,
albeit much wealthier, population to Malaysia, crammed
into a similar space. Four regional airlines - China
Airlines (CAL) subsidiary Mandarin, Far Eastern Air
Transport (FAT), TransAsia Airlines, and EVA Air
subsidiary Uni Air - compete for traffic against good
roads and railways domestically. Obviously there is not
much pie to go around.
Malaysia has only two
airlines of any consequence - brash low-cost upstart
AirAsia and stodgy network carrier Malaysia Airlines,
plus fast-improving roads and trains.
Something
has to give because no board, no shareholder, no lender
will accept losses indefinitely. Mergers would seem the
sensible, and only, way out. "Everybody has the
intention, but we don't see any synergy between the
airlines. Everybody is in the red. There's a lot of
obstacles, that's why I urge the government to give some
incentives regarding debts and routes, but there are not
many golden routes," says Lo.
Calls for
consolidation and cost-cutting fall on deaf
ears Such calls fall on deaf government ears.
There is also little aircraft commonality among the four
carriers, a big barrier to successful cost-saving
mergers. Fleet diversity thwarts any sensible
arrangement to pool maintenance too. "I think the
airlines should have one maintenance company together.
But with so many types it's impossible," says Lo.
Sheer bloody-mindedness apart, the only reason
the four regionals have hung on so long is the prospect
of one day gaining access to mainland China. A wait that
appears likely to continue for years to come, as bluster
and saber-rattling continue to characterize political
relations between China and Taiwan. "When direct flights
begin is the major question. It has been talked about
for the last 10 years," says Jim Eckes, managing
director of the consultancy Indoswiss Aviation.
When direct flights eventually resume, having
ceased shortly after the communists' 1949 victory in the
Chinese civil war, there may not be room for all four
carriers, plus CAL and EVA.
"Direct flights will
probably begin with one or two airlines from each side
being selected and then after a year or two the
floodgates will open. Of the four, at least two will
probably hold on if the shareholders have deep pockets,"
says Eckes.
Direct air and sea transportation
and cargo links between Taiwan and China are technically
forbidden by Taiwanese law. However, under pressure from
the business community, the Taiwanese government says it
will try to implement three direct links - trade,
transportation and postal services - across the Taiwan
Strait. The Chinese government, however, won't negotiate
with the Taiwan administration of President Chen
Shui-bian on the issue, as Beijing doesn't want to do
anything to make him more popular with the business
community. He is considered pro-independence, or at
least not pro-China. So no significant progress has
taken place, or is likely in the near future, opening
the way for the four Taiwan airlines to fly to China.
Taiwan does allow its airlines to fly to Hong
Kong and Macau. This became a big issue during the
Chinese New Year, as there was talk of finally allowing
direct flights from the mainland to Taiwan. But the
sticking point in the negotiations between Taiwan and
China came when China asked for Chinese airlines to
operate the flights. Taiwan wouldn't permit that, so
people traveling between the two countries for the
holiday had to fly from Taiwan to Hong Kong, Macau, or
Okinawa on a Taiwanese airline, and then change to a
Chinese airline to reach their destination in China - or
the reverse.
Without access to the mainland, the
regionals are running on hot air. "There might be room
for some of those carriers, but there's got to be some
form of consolidation. The market is not big enough for
them without access to China or other major markets,"
says Devagunam.
Investing in new carriers in
China's deregulating airline market would give them room
to expand, although still not fly direct to Taiwan.
Unfortunately their red-stained balance sheets do not
afford this luxury. Even Mandarin, which forecasts a
slim profit this year, with more to follow in 2005 as it
cuts diversity, will not have the kind of serious money
a new airline needs. "There are not many opportunities
for the four except for some short-haul international
flights to keep them alive," says Eckes.
In the
meantime they will thrash about, trying to survive,
cutting costs where they can, scrabbling for charter
work from tour agents, who know they have the upper
hand, and lobbying the government to open direct air
routes.
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