CROSS-STRAIT CHARTER FLIGHTS - AIRLINES

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003523

SIPDIS

DEPT FOR EAP/TC, EB/TRA/OTP

E.O. 12958: DECL: 11/05/2014
TAGS: EAIR PREL ECON CH TW
SUBJECT: CROSS-STRAIT CHARTER FLIGHTS - AIRLINES
UNENTHUSIASTIC, TIME RUNNING OUT

REF: A. 2003 TAIPEI 219


B. 2004 TAIPEI 84

C. 2004 BEIJING 17510

Classified By: Acting AIT Director David J. Keegan, Reason 1.4 (B/D)

Summary
--------------


1. (C) Largely for symbolic reasons, the Taiwan government
is pushing once again for cross-Strait charter flights to
bring Taiwan investors in the Mainland home to Taiwan for
Lunar New Year 2005. After losing money in 2003 and never
getting off the ground in 2004, Lunar New Year charter
flights in 2005 are not commercially attractive to Taiwan's
air carriers. Taiwan has shown some readiness to overcome
Beijing's objection to 2004 charter flights, but they remain
reluctant to allow full participation for Chinese airlines.
Taiwan's carriers can make much more money on other routes
during the busy Lunar New Year travel season, but if the
Taiwan government asks them to participate, they will comply.
Nevertheless, Taiwan's December 11 legislative elections
could prevent charter flights from returning this year.
Taiwan airline officials have warned us that unless the
Taiwan government reaches an agreement with the PRC soon,
there wouldn't be time to arrange the flights. Mainland
Affairs Council (MAC) Chairman Joseph Wu told AIT/T that
Beijing has shown a willingness to move forward on charter
flights, but not before the December 11 Legislative Yuan (LY)
elections. Charter flights are still a possibility, but the
clock is ticking and will run out very quickly after the
elections. (End Summary)

Lost Money in 2003, Grounded in 2004
--------------


2. (U) In February 2003, the six Taiwan airlines made
history by successfully completing Lunar New Year charter
flights between Shanghai and Taipei via Hong Kong and Macau
to provide transportation for Taiwan businessmen and their
families in the PRC (ref A). Charter flights could not be
arranged in 2004 for four main reasons: 1) the PRC demanded
that its carriers be allowed to participate, 2) Taiwan
insisted on semi-official talks to arrange the flights, 3)
Taiwan's carriers were reluctant to participate in a venture
that was likely to be unprofitable, and 4) the political
situation at the time was particularly tense leading up to
Taiwan's presidential election (ref B).


3. (U) President Chen in his October 10 National Day speech
this year and the Mainland Affairs Council (MAC) on several
occasions in the last month have publicly declared Taiwan is
eager to implement cross-Strait charter flights again during
the Lunar New Year in February 2005. MAC has already taken
steps toward resolving some of the problems that prevented
charter flights in early 2004. MAC has said that Taiwan is
willing to allow PRC airlines to participate. Moreover, both
sides have indicated that industry representatives acting on
behalf of government authorities can negotiate the conditions
for charter flights. Government officials would probably act
as unofficial advisors to industry representatives during
discussions.

High Opportunity Costs in 2005
--------------


4. (U) However, concerns about the profitability of Lunar
New Year charter flights remain. Airline officials have told
AIT that all of the airlines that participated in the 2003
charter flights lost money. Lunar New Year is the busiest
time for airlines throughout Asia. They can make a lot of
money on other routes that will be far more heavily booked
and don't have spare equipment to dedicate to unprofitable
charter flights.


5. (U) The charter flights lost money primarily due to two
factors. First, airlines were only allowed to carry
passengers one-way each trip. At the start of the Lunar New
Year, the airlines had to fly empty planes to Shanghai to
pick up passengers. At the end of the holiday, after
passengers returned to Shanghai, empty planes flew back to
Taipei. On October 13 2004, MAC vice-chairman Chiu Tai-san
stated publicly that Taiwan would allow airlines to carry
passengers both ways without an intermediate stop.
Accordingly to airlines, this would significantly improve
profitability.


6. (SBU) Airlines also lost money due to low passenger
loads. Overall, the 2003 charter flights were only 70
percent full. The inaugural China Airlines (CAL) flight was
only 30 percent full. Because the charter flights were
arranged hastily, there was little time to market the
flights. Lunar New Year is a busy travel time, and travelers
book early. Eva Airlines (EVA) claims it did fairly well in
2003 and flew at near capacity. CAL officials told AIT/T
that because of its experience in 2003 and more developed
infrastructure in the Mainland, it would be easier for CAL to
sell tickets for 2005 charter flights. Nevertheless, both
airlines said that participation in charter flights in 2005
would hurt the carriers' bottom lines.

An Invitation They Can't Refuse
--------------


7. (SBU) Despite the likelihood of losing money, the six
Taiwan airlines enthusiastically participated in the 2003
charter flights, if only for the public relations value.
Having already reaped the publicity benefits, they will be
less eager to participate in 2005. However, they are not
likely to refuse the Taiwan government's invitation to
participate if Taiwan and PRC can agree on the conditions.
The government still owns about 70 percent of CAL's shares.
In addition, airlines will want to facilitate any government
effort to move closer to regular cross-Strait direct air
links. CAL and EVA officials were both confident that if the
government asks the airlines to conduct charter flights, all
of Taiwan's carriers will participate.

Political Delay May Preclude Charters
--------------


8. (C) The election cycle is having an impact on the
possibility of charter flights again. Both CAL and EVA
officials told us that they do not expect to see any
substantial progress on the negotiation of charter flights
before the December 11 LY election. They also warned that if
Taiwan and PRC authorities cannot reach an agreement almost
immediately after the election, there would not be enough
time for airlines to make the necessary arrangements. EVA
officials told us that negotiating charter flight conditions
would take much longer if PRC airlines participate. They
speculated that Taiwan's Civil Aeronautics Administration
(CAA) might require special inspections for PRC aircraft,
possibly even require that CAA officials accompany the
flights. One MAC official told us that it would be much
easier to implement charter flights if the PRC backed away
from insisting on PRC airline participation ostensibly as a
humanitarian gesture for Taiwan businessmen in the Mainland.


9. (C) In its October 27 press briefing, the PRC's Taiwan
Affairs Office pointed out that Taiwan had not yet identified
local partners to work with Mainland organizations on charter
flights (ref C). MAC Chairman Joseph Wu told AIT/T that they
saw this pragmatic statement as a very positive sign from the
PRC. Using an aviation industry contact as an unofficial
channel, MAC inquired whether this comment represented a new
opening and whether there was the possibility of moving
forward before the December 11 LY elections. According to
Wu, the PRC indicated that the statement was sincere, but
that Beijing would not make any real policy adjustments until
after the elections. MAC Senior Vice Chairman Chiu Tai-san
speculated that the constructive October 27 statement may
have been in response to Secretary of State Powell's request
earlier in the week that Beijing show flexibility in it
approach to Taiwan.


10. (C) Wu said that the Taiwan government will tone down
its public statements on charter flights before the election
for fear that a negative reaction from Beijing will allow the
Taiwan Solidarity Union (TSU) to make cross-Strait issues a
focus of the campaign. Wu said that MAC had informed Taiwan
airlines that they could independently apply to PRC
authorities for permission to conduct charters, per the 2003
practice, but has not explicitly urged them to do so. Under
those conditions, airlines are unlikely to respond. In
addition, MAC passed the word to PRC authorities that
Mainland airlines could apply to Taiwan's Civil Aeronautics
Administration for permission to conduct charter flights.


11. (C) Comment: These developments suggest that even though
time is running out, there is still some possibility that
charter flights could take place. A key indicator will be
whether any Chinese airline takes up MAC's offer and
approaches Taiwan civil aviation authorities about
participating. We don't expect to see significant progress
between now and December 11. If the Taiwan government is
determined to see charter flights in February and moves very
quickly after the election, there may still be time to make
it happen )- but not much. (End comment.)
PAAL