ECONOMICS COULD DIMINISH PRC INTEREST IN

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 001091

SIPDIS

DEPT FOR EAP/TC, EB/TRA/AVP
DEPT PLEASE PASS AIT/W

E.O. 12958: DECL: 03/14/2015
TAGS: EAIR ECON CH TW
SUBJECT: ECONOMICS COULD DIMINISH PRC INTEREST IN
CROSS-STRAIT CARGO CHARTERS

Classified By: AIT Director Douglas H. Paal, Reason 1.5 d

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


1. (C) The next Chairman of the Taipei Airlines Association
(TAA) believes that Chinese airlines are not interested in
cross-Strait charter cargo flights because they don't have
the capacity to compete with China Airlines (CAL) and EVA
Air. He says that CAL has unrealistic expectations of the
long-run profitability of cross-Strait cargo traffic. The
Chairman also predicts that Taiwan will not support adding
seventh freedom rights for cargo flights to the U.S.-Taiwan
aviation agreement in the foreseeable future. He thinks that
CAL chairman Chiang Yao-tsung will take a more active role in
the airline's operations than his predecessors. End summary.


2. (U) AIT/T econoff and econ assistant met March 10 with
TransAsia Airways Chairman Tony C.C. Fan and Assistant Vice
President of Corporate Planning William Hsu. At the April
2005 board meeting of the Taipei Airlines Association (TAA),
Fan is slated to take over the chairmanship of the
organization from Mandarin Airlines President Michael Lo.
Hsu will be TAA's Secretary General. As Chairman of TAA, Fan
would lead the Taiwan delegation in any cross-Strait aviation
discussions conducted under the "Macao model" used to
negotiate the recent Lunar New Year cross-Strait charter
flights. Fan is also the chairman of Askey Computer
Corporation, a manufacturer of modems and voice over internet
protocol (VOIP) gateways. Fan has master's degrees in
business administration and computer engineering. He also
has a doctorate degree from Cambridge University in the U.K.
However, he preferred to use Chinese in his discussion with
econoff.

Cargo Charter Flights
--------------


3. (C) Fan explained why Taiwan and the PRC want to proceed
on different tracks in expanding cross-Strait charter flight
service. According to Fan, Taiwan airlines are not
particularly interested in the PRC proposal of expanding
Lunar New Year passenger charter flights to other holidays,
such as Tomb Sweeping Festival on April 5, because they don't
see as much additional demand. Fan noted that TransAsia
generally does not see substantial increases in passenger
load factors on its Taipei-Macao flights on holidays such as
Tomb Sweeping Festival or Mid-Autumn Festival. PRC airlines
are not interested in pursuing cargo flights because they
don't have adequate cargo capacity to fully take advantage of
such flights. In contrast, China Airlines and EVA Air are
both leaders in airfreight earning about 40 percent of
revenue and almost 100 percent of profit from cargo
operations. Among Taiwan airlines, only CAL and EVA have
large cargo capacities. Fan told us that TransAsia also
earns 40 percent of its revenue from cargo operations on its
Taipei-Macao flights, but most of the cargo is carried by EVA
aircraft under a code-share arrangement. TransAsia does not
have any aircraft dedicated to cargo. In short, traditional
airline business rivalries may join with political
sensitivities to dim prospects for cross-Strait cargo
flights. Mainland carriers are unwilling to 'spot' their
Taiwan rivals a leg-up in their basic business models.


4. (C) Although he agreed that right now it is a big money
maker, Fan doubted the long-run profitability of cross-Strait
cargo service. He pointed to declining shipments of
Taiwan-produced electronic components to the Mainland.
Referring to his experience as Chairman of Askey, he
explained that he had to personally approve the shipment of
components manufactured in Taiwan to assembly plants in the
PRC. He said that the stack of approval authorizations on
his desk each month had been steadily declining as more and
more components are produced in the Mainland. He noted that
90 percent of his firm's production now takes place in the
PRC. He also reported that several years ago the firm had
set up a factory in Vietnam, but had to move it to the PRC
because they were unable to find local suppliers.


5. (C) According to Fan, in addition to declining shipments
from Taiwan to the PRC, Taiwan airlines that want to carry
PRC shipments to the U.S. via Taipei will soon face
increasing competition from U.S. and PRC airlines. These
carriers are now ramping up their cargo capacities to take
advantage of additional direct routes created by the U.S.-PRC
aviation agreement concluded last year. Fan thinks that CAL
might be hoping that the PRC would grant Taiwan airlines
fifth freedom rights for cargo flights, which would allow CAL
to fly a Taipei-Shanghai-U.S. route. He pointed out that to
date the PRC has only granted cargo fifths to Singapore,
allowing Singapore Air to fly directly from Nanjing to the
U.S. on flights that originate in Singapore. Fan thinks CAL
has unrealistic expectations because its perspective is
clouded by its close relationship with the government. He
claims EVA knows that the opportunity for big profits on
cross-Strait airfreight will soon disappear, but is publicly
enthusiastic about the potential of cross-Strait cargo
charter flights to keep up stock prices.

Cargo Sevenths with the U.S.
--------------


6. (C) When asked about support among Taiwan airlines for
adding seventh freedom rights for cargo flights to the
U.S.-Taiwan aviation agreement, Fan confirmed that EVA and
CAL would be opposed because they want to minimize
competition on their profitable cargo routes. He said that
the other smaller airlines wouldn't have much interest
because they focus on passenger traffic and internal Taiwan
flights. He personally supports opening up aviation markets.
He believes that the Taiwan government will be resistant to
further liberalization in order to protect CAL's interest.
Fan believes that the aviation industry would be better off
if the government opened up the market, even if it meant
bankruptcy for CAL. (Comment: Fan seems to be a sincere
proponent of liberalization, but TransAsia would stand to
benefit from CAL being forced to compete on a level playing
field. End comment.) He complained that airlines are not
able to share their views freely with Taiwan's Civil Aviation
Administration because CAA might discriminate against them
when distributing routes.

CAL Leadership Personalities
--------------


7. (C) Econ assistant asked Fan about the new leadership at
CAL and how the Chairman and President divided their duties.
He explained that in the past the government had assigned
retired air force officers to serve as CAL's Chairmen and the
firm's Presidents had exercised control over most of the
airlines operations. For example, CAL's former Chairman
Capt. Y.L. Lee only took charge of safety issues. During his
tenure, President Christine Tsung handled all other
operations. Fan believes that this situation has changed
under the new Chairman Chiang Yao-tsung, who took office in
July 2004. Chiang came to CAL from the Public Construction
Commission (PCC),where he was Deputy Director. He is close
to President Chen Shui-bian -- Fan called him "the King's
right hand man." He believes that Chiang will take a more
active role in a variety of operational areas.


8. (C) However, based on his recent interaction with Chiang;
Fan also believes that Chiang will carefully divide
responsibilities with the current CAL President Philip Wei.
Chiang and Fan have met recently to discuss a joint venture
between TransAsia and CAL in aviation catering. He informed
us that Chiang had insisted that the duties of the joint
venture's Chairman and President be very clearly defined.


9. (C) Fan also believes that Chiang is aggressive and not
afraid to offend. He cited Chiang's personal decision that
some of CAL's advertisements in airports would be placed in
front of EVA check-in counters. He called this practice very
unusual for airlines and believes it reflects Chiang's
unfamiliarity with airline culture. He believes the
potential for CAL and EVA to work together in areas of mutual
interest will be much reduced under Chiang.
PAAL