TAIWAN'S AIR CARGO MARKET LOSING ALTITUDE

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004161

SIPDIS

DEPT FOR EAP/TC, EB/TRA
DEPT PASS AIT/W
COMMERCE FOR ITA/MAC/ASIA/MBMORGAN CABLE BOX 4431

E.O. 12958: DECL: 10/07/2015
TAGS: EAIR ECON ETRD CH TW
SUBJECT: TAIWAN'S AIR CARGO MARKET LOSING ALTITUDE

REF: TAIPEI 3752

Classified By: AIT Director Douglas H. Paal, Reason 1.4 d

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


1. (U) Taiwan's international air cargo volume
grew by a minuscule 0.7 percent in the first half
of 2005 after a decade of nearly uninterrupted
strong growth. Although transit cargo increased,
exports and imports both declined. July monthly
figures showed declines across all three
categories. The movement of Taiwan's IT
manufacturing to the PRC is largely to blame. The
PRC accounts for the largest share of cargo
volumes for Taiwan's carriers. They are using
various strategies, including investment in PRC
carriers, to access the PRC market in the absence
of direct air links. Air cargo will continue to
be an important part of Taiwan carriers' strategy,
but Taiwan will be of declining importance as a
source or destination of cargo. End Summary.

Taiwan Air Cargo Market in Decline
--------------


2. (U) Taiwan's international air cargo volume
barely changed in the first half of 2005 from the
same period in 2004 after a decade of strong
growth interrupted only by a one year of decline
during Taiwan's recession in 2001. More
disturbing for Taiwan cargo carriers, export and
import air cargo volumes dropped 3.6 percent and
5.4 for the first half respectively. Only because
of 14.4 percent growth in transit volume was total
cargo able to eke out anemic 0.7 percent growth.
Air cargo volumes for Taiwan's two international
airports, Chiang Kai-Shek International and
Kaohsiung International, released by the Ministry
of Transportation and Communication (MOTC) are
provided below in metric tons:

Year Total Import Export Transit
-------------- -------------- -------------- -------------- --------------

2001 1,278,618 433,502 607,824 237,293
2002 1,476,530 460,002 684,542 331,986
2003 1,584,673 465,237 726,441 392,995
2004 1,788,778 525,807 735,346 527,625
Jan-Jun 852,045 252,937 360,425 238,684
2005
Jan-Jun 857,820 243,831 340,944 273,048


3. (U) The latest figures for July 2005 offer no
reassurance. Total volume was down 5.6 percent
from the same month in 2004. Export and import
volumes were down 8.6 percent and 3.4 percent
respectively. Even transit volume fell 3.8
percent. These data suggest the trend could
worsen.

Factories Moving Instead of Cargo
--------------


4. (C) Taiwan's air cargo traffic is dominated by
electronic goods, which accounted for 63.2 percent
of exports and 25.3 percent of imports. The
category of "other manufactured goods" accounted
for most of the rest with 29.7 percent of exports
and 42.3 percent of imports. The decline in
export volume may be due in large part to the
transfer of Taiwan's IT manufacturing to the PRC.
The shipment from Taiwan of high-tech components
used to assemble electronic consumer goods in the
PRC was an important component of earlier growth
in air cargo. However, as increasingly advanced
manufacturing from farther up the supply chain
moves to the Mainland, electronics exports to the
PRC shipped by air are likely to continue to
decline. DHL Taiwan Director of Operations Nick
Chen identified the movement of Taiwan's entire
notebook PC manufacturing industry to the PRC as
the major cause of declining cargo volumes. He
added that TFT-LCD panels produced in Taiwan would
not reverse the decline as some had hoped. He
speculated that the panels will increasingly be
shipped by sea as the market supply stabilizes.

PRC Market Dominance
--------------


5. (U) MOTC air cargo statistics confirm the
importance of the PRC market to Taiwan carriers,
but the exact volume is difficult to estimate
because MOTC data includes the PRC in "other Asia
areas." This category accounted for 20.8 percent
of exports and 8.3 percent of imports. Trade with
the United States, Japan, and Hong Kong made up
most of the rest, accounting for 17.6 percent,
13.5 percent, and 11.8 percent of exports
respectively, and 22.9 percent, 20.9 percent and
10.3 percent of imports respectively.


6. (C) MOTC does not release source or destination
data on transit cargo. Nevertheless, increasing
transit volumes suggest that much of it is cargo
originally from the PRC in transit to the United
States and elsewhere. EVA Air Deputy Senior Vice
President for Cargo Management J.J. Lin (Jyh-jong)
told AIT/T that the Greater China market accounts
for 40 percent of EVA's total air cargo.

Challenge: Getting PRC Cargo on Taiwan Planes
--------------


7. (C) PRC carriers have had a shortage of air
cargo capacity, but are moving quickly to increase
it. CAL and EVA rank fifth and seventh
respectively among international air carriers in
terms of cargo capacity, and will continue to
expand capacity in the next few years despite
discouraging trends in the Taiwan market. CAL
President Philip Wei told AIT/T that CAL will take
delivery of three more 747 freighters by 2007 and
is in talks with Boeing to buy more. EVA plans to
convert eight 747 passenger jets to freighters
between 2007 and 2009. The challenge these
carriers face is taking advantage of China's
current capacity shortage despite being
handicapped by the lack of direct air links.


8. (C) CAL, EVA and even some of Taiwan's smaller
carriers have been resourceful at finding ways to
tap the PRC's air cargo market. Reftel reported
China Airlines purchase, together with Taiwan-
based shipping lines Wan Hai Lines and Yang Ming
Marine Transport and Belgium's air cargo carrier
CargoLux, of a 49 percent stake in PRC cargo
carrier Yangtze River Express. CAL's Wei told
AIT/T that his firm has abandoned plans to invest
in China Cargo Airlines, but maintains
cooperative arrangements with several PRC
carriers that allow it to carry PRC cargo out of
Hong Kong. He added that CAL even carries cargo
from the PRC that is shipped by sea from Xiamen
to Kaohsiung.


9. (C) Not to be outdone, EVA Airways signed a
joint venture agreement with Shanghai Airlines to
form an air cargo firm on September 30. EVA's
parent conglomerate, Evergreen, will pay RMB 200
million (about USD 25 million) for a 45 percent
stake in the venture. EVA will hold 25 percent
and other Evergreen units will hold the remaining
20 percent. According to EVA's Lin, the airline
had already arranged with Shanghai Airlines to
purchase the entire capacity of five weekly cargo
flights from Shanghai to Macau. This cargo is
transferred to EVA aircraft in Macau. EVA also
uses Xiamen-Kaohsiung marine shipping to route
PRC cargo onto EVA planes.

10. (U) In addition, Taiwan's TransAsia Airlines
is working on an alliance with Xiamen, Yunnan and
Shanghai Airlines to move cross-Strait transit
cargo. EVA and CAL together partnered with Far
Eastern Air Transport (FAT) and Taiwan Airport
Service Company (TASC),to buy 49 percent of
Xiamen Air Cargo Warehouse Co (reftel).


11. (C) At the same time, Taiwan's large carriers
are hoping and preparing for direct cross-Strait
air links. EVA's Lin told us that his firm is
prepared to take advantage of any breakthrough
quickly, but claimed he had no idea when such a
breakthrough might occur. CAL's Wei also denied
knowing how soon the two sides might reach an
agreement on direct flights. However, he did say
that he "knew" that they Taiwan and the PRC have
agreed to implement cargo and passenger charters
at the same time.

Oil Prices - Not a Problem, Yet
--------------


12. (C) Taiwan air carriers have been able to
manage rising oil prices to date. CAL's Wei
claims the firm earns USD 5 to 6 million per month
hedging oil and can continue to do so until the
middle of 2006. Cathay Pacific Taiwan General
Manager told AIT/T that although passenger fuel
surcharges do not make up the additional costs of
higher prices, cargo fuel surcharges do. DHL's
Chen confessed with some embarrassment that DHL is
actually making more money than previously thanks
to fuel surcharges but predicted it wouldn't last.

Comment - Even Taiwan Carriers will Bypass Taiwan
-------------- --------------


13. (C) EVA and CAL have generally earned higher
profits from cargo than passenger traffic. Their
strategies in the face of declining volumes, lack
of direct links and higher oil prices show that
these carriers are determined to stay competitive
in the global air cargo market. If Taiwan air
cargo exports and imports continue to fall, which
appears likely, EVA and CAL will need to invest
more resources in PRC ventures. Some of these
resources could be invested in Taiwan operations
if the Chen Administration and the PRC were to
move more quickly on cross-Strait direct links.
Unfortunately for Taiwan, this economic factor
is unlikely to have much impact on the political
calculations driving cross-Strait policy. End
comment.
PAAL