XIAMEN AIRLINES: LOYAL BOEING CUSTOMER LOOKS AHEAD

UNCLAS SECTION 01 OF 03 GUANGZHOU 018105

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM AND EBA/TRA/AN ENGLE, DEMARS
STATE PASS USTR FOR STRATFORD/WINTER/ALTBACH
BEIJING FOR CRAIG REILLY
TOKYO FOR FAA
DOT FOR OFFICE OF INTL AVIATION OPPLER, BLOCH, GLATZ
COMMERCE FOR ITA/MAC - DAS LEVINE, MCQUEEN
COMMERCE FOR ITA/TD - ALFORD

E.O. 12958: N/A
TAGS: EAIR ECON KTIA CH
SUBJECT: XIAMEN AIRLINES: LOYAL BOEING CUSTOMER LOOKS AHEAD
TO FLIGHTS TO TAIWAN

REF: GUANGZHOU 14846

(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED. PLEASE
PROTECT ACCORDINGLY.


1. (SBU) Summary. Xiamen Airlines, a regional airline whose
biggest shareholder is China Southern Airlines, plans to add
30 new Boeing aircraft to its fleet by 2010, augmenting its
current all-Boeing fleet of 35. The fleet's simple
structure is credited in part for helping the airline
confront rising fuel costs. Most of the airline's 145
routes serve Fujian, where it enjoys a 50% market share; its
current expansion focuses on routes between Fujian and
China's largest cities, as well as increasing its presence
in the Yangtze River Delta. Looking ahead, the airline's
attention is firmly set on Taiwan and the eventual
resumption of direct cross-straits flights. Fujian enjoys
close, long-standing ties to Taiwan, and Xiamen Air's
stronghold in the former should allow it to capitalize once
direct flights resume. Curiously, and as opposed to other
Chinese airlines, Xiamen Air does not have a preference for
military aviators, looking instead for fresh university
graduates. End summary.

Company profile
--------------


2. (SBU) At a June 15 meeting in Xiamen, Xiamen Airlines
officials Huang Guohui and Lin Yingru discussed the
airline's situation. The airline (also known as Xiamen Air
and by its two-letter ICAO code: MF) started operations in

1984. China Southern Airlines is its majority shareholder
(60%),with Xiamen C & D Company owning the remaining 40% of
shares. Xiamen Air's share of the Chinese market is between
5% and 6%, and it has turned a profit for 19 consecutive
years, although rising costs have recently taken a toll on
its earnings. The airline's after-tax net profit for 2005
was roughly USD 9.5 million, down 56.51% year-on-year. In
the same year, the airline carried more than 6.92 million
passengers, up 11.1% year-on-year.

A loyal Boeing customer
--------------


3. (U) MF operates an all-Boeing fleet, composed of nine
757s and 26 737s (one -800, 15 -700s, six -500s, and four -
300s). The average age of its aircraft is seven years. MF
is set to acquire six more 737-800s by the end of 2006, and
plans to enlarge its fleet to 65 aircraft by 2010,
purchasing Boeing jets exclusively.


4. (SBU) Huang attributes part of the airline's relative
financial success to its decision to only operate two kinds
of aircraft (and then mostly 737s). In particular, this
simple structure makes it easier to implement fuel-saving
measures across the fleet. It also reduces the need for
crew training, and allows greater flexibility in dispatching
flight crews. By contrast, China Southern's hodgepodge of a
fleet has the opposite effect. MF also saves on costs by
handling its own maintenance and catering, and by offering
financial rewards to flight crews that manage to save fuel.

Fujian's airline
--------------


5. (U) MF flies 145 routes, most of which serve the province
of Fujian. In addition to its main hub at Xiamen Gaoqi
Airport, the airline has three other bases in Fujian:
Fuzhou, Jinjiang-Quanzhou, and Wuyishan. MF presently holds
a 50% market share in Fujian, which it hopes will increase
to 55% by 2010. The airline also has a base in Nanchang, in
the neighboring province of Jiangxi. It expects to hold a
30% market share in Nanchang by 2010.


GUANGZHOU 00018105 002.2 OF 003


Modest expansion plans
--------------


6. (SBU) The airline's current expansion efforts are modest
by Chinese standards. In addition to strengthening routes
from the country's main cities to Fujian, the airline wants
to increase its presence in the Yangtze River Delta (YRD).
For this purpose, MF is setting up a new base in Hangzhou,
112 miles southwest of Shanghai. (Note: The central
government has already approved plans for a maglev, or
magnetic levitation, train line between Shanghai and
Hangzhou, which would connect the two cities in less than 30
minutes. A maglev line already connects Shanghai's Pudong
district with the city's international airport. End note.)
The Hangzhou base only flies two planes at the moment, but
MF hopes to increase the number to ten by 2010. MF already
has a 13.2% market share in Hangzhou, and hopes it will grow
to 20% by 2010.

Small international network
--------------


7. (SBU) Xiamen Air's international presence is limited. MF
now flies from both Xiamen and Fuzhou to Macau, Kuala
Lumpur, and Singapore, and it has flights to Hong Kong from
all four of its Fujian bases. From Xiamen the airline also
flies to Bangkok, Penang, Tokyo, Osaka, and Seoul.
Meanwhile, MF already flies to Macau and Bangkok from its
budding base in Hangzhou. Although the airline plans to
seek out new international destinations in nearby Asian
countries, the focus of its future expansion will be on
domestic routes, and on Taiwan.

Eyes set on Taiwan
--------------


8. (SBU) As mentioned in paragraph 6, Xiamen Air's current
expansion efforts are rather timid. However, the airline is
clearly holding its fire until the reestablishment of
regular flights between Taiwan and the mainland. As the
strongest airline in Fujian, MF will be in an ideal position
to cash in once cross-straits flights are once again
possible. Fujian and Taiwan have long-standing ties, which
are being reinforced by streams of investment from Taiwan.
MF is not shy about publicizing its hopes, and its officials
view the airline's successful New Year flights to Taiwan as
an auspicious sign. (Note: Mainland and Taiwan authorities
allow a limited number of direct flights during the Lunar
New Year. Last year, Xiamen Air Vice President Song
Chengren flew the special season's first flight. He
declared that flying into Taipei had been "the greatest
dream of [his] career". End note.) Xiamen Air has already
established a partnership with a Taiwan airline, TransAsia
Airways, allowing passengers to travel between destinations
in the mainland and Taiwan via Xiamen and Jinmen, a Taiwan-
controlled island near Xiamen (see reftel).

Give us the nerds, not the jocks
--------------


9. (SBU) In contrast to some of its domestic competitors, MF
does not prefer to recruit pilots from the ranks of the
military. Instead the airline focuses its recruitment
efforts on universities, and was in fact the first Chinese
airline to recruit fresh college graduates. According to
Huang, these graduates are more educated and intellectually
capable than the pilots leaving the service. In particular,
he praised the English language skills of the college
graduates. This preference, combined with the airline's
relatively small size, has allowed MF to bypass the effects
of a nationwide pilot shortage.

Low-cost threat?
--------------

GUANGZHOU 00018105 003.2 OF 003




10. (SBU) Referring to the airline start-ups that are being
established across the country, Huang agreed that only a few
are likely to survive an eventual stabilization of the
market. However, in the short term these airlines will
inconvenience the more established carriers, by increasing
competition for pilots and bringing down prices.

Comment: Happy times ahead for the Egret?
--------------


11. (SBU) It is hard to find an official in Fujian that will
not insert the phrase "the western shore of the Taiwan
Straits" in every other sentence, referring to the province
and its government's plans to capitalize on improving cross-
straits ties. Having seen its progress hampered in the past
because of tensions between Taiwan and the mainland (and the
central government's fear of dropping economic resources in
a potential war zone),Fujian is now keen on using its
proximity to Taiwan's strong economy to spark its own
economy. Already a preferred destination for Taiwan
investment dollars, Fujian stands to benefit greatly from
more normal relations, and a consequent increase in trade,
between the mainland and Taiwan. The lack of direct flights
between Fujian and Taiwan is one of the remaining anomalies
in what has become a vibrant economic relationship, boosted
of course by the profound historical ties between both
provinces. Once such flights become possible, a wildly
promising market will open, and Xiamen Air will be ideally
placed to tap it to its benefit.


12. (SBU) At the same time, success in Taiwan may ironically
spell the end for Xiamen Air, whose symbol is an egret. In
some ways, MF is already a subsidiary of its majority owner,
China Southern. The airlines do not really compete in the
markets they both fly, instead complementing one another.
At Guangzhou Baiyun Airport, MF shares China Southern's hub
terminal, and China Southern's frequent flyer program gives
credit for miles flown on MF. A future switch from niche
player to cross-straits star may make MF too much of an
attractive takeover target for the Guangzhou-based giant.
China Southern's financial situation is delicate, and the
airline would probably welcome a larger take from the
promising mainland-Taiwan market.

DONG