CROSS-STRAIT CHARTER FLIGHTS - AIRLINES STILL

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 002376

SIPDIS

SIPDIS

DEPT FOR EAP/TC

E.O. 12958: DECL: 07/12/2016
TAGS: EAIR PREL ECON CH TW
SUBJECT: CROSS-STRAIT CHARTER FLIGHTS - AIRLINES STILL
WAITING FOR THE BIG PRIZE

REF: A. TAIPEI 1852


B. TAIPEI 2041

C. TAIPEI 2042

Classified By: AIT Acting Deputy Director Charles E. Bennett, Reason 1.
4 d


1. (C) Summary: Taiwan airlines have begun preparing for
new cross-Strait charter flights announced June 14 but
complain that the number of flights for the holiday
charters is too small. China Airlines (CAL) hopes that it
will be able to fly cargo charters as often as once a week,
but EVA Air believes the permitted cargo charters will be
unprofitable. The Cathay Pacific-Dragonair merger has
increased the urgency of Taiwan carriers' interest in more
frequent charter flights. In the next round of industry-
led charter discussions, the PRC and Taiwan will discuss
entry-permit arrangements for PRC passengers and
representative offices for PRC airlines in Taiwan. End
summary.



2. (U) Taiwan airlines have begun preparing for
implementation of new cross-strait charter flights under
the agreement announced by Taiwan and the PRC on June 14.
Taiwan released its governing regulations for the flights
on July 7. The new package of charters includes several
small breakthroughs. Passenger charters will take place on
three additional holidays, adding Tomb Sweeping Day (April
5),the Dragon Boat Festival (late May/June) and the Mid-
Autumn Festival (September/early October) to the Lunar New
Year (late January/February) holiday charters. The holiday
charters have all been institutionalized and will not need
to be renegotiated every year. Special ad hoc cargo
charters will be the first commercial direct cross-Strait
cargo flights, but will only be permitted to take machinery
from Taiwan to the PRC for Taiwan investors building
factories there. Humanitarian and medical emergency
flights will be allowed for the first time. Humanitarian
charter flights will be permitted to carry PRC nationals,
even though holiday charters will still be limited to
Taiwan (ROC) passport holders.

Holiday Flights - Lacking Capacity
--------------


3. (C) Taiwan air carriers complain the number of new
holiday charters is too small to have a significant impact
on revenue. Jenny Lee, Deputy Senior Vice President for
Corporate Planning at EVA Air, told AIT/T that with only
eight round trips per airline over the Lunar New Year and
only two round trips for each of the other holidays, EVA
doesn't expect to make much money. She noted that for the
Mid-Autumn Festival charters, EVA would use a Boeing 777,
one of the larger planes in its fleet, to maximize
profitability on the flight. CAL Marketing and Planning
Vice President Steve Yang told us that CAL would lease a
747 to its subsidiary Mandarin Airlines to maximize
Mandarin's capacity for the charter flights.

Cargo - CAL and EVA, Different Expectations
--------------


4. (C) CAL and EVA have different plans for special cargo
charters. Yang said that CAL will fly the first cargo
charter in late July. It has already been in discussions
with Taiwan Semiconductor Manufacturing Company (TSMC) to
transport equipment to its plant in Shanghai. According to
Yang, CAL hopes that they will be able to fly cargo
charters as often as once a week, combining shipments from
various firms on to a single aircraft to reduce costs.
EVA's Lee is not as optimistic about the potential for
special cargo charters because they are limited to
transporting factory equipment. EVA has been in
discussions with some information technology firms, but Lee
believes there's only demand for a handful of flights each
year. She added that with current fuel prices the one-way
flights would be far too expensive for most potential
customers.

TAIPEI 00002376 002 OF 002



Humanitarian Charters - Guidelines Still Unclear
-------------- ---


5. (C) Executives at CAL and EVA both expressed some
confusion over the definition of humanitarian charters.
They said that the Ministry of Transportation and
Communications had still not released clear guidance on
what could qualify for humanitarian charters. Supporters
of a troop of deaf PRC Buddhist dancers, including
Kuomintang Legislative Yuan Member John Chiang, have been
seeking a humanitarian charter to return the dance troop to
the PRC later this month. The Taiwan authorities have not
yet approved the request.

Cathay-Dragonair Merger - Adding Urgency
--------------


6. (C) CAL's Yang commented that with the Cathay Pacific-
Dragonair merger it could be too late for Taiwan airlines
to compete effectively in the greater China market. EVA's
Lee said the impact on Taiwan airlines would be huge,
pointing out that the combined airline would have a fleet
that including eighteen 747 freighters (equal to CAL's 747
freighter fleet) plus six more on order from Boeing.
According to Lee, Dragonair's extensive network in the PRC
will add about 20 PRC destinations to Cathay's routes.
China Airlines has already been affected by the merger when
Dragonair cancelled its lease of a CAL 747 freighter for a
Hong Kong-New York route. China Airlines had reserved 50
percent of the leased plane's cargo capacity on the
lucrative route. The Cathay-Dragonair merger will add
urgency to interest on both sides of the Strait as PRC and
Taiwan airlines seek to compete with the combined Hong Kong
carrier, which now holds both a large share of Taipei-Hong
Kong traffic as well as an impressive set of PRC
connections.

Next Round - Entry Permits and Representative Offices
-------------- --------------


7. (C) Trans Asia Chairman Tony C.C. Fan, who represents
Taiwan in industry-led discussions with the PRC as chairman
of the Taipei Airlines Association, told AIT/T that the
next set of discussions on more frequent passenger and
cargo charters would likely be held in August or September.
The talks had previously been scheduled for mid-July, but
Fan said they would probably be postponed because the
Mainland Affairs Council needed more time to prepare. The
two sides will discuss entry permit procedures for PRC
passengers after and representative offices for PRC
airlines in Taiwan. (Note: Currently, PRC airlines hire
agents, usually travel agencies, to represent them and sell
tickets in Taiwan. End note.) Fan said that he believed
Taiwan would be able to accept the PRC proposal that PRC
passengers be able to obtain their entry permit documents
on arrival at Taiwan's airports after preliminary
processing through travel agents. However, he suspects
representative offices for PRC carriers will be more
problematic because the Taiwan authorities will be
concerned about the risk of espionage. Fan also reaffirmed
that no deal on more frequent charter flights will be
finalized until a deal on cross-Strait tourism can be
announced simultaneously.

Comment - Small Steps
--------------


8. (C) The observations of Taiwan airline executives
indicate that the latest package of charter flights
represents a mostly symbolic achievement. The new flights
won't bring a substantial economic benefit to airlines or
Taiwan's economy at large. However, as Fan confirmed,
discussions continue to make progress. A few more small
steps like those in this latest package could set the stage
for a real breakthrough in direct transportation that would
have a significant positive impact on Taiwan's economy.
End comment.
YOUNG