TAIWAN AVIATION - DIRECT LINKS, HIGH-SPEED RAIL,

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 003473

SIPDIS

SIPDIS

STATE FOR EAP/TC, EB/TRA
STATE PASS USTR
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
USTR FOR STRATFORD, ALTBACH

E.O. 12958: DECL: 10/04/2016
TAGS: EAIR ECON PREL CH TW
SUBJECT: TAIWAN AVIATION - DIRECT LINKS, HIGH-SPEED RAIL,
FUTURE OF UNCERTAINTY (PART 3 OF 3)

REF: A. 05 TAIPEI 3752


B. 05 TAIPEI 4161

C. TAIPEI 1152

D. TAIPEI 3210

E. TAIPEI 3414

F. TAIPEI 3446

Classified By: AIT Deputy Director Robert S. Wang, Reason 1.4 b/d


1. (C) Summary: U.S. firms have different views on the
potential impact of direct cross-Strait air links on
their business. United hopes regular cross-Strait
flights on other airlines will increase the
attractiveness of its planned non-stop service to San
Francisco. Northwest and FedEx believe direct links that
exclude foreign carriers will only make their services
less competitive. Boeing sees improved prospects for
aircraft sales to Taiwan firms with direct links.
(Comment: We should continue to encourage Taipei and
Beijing to implement direct aviation links, but
underscore that foreign carriers should also be allowed
to operate cross-Strait flights at least starting with
international passengers and cargo.) End summary.


2. (U) This is the third of a three part report on the
challenges facing Taiwan's aviation industry (with refs E
and F). This part deals with the impact of current
difficulties in Taiwan's air transport market on U.S.
companies.

United, Northwest - Different Views on Cross-Strait Links
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3. (U) U.S. airlines have gradually decreased their
presence in Taiwan over the past ten years. At one time,
United, Northwest, Continental, Delta and American
Airlines all flew to Taiwan. Today, only United and
Northwest operate their own flights; the others serve
Taiwan only through code shares with other airlines.
Even the airlines that continue to fly to Taiwan have
reduced their presence. United's service to Taiwan has
gradually fallen from 10 daily flights to two. Northwest
operates only one daily flight to Osaka. Foreign
carriers in general have reduced service to Taipei,
especially large international carriers. Instead, many
are increasingly focused on China and other more rapidly
growing markets in the Asia-Pacific region. Only a few
smaller regional or low-cost airlines, such as Bali Air
and Jet Star, have expanded service to Taiwan in recent
years. Nevertheless, United recently bucked the trend by
announcing a daily Taipei-San Francisco non-stop flight
starting in April 2007.


4. (C) Northwest and United have different views on the
effects cross-Strait direct links will have on their
business in Taiwan. Northwest Taiwan Station Operation
Manager Nelson Wang told AIT/T cross-Strait direct
flights would make Northwest less competitive in Taiwan.
Foreign carriers would most likely not be able to operate
direct flights, giving CAL and EVA an advantage in being
able to offer direct service to both the United States
and the Mainland.


5. (C) United Airlines Taiwan General Manager Andrea Wu,
on the other hand, sees regular direct flights as a
potential boon for United. Such flights would enhance
United's position, once it begins direct service to San
Francisco, as the only airline that offers non-stop
service from the U.S. to both Taiwan and the PRC.
Working with future Star Alliance partners Shanghai
Airlines and Air China (now Star Alliance observers),
United would be able to offer convenient service to
customers traveling to all three destinations. However,
she emphasized that cross-Strait charter flights would
only be helpful as a stepping stone for regular flights
because United would be unable to sell tickets on charter
flights to its customers.


6. (C) United's Wu and Northwest's Wang both expressed

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interest in eventually being able to operate cross-Strait
flights as well. Wu, however, pointed out that pressure
from foreign carriers would only complicate cross-Strait
charter flight discussions. Direct flights will only
happen if sovereignty issues are removed from the
discussion, she commented.

FedEx - Direct Links Will Be a Challenge
--------------


7. (C) FedEx Express has found it difficult to maintain
growth in the current environment, according to Taiwan
Managing Director Michael Chu. FedEx's Taiwan business
has suffered as air cargo export volumes have stagnated.
Chu told us exports used to account for 60 percent of
FedEx's Taiwan business, compared to less than 55 percent
currently. He said deliveries from Taiwan to the United
States had shown declines recently, even as traffic from
Taiwan to Europe and Asian destinations had continued
modest growth.


8. (C) Chu believes that FedEx's situation in Taiwan will
worsen once direct cargo charter flights are implemented.
FedEx uses its own aircraft fleet for all deliveries. It
will be unable to utilize cross-Strait charters limited
to Taiwan and PRC airlines, giving its competitors (both
Taiwan air carriers and freight forwarding agents who use
them) an advantage. FedEx faces an additional challenge
in Taiwan with the impending transfer of FedEx's Asian
hub from Subic Bay, Philippines, to Guangzhou, China.
Chu pointed out that FedEx's cross-Strait deliveries
currently transit the Subic hub just like the rest of its
international Asian deliveries. However, with the
transfer of the hub to Guangzhou, there will be no direct
connection from Taiwan to the company's hub.


9. (C) Chu indicated FedEx would very much like to
operate cross-Strait cargo charters. He explained that
FedEx would be willing to operate the flights under the
same conditions as the Kaohsiung-Taipei leg that it
currently operates as part of an Anchorage-Kaohsiung-
Taipei-Subic flight. Because FedEx has no cabotage
rights in Taiwan, it does not carry deliveries that
originate in Kaohsiung and terminate in Taipei on the
flights. At the Taiwan stops, only export and import
cargo is loaded or unloaded. FedEx operates a Beijing-
Guangzhou route under similar conditions in China,
according to Chu. If FedEx operated cross-Strait
charters under similar conditions, they might not raise
the usual objections from the PRC that cross-Strait
flights cannot be designated as international routes.


10. (C) (Note: UPS also has extensive operations in
Taiwan, but refused to discuss the island's business
environment with econoff because of the sensitivity of
cross-Strait issues. A UPS representative said UPS would
contact officials in Washington if it needed support on
issues related to Taiwan. End note.)

Boeing - Direct Links Will Boost Sales Prospects
-------------- ---


11. (SBU) Boeing and Airbus have competed intently for
aircraft sales to Taiwan's two large airlines, CAL and
EVA. None of the four small airlines are financially
strong enough to expand their fleets. Even replacing
aging aircraft is a challenge for the small carriers
under current conditions.


12. (U) Both CAL and EVA have fleets that consist mostly
of Boeing aircraft. CAL currently flies 46 Boeing
aircraft and 21 Airbus planes (including an A340-400
leased from Boeing). EVA's fleet includes 21 Boeing
planes and 11 Airbus planes. It also flies 18 McDonnell-
Douglas aircraft. CAL and EVA have relatively large 747
fleets with 34 and 18 747s, respectively.


13. (U) Their cargo capacity is particularly impressive.
With 18 planes, CAL has the world's largest fleet of 747

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freighters. In addition, to three 747 freighters and
nine 747 Combi's (with expanded cargo and reduced
passenger capacity),EVA flies 14 MD-11 freighters. Air
Cargo World ranked CAL the world's seventh largest cargo
carrier in 2005 by cargo weight and distance flown. EVA
was ranked tenth. If combined, the two airlines would
rank second, only behind FedEx.


14. (C) AIT/T has worked closely with Boeing to support
the sale of ten new 747-800 aircraft to CAL (ref C).
However, CAL announced in June that it was suspending
consideration of the purchase due to high fuel costs.
Boeing continues discussions with CAL on the 747-800 sale.
In addition, Boeing Commercial Airplane Chief
Representative in Taiwan Paul Fang told AIT/T that Boeing
hopes CAL might replace some of its A350 aircraft with
787s. Fang has also informed us that Boeing believes it
may have an opportunity to sell 777 freighter, 787 and
737 Next Generation aircraft to EVA.


15. (C) In addition to fuel prices, Fang said the
development of cross-Strait air links will also be an
important factor in fleet planning decisions for CAL and
EVA. Direct links could accelerate fleet expansion. In
addition, the two airlines' respective joint ventures
with Mainland cargo carriers could boost aircraft
purchases if successful.

Comment - Direct Links Benefit U.S. Interests Overall
-------------- --------------


16. (C) Direct cross-Strait air links present a mix of
challenges and opportunities for U.S. aviation industry
firms in Taiwan. However, all U.S. firms operating in
both Mainland China and Taiwan will receive some benefit
from the convenience of direct cross-Strait flights and
the ability to more fully integrate Greater China
operations. In addition, direct air links could move
Taiwan and the PRC closer to resolution of the cross-
Strait conflict through deeper economic integration and
provide a more stable environment for business. The
United States should continue to encourage both sides to
reach an agreement as soon as possible on direct air
links along with further liberalization of cross-Strait
ties. We should also regularly remind Taipei and Beijing
that international carriers should be permitted to
operate cross-Strait flights perhaps starting with
international passengers and export/import cargo to avoid
cabotage issues.
YOUNG