CLOSING THE FINAL LINK - AVIATION (PART 2 OF 2)

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 000246

SIPDIS

SIPDIS


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

E.O. 12958: DECL: 01/25/2017
TAGS: EAIR ECON PREL EINV ETRD TW CH
SUBJECT: CLOSING THE FINAL LINK - AVIATION (PART 2 OF 2)

REF: A. TAIPEI 152


B. TAIPEI 133

C. 06 TAIPEI 4173

D. 06 TAIPEI 3473

E. 06 TAIPEI 3446

F. 06 TAIPEI 3414

G. 06 TAIPEI 2376

H. 06 TAIPEI 323

I. 05 TAIPEI 3717

J. 05 TAIPEI 222

K. 03 TAIPEI 219

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


1. (C) Summary: The lack of direct air links between
Taiwan and the Mainland causes considerable harm to
Taiwan's economy. Inconvenient passenger routes change
how Taiwan businessmen and foreign investors do business.
More expensive air cargo makes Taiwan exporters less
competitive. Direct air links would increase investment
in Taiwan, foreign trade, the number of residents in
Taiwan, and tourists. Tentative progress on direct air
links to date has produced an unsatisfactory situation
for both sides. AIT will continue to support American
businesses in encouraging Taiwan to move forward on
direct air links and include foreign passengers and
carriers. End summary.


2. (U) Of the original three links (san tong) -- postal
and telecommunications links (tong you),trade (tong
shang),and transportation (tong hang) -- transportation
still remains primarily indirect. Ref A reported on the
status of cross-Strait maritime links and their impact on
the Taiwan economy. This report will examine efforts to
establish direct air links and the potential benefits for
Taiwan.

Wasting Time on Bad Connections
--------------


3. (SBU) The lack of direct passenger flights to the
Mainland China creates inconvenience, causing
considerable harm to Taiwan's economy. In 2005, more
than 10 million passengers traveled on flights linking
Taiwan to Hong Kong and Macau. They accounted for 39
percent of Taiwan's international air travelers. Most of
them had connecting PRC flights. EVA Air estimates that
60 percent of its Hong Kong passengers and 80 percent of
its Macau passengers connect to the PRC flights. In
addition, Taiwan airlines also offer connections to
Mainland flights through Okinawa, Japan, and Cheju, South
Korea.


4. (U) The inconvenience of stopping in Hong Kong, Macau
or other connecting airports has a greater impact on
Taiwan's economy than the added expense of indirect
flights. With a connection in Hong Kong, the average
trip to Shanghai takes at least five hours from take-off
in Taipei to arrival. Direct charter flights only take
three hours. The stop in Hong Kong, Macau or elsewhere
makes it impossible to fly to Shanghai in the morning,
attend a meeting and get back the same day. This can
have a significant impact on how people run their
businesses, especially for Taiwan investors in the PRC
and foreign investors who want to better integrate their
Taiwan and Mainland operations.

Bound by More Cumbersome Supply Chains
--------------


5. (C) For air cargo, cost savings could be much more
substantial. Michael Chu, Managing Director of FedEx
Express in Taiwan, speculated to AIT that with daily
cargo flights, the cost of general cargo air shipment
could be 20 to 30 percent lower than currently. For
express mail with door-to-door service, he believes the
savings will be smaller at 10 to 15 percent.


6. (U) Air cargo plays an important role in Taiwan's

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export industry. Taiwan exported more than 567,000
metric tons of goods by air in 2005. Electronic
equipment manufactured by Taiwan's powerful high-tech
industries accounted for 62 percent of those exports by
weight at 350,000 metric tons. Of Taiwan's total exports
shipped by air, Mainland China, including the PRC, Hong
Kong and Macau, accounted for 30 percent. The United
States had the next highest percentage at 18 percent.


7. (U) Cargo is particularly important to Taiwan's major
airlines. In 2005, China Airlines and EVA ranked seventh
and ninth, respectively, for total scheduled freight
flown by ton-kilometers. If combined, they would rank
second after FedEx and ahead of UPS. While cargo
generally accounts for about half of total revenue for
the two airlines, it usually makes up a much higher
portion of total profit.

More, More, More
--------------


8. (SBU) Direct cross-Strait flights would have few
economic drawbacks for Taiwan. Some of the many
advantages include the following:

--Domestic Investment - Direct air links would make
Taiwan a more attractive investment environment. The
Taiwan government has long promoted the goal of making
the island a regional operations and logistics center.
These plans have been stuck on the runway in no small
part because the lack of direct links eliminates one of
Taiwan's main advantages -- its close proximity to China,
the most rapidly growing economy in the region. The
American Chamber of Commerce in Taipei and other foreign
business interests have repeatedly told Taiwan (and AIT)
that with direct links, expatriates who might otherwise
need to reside in the Mainland could opt to live in
Taiwan. They underscore Taipei's conveniences and high
standard of living. As an example, air quality, one of
Taiwan's advantages has only improved with the migration
of manufacturing to the Mainland. At the same time,
poorer air quality has hurt Hong Kong's attractiveness as
a home for expatriate businessmen.

--Foreign Trade - Less expensive air cargo costs would
only increase the competitiveness of Taiwan's exports to
the Mainland. More rapid and efficient transportation
could reduce pressure on some firms to move manufacturing
operations to the Mainland in order to stay integrated in
industry supply chains.

--Residents - In addition to expatriate businessmen,
direct links could allow some Taiwan investors now
resident in the Mainland to move back to Taiwan. By some
accounts, Taiwan investors and their families total as
many as one million residents in the PRC. Some market
observers believe that anticipation of direct flights has
helped fuel recent strong performance in Taiwan's
residential property market.

--Tourists - Taipei and Beijing are currently discussing
further opening Taiwan to PRC tourists. Many hope that
Taiwan can replicate the experience of Hong Kong, where
PRC tourists have made a major contribution to recent
growth. Direct flights would facilitate PRC tourism to
Taiwan.

Moving Forward
--------------


9. (SBU) Some of the important recent milestones in
cross-Strait aviation include the following:

--January 2003 First Lunar New Year (LNY) Charters - For
the first time, Taiwan airlines carried passengers from
Shanghai to Taiwan before the holiday with return flights
to the Mainland afterwards. The flights carried
passengers in one direction only on each roundtrip
flight. The flights had to land in Hong Kong before

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proceeding to Shanghai. Passengers were limited to
Taiwan investors in the PRC and their families. In all,
the six Taiwan airlines flew a total of 16 flights (ref
K).

--January 2005 Two-Way, Non-Stop LNY Charters - Taipei
and Beijing were unable to reach agreement on charter
flights for the LNY holiday in 2004. However, for 2005,
they agreed that Chinese airlines would participate in
the flights. Planes carried passengers in both
directions on each roundtrip across the Strait. In
addition, planes did not have to land in Hong Kong en
route. Instead, they passed through Hong Kong airspace.
PRC destinations were expanded to include Beijing and
Guangzhou. However, passengers were again limited to
Taiwan investors and their families. Taiwan and PRC
airlines flew a total of 96 flights over the course of
about 3 weeks (ref J).

--August 2005 PRC Overflight - Taiwan announced in August
2006 that it would permit Taiwan airlines to seek
permission from the PRC to fly through Chinese airspace
on routes to Europe and the Middle East. PRC aviation
authorities have generally approved these requests (ref
I).

--January 2006 LNY ChartersQurther Expansion - LNY
holiday charters were expanded in 2006 to include Xiamen
as an additional PRC destination. In addition, passenger
restrictions were relaxed to include any Taiwan passport
holder with valid PRC entry documents, employees of
Taiwan companies, and their family members. A total of
144 flights were operated over more than 3 weeks (ref H).

--June 2006 Institutionalized Holiday Charter Flights -
On June 14, 2006, Taipei and Beijing announced an
agreement to implement charter flights during each of
four major holidays -- LNY, Tomb Sweeping Festival,
Dragon Boat Festival, and Mid-Autumn Festival. Eligible
passengers are still limited to the same restrictions for
2006 LNY charter flights. Airlines will fly 192 flights
over 4 weeks during the LNY holiday and 48 flights over 2
weeks during each of the other three holidays. This
expands charter flights to a total of 336 flights during
10 weeks of the year. The first round of holiday
charters under the new agreement was conducted for the
Mid-Autumn Festival in September and October 2006. The
next round for the Lunar New Year holiday will begin on
February 5 (ref G).

--June 2006 New Charter Flights - In addition, the two
sides agreed in June to allow special cargo, medical
emergency and humanitarian charters. The special cargo
charters are limited to flights chartered to carry the
cargo of a single firm. To date, the only cargo charters
have been contracted by Taiwan Semiconductor
Manufacturing Company (TSMC). It chartered five flights
to carry equipment to its factory in China. Seven
medical emergency charters have been conducted. To date,
there have been no humanitarian charters. Some observers
have commented that it is unclear what would be
categorized as a humanitarian charter but fall outside
the scope of medical emergency charters (ref G).

Comment - Stopping Short
--------------


10. (C) These events show that the two sides have made
significant progress, but the current situation still
falls far short of what the business community seeks.
Regularly scheduled, frequent, widely accessible cross-
Strait air travel would help Taiwan, U.S. and other
foreign businesses. It could have a transformational
effect on Taiwan's economy, assisting its efforts to
become a regional operations and logistics center,
develop the service sector and prevent economic
marginalization. Taipei and Beijing are currently
engaged in industry-led discussions on a more extensive
set of frequent cargo and weekend passenger charter

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flights as reported refs B and C. Nonetheless, political
considerations on both sides continue to block more
significant progress on direct air links. AIT has
publicly supported American businesses in encouraging
Taiwan to move forward on this most important of cross-
Strait economic initiatives. End comment.
YOUNG