Taiwan's domestic air carriers are flying
fewer people to a smaller number of destinations.
What keeps them going? A long-standing,
dogged belief that direct flights to China will
become a reality one day soon.
The domestic aviation industry in Taiwan reached its zenith just six years ago, but that era now seems like ancient history. Back then, nine different airlines flew the skies of Taiwan, offering low fares, high frequencies, and service that was generally on time and reliable. Despite the competition--six airlines once flew the Taipei-Kaohsiung route alone--most of the carriers posted annual profits in the mid-1990s. Taiwan was considered a paragon of airline deregulation, and was held up as an example for other Asian countries to emulate.
Today the situation is much different. Just four airlines fly domestic routes, and all of them are struggling to make money. The four surviving carriers, UNI Airways, Mandarin Airlines, TransAsia Airways, and Far Eastern Air Transport (FAT) cut a combined forty-seven flights per week in February, yet their airplanes remain just half full.
According to the Civil Aeronautics Administration (CAA), the number of passengers on domestic flights fell from 35.9 million in 1996 to 26.7 million in 2000, a drop of 25 percent. In contrast, the number of international flights has been rising ever since 1971.
"Taiwan is a troubled market," says Daniel Pierce, director of Asia-Pacific sales for Bombardier Aerospace, the world's leading manufacturer of regional aircraft. "Passenger traffic is stagnant or dropping, the airlines have excess capacity, and now the high-speed train is being built, and its fares will be 25 percent lower than the airfares."
The decline in domestic air traffic follows a period of unprecedented growth. After the airline industry was opened to competition in 1987, aviation in Taiwan grew at a rapid pace for eight years. By historical coincidence, the 1987 deregulation came the same year that Taiwanese were allowed to travel to China. That combination sparked an aviation boom, and by the time the industry peaked in 1995, nine airlines were flying domestic routes and eagerly awaiting the start of direct flights to China.
The resulting high frequencies and low airfares turned Taiwan's 22 million people into air travelers almost overnight. At its peak, the Taipei to Kaohsiung route, with more than a hundred return flights per day, was the busiest city pair in the world, by frequency. In all, the nine airlines flew thirty-two sectors, landed at sixteen destinations, and deployed more than a hundred aircraft and twenty different aircraft types: an astounding level of saturation for an island as small as Taiwan.
But flying in Taiwan is not what it used to be. Gone are the price wars of the mid-1990s, when last-minute bargaining often yielded one-way Taipei-Kaohsiung fares of NT$1,000 (US$30) or less. Gone too are the hurried hot-noodle meals, in which flight attendants scrambled like crazy for the entire forty-minute flight, often clearing the last tray just as the wheels hit the tarmac. Fixed prices have replaced the discount wars. Every airline now charges from NT$1,600 to $1,900 (US$48-58) for a one-way trip, and sponge cake has replaced the hot noodles. No-frills flights have arrived.
What happened to Taiwan's once-thriving domestic aviation industry? The main culprit appears to be rising ticket prices. For years, the CAA maintained a strict upper limit on air fares, while the aviation industry lobbied to have it raised. As the saying goes, beware what you wish for; you may get it. Domestic carriers were allowed to raise fares early in 2000, and they did. Last year the airlines raised fares 20 to 30 percent on trunk routes, and up to 50 percent on secondary routes.
Soon after that, the Taiwan economy began to slow, and the falling stock market cut sharply into discretionary spending. Travelers found other options: the main north-south highway has been expanded and is faster and less crowded than it was five years ago, and train and bus services have also improved. Airfares suddenly began to look expensive, and many former air travelers became bus, train, and car passengers.
A series of accidents also eroded public confidence in the country's airlines. From 1993 to 1999, Taiwan airlines suffered seven fatal accidents that between them killed 500 people. China Airlines (CAL) had four wrecks in the 1990s, causing 469 deaths and destroying four airplanes, and CAL subsidiary Formosa Airlines crashed a Dornier 228 on Matsu Island in 1997, killing sixteen. Another Formosa Airlines Dornier 228 crashed on Matsu in April 1996, two months before CAL bought its controlling stake, causing five deaths. Three years earlier, a Formosa Dornier 228 had plunged into the sea near Green Island, taking six lives. A TransAsia Airways ATR 72 wreck in 1995 killed four more people.
A string of non-fatal mishaps also made headlines. These included a Formosa Airlines Saab 340 that smashed into a baggage inspection station at Sungshan Airport, a CAL MD-11 that hit the ground so hard it damaged its landing gear, and a UNI Air MD-90 that caught fire and burned on the tarmac in Hualien in August 1999, following an explosion in an overhead locker.
While the accidents and rising airfares caused passenger numbers to decline, the airlines made managerial mistakes. Many of them were owned and operated by computer firms and construction companies, rather than airline specialists. A key mistake was the airlines' dogged belief that direct flights to China would soon become a reality. More than a decade ago, the airlines were predicting flights to China within a year or two. This inspired them to buy too many jets, and made them reluctant to sell the planes when cross-strait flights did not materialize. This Holy Grail of Taiwan aviation continues to elude the struggling airlines, but it still seizes their imaginations and dictates some of their business decisions.
As the carriers ramped up their jet fleets in anticipation of flights to China, they moved away from cheap and efficient propeller-driven airplanes and bought gas-guzzling jets, which are more expensive to buy, maintain, and operate. As a result they are now stuck with aircraft that are ill-suited for the thirty- to fifty-minute hops that predominate in Taiwan.
FAT has an all-jet fleet of MD-80s and Boeing 757s. The other three carriers have mixed turboprop and jet fleets, but none of them fly the efficient new thirty- to seventy-seat regional jets that now dominate short-haul markets in the United States and Canada. Instead they have larger jet aircraft that are slow to load and unload, and expensive to operate. "Those MD-90s are killing UNI," says Bombardier's Daniel Pierce, referring to the company's 155-seat MD-90 jets whose range makes them more suitable for much longer flights.
Optimism about direct flights to China has had another detrimental side effect. As passenger numbers dropped, the airlines were slow to cut routes and sell aircraft, a standard industry practice that raises quick cash and reduces excess capacity. With the exception of Mandarin, the carriers are reluctant to reduce their fleets because they are waiting for flights to China. Rather than sell aircraft now, and then buy or lease more planes when direct flights begin, they are retaining their current fleets in anticipation of a cross-strait breakthrough.
The combination of too many aircraft and falling passenger numbers made an industry-wide shakeout all but inevitable. The nine airlines that flew domestic routes in 1995 were CAL, China Asia Airlines, EVA Air, FAT, Formosa Airlines, Great China Airlines, Makung Airlines, Taiwan Airlines, and TransAsia Airways. Today, only four of them remain.
The CAA played a role in the shakeout as well, by urging CAL and EVA to purchase shares in domestic carriers, and lend their management expertise to the local market. In 1996, CAL bought a controlling stake in Formosa Airlines, and later merged Formosa with its international subsidiary, Mandarin Airlines. Mandarin was originally launched to fly to politically sensitive destinations, but it became superfluous when CAL repainted its airplanes in 1995, replacing the provocative ROC flag with an innocent plum blossom.
In 1998, EVA merged its newly acquired subsidiaries Great China, Taiwan Airlines, and Makung into a single carrier called UNI Airways. The final casualty was China Asia Airlines. In 1995, a construction company bought China Asia and changed its name to U-Land. Despite marketing innovations that included NT$1 (three US cent) fares, and using attractive, scantily clad betel-nut vendors as ticketing agents, last year the CAA grounded U-Land for maintenance violations and unpaid fees.
TransAsia and FAT are still flying, and CAL and EVA have turned over all domestic routes to their subsidiaries. That leaves the current four: TransAsia, Far Eastern, UNI, and Mandarin. They are not saying so in public, but both CAL and EVA regret buying their domestic subsidiaries. Flag carriers normally avoid buying small carriers because the new owners must deal with additional aircraft types that require separate maintenance crews and pilots, and with a new management and personnel that may be resistant to change. CAL has been plagued by its acquisition of inefficient, unsafe Formosa Airlines, and EVA has also struggled with unprofitable UNI.
So why did flag carriers CAL and EVA jump headlong into the domestic market, purchasing their own subsidiaries, rather than operating their own aircraft on domestic routes, as other airlines do? They were lured partly at the behest of the CAA, which was trying to reduce the number of airlines to improve their safety records. But they had business reasons as well. Both carriers were worried about slot constraints at Sungshan, Taipei's domestic airport, and they both wanted to make Kaohsiung Airport a hub for their Southeast Asian flights. Sungshan had reached capacity in 1995, and CAL and EVA both feared that the slot constraints would reduce their share of the domestic market.
Both airlines tried and ultimately failed to make Kaohsiung a hub for their regional flights. They had hoped to feed passengers from cities like Taitung, Hualien, and Taichung, to connect with their international flights at Kaohsiung. One look at Kaohsiung Airport's new international terminal, which opened in 1997 and remains almost empty, is sufficient evidence of their failure. In the end, the airlines were unable to establish enough international frequencies from Kaohsiung. Most overseas passengers found it easier to fly to Sungshan Airport and take a bus to Chiang Kai-shek International Airport.
Five airlines are gone, but a further shakeout may be imminent, because those that remain still have too many planes and too few passengers. The prospects for 2001 look bleak, with all four airlines predicting losses on domestic routes and load factors in the mid-fifties, far below the usual break-even load factor of 65 to 70 percent.
Rising fuel prices have not helped. Fuel comprises about 40 percent of an airline's operating costs, and it is normally paid for in US dollars. The weakening NT dollar, combined with rising costs and the drop in passenger traffic, has plunged three of the four carriers into the red. FAT remains profitable, but its after-tax profit of NT$80 million (US$2.5 million) in 2000 is a far cry from the US$30 to $50 million annual profits it posted in the mid-1990s.
The airline foresees another tough year in 2001. "This year we hope we can make a little money, but we haven't seen any improvement in our load factors," says one Far Eastern Air Transport manager. FAT's load factor in 2000 was 56 percent. Like its competitors, it flies a handful of overseas routes and charters, including Bali, Rangoon, Guam, Saipan, Cebu, and Chiang Mai, but fierce competition from CAL and EVA limits the number of profitable regional routes that are available.
The company remains the largest domestic carrier--in 2000 its market share was 38 percent, followed by TransAsia with 29 percent, UNI with 24 percent, and Mandarin Airlines with 9 percent. TransAsia lost NT$53 million (US$1.66 million) in 2000, says spokesman Janet So, an improvement on its NT$1.75 billion (US$55 million) loss in 1999. TransAsia is kept afloat by its lucrative Taiwan-Macau routes, which enjoy load factors of 80 percent and contributed 40 percent of the airline's 2000 revenue. When the Macau airport opened in 1995, the CAA awarded the route to EVA and TransAsia, but not CAL, and it has since become a popular destination and gateway to China. TransAsia has eight daily flights from Chiang Kai-shek Airport to Macau, and four daily flights from Kaohsiung to Macau.
Unlike FAT and TransAsia, UNI Airways and Mandarin are subsidiary airlines and do not compete directly with the majors on overseas routes. EVA allows UNI to fly regional charters and thin scheduled routes, and CAL does the same with Mandarin. Mandarin's overseas routes are profitable, says Vincent Chen, the airline's public relations representative. It posted a NT$10 million (US$312,000) profit in 2000, but that was due to the one-time sale of a Boeing 747-400. In 2001, the carrier projects a loss of NT$100 million (US$3.1 million). CAL wants to sell half of its 90 percent stake in Mandarin, but no offers are imminent, as CAL's asking price remains too high. Mandarin's overseas routes include Kathmandu, Pattaya, Phnom Penh, Chiang Mai, and Kuantan in eastern Malaysia.
UNI Airways is in the worst shape of the four airlines. Its load factor in 2000 was 55 percent, and this year it is just 56 percent. UNI would not comment on its finances, but sources say the airline lost about NT$1 billion (US$31.2 million) in 2000 as it struggled with high interest rates on its debt, which stood at NT$17 billion (US$530 million) at the end of 2000. Parent company EVA Air is not expected to support UNI indefinitely, although it denies plans to sell or merge the struggling airline.
UNI Airways has postponed delivery of six brand-new Bombardier Dash 8-Q400 turboprops that were originally due to be delivered in early 1999. "We didn't cancel the order, but we postponed it while we consider the market," says UNI airport manager Mandy Yu.
Unlike its competitors, Mandarin is actively shrinking its fleet. It plans to sell its two Fokker 100s, and is considering returning one or more of its three leased Boeing 737-800s. FAT is keeping its sixteen aircraft and is seeking more charter business, while TransAsia will take delivery of another ATR 72-500 later this year. TransAsia is also trying to sell and lease back its three older ATR 72-300s.
Normally an airline with excess capacity would simply park a few planes, but this option is not readily available to local carriers, because they have limited freedom to cut services. They must apply for government approval to reduce frequencies or eliminate routes, and such approval is seldom given. On February 1, the CAA did allow the airlines to drop forty-seven frequencies per week, and each carrier cancelled several routes. "We would like to cut flights further to save money, but we can't, because of government pressure," Mandarin's Vincent Chen says.
The CAA also forces some airlines to fly unprofitable routes. Mandarin flies to Chimei and Wanan islands, while UNI flies to Taiwan's offshore Green Island and Orchid Island. UNI has tried to cancel its unprofitable island routes, but the CAA has denied the request, promising instead to subsidize the routes.
The CAA is also busy upgrading the island's airports. A brand-new airport will be completed in two years at Hengchun, gateway to southern Taiwan's Kenting National Park. It will have a 1,500-meter runway that can accommodate turboprop aircraft. A new terminal building has opened in Taichung, and Sungshan was recently renovated. New terminal buildings are also under way at Hualien, Tainan, Kaohsiung, and Hsinchu. All are scheduled for completion within the next two years. New terminals were also planned for Taitung and Pingtung, but declining air traffic has put those projects on hold.
Taiwan's most dangerous airport, on Matsu Island, is also getting an upgrade. The large hill that borders the runway is being leveled, while the runway is being widened and extended. The improvements are expected to improve Matsu's poor safety record.
Meanwhile, another infrastructure project has attracted the airlines' attention: the US$12.5 billion high-speed railway line that is scheduled for completion in 2006. The train will make the 345-km trip from Taipei to Kaohsiung in eighty-four minutes and will cost less than an air ticket. The Evergreen Corp., parent company of EVA and UNI, is hedging its bets--it is part of a five-company consortium that is building the high-speed railway.
FAT is likewise hedging its bets. Many of its aircraft operating leases will expire at about the time the high-speed rail project is finished, and if cross-strait routes are not available by then, FAT will return the aircraft to the leasing companies. As always, however, the possibility of direct flights to China creates optimism. The CAA favors competition and has a reputation for fairness when it comes to route allocation. The domestic carriers believe the CAA will award flights to Beijing, Shanghai, and other major cities in China to CAL and EVA, and will allow the smaller carriers to serve China's secondary cities.
Direct flights to China may begin after China and Taiwan join the World Trade Organization (WTO), probably within the next year or two. The ban on direct flights is illegal under WTO rules. Taiwan could invoke a special exclusion to maintain the ban, but the government has indicated that it will not do so. Flights to China would give a big boost to the struggling airlines if they can wait that long. Meanwhile, they must grit their teeth and do what they can to preserve their already long-suffering load factors from further depletion.
Brent Hannon is a freelance journalist based in Taipei. He writes for Time, Flight International, and Business Traveler, among other publications.
Copyright (c) 2001 by Brent Hannon.