US embassy cable - 04TAIPEI3850

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 003850 
 
SIPDIS 
 
DEPT FOR EAP/TC AND EB/TRA/OTP 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 12/03/2014 
TAGS: EAIR, ECON, PREL, ETRD, EINV, TW, CH, Cross Strait Economics 
SUBJECT: CROSS-STRAIT AVIATION - THE GOLDEN LINK STILL OUT 
OF REACH 
 
REF: A. AIT TAIPEI 2320 
 
     B. AIT TAIPEI 3406 
 
Classified By: AIT Direct Douglas H. Paal, Reason 1.5 D 
 
Summary 
------- 
 
1. (C) Direct air transportation is the last area where the 
"three-links" have not been realized in either name or 
substance.  Direct air links would cut passenger travel time 
by up to an hour and a half; ticket prices by more than 25 
percent; and airfreight costs by 20 percent or more. 
Taiwan's high-tech industries would benefit from reduced air 
transportation costs that would likely increase cross-Strait 
trade.  Less expensive cross-Strait air transportation could 
also dampen the rate of increase in the flow of investment 
from Taiwan to the PRC.  Taiwan airlines have already 
developed connection arrangements akin to code-shares with 
PRC airlines in order to compete with Hong Kong and Macau 
carriers across the Strait.  However, Taiwan carriers are 
also ready to compete with PRC firms on direct cross-Strait 
routes.  U.S. passenger airlines are not interested in 
providing cross-Strait service, but some U.S. air cargo 
firms, are concerned that if direct air links were to be 
established, foreign firms would be excluded from the new 
routes.  Direct air links would contribute to growth on both 
sides of the Strait, but politics continue to get in the way. 
 End Summary. 
 
2. (U) When originally proposed in 1979, the "three-links" to 
be established between Taiwan and the PRC consisted of direct 
postal and telecommunications services, cross-Strait 
commerce, and direct transportation.  The first two links 
have been effectively realized.  Over one million pieces of 
mail and about 50 million phone calls cross the Taiwan Strait 
every month.  The PRC accounted for 70 percent of Taiwan's 
outward investment and 25 percent of its exports in the first 
half of this year and has been Taiwan's largest trade partner 
for two years.  In transportation, various methods of 
cross-Strait sea freight have emerged to keep costs low 
despite the absence of full direct shipping (reported ref B). 
 The last and missing link is air transportation. 
 
Passenger Aviation ) Inconvenient and Expensive 
--------------------------------------------- -- 
 
3. (U) Most cross-Strait air travelers pass through Hong Kong 
and Macau, but airlines have also tapped other airports to 
handle cross-Strait air traffic.  Every week there are 444 
scheduled flights between Taiwan and Hong Kong (counting both 
outbound and inbound).  There are 336 scheduled flights 
between Taiwan and Macau.  Some cross-Strait traffic also 
passes through Okinawa, Japan, and Cheju, South Korea, with 
28 and 7 scheduled weekly flights.  According to Ministry of 
Transportation and Communications (MOTC) statistics, more 
than 617,000 passengers flew between Taiwan and Hong Kong in 
September 2004, 195,000 between Taiwan and Macau.  About 
15,000 passengers flew between Taiwan and Okinawa.  MOTC did 
not release data for Cheju.  Most passengers flying to Hong 
Kong and Macau proceed on to airports in the PRC.  Eva Air 
(EVA) currently estimates that 60 percent of Hong Kong 
passengers and 80 percent of Macau passengers continue onward 
to airports in the PRC.  The percentage of travelers to 
Okinawa and Cheju who are ultimately bound for PRC airports 
is probably even higher. 
 
4. (C) Air travel on the popular route between Taipei and 
Shanghai generally costs between NT$ 14,000 and NT$ 18,000 
(USD 435 to USD 560) for a round trip ticket.  Far Eastern 
and China Eastern Airlines offers a much cheaper fare through 
Cheju of about NT$ 10,000 (about USD 310), but that fare is 
the exception.  It is difficult to estimate precisely how 
much cheaper the fares would be on direct flights.  Joseph 
Lee, Manager of the International Affairs Department at Eva 
Air, told AIT/T that direct air links would probably cut NT$ 
5,000 to NT$ 7,000 (USD 155 to USD 215) from the total cost 
of a Taipei-Shanghai round trip ticket, or somewhere between 
25 and 50 percent of the total ticket price.  Total travel 
time is generally about five and a half hours.  Airlines 
agree that direct flights would cut about one and a half 
hours off the total travel time. 
Air Cargo ) Important Factor in Cross-Strait Trade 
--------------------------------------------- ----- 
5. (C) A high volume of air cargo crosses the Taiwan Strait, 
playing an important role in cross-Strait economic trade.  In 
addition to cargo carried on passenger flights, Taiwan, Hong 
Kong, and Macau airlines conduct a total of 86 weekly all 
cargo flights between Taiwan and Hong Kong or Macau.  In 
2003, Taiwan exported 94,000 MT of goods to Mainland China by 
air via Hong Kong and Macau.  During the same period it 
imported 66,000 MT from the Mainland by air.  EVA estimates 
that 35 percent of air cargo shipped to Hong Kong and 30 
percent of cargo shipped to Macau is ultimately bound for the 
PRC. 
 
6. (C) The impact direct flights would have on the cost of 
cross-Strait air cargo varies by the type of service. 
Door-to-door express delivery services offered by firms like 
Federal Express, DHL and UPS differ in cost structure from 
services offered by freight forwarding firms or smaller 
courier services.  Nick Chen, Director of Operations for DHL 
Taiwan, estimated that direct flights would cut the cost of 
DHL's cross-Strait express delivery service by approximately 
20 percent.  The savings on air cargo arranged by freight 
forwarders that do not generally provide door-to-door service 
would be higher. 
 
Impact ) More Trade, Possibly Less Investment 
--------------------------------------------- --- 
 
7. (U) Lower air transportation costs from direct aviation 
links would stimulate cross-Strait trade, particularly for 
Taiwan's high-tech industries.  MOTC statistics show that 
Taiwan's electronic goods manufacturers rely heavily on air 
transportation.  According to the most recent data, 
approximately 15 percent by weight of Taiwan's electronics 
exports to Mainland China are shipped by air.  Electronics 
goods accounted for almost 58 percent by weight of Taiwan 
exports shipped to Mainland China by air and about 44 percent 
of imports. 
 
8. (C) Less expensive, more efficient cross-Strait 
transportation might also mitigate the rate at which Taiwan 
investment in the PRC is increasing.  If it's cheaper and 
easier to move goods from Taiwan to China, there may be less 
economic pressure to move manufacturing operations to the 
Mainland.  Jason Chen, Deputy Spokesman for Taiwan laptop 
computer manufacturer Quanta, told AIT/T that Quanta could 
assemble its laptops in either Taiwan or the Mainland, but 
felt forced to move its manufacturing facilities to the PRC 
because most of its suppliers had already moved.  Inexpensive 
and reliable air cargo transportation would increase the 
incentive for Taiwan firms to maintain the manufacture of 
capital and technology-intensive components in Taiwan, 
regardless of the location of input manufacturers or final 
assembly facilities.  Overall, Taiwan firms will continue 
investing heavily in the Mainland regardless of the status of 
aviation links.  However, the flow may be slightly slower 
with direct air transportation. 
 
9. (U) Reduced air transportation costs would also benefit 
Taiwan firms that already have invested in the Mainland. 
Lower airfares would cut costs for managers that live in 
Taiwan and fly to the Mainland regularly to oversee 
investments.  Some managers, who currently reside in the 
Mainland due to the inconvenience and high cost of air 
transportation, might even decide to return to Taiwan as 
their base of operations.  Similarly, multinational firms 
considering abandoning Taiwan as their headquarters for 
greater China or East Asia would be more inclined to continue 
managing regional operations from Taiwan. 
 
Impact ) Airline Industry Competition and Exclusion 
--------------------------------------------- ------ 
 
10. (U) Taiwan airlines have already taken measures to help 
them compete with Hong Kong and Macau airlines, which can 
offer service across the Strait and onward connections to PRC 
destinations.  China Airlines (CAL), EVA, Far Eastern Air 
Transport (FAT) and Trans Asia all have representative 
offices in Shanghai and Beijing.  EVA also has offices in 
Guangzhou and Xiamen.  Many carriers also have cooperative 
agreements with PRC airlines that function like code-shares 
in everything but name.  CAL flights into Okinawa connect to 
China Eastern Airlines flights to Shanghai.  FAT has a 
similar arrangement with China Eastern for its flights into 
Cheju.  EVA partners with Shanghai Airlines.  Taiwan airlines 
are able to sell tickets on the PRC legs of these connections 
to their customers in Taiwan and their PRC partners sell 
tickets on flights into Taiwan to Mainland customers. 
However, Taiwan law prohibits Taiwan airlines from entering 
into code-share agreements with PRC airlines, so these 
arrangements are not identified as code shares. 
 
11. (C) If direct air links are implemented, Taiwan carriers 
will have to compete with PRC airlines on the lucrative new 
cross-Strait routes.  Taiwan and PRC authorities will tightly 
control the routes.  EVA's Lee speculated that the Taiwan and 
PRC would initially open only four PRC airports for Taiwan 
flights -) Beijing, Guangzhou, Shanghai and Xiamen.  The 
number of airlines permitted to fly each route would also be 
strictly limited.  PRC airlines may benefit from lower labor 
costs for most operations, but as CAL's General Manager for 
Strategic Planning Frank Mao pointed out to AIT/T, many of 
the costs that airlines face )- fuel, equipment, and landing 
fees )- are the same for all airlines.  EVA's Lee told AIT 
that although cross-Strait routes might reduce the airline's 
profit margins, they would substantially increase the revenue 
base.  Both CAL and EVA are confident of their ability to 
compete with PRC airlines on cross-Strait routes.  They 
expect to benefit from Taiwan investors in the PRC who would 
prefer to fly Taiwan carriers for better service or due to 
brand loyalty. 
 
12. (U) The establishment of direct aviation links will 
require negotiation and compromise on the classification of 
cross-Strait routes that will impact non-PRC and non-Taiwan 
carriers.  The PRC government will insist that cross-Strait 
routes are domestic ones, while Taiwan will seek to have them 
classified as international routes.  The most likely outcome 
is a special "cross-Strait" classification or no 
classification at all.  The Hong Kong-Taiwan Aviation 
Agreement (as reported ref A) does not identify Hong 
Kong-Taiwan routes as either domestic, international, or 
otherwise.  However, only Taiwan and Hong Kong carriers are 
permitted to conduct flights.  A similar structure for 
Taiwan-PRC direct air links would exclude U.S. and other 
foreign carriers. 
 
13. (C) U.S. passenger airlines are not particularly 
interested in offering cross-Strait service.  U.S. airlines 
service to Taiwan has generally declined over the years. 
Delta stopped service to Taiwan nine years ago.  Northwest 
eliminated Taipei-Tokyo service on November 1 and now only 
offers Taipei-Osaka flights.  United Airlines Taiwan General 
Manager Andrea Wu told AIT/T that United would not be 
interested in conducting PRC-Taiwan flights, but would be 
interested in taking advantage of direct flights on other 
carriers to offer better service for United passengers on a 
"triangular route."  She explained that a significant number 
of United U.S. passengers traveling to Taiwan want to stop in 
the PRC on the same trip.  The typical pattern is a San 
Francisco-Shanghai-Taipei-San Francisco trip for business 
travelers from Silicon Valley visiting greater China's 
technology centers. 
 
14. (C) U.S. cargo carriers would be more concerned about 
exclusion from cross-Strait routes.  A firm like DHL that 
primarily transports cargo on planes owned by other firms 
would not be disadvantaged by a cross-Strait direct air link 
agreement that excludes foreign carriers.  However, FedEx, 
which maintains its own fleet of aircraft, would be 
negatively affected.  Scott Williams, Taiwan Managing 
Director for FedEx Express, told AIT/T that the impact of 
such an agreement on FedEx's Taiwan operations would be 
"huge."  FedEx would be forced to use other carriers for 
cross-Strait traffic in order to compete, a strategy FedEx 
generally only employs when its own capacity is inadequate to 
meet demand. 
 
Comment ) Politics in the Way of Growth 
--------------------------------------- 
 
15. (C) Taiwan and the PRC have gradually liberalized 
cross-Strait economic relations in recent years, increasing 
their economic integration.  Establishing direct air links is 
the single most important step that the two sides could take 
to facilitate further cross-Strait commerce.  More trade and 
more efficient investment due to direct air transportation 
would contribute to growth in both the Mainland and Taiwan. 
However, domestic politics in Taiwan and the PRC still stand 
in the way.  The political environment after Taiwan's 
December 11 Legislative Yuan elections on both sides of the 
Strait will determine the potential for progress toward 
direct air links.  End comment. 
PAAL