US embassy cable - 05TAIPEI711

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 000711 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 02/23/2015 
TAGS: EAIR, ECON, CH, TW, Cross Strait Economics 
SUBJECT: CROSS-STRAIT CHARTER FLIGHTS - LOOKING BACK AND 
MOVING FORWARD 
 
REF: A. TAIPEI 43 
     B. TAIPEI 130 
     C. TAIPEI 222 
     D. TAIPEI 280 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.5 d 
 
Summary 
------- 
 
1. (C)  Cross-Strait Lunar New Year charter flights ended 
February 20.  Passenger loads were up from 2003, the last 
time charter flights were implemented, and airline financial 
losses were lower.  The Taiwan government wants to proceed 
with cargo charter flights, but will attempt to insist on 
bilateral negotiations that include Mainland Affairs Council 
(MAC) and/or Straits Exchange Foundation (SEF).  China 
Airlines (CAL) hopes that the PRC may grant Taiwan airlines 
overflight permission for flights to Europe and other 
destinations.  The Taiwan-imposed restriction of charter 
flights to Taiwan businessmen with investment in the Mainland 
caused some problems.  Taiwan will use expanding service to 
other groups on future cross-Strait flights as an argument 
for a cross-Strait dialogue that includes more government 
representation.  End summary. 
 
Bigger and Better than 2003 
--------------------------- 
 
2. (U) The Lunar New Year cross-Strait charter flights 
wrapped up on February 20 with a Hainan Airlines flight from 
Taipei to Beijing.  The flights marked a step forward in 
cross-Strait relations, and a modest success for Taiwan 
airlines.  According to the Ministry of Transportation and 
Communications (MOTC), about 10,000 passengers took advantage 
of 48 charter flights -- compared to 1,300 passengers on 
eight flights in 2003, the last time Lunar New Year charter 
flights were implemented.  Passenger load factors (PLF) 
averaged around 50 percent, also up from 2003.  China 
Airlines (CAL) Chairman Chiang Yao-tsung told the media that 
CAL's PLF for the flights reached 60 percent, and the carrier 
earned profits of NT$ 400,000 for a profit margin of about 
5.6 percent.  Mandarin Airlines, Far Eastern Air Transport 
(FAT) and TransAsia all claimed that they ended up around the 
breakeven point.  Nevertheless, even CAL's profit must be 
seen in the context of the opportunity cost of devoting 
aircraft and personnel to charter flights during Asia's 
busiest travel time of the year. 
 
3. (U) Taiwan's Mainland Affairs Council (MAC) hosted a 
dinner for Taiwan's six air carriers on February 21 to 
celebrate the success of the charter flights.  The dinner was 
planned after the PRC announced that it would host a similar 
event on February 22.  The chairmen of CAL, Eva Air, FAT Uni 
Airlines, and TransAsia had all publicly confirmed that they 
would attend the event.  Mandarin Airlines Michael Lo has 
also confirmed that he will attend.  However, he denied 
reports that he would discuss charter cargo flights with PRC 
officials in his capacity as Chairman of the Taipei Airlines 
Association.  According to Lo, he will attend only as 
President of Mandarin Airlines. 
 
Next Step Cargo Flights 
----------------------- 
 
4. (U) The Chen administration has made it very clear that it 
would like to proceed with cross-Strait discussions of direct 
cargo charter flights.  President Chen told the Lunar New 
Year meeting of Taiwan businessmen with investment in the 
Mainland hosted by the Mainland Affairs Council and the 
Straits Exchange Foundation on February 16 that cross-Strait 
charter cargo flights would be the government's priority for 
cross-Strait relations.  Direct cargo flights would be a huge 
boon to Taiwan's high-tech manufacturers, who transport a 
large volume of components to factories that assemble 
consumer electronic goods in the Mainland.  The Taiwan 
government awaits a clear response from the PRC on the cargo 
charter flight proposal. 
 
5. (C) Cross-Strait cargo charter flights have been on the 
table before.  In 2003, MAC had announced a plan that would 
permit Taiwan firms to conduct cross-Strait charter flights 
if approved by the PRC.  MAC Senior Secretary Lee Li-jane 
told AIT/T the plan did not require any cross-Strait 
negotiations at the time because it was only open to Taiwan 
carriers.  It was never implemented because the PRC never 
endorsed it.  Lee claims the 2003 plan won't work now because 
the Taiwan government wants to proceed with bilateral cargo 
charters that would require some form of negotiation between 
the two governments before implementation. 
 
6. (C) The Taiwan government will likely insist that cargo 
charter flights occur only after bilateral discussions that 
include key government officials.  Terms for the Lunar New 
Year flights were negotiated using the "Hong Kong model" with 
government officials acting as unofficial advisors to airline 
business associations.  In a key concession by the Taiwan 
government, MAC and Straits Exchange Foundation (SEF) 
officials were not included in the discussions -- only civil 
aviation officials participated.  A few observers are now 
calling this precedent with discussions focused on technical 
issues and conducted primarily by airline associations with 
assistance only from civil aviation officials the "Macao 
model."  Taiwan will not readily agree to use this model 
again to discuss cargo charters or further expansion of 
passenger charters. 
 
7. (U) CAL's Chiang has publicly proposed that only CAL and 
EVA be permitted to participate in charter cargo flights 
because of their large cargo fleets.  According to media 
reports, TAA Chairman Lo endorsed this approach, upsetting 
his counterparts at FAT and TransAsia.  (Note: Lo's Mandarin 
Airlines is an affiliate of CAL.  Lo will step down as TAA 
Chairman in March.  His replacement is likely to be TransAsia 
Chairman Fan Chih-chiang.  End note.)  MOTC Vice Minister 
Oliver Yu has indicated publicly that charter cargo routes 
will be distributed based on airline capacities. 
 
CAL Wants First Freedom Rights 
------------------------------ 
 
8. (C) In a lunch with AIT/T Econ Section Chief, CAL 
President Philip Wei believes that the next step in improved 
cross-Strait aviation relations could be the PRC granting 
first freedom rights to Taiwan airlines, allowing them to fly 
through PRC airspace enroute to Europe and other 
destinations.  Wei doesn't believe that Taiwan will be 
willing to grant the same rights to PRC carriers, but still 
had hopes that the PRC would make this concession 
unilaterally.  According to MAC's Lee, the PRC granted 
overflight rights to some Taiwan airline flights on a 
case-by-case basis in 2003 during hostilities in Iraq.  She 
believes that a similar case-by-case model could be applied 
today.  However, she foresees difficulty in implementing a 
permanent, more formal structure.  According to Lee, even for 
overflight rights granted unilaterally by the PRC, Taiwan's 
Legislative Yuan (LY) would have to authorize Taiwan carriers 
to take advantage of them. 
 
Passengers Turned Away ) Resentment and Leverage 
--------------------------------------------- --- 
 
9. (C) The major glitch in charter flight implementation was 
verification that passengers were qualified to take advantage 
of the charter flights.  As reported ref C, the Taiwan 
government deliberately restricted passengers to Taiwan 
businessmen with investment in the Mainland, their families 
and employees.  Reports indicate that because airlines relied 
on Taiwan business associations in the Mainland to verify 
passenger status, many who didn't qualify were able to buy 
tickets and travel, including tourists, journalists, students 
and even some foreign laborers.  Airlines had some 
flexibility in this area.  At AIT/T Econ Chief's lunch with 
CAL President Philip Wei, one CAL executive offered to 
facilitate charter travel for an AIT/T officer by temporarily 
naming him a CAL consultant.  Nevertheless, some unqualified 
travelers were turned away and told to make other 
arrangements.  MAC reports that the largest such group of 
unqualified travelers numbered 55 individuals.  The 
restrictions generated some public opposition in Taiwan, 
especially among the families of Taiwan students studying in 
the PRC.  The Taiwan government's determination to enforce 
the restriction shows its resolve to maintain strict control 
the liberalization of the cross-Strait aviation policy.  It 
will use expanding service to other groups as further 
justification for a broader dialogue with the PRC that 
includes MAC and/or SEF officials in some capacity. 
PAAL