US embassy cable - 05TAIPEI1091

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 001091 
 
SIPDIS 
 
DEPT FOR EAP/TC, EB/TRA/AVP 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 03/14/2015 
TAGS: EAIR, ECON, CH, TW, Cross Strait Economics 
SUBJECT: ECONOMICS COULD DIMINISH PRC INTEREST IN 
CROSS-STRAIT CARGO CHARTERS 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.5 d 
 
Summary 
------- 
 
1. (C) The next Chairman of the Taipei Airlines Association 
(TAA) believes that Chinese airlines are not interested in 
cross-Strait charter cargo flights because they don't have 
the capacity to compete with China Airlines (CAL) and EVA 
Air.  He says that CAL has unrealistic expectations of the 
long-run profitability of cross-Strait cargo traffic.  The 
Chairman also predicts that Taiwan will not support adding 
seventh freedom rights for cargo flights to the U.S.-Taiwan 
aviation agreement in the foreseeable future.  He thinks that 
CAL chairman Chiang Yao-tsung will take a more active role in 
the airline's operations than his predecessors.  End summary. 
 
2. (U) AIT/T econoff and econ assistant met March 10 with 
TransAsia Airways Chairman Tony C.C. Fan and Assistant Vice 
President of Corporate Planning William Hsu.  At the April 
2005 board meeting of the Taipei Airlines Association (TAA), 
Fan is slated to take over the chairmanship of the 
organization from Mandarin Airlines President Michael Lo. 
Hsu will be TAA's Secretary General.  As Chairman of TAA, Fan 
would lead the Taiwan delegation in any cross-Strait aviation 
discussions conducted under the "Macao model" used to 
negotiate the recent Lunar New Year cross-Strait charter 
flights.  Fan is also the chairman of Askey Computer 
Corporation, a manufacturer of modems and voice over internet 
protocol (VOIP) gateways.  Fan has master's degrees in 
business administration and computer engineering.  He also 
has a doctorate degree from Cambridge University in the U.K. 
However, he preferred to use Chinese in his discussion with 
econoff. 
 
Cargo Charter Flights 
--------------------- 
 
3. (C) Fan explained why Taiwan and the PRC want to proceed 
on different tracks in expanding cross-Strait charter flight 
service.  According to Fan, Taiwan airlines are not 
particularly interested in the PRC proposal of expanding 
Lunar New Year passenger charter flights to other holidays, 
such as Tomb Sweeping Festival on April 5, because they don't 
see as much additional demand.  Fan noted that TransAsia 
generally does not see substantial increases in passenger 
load factors on its Taipei-Macao flights on holidays such as 
Tomb Sweeping Festival or Mid-Autumn Festival.  PRC airlines 
are not interested in pursuing cargo flights because they 
don't have adequate cargo capacity to fully take advantage of 
such flights.  In contrast, China Airlines and EVA Air are 
both leaders in airfreight earning about 40 percent of 
revenue and almost 100 percent of profit from cargo 
operations.  Among Taiwan airlines, only CAL and EVA have 
large cargo capacities.  Fan told us that TransAsia also 
earns 40 percent of its revenue from cargo operations on its 
Taipei-Macao flights, but most of the cargo is carried by EVA 
aircraft under a code-share arrangement.  TransAsia does not 
have any aircraft dedicated to cargo.  In short, traditional 
airline business rivalries may join with political 
sensitivities to dim prospects for cross-Strait cargo 
flights.  Mainland carriers are unwilling to 'spot' their 
Taiwan rivals a leg-up in their basic business models. 
 
4. (C) Although he agreed that right now it is a big money 
maker, Fan doubted the long-run profitability of cross-Strait 
cargo service.  He pointed to declining shipments of 
Taiwan-produced electronic components to the Mainland. 
Referring to his experience as Chairman of Askey, he 
explained that he had to personally approve the shipment of 
components manufactured in Taiwan to assembly plants in the 
PRC.  He said that the stack of approval authorizations on 
his desk each month had been steadily declining as more and 
more components are produced in the Mainland.  He noted that 
90 percent of his firm's production now takes place in the 
PRC.  He also reported that several years ago the firm had 
set up a factory in Vietnam, but had to move it to the PRC 
because they were unable to find local suppliers. 
 
5. (C) According to Fan, in addition to declining shipments 
from Taiwan to the PRC, Taiwan airlines that want to carry 
PRC shipments to the U.S. via Taipei will soon face 
increasing competition from U.S. and PRC airlines.  These 
carriers are now ramping up their cargo capacities to take 
advantage of additional direct routes created by the U.S.-PRC 
aviation agreement concluded last year.  Fan thinks that CAL 
might be hoping that the PRC would grant Taiwan airlines 
fifth freedom rights for cargo flights, which would allow CAL 
to fly a Taipei-Shanghai-U.S. route.  He pointed out that to 
date the PRC has only granted cargo fifths to Singapore, 
allowing Singapore Air to fly directly from Nanjing to the 
U.S. on flights that originate in Singapore.  Fan thinks CAL 
has unrealistic expectations because its perspective is 
clouded by its close relationship with the government.  He 
claims EVA knows that the opportunity for big profits on 
cross-Strait airfreight will soon disappear, but is publicly 
enthusiastic about the potential of cross-Strait cargo 
charter flights to keep up stock prices. 
 
Cargo Sevenths with the U.S. 
---------------------------- 
 
6. (C) When asked about support among Taiwan airlines for 
adding seventh freedom rights for cargo flights to the 
U.S.-Taiwan aviation agreement, Fan confirmed that EVA and 
CAL would be opposed because they want to minimize 
competition on their profitable cargo routes.  He said that 
the other smaller airlines wouldn't have much interest 
because they focus on passenger traffic and internal Taiwan 
flights.  He personally supports opening up aviation markets. 
 He believes that the Taiwan government will be resistant to 
further liberalization in order to protect CAL's interest. 
Fan believes that the aviation industry would be better off 
if the government opened up the market, even if it meant 
bankruptcy for CAL.  (Comment: Fan seems to be a sincere 
proponent of liberalization, but TransAsia would stand to 
benefit from CAL being forced to compete on a level playing 
field.  End comment.)  He complained that airlines are not 
able to share their views freely with Taiwan's Civil Aviation 
Administration because CAA might discriminate against them 
when distributing routes. 
 
CAL Leadership Personalities 
---------------------------- 
 
7. (C) Econ assistant asked Fan about the new leadership at 
CAL and how the Chairman and President divided their duties. 
He explained that in the past the government had assigned 
retired air force officers to serve as CAL's Chairmen and the 
firm's Presidents had exercised control over most of the 
airlines operations.  For example, CAL's former Chairman 
Capt. Y.L. Lee only took charge of safety issues.  During his 
tenure, President Christine Tsung handled all other 
operations.  Fan believes that this situation has changed 
under the new Chairman Chiang Yao-tsung, who took office in 
July 2004.  Chiang came to CAL from the Public Construction 
Commission (PCC), where he was Deputy Director.  He is close 
to President Chen Shui-bian -- Fan called him "the King's 
right hand man."  He believes that Chiang will take a more 
active role in a variety of operational areas. 
 
8. (C) However, based on his recent interaction with Chiang; 
Fan also believes that Chiang will carefully divide 
responsibilities with the current CAL President Philip Wei. 
Chiang and Fan have met recently to discuss a joint venture 
between TransAsia and CAL in aviation catering.  He informed 
us that Chiang had insisted that the duties of the joint 
venture's Chairman and President be very clearly defined. 
 
9. (C) Fan also believes that Chiang is aggressive and not 
afraid to offend.  He cited Chiang's personal decision that 
some of CAL's advertisements in airports would be placed in 
front of EVA check-in counters.  He called this practice very 
unusual for airlines and believes it reflects Chiang's 
unfamiliarity with airline culture.  He believes the 
potential for CAL and EVA to work together in areas of mutual 
interest will be much reduced under Chiang. 
PAAL