US embassy cable - 05TAIPEI4161

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 004161 
 
SIPDIS 
 
DEPT FOR EAP/TC, EB/TRA 
DEPT PASS AIT/W 
COMMERCE FOR ITA/MAC/ASIA/MBMORGAN CABLE BOX 4431 
 
E.O. 12958: DECL: 10/07/2015 
TAGS: EAIR, ECON, ETRD, CH, TW 
SUBJECT: TAIWAN'S AIR CARGO MARKET LOSING ALTITUDE 
 
REF: TAIPEI 3752 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.4 d 
 
Summary 
------- 
 
1. (U) Taiwan's international air cargo volume 
grew by a minuscule 0.7 percent in the first half 
of 2005 after a decade of nearly uninterrupted 
strong growth.  Although transit cargo increased, 
exports and imports both declined.  July monthly 
figures showed declines across all three 
categories.  The movement of Taiwan's IT 
manufacturing to the PRC is largely to blame.  The 
PRC accounts for the largest share of cargo 
volumes for Taiwan's carriers.  They are using 
various strategies, including investment in PRC 
carriers, to access the PRC market in the absence 
of direct air links.  Air cargo will continue to 
be an important part of Taiwan carriers' strategy, 
but Taiwan will be of declining importance as a 
source or destination of cargo.   End Summary. 
 
Taiwan Air Cargo Market in Decline 
---------------------------------- 
 
2. (U) Taiwan's international air cargo volume 
barely changed in the first half of 2005 from the 
same period in 2004 after a decade of strong 
growth interrupted only by a one year of decline 
during Taiwan's recession in 2001.  More 
disturbing for Taiwan cargo carriers, export and 
import air cargo volumes dropped 3.6 percent and 
5.4 for the first half respectively.  Only because 
of 14.4 percent growth in transit volume was total 
cargo able to eke out anemic 0.7 percent growth. 
Air cargo volumes for Taiwan's two international 
airports, Chiang Kai-Shek International and 
Kaohsiung International, released by the Ministry 
of Transportation and Communication (MOTC) are 
provided below in metric tons: 
 
Year      Total    Import   Export   Transit 
----    ---------  -------  -------  ------- 
 
2001    1,278,618  433,502  607,824  237,293 
2002    1,476,530  460,002  684,542  331,986 
2003    1,584,673  465,237  726,441  392,995 
2004    1,788,778  525,807  735,346  527,625 
Jan-Jun   852,045  252,937  360,425  238,684 
2005 
Jan-Jun   857,820  243,831  340,944  273,048 
 
3. (U) The latest figures for July 2005 offer no 
reassurance.  Total volume was down 5.6 percent 
from the same month in 2004.  Export and import 
volumes were down 8.6 percent and 3.4 percent 
respectively.  Even transit volume fell 3.8 
percent.  These data suggest the trend could 
worsen. 
 
Factories Moving Instead of Cargo 
--------------------------------- 
 
4. (C) Taiwan's air cargo traffic is dominated by 
electronic goods, which accounted for 63.2 percent 
of exports and 25.3 percent of imports.  The 
category of "other manufactured goods" accounted 
for most of the rest with 29.7 percent of exports 
and 42.3 percent of imports.  The decline in 
export volume may be due in large part to the 
transfer of Taiwan's IT manufacturing to the PRC. 
The shipment from Taiwan of high-tech components 
used to assemble electronic consumer goods in the 
PRC was an important component of earlier growth 
in air cargo.  However, as increasingly advanced 
manufacturing from farther up the supply chain 
moves to the Mainland, electronics exports to the 
PRC shipped by air are likely to continue to 
decline.  DHL Taiwan Director of Operations Nick 
Chen identified the movement of Taiwan's entire 
notebook PC manufacturing industry to the PRC as 
the major cause of declining cargo volumes.  He 
added that TFT-LCD panels produced in Taiwan would 
not reverse the decline as some had hoped.  He 
speculated that the panels will increasingly be 
shipped by sea as the market supply stabilizes. 
 
PRC Market Dominance 
-------------------- 
 
5. (U) MOTC air cargo statistics confirm the 
importance of the PRC market to Taiwan carriers, 
but the exact volume is difficult to estimate 
because MOTC data includes the PRC in "other Asia 
areas."  This category accounted for 20.8 percent 
of exports and 8.3 percent of imports.  Trade with 
the United States, Japan, and Hong Kong made up 
most of the rest, accounting for 17.6 percent, 
13.5 percent, and 11.8 percent of exports 
respectively, and 22.9 percent, 20.9 percent and 
10.3 percent of imports respectively. 
 
6. (C) MOTC does not release source or destination 
data on transit cargo.  Nevertheless, increasing 
transit volumes suggest that much of it is cargo 
originally from the PRC in transit to the United 
States and elsewhere.  EVA Air Deputy Senior Vice 
President for Cargo Management J.J. Lin (Jyh-jong) 
told AIT/T that the Greater China market accounts 
for 40 percent of EVA's total air cargo. 
 
Challenge: Getting PRC Cargo on Taiwan Planes 
--------------------------------------------- 
 
7. (C) PRC carriers have had a shortage of air 
cargo capacity, but are moving quickly to increase 
it.  CAL and EVA rank fifth and seventh 
respectively among international air carriers in 
terms of cargo capacity, and will continue to 
expand capacity in the next few years despite 
discouraging trends in the Taiwan market.  CAL 
President Philip Wei told AIT/T that CAL will take 
delivery of three more 747 freighters by 2007 and 
is in talks with Boeing to buy more.  EVA plans to 
convert eight 747 passenger jets to freighters 
between 2007 and 2009.  The challenge these 
carriers face is taking advantage of China's 
current capacity shortage despite being 
handicapped by the lack of direct air links. 
 
8. (C) CAL, EVA and even some of Taiwan's smaller 
carriers have been resourceful at finding ways to 
tap the PRC's air cargo market.  Reftel reported 
China Airlines purchase, together with Taiwan- 
based shipping lines Wan Hai Lines and Yang Ming 
Marine Transport and Belgium's air cargo carrier 
CargoLux, of a 49 percent stake in PRC cargo 
carrier Yangtze River Express.  CAL's Wei told 
AIT/T that his firm has abandoned plans to invest 
in China Cargo Airlines, but maintains 
cooperative arrangements with several PRC 
carriers that allow it to carry PRC cargo out of 
Hong Kong.  He added that CAL even carries cargo 
from the PRC that is shipped by sea from Xiamen 
to Kaohsiung. 
 
9. (C) Not to be outdone, EVA Airways signed a 
joint venture agreement with Shanghai Airlines to 
form an air cargo firm on September 30.  EVA's 
parent conglomerate, Evergreen, will pay RMB 200 
million (about USD 25 million) for a 45 percent 
stake in the venture.  EVA will hold 25 percent 
and other Evergreen units will hold the remaining 
20 percent.  According to EVA's Lin, the airline 
had already arranged with Shanghai Airlines to 
purchase the entire capacity of five weekly cargo 
flights from Shanghai to Macau.  This cargo is 
transferred to EVA aircraft in Macau.  EVA also 
uses Xiamen-Kaohsiung marine shipping to route 
PRC cargo onto EVA planes. 
10. (U) In addition, Taiwan's TransAsia Airlines 
is working on an alliance with Xiamen, Yunnan and 
Shanghai Airlines to move cross-Strait transit 
cargo.  EVA and CAL together partnered with Far 
Eastern Air Transport (FAT) and Taiwan Airport 
Service Company (TASC), to buy 49 percent of 
Xiamen Air Cargo Warehouse Co (reftel). 
 
11. (C) At the same time, Taiwan's large carriers 
are hoping and preparing for direct cross-Strait 
air links.  EVA's Lin told us that his firm is 
prepared to take advantage of any breakthrough 
quickly, but claimed he had no idea when such a 
breakthrough might occur.  CAL's Wei also denied 
knowing how soon the two sides might reach an 
agreement on direct flights.  However, he did say 
that he "knew" that they Taiwan and the PRC have 
agreed to implement cargo and passenger charters 
at the same time. 
 
Oil Prices - Not a Problem, Yet 
------------------------------- 
 
12. (C) Taiwan air carriers have been able to 
manage rising oil prices to date.  CAL's Wei 
claims the firm earns USD 5 to 6 million per month 
hedging oil and can continue to do so until the 
middle of 2006.  Cathay Pacific Taiwan General 
Manager told AIT/T that although passenger fuel 
surcharges do not make up the additional costs of 
higher prices, cargo fuel surcharges do.  DHL's 
Chen confessed with some embarrassment that DHL is 
actually making more money than previously thanks 
to fuel surcharges but predicted it wouldn't last. 
 
Comment - Even Taiwan Carriers will Bypass Taiwan 
--------------------------------------------- ---- 
 
13. (C) EVA and CAL have generally earned higher 
profits from cargo than passenger traffic.  Their 
strategies in the face of declining volumes, lack 
of direct links and higher oil prices show that 
these carriers are determined to stay competitive 
in the global air cargo market.  If Taiwan air 
cargo exports and imports continue to fall, which 
appears likely, EVA and CAL will need to invest 
more resources in PRC ventures.  Some of these 
resources could be invested in Taiwan operations 
if the Chen Administration and the PRC were to 
move more quickly on cross-Strait direct links. 
Unfortunately for Taiwan, this economic factor 
is unlikely to have much impact on the political 
calculations driving cross-Strait policy.  End 
comment. 
PAAL