Taiwan's domestic carriers are under real pressure as revenues decline
Brent Hannon/TAIPEI
Five years ago, nine airlines flew the skies of Taiwan, offering low fares, high frequencies, and a service that was generally on-time and reliable. Despite the intense competition - six airlines once flew the Tapei-Kaohsiung route - most of the domestic carriers posted solid 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 follow.
Today the situation is very different. Just four airlines fly domestic routes, and all are struggling to make money. The four carriers - UNI Air, Mandarin Airlines, TransAsia Airways, and Far Eastern Air Transport (FAT) - last month cut a combined 47 flights per week, yet their aircraft remain just half full.
According to Taiwan's Civil Aeronautics Administration (CAA), the number of domestic passengers fell by 18.6%, from 16.1 million in 1999 to 13.1 million in 2000. In comparison, in 1997, the first year of CAA records, 18.6 million passengers flew domestic flights - 30% more than in 2000.
The prospects for 2001 look just as bleak, with all four airlines predicting losses on domestic routes and load factors in the mid-50s. The prospect of a high-speed railway has added to the gloom. "Taiwan is a troubled market," says Daniel Pierce, director of Asia Pacific sales for Bombardier Aerospace. "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% lower than the air fares."
Several factors have contributed to the decline in domestic air traffic. Costs increased as the airlines switched from cheap and efficient propeller-driven aircraft to jets, which are more expensive to buy, maintain and operate. Ticket prices rose - last year the airlines raised fares by 20 to 30% on trunk routes, and by up to 50% on secondary routes - so customers found other ways to travel. The main north-south highway is larger and faster than it was five years ago.
Taiwan's slowing economy and depressed stock market also contributed to the decline. Accidents have taken a toll, too, contributing to a decline in consumer confidence in a highly fatalistic culture. From 1993 to 1999, Taiwan airlines suffered seven fatal accidents that killed 500 people. Four CAL aircraft crashed in the 1990s; CAL subsidiary Formosa Airlines lost three aircraft to crashes; and a TransAsia Airways aircraft crashed in 1995.
Cross-strait breakthrough
But as passenger numbers declined, the airlines were still slow to cut routes and sell aircraft. They are waiting for the inauguration of direct flights between Taiwan and mainland China, prevented by a ban based on the political emnity between the two countries. Currently, travelers to China from Taiwan transit through Hong Kong or Macao on international carriers. Ending the ban would clear the path for the domestics to pick up the China-Taiwan traffic. Rather than sell aircraft now, and then buy or lease more aircraft when direct flights begin, they are trying to retain their current fleets in anticipation of a cross-strait breakthrough.
The airlines also have limited freedom to cut services and must apply for government permission to reduce frequencies or eliminate routes, and this is seldom granted. On 1 February, the CAA allowed them to drop 47 weekly flights, and each carrier cancelled several routes. "We would like to cut flights further to save money, but we can't because of the government pressure," says Mandarin Airlines spokesman Vincent Chen.
The resulting overcapacity, combined with the drop in passenger traffic, rising fuel costs, and a weakening New Taiwan dollar, has plunged three of the four carriers into the red. FAT remains profitable, but its after-tax profit of NT$10 million ($300,000) in 2000 is a far cry from the $30-$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 a manager at FAT. Last year FAT's load factor was 56%. Like its competitors, FAT flies a handful of overseas routes and charters, but competition from China Airlines (CAL) and EVA Air limits the number of profitable regional routes that are available.
FAT remains the largest domestic carrier - in 2000 its domestic market share was 38%, followed by TransAsia with 29%, UNI Air with 24%, and Mandarin Airlines with 9%. TransAsia says it lost NT$53 million in 2000 - an improvement on its NT$1.75 billion loss in 1999. TransAsia is kept afloat by its lucrative Taiwan-Macau routes, which enjoy load factors of 80%, and contributed 40% 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 Air and Mandarin are subsidiaries, and do not compete directly with both majors on overseas routes. EVA allows its subsidiary UNI Air to fly regional charters and thin scheduled routes, and CAL does the same with its subsidiary, Mandarin.
Huge losses
Mandarin's overseas routes are profitable, says Chen. The airline posted a NT$10 million profit in 2000, but that was due to the sale of a Boeing 747-400. The carrier projects a loss of NT$100 million for 2001. CAL wants to sell half of its 90% stake in Mandarin, but offers are unlikely as the asking price is too high.
UNI Air is in the worst shape of the four. Its load factor in 2000 was 55%, and this year it is just 56%. UNI would not comment on its finances, but sources say the airline lost about NT$1 billion in 2000 as it struggled with high interest rates on its debt - NT$17 billion at the end of 1999. Parent company EVA Air is not expected to support UNI indefinitely.
UNI Air has delayed delivery of six firm and six optioned Bombardier Dash 8-Q400s that were due to arrive in early 1999. "We didn't cancel the order, but we postponed it while we consider the market," says UNI airport manager Mandy Yu. UNI must make a final decision on the six Dash 8-Q400s by June.
Unlike its competitors, Mandarin is shrinking its fleet. It plans to sell its two Fokker 100s, and is considering returning one or more of the three Boeing 737-800s leased from ILFC. FAT is keeping its 16 aircraft, and seeks 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.
The carriers originally ramped up their jet fleets in anticipation of direct flights to China, and as a result they are stuck with aircraft that are ill-suited for the 30- to 50-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 50- to 70-seat regional jets that dominate short-haul markets in the USA. Instead they have larger jet aircraft that are slow to load and unload, and expensive to operate.
The domestic airlines must also worry about a high-speed railway that is scheduled for completion in 2006. The train will make the 320km (200 miles)trip from Taipei to Kaohsiung in 90 minutes, with staggered stops in 12 cities. Evergreen, parent company of EVA and UNI, is hedging its bets and is part of the consortium that is building the rail link.
The carriers are optimistic about the possibility of direct flights to China. The CAA favours competition, and has a reputation for fairness on route allocation. The domestic carriers believe the CAA will award Beijing, Shanghai, and other major cities to CAL and EVA, and allow the smaller carriers to serve China's secondary cities.
Direct flights to China are likely to come after China and Taiwan join the World Trade Organisation (WTO) in the next year or two. The ban on direct flights is illegal under WTO rules and Taiwan's Government is unlikely to invoke a special exclusion to maintain the ban. These flights would give a much-needed boost to the struggling airlines - if they can wait that long.
| FLEETS | |
| Far Eastern Air Transport: | Mandarin Airlines: |
| 9X MD-80 | 5X Boeing 737-800 |
| 7X Boeing 757-200 | 7X Fokker 50 |
|
| 2X Fokker 100 |
| 2x Dornier 228 | |
| TransAsia Airways: | Uni Air: |
| 3X Airbus A320 | 13X MD-90 |
| 6X Airbus A321 | 12X Dash 8-300 |
| 3X ATR 72-300 | 1X Dash 8-200 |
| 7X ATR 72-500 | 3X Dornier 228 |
Source: Flight International
