China-Taiwan flights take off

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Now that regular flights have begun between China and Taiwan, carriers from both sides are looking to boost co-operation

Airlines from China and ­Taiwan are scrambling to forge partnerships following a groundbreaking political agreement that has opened up the market to regular non-stop flights for the first time in nearly 60 years.

The long-time rivals signed an historic agreement in June allowing non-stop passenger flights across the Taiwan Strait between Fridays and Mondays. Six ­Chinese and five Taiwanese ­airlines are now operating a total of 36 weekly round-trip flights, between five points in China and eight in Taiwan. Direct flights had been banned since 1949 when the two sides split following a civil war, although an agreement reached two years ago allowed limited flights over four annual holiday periods.

china southern - china airlines pact signing

China has repeatedly threatened to take the island back by force but on the business side there are extensive ties with many Taiwanese companies having operations in mainland China. Their respective airlines also have good relations, which have been improving over the past few years in anticipation of direct flights being allowed. Ties include interlining for their connecting flights through Hong Kong and Macau and frequent-flyer programme links. There are even ownership ties. Taiwan's China Airlines owns 25% of Chinese freight carrier Yangtze River Express while EVA Air owns 25% of Shanghai Airlines' cargo subsidiary.

Partnership talks are now being substantially increased. China Southern and CAL agreed in late June to represent each other in passenger, cargo, maintenance and ground handling. China Southern has agreed to support CAL in its bid to join SkyTeam. CAL is also in talks with other Chinese carriers while home rival EVA is negotiating similar partnership deals, with a view to eventually having codesharing links.

The new flights should provide a needed financial boost to the 11 carriers now operating the new flights. Taiwanese airlines have been looking to serve new international markets to help them shift focus away from a recent 25% drop in domestic traffic caused by the opening of a high-speed rail line. The ability to operate regular flights to Taiwan also comes at a good time for Chinese carriers, which in recent months have seen a drop in traffic.

The new flights are expected to carry just under one million passengers annually. But more significantly, the Chinese government as part of the new deal is now allowing up to 3,000 of its nationals to visit Taiwan each day. This will result in an extra two million passengers per year travelling across the Taiwan Strait, meaning the extra demand caused will far outstrip supply. Today the Taiwan-China market consists of about eight million passengers annually.

Association of Asia Pacific Airlines director general Andrew Herdman points out the market has traditionally been mainly a business market due to visa restrictions but this will change as more Chinese nationals are permitted to holiday in Taiwan: "The market could double or ­triple in size. There is a lot of latent demand."

Historically about 60% of traffic between China and Taiwan has transited in Hong Kong, 30% in Macau and the rest at other points. Air Macau and Cathay Pacific Airways subsidiary Dragonair have traditionally relied heavily on the mainland China-Taiwan market, although in recent years they have adjusted their strategies to diversify in anticipation it would eventually open up to non-stop flights. Hong Kong-based HSBC analyst Mark Webb says only 8% of Cathay's revenues now come from the Taiwan market, of which 40% could be lost if the market fully opens. "The complete opening up will be spread over two or three years. It's a relatively slow process. The impact on Cathay won't be ­significant," Webb says.

The Hong Kong Airport Authority, which relies on Taiwan for 18% of its traffic, is also not concerned: "We believe in the short-run the impact will be relatively small. In the medium- to long-term, the launch of direct cross-strait air services will help foster closer ties of economic partnership, trade, social and cultural exchange between Hong Kong, Taiwan and Chinese Mainland. It will also bring more economic and tourist activities as well as increasing demand for air services."

Herdman points out that while some traffic flows will change, the market will grow in size overall: "The key thing is to focus on what is the size of the market. The warming of relations across the Strait is positive in terms of ­commercial business and in terms of the size of the market."

Webb, however, warns that Air Macau "is very significantly impacted". The flag carrier is struggling financially and is now looking for a cash infusion that is expected to result in some of its smaller shareholders including TAP Portugal selling out.

China Southern chairman Liu Shao-yong (left) poses with the just-departed China Airlines chairman Ringo Chao as they sign a new pact

For more on Air Macau's situation go to: flightglobal.com/airmacau