Opening the flood gates: airlines allowed to fly between China and Taiwan

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In a long-awaited political breakthrough, Chinese and Taiwanese carriers will receive a much needed boost with the launch early next month of regular flights between the two countries for the first time in nearly half a century.

The new flights between Taiwan and mainland China will provide a financial boost to 11 carriers in a move that most commentators believe will not adversely impact carriers from Hong Kong and Macau, which have traditionally carried a large chunk of Taiwan-China traffic.

Six Chinese and five Taiwanese carriers have been authorised to operate 36 weekly flights combined across the Taiwan Strait following a landmark agreement reached last week between China and Taiwan.

Regular flights have not been allowed between China and Taiwan since 1949 when the two sides split following a civil war. For the last three years the two sides have agreed to allow a few ad hoc charter flights during the Chinese New Year holiday season.

Under the new agreement regular charter flights will be allowed every Friday, Saturday, Sunday and Monday, starting on 4 July.

The flights represent a significant breakthrough for Taiwanese carriers, which have been hoping for years to serve mainland China and have been banking on the market opening up to offset the rapid decline of Taiwan's domestic market since the launch of high-speed train services at the beginning of 2007.

Taiwanese carriers, many of which are now struggling financially, have since seen the domestic market drop by about two million passengers per year, or 25%.

The ability to operate regular flights to Taiwan comes also at a good time for Chinese carriers because in recent months they have seen a drop in demand in their domestic and international markets.

The 36 flights are expected to carry a little less than one million passengers annually, based on an average aircraft size of 250 seats. But more significantly, as part of the deal the Chinese government will begin allowing up to 3,000 mainland Chinese residents to visit Taiwan per day.

This will result in an extra two million passengers per year travelling across the Taiwan Strait, meaning the extra demand caused by the agreement will far outstrip the extra supply.

The Taipei Airlines Association, which represents all five of Taiwan's active scheduled carriers, says the mainland China-Taiwan market now consists of about 8 million passengers annually, based on visitor data from Taiwan's Mainland Affairs Council, and this will immediately grow to 10 million.

However, figures from IATA's PaxIS product, which is based on tickets issued, show the size of the market is now about 6 million passengers annually. Shanghai-Taipei is by far the largest city pair (see chart), accounting for about 40% of all passengers travelling between mainland China and Taiwan.

Besides Shanghai, flights will be operated to Taiwan from Beijing, Guangzhou, Nanjing, and Xiamen.

Association of Asia Pacific Airlines director general Andrew Herdman points out that the market has traditionally been mainly a business market due to visa restrictions but this will change quickly as more mainland Chinese are permitted to holiday in Taiwan.

"I think we'll see the market increase substantially. The market could double or triple in size," he says. "There is a lot of latent demand."

This is good news for the Hong Kong and Macau airports and carriers based in these two special administrative regions of China.

Historically about 60% of traffic between mainland China and Taiwan has transited in Hong Kong, 30% in Macau and the rest at other points such as South Korea's Jeju island. Air Macau and Cathay Pacific subsidiary Dragonair, in particular, have historically relied heavily on the mainland China-Taiwan market, although in recent years they have adjusted their strategies to diversify their business in anticipation the market would eventually open up to non-stop flights.

Industry sources say the Chinese government wants to make sure Hong Kong and Macau are not impacted by the new policy.

They expect the cap of 36 weekly flights will gradually be increased over the next few years, perhaps reaching 100 flights, but the Chinese government is expected to make sure that the capacity provided by the new direct flights equals or is less than the extra demand generated by the new policy.

The Airport Authority of Hong Kong says it "welcomes the launch of direct cross-strait air services", adding: "We believe that in the short-run, the impact for Hong Kong's aviation and logistics industries will be relatively small.

"In medium- to long-term, we believe that 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. We are confident that in the long-run, Hong Kong will be benefited by the increasing flows of passenger and cargo."

Herdman agrees, pointing out that while some traffic flows will change, the market will grow in size overall and that many of the Taiwanese have business connections in the Pearl River Delta region of China, which is accessed easily from Hong Kong.

"The key thing is to focus on what is the size of the market," he says. "The warming of relations across the Strait is positive in terms of commercial business and in terms of the size of the market."

Taiwan accounted for 18% of Hong Kong's 45 million passengers in fiscal 2006-07, according to the Airport Authority of Hong Kong.

In fact, Hong Kong-Taipei is the largest and one of the most lucrative routes in the world. Roughly 60% of traffic between Hong Kong and Taipei - and about 80% of traffic between Macau and Hong Kong - now connects on to flights to mainland China.

While Dragonair and Air Macau offer connecting flights between Taiwan and mainland China, Taiwanese carriers also have in place comprehensive interline and pro-rate agreements with mainland Chinese carriers that ensure they receive a good chunk of the lucrative mainland China-Taiwan market.

Figures from IATA's PaxIS product show the average one-way fare in the market was $422 last year, up from $414 in 2006. In March of this year, the latest month available, the average one-way fare had increased to $455.

The fares in the mainland China-Taiwan market are generally set by pro-rate and interline agreements.

Sources say the new non-stop flights will be priced slightly higher, with passengers being asked to pay for the added convenience of non-stop flights.

Costs for these flights, however, will be significantly lower due to their more direct routing and avoidance of transit costs. Therefore, the flights are expected to be highly profitable with load factors at or near 100% due to the fact demand will far outstrip supply.

If the market fully liberalises and airlines are free to fly as many flights as they want across the Strait, significantly lower fares would likely result and this would stimulate the market and lead to a dramatic increase in the number of passengers.

But this is unlikely to happen as the mainland China-Taiwan market is expected to remain highly regulated with a cap that will force most passengers to continue to travel via Hong Kong and Macau.

As a result, major carriers are expected to reap the benefits while low-cost operators will at least initially be shut out of this important new market.

All five of Taiwan's active scheduled carriers have been authorised to operate the new flights - China Airlines, EVA Air, Mandarin Airlines, TransAsia Airways and UNI Air. China has authorised six of its carriers - Air China, China Eastern, China Southern, Hainan Airlines, Shanghai Airlines and Xiamen Airlines.

Leading city pairs in China-Taiwan market
City Pair 2005 2006 2007
Shanghai-Taipei 1,056,000 1,179,000 1,249,000
Beijing-Taipei 227,000 257,000 274,000
Shanghai-Kaohsiung 167,000 183,000 198,000
Xiamen-Taipei 149,000 141,000 134,000
Shenzhen-Taipei 81,000 99,000 55,000
Fuzhou-Taipei 71,000 74,000 72,000
Guangzhou-Taipei 70,000 61,000 69,000
Hangzhou-Taipei 65,000 100,000 104,000
Nanjing-Taipei 61,000 92,000 84,000
Source: IATA PaxIS. Notes: one-way traffic China to Taiwan