Sandy Liu, newly-confirmed president of China Airlines, is resorting to a radical approach to turn the airline around. Nicholas Ionides reports from Taipei.

When Sandy Liu, president of China Airlines (CAL) has time on his hands, he picks up the company's internal telephone directory and picks a name. Liu then calls the employee and identifies himself, before asking: "Are you satisfied with the work you have done today?" If the answer is yes, he commends the employee. If no, or if there is any hesitation, Liu has the employee immediately spoken to by his or her supervisor.

Certainly intimidating, perhaps excessive, Liu recognises that his style may not make him the most popular executive within the airline. He considers it necessary, however, as the Taiwanese national carrier is in desperate need of a shakeup, from the inside out.

"I believe there's no reason why we can't be the best," Liu says from his small office at Taipei's domestic Sungshan airport. "There's no excuse for not following things properly," he says.

Liu, described by the airline as having a "thorough familiarity with international affairs and a powerful negotiating ability", was initially appointed as acting president in November. But by 9 April this year, the word "acting" disappeared and Liu was confirmed in the role.

A CAL veteran

A 30-year CAL employee, Liu started at the bottom and worked his way up, holding posts in Taiwan as well as abroad, including Amsterdam, Honolulu and the mainland USA. Liu has seen great change during that time, but none as drastic as on 16 February last year, when a CAL Airbus A300-600R crashed during final approach to Taipei airport, killing 202, including six on the ground.

While it was the worst accident on Taiwanese soil, it was not the worst for CAL, which in April 1994 lost another A300-600R in an eerily similar crash on final approach to Nagoya airport in Japan, killing 249 passengers and 15 crew. The accidents have given CAL the awful distinction of being not just the only operator to have crashed an A300-600R, but to have done so twice.

Last year's accident came as a devastating blow to both the airline and to Taiwan's air travel industry. It also could not have come at a worse time for the country's carriers, which by then had begun to feel the effects of the regional economic downturn which had been crippling many of the Asia-Pacific's carriers since mid-1997.

As a result, passenger traffic numbers fell last year in Taiwan for the first time in a decade on both domestic and international routes, and CAL will post its first net loss in 12 years.

The February crash, followed a month later by the crash of a Saab 340B operated by Formosa Airlines - a CAL associate, forced major change in both CAL and in Taiwan's pro-competition aviation bureaucracy. The Formosa crash killed all 13 on board.

Taiwan's transport minister left soon afterwards, as did the head of its Civil Aeronautics Administration (CAA), which for years has been promoting the expansion of air services to and within the country. CAL's honourary chairman, together with its president, had already taken "moral responsibility" for the crash by resigning from their position; senior flight operations division employees were either fired or demoted; and the airline's entire board was replaced apart from its chairman, Chiang Hung-I, who was hit by a pay cut.

Chiang, chairman since mid-1994, acted as president until the appointment of Liu, whom some say won the job against the odds. Apparently the government-linked China Aviation Development Foundation (CADF), which owns 71% of the airline, wanted an "outsider" to be hired. Another factor working against Liu was that his well-connected father, Liu Teh-ming, was CAL's chairman from March 1993 to May 1994. CADF's board was said to have been hesitant to appoint a close relative of a former chairman while trying to convince the public that real and necessary change was taking place within the carrier.

Few would deny, however, that the younger Liu, 50, got the job on merit. He has been at the carrier since its early days as a fledgling international carrier. CALwas originally established by ex-Air Force officers in 1959 with two amphibious aircraft, but had inaugurated domestic scheduled services by 1962 and added international flights four years later. After proving himself in numerous positions, Liu eventually emerged as vice president commercial, charged with boosting CAL's profile. In particular, it was his task to ensure that the flag-carrier remained Taiwan's dominant airline, in the face of aggressive competition from rival EVA Airways, which launched in 1991.

Although it was nine months before his appointment as acting president, many say Liu effectively took charge immediately after the February accident, helping to implement a successful two-pronged strategy for recovery.

Recovering share

This has a pair of key goals: regain lost market share by boosting load factors, and regain lost revenue by boosting ticket prices.

Before the accident, CAL's market share on routes into and out of Taiwan stood at 31%, but by March 1998 it had plunged to below 20%, Liu says. In April it edged up to 23%, in May to 26% and back close to 30% by June.

Regaining that share was achieved by slashing prices to mid-June, after which fares were raised ahead of the busy summer period. Although business dipped slightly thereafter, Liu says it returned to pre-crash levels by November.

"In 1998 we had five months where we were badly affected because of the accident," he says. "In the second half we were hurt by the economic situation. But we still achieved a 70% passenger load factor for the whole year, and we were ranked number three among all AAPA (the 19-member Association of Asia-Pacific Airlines) carriers."

A high load factor is obviously important but yield is far more so, Liu concedes, and CAL's breakeven load factor from fare cutting rose dramatically last year. Liu says he is "embarrassed to admit" that it rose between 10% and 15% after the accident. Some analysts estimate it was even higher than 90% for at least one quarter of the year.

The airline expects to turn in a pretax loss of NT$2.85 billion ($88 million) this year but is officially forecasting a break-even result for 1999. However, Liu says this is "very conservative", pointing to profits so far this year.

He acknowledges that CAL management cannot take full credit for the airline's improving financial position. The airline has benefited greatly from Taiwan's economic situation, which is far better than most other Asia-Pacific countries. Low fuel prices, falling interest rates and favourable foreign exchange rates have also helped the airline since the second half of last year.

Whatever the reasons for CAL's turnaround, the airline is looking at improving other areas of its business now that most lost passengers have returned. It claims to have radically enhanced flight safety since the crash, with the help of consultants Lufthansa Technik.

Liu says there is "no sense for me to elaborate on how much we have focused on the flight safety side".

"I can tell you that in the last six months, irregular cases have decreased dramatically. We have Lufthansa Technik helping us and I personally chair the review meeting with them every two months, and that is what I get from their remarks and comments. Sometimes they disagree with our criticism of ourselves. They say we are much better than our comments to ourselves."

Senior training pilots have been re-certificated in recent months, and then re-tested again, Liu says, while CRM (crew resource management) has become an acronym familiar to all CAL pilots, who are being monitored far more closely. The airline employs 700 cockpit crew, including 400 captains of whom more than 30% are expatriates.

Liu says that with the strengthened emphasis on CRM and with new training procedures and operations manuals issued to all cockpit crew, there is less division between the "old guard" and the "new guard". CAL has long been considered by many to be a retirement home for ex-air force pilots, but Liu says this has changed, with the dwindling number of older cockpit crew, in particular, willing to accept change more readily.

While flight operations will continue being targeted for improvement, Liu pledges, internal cost-cutting efforts are being stepped up. A new passenger revenue management system has been in place since last year to help identify ways to prop up depressed yields, while executive salaries have been trimmed and a general hiring freeze has been in effect.

While analysts generally accept that the company's is changing its overall operations for the better, one area where many are not so optimistic is that of long-promised ownership changes.

"Whatever they do to improve the safety or service, until they are really privatised they are going to have an airline with a reputation for cronyism," says one Taipei-based analyst. He adds that the CADF is seen by most as calling the shots within the airline on behalf of the Taiwanese Government, which has five seats on the Foundation's board.

Privatisation in prospect

Liu seems genuinely surprised when confronted with such scepticism over the likelihood of privatisation. "There is no doubt. As far as the CADF is concerned it's going to happen. It's not just talk. They will release their shares by 50% or more - absolutely," he says.

Plans for a sale were first discussed in mid-1996, when it was revealed that the CADF was talking with eight foreign companies to sell as much as 31%. The parties were not named, but it was said at the time that it was hoped a deal could be done by September that year.

The deal was not made, and many began doubting the CADF's resolve to give up control of the airline. And despite a renewed pledge by the CADF last year to become a "passive investor" in CAL as soon as possible, those doubts remain.

The CADF was originally established in 1988 and describes itself as a semi-independent non-profit group tasked with helping to grow Taiwan into a major Asia-Pacific aviation hub. Its board is dominated by the government, which has five seats. Two other seats are held by CAL, while another is held by a legal professional and the last by a finance industry professional.

After the first A300 crash last year, the government announced that it had ordered the CADF to sell shares to a foreign airline, with the goal being to enhance the carrier's management capabilities. The Foundation then instructed CAL to start identifying foreign carriers that might make good partners, while its board mulled a proposal to sell "at least half" of its holding in the airline.

A breakthrough appeared to have been made early in August, when CAL and Singapore Airlines (SIA) announced a memorandum of understanding for a sweeping alliance under which SIA would take a 5-10% stake within six months. But by late September, the Singaporean revealed that it wanted a 25% stake.

Analysts believe that the decision by arch-rival Cathay Pacific Airways to join the British Airways/American Airlines led oneworld alliance may have played a part in focussing SIA's mind on developing a hub in the north of Asia.

Whatever the motivation, talks broke down in January, with SIA saying that the reasons "went beyond the size of the stake". Liu dismisses dark speculation about the reasons behind the breakup. He says the only reason was SIA's desire for an immediate 25% stake, while the CADF initially wanted give up a smaller slice.

But doubts remain in the financial markets. One Hong-Kong based analyst questions whether the CADF genuinely wants to loosen its control, adding: "They'll have a lot harder time finding a partner now that things didn't work out with SIA."

A senior CADF official is adamant that the critics are wrong and that sale plans are well on track. He says financial advisers are being selected to assist while CAL has been instructed to identify potential alliance partners.

Since SIA's withdrawal from talks, Taiwan's China Development Bank (CDB) has declared an interest in buying a 35.5% stake. The move will probably not please those hoping to see real change, however, as the bank is an investment arm of Taiwan's ruling Nationalist Party.

"We could probably sell to a bank or some institutional investors quite quickly if we want, but we are looking at what's best for China Airlines," says the unnamed Foundation official.

"We really believe China Airlines has a great future, and it needs an airline partner. An equity sale must come with an alliance."

The executive adds that the CADF is allowing CAL to "screen" potential partners on its own, as "they know the airline industry best". BA, KLM and Lufthansa have been approached for initial talks, as have existing codeshare partners American Airlines and Continental Airlines.

Although the executive declines to predict the precise timing of a sale, he says the CADF does not rule out the possibility of shares being sold to a consortium of investors including the CDB, adding that there is no reason why SIA cannot return to the bargaining table.

Maintenance spin off

As part of its corporate overhaul, CALis also looking to spin off its newly expanded maintenance and engineering operation into a stand-alone subsidiary within two years. Since March, a handful of CAL executives have been tasked with making it a reality, and Lufthansa Technik is helping.

Lin Yung Lang, director of CAL's engineering and maintenance division, says a spin-off will allow it to operate more efficiently and secure more third-party work. He says that last year, 83% of the division's business, in maintenance man-hour terms, was for CAL, while the remaining 17% was for outside airline customers. By 2003, he says, it is hoped that 70% will be for CAL and the remaining 30% for outside customers.

The airline opened a new NT$3.2 billion three-bay maintenance hangar joining an existing two-bay hangar, at Chiang Kai Shek airport last year.

An international roadshow has been under study to promote the expanded maintenance centre, which is competing more fiercely with major Asia-Pacific firms including Hong Kong Aircraft Engineering, and Singapore Technologies Aviation Services.

Liu believes CAL's facility can compete with the others, and says he is pushing its executives - as well as those in all other parts of the business - to be more progressive and aggressive.

"In personal talk, we can have a good time. But once we are around the table there can be no nonsense - no more of the 'Chinese culture' where we just go around and around and around. We need results."

Fleet renewal

Fleet changes are high on the list of actions at China Airlines, starting with the end-March retirement of two remaining Boeing 747SPs and the assignment of a last 747-200 passenger aircraft to a "back-up aircraft" position, until eventually sold.

Airbus A300B4s are also going this year, starting with the two that CAL owns, as early as April. Four others, owned by Taiwan's CAA and on lease to the national airline, will be purchased by CAL by mid-year, says Liu, after which they will be sold. Twelve Airbus A300-600Rs, four of which are leased, may go, as may its five Boeing MD-11s, but this depends on the acquisition of new passenger aircraft, a decision on which is to be made "rather soon".

The Boeing 777 and Airbus A330/A340 are being considered, with the eventual aim to operate a fleet comprising Boeing 747-400s, of which CAL has 12, Boeing 737-800s, a medium-range widebody type of around 300 seats and a long-range widebody type of around 300 seats. CAL began taking delivery of new 737-800s last year and operates eight, with seven others on firm order and due for delivery through 2001.

On the cargo side, CAL is negotiating the acquisition of up to ten 747-400 freighters, some purchased from Boeing and some of which will be leased.

Peter Yap, director of the airline's cargo division, says some may come from Atlas Air, from where CAL already leases six 747-200Fs. CAL's cargo division currently has ten 747-200Fs, including the six from Atlas, with another to be added in May after a conversion from an all-passenger configuration. Yap says plans call for 17 freighters to be in operation by 2003.

Liu confirms the details: "In the next five years our 747-200 freighters will reach age 25 (the maximum allowable age for Taiwan-registered aircraft). So we will start introducing 747-400 freighters early next year if not the end of this year."

Cargo is seen as a major growth area for CAL, which for 1997 was ranked by IATA as the world's tenth largest airfreight carrier in terms of volume. Cargo revenues are running at over NT$16 billion a year and now account for close to 30% of the group's revenues.

Liu recognises that CAL still has to overcome its tarnished safety record, but he is trying to convince passengers to "give us one more chance". He often appears at Chiang Kai Shek airport in Taoyuan to greet passengers arriving from key destinations, such as San Francisco, asking if they liked their flight and grilling the crew on service and procedural changes needing to be made.

It may be above the call of duty for most executives in his position, but Liu says it allows him to gauge how the company is competing, and whether the changes are working.

"We airline executives are competing with each other to see who's smarter," he says. "For me, I know this is probably the last job I'm going to have, so I only have this one chance at it."

Source: Airline Business