Nicholas Ionides TAIPEI Taiwan's EVA Airways has enjoyed rapid growth since it started flying eight years ago. Now it is time for consolidation and to take stock

An unfamiliar quiet now fills the once bustling halls of the EVA Airways corporate offices. After eight years of phenomenal growth, Asia's bright young start-up has reached maturity. Gone are the days when new aircraft were arriving faster than one could count the new routes being inaugurated.

"There is still some growth, but the majority is from cargo operations," says founding president and vice-chairman Frank Hsu. "The passenger side of the business has already reached a certain point, especially with the economies being so down. So, at this particular time, it is a great opportunity for us to sit down, to consolidate internally, to make ourselves more efficient. It's a time for us to consolidate."

Consolidation must be an odd concept for Hsu, who was a senior executive with the fast-expanding Evergreen shipping giant for two decades before being named the first president of EVA in the late 1980s.

He became vice-chairman and was succeeded as president by Richard Huang in 1995, but returned in that role last year, when Huang became chairman of Evergreen America.

EVA is a subsidiary of the Evergreen Group, which includes the world's largest container shipping company, Evergreen Marine.

The early days at EVA, which followed liberalisation in Taiwan's skies, were harried ones. At one point, new routes were being launched at an average rate of one every 45 days. Political battles were also faced regularly as EVA worked to break the monopoly until then enjoyed by the government-linked China Airlines (CAL).

EVA has grown into a major global player since its first flights in July 1991.Its rise has been primarily from annual double-digit growth in overall air traffic, rather than by market share gains from CAL. EVA has 33 widebodied aircraft serving 27 cities on 28 passenger routes to five continents. It also pioneered the world's first four-class service, has a spotless safety record, its own training and maintenance facilities, around 5,000 employees - and alliances with some of the world's major players.

Partly because of its parent group's dominance in sea freight, EVA is also a strong force in air freight. With its fleet including 10 Boeing 747-400 Combis and seven MD-11 freighters, the carrier expects to carry 450,000t this year.

But not all is rosy. EVA still has a marathon to run in recouping the estimated $200 million in start-up costs - in addition to net losses totalling $218 million over the four years to the end of 1994. While it has been profitable in every year since 1995, it has netted just $56 million over those four years to the end of last year. Payback to its parent is clearly a far-off possibility.

Last year's profit, of $2.3 million on revenues of $1.32 billion, is described by Hsu as "tiny", but it still came as a surprise to most as EVA posted big first-half losses and predicted a substantial full-year deficit. Despite a tough year so far, it forecasts a $14.8 million net profit for this year on revenues rising another $100 million.


The positives are partly a result of the carrier's slowdown. It has cut loss-making routes, is reducing its workforce and is focusing more on cargo. Hsu estimates that in the not-too-distant-future cargo will account for half of EVA's business, compared with just over one-third now.

Its only immediately planned new passenger route this year is to Vancouver on a codeshare with Air Canada, and its only capacity increases will be in the form of two new MD-11 freighters. Last year it dropped tentative plans to establish a new carrier in the Philippines and rejected an offer to buy a sizeable stake in Myanma Airways International. Hsu says no further acquisition plans are pending.

Plans abandoned

Cuts last year included the abandonment of plans to make the southern Taiwanese port city of Kaohsiung its "sub-hub" for international flights. It dropped its seven-month-old Kaohsiung-Los Angeles service at the start of this year - months after cutting Kaohsiung-Singapore.

The carrier also ditched plans for a new route from Kaohsiung to Ho Chi Minh City in Vietnam, leaving flights from Kaohsiung serving only the tiny Portuguese enclave of Macau, west of Hong Kong.

Cargo is a different story, however, with services from Taipei added to Mumbai (formerly Bombay) earlier this year. The arrival in the middle of this year of the two additional MD-11 freighters should permit new services to be launched within Asia and to Europe and the USA.

EVA's cargo expansion plans are in line with the Taiwanese Government's efforts to promote Taipei as a regional cargo hub. Last year it launched freighter services to the US cities of Chicago and Dallas, and to Sharjah in the United Arab Emirates (UAE). It also established codesharing agreements with British Airways World Cargo and Lufthansa Cargo.

Other cargo flights include those to Amsterdam, Brussels and London in Europe; Dubai in the UAE; and to Singapore, Kuala Lumpur, Penang, Manila and Jakarta in Asia.

Hsu says the carrier is forecasting more than 20% cargo growth this year in terms of tonnes carried, and traffic (freight tonne kilometres) should grow by about 32%.

A focus on cargo is not new, but it has been made more of a priority since the start of the regional economic downturn in mid-1997. Although Taiwan has not been as badly hurt as many of its neighbours, it has suffered nonetheless.

Last year was also a particularly bad time for the Taiwanese industry for other reasons, starting in February with the crash of a China Airlines Airbus Industrie A300-600R at Taipei that killed 202 people, followed by other less dramatic crashes that forced a sweeping shake-up of the industry.

All Taiwanese carriers are believed to have lost money in the first half of last year. EVA is one of the few to have made some money in that period.

The carrier led the push for change on the domestic side last year, with the merger of subsidiary carriers UNI Airways, Great China Airlines and Taiwan Airlines, and the transfer of its own domestic routes to the enlarged UNI.

Hsu, who is also chairman of UNI and of the Taipei Airlines Association, says all Taiwanese carriers will continue to have a tough time this year, with a recovery not forecast until around 2001.

Hsu is not looking at the market downturn with completely negative eyes, however. He says that EVA is using it as an opportunity to make necessary changes that might not otherwise have taken place.

"We are trying to make our company a bit leaner, so we will shrink," he says. "We didn't lay off anyone, but we are transferring some of our personnel [to other businesses]. We will try to consolidate and switch some manpower to become leaner. We will be about 10% leaner, gradually. Within this year we should reach that target."

No passenger aircraft orders are expected for at least a couple of years, he adds. EVA has scaled back its fleet expansion plans, deciding late last year against a formal order for up to 12 Airbus A340-500/600s. It had earlier signed a letter of intent to be a launch customer for the new ultra-long-range aircraft, but suspended plans because of the regional economic downturn.

"I think that, until the year 2001, we will not buy any more new aircraft," Hsu says. "Of course, if the market requires it, we may lease some, but at this moment, with the economic situation, it is not wise to place new orders."


Since its launch, EVA has been the subject of much negative speculation. Given its huge start-up costs and the big losses in its first four years of operation, some have predicted that the carrier will not survive long. Hsu laughs off such speculation, saying that it is groundless and implying that those who suggest it do not understand the industry. "I don't know why people speculate with these rumours," he says. "This is a long-term business and we have a very big group behind us."

He says that going public should help to quell those rumours, and Taiwan's Over the Counter Authority is assessing an application for a listing. Approval is expected by July and Hsu expects the company's stock to start trading around six months later.

"It will give us more channels to get more capital," he says, adding that the airline is capitalised at about $615 million. "As an airline, it's quite capital intensive. Also, we feel it's time to reward our shareholders."

Alliances are also a major focus for the airline in its move to cut costs, but Hsu says that a decision on which global grouping it will join is still some time away.

He says EVA has been assessing for some time membership in a global alliance, and has held preliminary discussions with oneworld, the Star Alliance and the Continental Airlines and KLM/ Northwest Airlines group.

"It's the trend, and we have to catch on this trend," he says. "What we should do is to go along with bilateral working relationships, and enter an alliance later. Our conclusion is we will join eventually, but we will intensify all the bilateral alliances first to see where we fit into which group."

EVA's Star Alliance links include passenger codeshare agreements with members Air Canada, Air New Zealand, ANA and Ansett, plus the cargo agreement with Lufthansa and talks with United on a passenger agreement to take advantage of the Taiwan-USA "open-skies" air services agreement. Oneworld links include the cargo agreement with BA, while other global links include passenger codeshares with America West Airlines and Continental.

Hsu acknowledges that EVA has closer ties with Star than it does with any other grouping, but claims that it is too early to predict the direction in which the carrier will go.

The increasing number of partnerships comes as the carrier has grown into an established, "full-service" airline, with its own maintenance capabilities and crew training facilities.

From his large office near Taipei's Chiang Kai Shek International Airport in Taoyuan, Hsu states confidently that EVA is no longer the "new kid on the block".

He says, almost proudly: "From the very beginning, most of the Asian carriers looked down on us. They thought we'd never succeed. But we proved it."


Crash triggers Taiwan shake-up

Few aviation markets can have been through such a radical shake-up in such a short space of time. But, since early last year, Taiwan's airline industry has set about re-inventing itself.

Behind much of the soul searching was the disastrous crash of a China Airlines (CAL) Airbus A300-600R at Taipei. The timing of the accident could hardly have been worse. It came just as Taiwan's many carriers were starting to feel the effects of the regional economic downturn, and forced change within both the country's aviation bureaucracy and its carriers. Fewer airlines ply Taiwan's skies today, and even fewer will do so later this year after national carrier CAL merges its subsidiaries, Mandarin Airlines and Formosa Airlines.

CAL's main rival, EVA Airways, led the airline changes last year, merging its domestic subsidiaries UNI Airways, Great China Airlines and Taiwan Airlines and transferring its own domestic routes to the newly enlarged UNI.

CAL followed by announcing plans for its subsidiaries, and many expect two other primarily domestic carriers, Far Eastern Air Transport and TransAsia Airways, to merge at some point.

Chairman of the Taipei Airlines Association, Frank Hsu, also chairman of UNI and president and vice-chairman of EVA, welcomes the changes, saying that the consolidation is helping to stabilise the industry after a decade of double-digit growth.

"I would like to see more mergers and more consolidation," Hsu says. "This is the only way to stabilise domestic traffic. Three or four domestic airlines are about right, and two international carriers are enough."

Hsu also expects the domestic market to stabilise after the local Civil Aeronautics Administration approves an increase in pricing levels, to discourage heavy discounting. He is leading a push for reductions in airport charges, and other industry related administrative fees, in a bid to cope with the effects of the downturn.

Hsu says regular talks are being held with the Ministry of Transport and Communications for landing charges to be reduced at domestic and international airports across the country. At the same time, carriers are trying to have related fees reduced, such as those for new aircraft registrations, airport space rentals and aircraft refuelling.

Taiwan's economy - and its carriers - has been less badly affected than those of its regional neighbours in Indonesia, Malaysia and Thailand. But last year the country's traffic fell across the board for the first time in a decade.

"Last year was horrible for every airline," Hsu says. "International air traffic has shrunk so much - by at least 10-15%. Domestic in Taiwan also shrunk by 10-15%, and the yield was low. This year is still tough. The forecast is that the second half should be getting better, but it is still difficult. I hope that some of the things we are trying to do will help."

Source: Airline Business