Brent Hannon/TAIPEI
China Airlines (CAL) is aggressively expanding and modernising its fleet - in the past two months it has ordered 13 Boeing 747-400 freighters and picked up an option on five Boeing 737-800s, bringing its firm orders for 737-800s to 15. It is set to replace its Airbus A300s and Boeing MD-11s with an order for Airbus A340s or Boeing 777s. CAL is thought to have ordered seven A340-300s, with orders for another five, but the airline will not confirm the order.
EVA Airways, on the other hand, has no immediate expansion plans. In September last year, at the height of the Asian downturn, the carrier cancelled a letter of intent to purchase 12 A340-500 and -600 aircraft. Despite the market recovery, the airline does not plan to revive that order. "We are cutting costs and trying to make money," says executive vice-president Daniel Wu. "We do not plan to order the A340s. We will wait and see what happens."
EVA wants to see further signs of prosperity in Asia, says president Frank Hsu. "So far the economic recovery has mostly affected passenger and cargo traffic from Taiwan," says Hsu. "We have to see more improvement from other Asian markets before purchasing more aircraft." EVA will not restrict its options to the A340, but will also consider the 777, he says.
CAL president Sandy Liu (above) has spearheaded the airline's fleet modernisation. Since his appointment as acting president last November - a position made permanent in April - Liu has moved aggressively to reduce the number of aircraft types in CAL's fleet. "Having fewer types will dramatically reduce our operational costs," he says. So far two Airbus A300B4s and two 747SPs have been retired, while 10 747-200 freighters will be phased out as the new 747-400 freighters arrive.
CAL's fleet, which has seven types, will soon be cut to four: the 737-800, 747-400, A300-600, and a 300-seater aircraft, either the A340 or the 777. "That's four types, but we may reduce to three types," Liu says. "In five years' time we may phase out the A300-600s and use smaller versions of the A340 or 777 to replace them. By 2008 we will be down to three types, including freighters."
CAL, which leases half of its fleet, will extend this practice to the 13 747-400 freighters. Although leased aircraft are more expensive, CAL can return the aircraft in the event of a downturn and quickly reduce capacity. Six of CAL's 11 747-200Fs are wet leased from Atlas Air. About half of the 13 newly ordered 747-400Fs will also be leased.
The first two of the new 747-400Fs, which will be leased, are due for delivery later this year. If the market continues to grow, says Liu, CAL will operate 17 Boeing 747-400Fs by 2007.
EVA, which launched in 1991, has a younger fleet and is growing more slowly. In May, it ordered three 747-400 freighters, for delivery from next year, and will take delivery of two MD-11 freighters in the autumn, bringing its total of that aircraft to nine. Aside from that, it has no acquisition plans.
Dramatic turnaround
Both airlines have reversed their fortunes this year. CAL predicts a pre-tax profit of $52.9 million for 1999, a strong recovery from last year's after-tax loss of $67.7 million. Pre-tax profit in the first quarter reached $24.6 million. Yield has improved sharply, says Liu, while the airline has cut costs by 6%, compared with last year.
EVA's growth has been equally meteoric. After earning an after-tax profit of $2.26 million in 1998, on revenues of $1.28 billion, the airline predicts a pre-tax profit of $37.9 million for this year, on revenues of $1.48 billion. In the first six months of 1999, EVA's revenue grew 11% compared with the first six months of 1998, to $686 million, of which passenger revenue comprised $385 million, and cargo revenue $277 million.
Low fuel prices and interest rates, plus a strong New Taiwan dollar, have lowered operating costs for both airlines. Meanwhile Taiwan's strong economy has weathered the Asian crisis well: it posted annual growth in gross domestic product of 4.7% last year and is expected to grow another 5.2% this year. The economy has boosted passenger numbers and yields, along with cargo loads and tariffs.
After falling last year for the first time in 17 years, outbound travel from Taiwan rose by 10.3% in the first half of this year, compared with the first half of 1998, from 2.9 million to 3.2 million. Similarly, inbound traffic grew 14% in the same period, from 1.12 million to 1.28 million, according to the Taiwan Tourism Bureau.
Through May, CAL's passenger traffic increased by almost 20%, compared with 12% growth in capacity. Its passenger load factor reached 74%, up by 5% from the first five months of 1998.
Similarly, EVA's passenger revenue grew by 7.2% in the first four months of 1999, compared with 1998. The airline predicts a passenger load factor for 1999 of 77%, compared with 70% in 1998. EVA deputy senior vice-president K W Nieh says the growth is the result of increased traffic on regional routes. "Our south Asian and South-East Asian routes are much better than last year," he says.
EVA's cargo revenue is growing faster than its passenger revenue. The airline's cargo business grew by 32% in 1998, compared with 1997, and the growth has continued in the first four months of 1999, as cargo revenue increased another 15.5%. EVA anticipates annual growth in cargo revenue of 6%. In three years, says Nieh, cargo will account for half of EVA's revenues. In 1998, cargo accounted for 41% of EVA's total revenue.
EVA's purchase of three 747-400F freighters is the beginning of a plan to replace its MD-11s within the next four years. "The 747-400 flies farther and carries more than the MD-11F," says Nieh.
CAL's 13 747-400Fs will replace 11 Boeing 747-200Fs. "The cargo market will continue to grow for a good number of years, especially in Asia and Europe, and we don't want to miss the opportunity," says Liu, explaining the timing of the purchase of the 13 new freighters.
CAL's cargo load factor in the second quarter, from April up to June, reached 84%, 2.5 points higher than the same quarter last year. CAL has experienced double digit growth in its cargo operations for the past five or six years, says Liu. During that time, cargo revenue growth has outstripped capacity growth. CAL's cargo revenue reached $538 million in 1998, up by 8% from 1997, while passenger revenue fell by 7.1% in 1998, to $1.6 billion.
Shares for sale
Investors can buy shares in EVA's parent company Evergreen Group, but they will be able to invest directly on 1 September, when EVA lists on Taiwan's Over The Counter stock exchange. "It is cheaper to raise money from other people than it is to raise money from banks," says Wu.
CAL faces its own financial task: 71% of its shares are owned by the government-linked China Aviation Development Foundation (CADF). The CADF has been trying to sell half of those, preferably to another airline. This year CAL appointed US broker Salomon Smith Barney to oversee the sale. "I sincerely hope it can happen within six months," says Liu. Selling 35% of CAL is complicated, he says. Because the CADF is looking for an airline partner, selling the shares is linked to CAL's alliance plans.
CAL is not eager to join oneworld or the Star Alliance, because too many questions remain unanswered. "We are not so far seriously involved in negotiations," says Liu. "What role will China Airlines play in that combination? What can we contribute? If we need to exercise retrenchment, who and what role should each carrier play?"
EVA is more interested in joining an alliance, but Hsu denies that EVA is close to joining oneworld. "We are talking to both alliances," he says. "We are very close to the parents of Star Alliance in the USA."
According to the Civil Aeronautics Administration (CAA), passenger traffic in Taiwan fell 10.4% in 1998, compared with 1997, partly because of the Asian economic downturn, and partly because of CAL's February 1998 accident at CKS Airport near Taipei, which killed 202 people. That was followed by an accident the following March by subsidiary Formosa Airlines, which caused another 13 deaths.
All Taiwan airlines, including EVA, which has never had a fatal accident, suffered reduced traffic and declining yields after the CAL crash, as CAL slashed prices on US and Asian routes in an attempt to revive the market. The CAA restricted CAL aircraft purchases following the accident, but lifted the ban in early July.
Safety measures
CAL has instituted several safety measures, some of them with Lufthansa, brought aboard as a safety consultant. Every aircraft in the fleet has a flight operation data analysis system and each flight is automatically downloaded and reviewed. If an irregularity shows up, the pilot is interviewed, and if necessary, grounded for retraining. "There's nothing personal involved - it's all business," says Liu.
Cross strait flights, banned by Taiwan since 1949, remain the holy grail of Taiwan airlines. Taiwanese were first allowed to travel to China in the mid-1980s, and by 1998, more than 1 million visited the mainland each year. Most travel via Hong Kong, although Macau is an increasingly popular gateway.
A series of incremental steps in the early 1990s fuelled the hope that the Taiwan Government might soon allow cross strait flights, but that hope faded because of the sour relationship between the two countries. Now, the faint hope has been revived, as CAL was allowed to change the name of its Beijing branch, from CAL-Asia Investment to China Airlines Beijing Office.
Liu has downplayed the importance of the step in cross strait flights. "It's more important from a marketing view," he says. "Now we can start marketing ourself in mainland China. It is a meaningful step, but whether it will improve direct air links - it's just one move forward."
Even without direct flights, the airlines are optimistic about the next five months. "The second half of this year will absolutely be better than the first half," says Liu.
Source: Flight International
