SUN AWAITS TRANSIT BONANZA

Global economic volatility, fierce regional competition, a low-cost start-up and high operating costs have made profits elusive at China Airlines (CAL). But 2015 holds promise predicts chairman, Huang-Hsiang Sun, especially if China lifts the ban on Chinese tourists transiting through Taiwan.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

February 1st 2015

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As he watched China Airlines’ (CAL) first B777-300ER fly out of Taipei to Los Angeles last December, the CAL chairman and airline veteran, Huang-Hsiang Sun, must have been relieved that some good news was finally coming the carrier’s way after a punishing 12 months. Read More »

Apart from the fleet upgrade, which will see most of CAL’s B747s phased out of operations, CAL is showing strong signs of recovery from last year’s financial red ink. It suffered a net loss of US$81.06 million in the nine months to September 30, mainly due to high fuel prices in the early part of the year and a $90 million payment to settle a U.S. lawsuit on alleged price fixing.

However, the dramatic decline in the price of oil since last June resulted in a profit of $40.36 million in the third quarter to September 30, which could only improve with the thinning out of its B747s and as new planes come on line.

The B777s, which will number ten when deliveries are completed, are a pivotal part of CAL’s multi-million revamp that is a quantum leap in CAL’s service, network and cabin standards. The brand facelift includes new cabin interiors, new lounges for its frequent travelers and cabin services, such as inflight bars and lounge areas, in aircraft fitted with wood paneling throughout their cabins.

Also on order are 14 A350-900XWB (with six options) that will begin arriving in the third quarter of next year (2016), as well as three B737-800s that will be added to the 16 the carrier has in its fleet.

Improvements in market conditions, lower fuel costs and upgraded airliners are all good news for CAL’s bottom line. But the icing on the cake would the long awaited lifting of Mainland China’s ban on allowing its citizens to transit through Taiwan to destinations across the world.

Sun told Orient Aviation he is confident a major breakthrough on this issue is on the horizon. Mainland Chinese international travelers can transit to third countries via South Korea, Japan and Hong Kong in North Asia but not Taiwan.

Statistics published by the U.S. Department of Commerce report that of the 1.8 million Mainland Chinese tourists who visit the U.S. annually, 60% transit through third-party airports such as Hong Kong, Seoul and Tokyo. If the restriction was lifted in the Mandarin speaking nation, Taiwan would offer both an appealing alternative for Chinese travelling abroad as well as allowing CAL access to a huge number of new passengers.

Just how confident is Sun that a breakthrough will be achieved? “This issue has been going on for some time. Too long,” he told Orient Aviation in an interview in the airline’s new VIP lounge at Taoyuan Airport.

“Now is about the time. I can see progress in the last couple of months that is very encouraging. The official dialogue has begun. I am quite optimistic. I think both sides will find a solution and make the transfer point in Taiwan feasible.

“I would say maybe in six months. We are ready for it and have been for a long time. The Chinese carriers are carrying a lot of beyond traffic from Taiwan, so I don’t see any reason why we should not be able to do the same.”

The policy change would be one of the most important developments in CAL’s history. Since cross strait flights were introduced over the last decade, CAL has expanded its regional network to include 152 flights a week to 32 cities in China. Offering 75,000 seats weekly between the Mainland and Taiwan, CAL is the largest cross strait operator in available seat kilometres (ASK). It has almost 30% of the cross-strait market, and enjoys an average load factor of near 80%.

'More U.S. carriers coming to Taiwan are welcome. Maybe we can make the pie bigger. We are not so far away from the U.S. West Coast - nine to ten hours - but long-haul traffic is only about 10% of our total traffic. There is room for growth'

Huang-Hsiang Sun Chairman China Airlines

“Taiwan and China share the same language and culture so we aim to be the leading cargo and passenger carrier serving both sides of the Taiwan Strait,” said Sun. “Taiwan is a small island with abundant resources for tourism and hi-tech development, which should boost business, particularly aviation industry prospects.

“Since we have opened the door to friendly dialogue between the two sides, when new [Mainland] destinations and flights are opened we will have more opportunities in the China market. Because of our geographic advantage, Taiwan is working aggressively towards being a a regional hub. As the largest airline based in Taiwan, business expansion is anticipated.”

He said cross strait business has become one of CAL’s focal markets. “With the partial deregulation of air travel we look forward to further relaxation of traffic rights for both China and Taiwan. In the meantime, the cross strait market not only contributes to our regional network, but also to our long haul load factor. So, it makes sense for CAL to continue to expand its cross strait network,” he said.

There is another issue on the China front that Sun hopes can soon be resolved. Unlike other airlines, CAL is not permitted to fly over Mainland China en route to Europe. Its flights must detour through Southeast Asia and then fly north to Europe.

If overflights can be negotiated, the airline would benefit from thousands of hours of reduced flying time and have a much lower annual fuel bill. At present, it is not known how negotiations are progressing on these issues.

Sun is no stranger to the political and operational challenges of both Mainland Chinese and Taiwanese aviation. He joined CAL in 1970 and has held leadership positions across the group and at several of its affiliates. In the past four decades, he has served as vice president of the carrier’s passenger sales and corporate planning divisions, general manager of its Europe and San Francisco branch offices, vice president of Mandarin Airlines, president of Formosa Airlines and TransAsia Airways and chief executive of Yangtze River Express Airlines. He was appointed president of CAL in June 2008 and chairman in March 2013.

Obviously, lower fuel costs will help the airline financially, he said. “We have been nailed down by high fuel costs for quite some years. But now they are at a reasonable level. Also, cargo demand is looking a little better,” he said.

“With the [oil] price drop people have more disposable income to travel. That’s good for everyone. It’s a good positive cycle. I am looking forward to a better 2015, but we still have to be very careful.”

While the economic outlook is healthier, CAL is not ignoring the need for consistent cost reduction. It launched “Pheonix” six years ago, a company wide program to maximize revenue and minimize costs without sacrificing flight safety, service quality, market share and employee benefits.

Explained Sun: “our cost reduction projects cover fuel, ground operations, maintenance costs, procurement, process improvement and other smaller departments. All are tracked to maximize revenue, but in different way.”

CAL added the Gap Abatement Project in May 2014 to produce further savings of US$50 million. It aims to reduce contract rates by 3%, achieve a 20% reduction in optional expenses and a suspension of non-urgent expenses.

Like Japan, until recently Taiwan had no home-grown low-cost carriers. CAL launched its Tigerair Taiwan subsidiary last September, a few months before V Air, a subsidiary of rival, TransAsia Airways, made its first flight.

Sun said that as the leader of Taiwan’s aviation industry, the onus was on CAL to respond to the low-cost carrier (LCC) challenge. “We not only want to directly compete with existing LCCs, but also plan to offer travelers more choices that will promote Taiwan’s tourism industry and economic development.

“We have full confidence in Tigerair Taiwan. Its biggest advantages are the high brand recognition of Tigerair in Taiwan and the Tigerair Group’s route and sales network across the Asia-Pacific,” Sun said.

“Tigerair Taiwan will focus on routes to Southeast and Northeast Asia such as Thailand, Japan and South Korea. If we can secure approval for new Mainland China services, our LCC will actively participate in that market.”

Asked if he was concerned about Tigerair Singapore’s (it has a 10% stake while CAL holds 90%) recent loss-making performance, Sun said the partnership was the most important factor in the deal.

“If we had set up our own LCC without a partner the learning curve would have been too steep. So yes, Tigerair may be having some difficulties, but I don’t think that will affect our operation at all,” he said.

“Tigerair Taiwan has been in operation for only a few months and everything is going quite smoothly. It is growing very fast. There were only two aircraft in its fleet at the end of 2014.

“By the end of this year, there will be seven and we are talking about adding five aircraft a year. There is room to grow. The LCCs certainly get part of CAL’s traffic, but they also generate traffic. It’s a fact of life.”

Significantly, Tigerair Taiwan has been operating with load factors of around 90% since take-off and was expected to end 2014 with a relatively small loss that will only modestly impact on CAL’s annual results.

There is little doubt the budget sector holds big promise. Singapore’s Jetstar was the first LCC to fly into Taiwan, in 2004. Since then the number of LCCs servicing Taiwan has increased to 14, including airlines from Singapore, Malaysia, Japan, South Korea, Hong Kong and China.

According to Taiwan’s Civil Aeronautics Administration (CAA), budget airlines account for up to 7% of passengers carried in Taiwan. The number of people traveling in and out of Taiwan on budget airliners has climbed from 260,000 in 2009 to 2.32 million in 2013.

Another important factor in CAL’s strategy is its membership of global alliance, SkyTeam, which it joined in September 2011. Membership increased its international destinations from 118 to 1,052 and remains an integral part of CAL’s strategy to increase its international traffic and profitability, said Sun.

“Our relationship with SkyTeam members is very important, but there are some destinations the SkyTeam network doesn’t completely cover, so we will develop partnerships with appropriate non-SkyTeam carriers.”

CAL has code-share agreements with 17 airlines, including Qantas Airways, China Southern Airlines, China Eastern Airlines, Shanghai Airlines, Xiamen Airlines, Delta Air Lines, Garuda Indonesia, Vietnam Airlines, Korean Air, Czech Airlines, KLM, Alitalia, Japan Airlines, Hawaiian Airlines and Transaero Airlines.

“We’ve been concentrating on regional expansion. That must be right to feed a successful long-haul business,” he explained. “Obviously, Mainland China is the big market. We have more than 152 flights a week between Taiwan and Mainland China, covering 32 destinations,” he said.

“According to our analysis, passengers taking cross strait flights account for about 55% of total cross strait travellers. This means 45% of travellers transit through other regions on their way to China. So we would like to increase flight frequencies to China.”

Japan is also important. “In 2011, the market was liberalized between Japan and Taiwan and we expanded our service to Japan from 95 flights a week, to 130 flights to 13 destinations each week. In Southeast Asia, we are increasing flights to major cities such as Manila, Jakarta and Bangkok,” he said.

“But we are a full-service airline and we have a very viable long-haul business. In fact, our long-haul services account for around 45% of our passenger revenue. We have bought our new aircraft with the long-haul sector in mind.”

Sun said the new B777s, and when they arrive, the A350s, will significantly improve the airline’s long-haul network. After the first B777, which he describes as the “gold standard” for long-haul flying, began services to Los Angeles in December, CAL will add flights to San Francisco and New York with the aircraft type.

“China Airlines offers more than 20,000 seats a week between Taiwan and North America. To expand our network, we started code-sharing with Virgin America and WestJet last October, which provides passengers with a greater choice of destinations in the U.S. and Canada,” he said.

“We expect both Intra-Asia and Trans-Pacific traffic to grow, but with limited expansion on longer-haul routes and increases in flight frequency on regional routes.”

Sun is not phased by greater competition from big U.S. carriers putting more capacity into Asia as they seek seats in the world’s biggest aviation growth market. “They are coming, but I always say that it’s not bad for competition,” said Sun.

“You cannot stop it. The only way you can compete is to be better. More U.S. carriers coming to Taiwan are welcome. Maybe we can make the pie bigger. We are not so far away from the U.S. West Coast - nine to ten hours - but long-haul traffic there is only about 10% of our total traffic. There is room for growth.

“The Visa waver program, introduced in 2012 for Taiwanese travelling to the U.S., made a huge difference [to us] because people can go to the States any time they want. So it’s not bad to have new competition.”

Whatever the challenges ahead, Sun said CAL is prepared for them. “I’ve been in this industry for 40 years, but the last few years have definitely been the toughest. Airlines have been severely affected by events outside of their control.

“There has been global economic uncertainty, political instability, SARS and other potential pandemics. Fuel prices soared. It has become more and more difficult to manage an airline in such a volatile world.

“While it is more challenging than ever, airlines have grown stronger. There have been many improvements. By strengthening our core competencies we are better able to adapt to the outside environment,” he said.