Despite strong load factors and an expected 20% growth in local air travel, Taiwan's domestic carriers are losing money
Brent Hannon/TAIPEI
Taiwan's air transport industry lost $246 million last year, according to the Taipei Airlines Association. A survey of the airlines, however, showed a smaller total loss, of about $190 million. Discounting the $67 million deficit posted by China Airlines (CAL), the country's carriers lost $124 million.
Last year, according to the conservative estimate, TransAsia Airways' deficit was $67.9 million, U-Land Airlines lost $25.1 million, UNI Air recorded a deficit of $20.2 million and Formosa Airlines was $18.1 million in the red. Mandarin Airlines made a profit of $1.9 million, but last year it only flew international routes.
Among the domestic carriers, only Far Eastern Air Transport (FAT) turned a profit last year, making $5.5 million. Corporate planning manager Glen Lee, however, says FAT will lose money this year, despite load factors of almost 80%. "Every domestic airline in Taiwan has been losing money the past six months," he says. "The situation is terrible."
In the first half of this year, the deficits continued, as another $62 million of losses piled up. TransAsia again led the way, with a loss of $28.7 million, followed by UNI, with a $17.8 million deficit and U-Land, $7.7 million in the red.
The problem, according to the airlines, is a government-imposed ceiling on domestic airfares. Higher operating costs have pushed their expenses above the ceiling on ticket prices.
"We hope the CAA [Civil Aeronautics Administration] will raise airfares - they've been at the same level for six years," says UNI Air representative Mandy Yu. The published one-way fare on the most popular route, Taipei to Kaohsiung, is NT$1,409 ($44). "This year we've had a satisfactory load factor on most of our routes, but we are not optimistic about making a profit," says Yu.
Despite a drop in fuel prices, the airlines have high operating costs. Landing fees are expensive, compared with other Asian countries. Most airlines serve meals, despite the brevity of the flights. Many have switched from efficient turboprops to expensive new narrowbody jets.
Lee believes the airlines would be profitable if they could set fares at market price. "It's a 40min flight to Kaohsiung and the price is $30 -40, one-way," he says. On an equivalent US route, from Los Angeles to San Francisco, he says, "the airlines charge $90-100, one-way".
The CAA has given initial approval for a 15% increase, but a decision, originally due this month, has been postponed until October and may be put back further. "They don't dare raise the fares with elections coming up," says Yu.
In terms of revenue, TransAsia was number one among the domestic airlines last year, with revenue of $177 million, followed by FAT ($171 million), UNI ($139 million), Mandarin ($72 million), Formosa ( $52 million) and U-Land ($36 million). UNI's 1998 revenue increased 35% over its 1997 figure. If that growth continues, UNI will take over top spot this year.
Passenger traffic is recovering after last year's slowdown. In 1998 about 4 million people took domestic flights in Taiwan. That figure is expected to rise to 5 million this year, with a corresponding 20% jump in revenue. Taiwan's booming economy and a new law that reduced the working week from six days to five every other week are responsible for the growth. The Taipei/Kaohsiung route is among the busiest in the world by frequency: on Saturdays, six airlines fly a total of 98 round trips.
Safe mergers
To increase safety, the CAA has promoted airline mergers. The government believes that fewer airlines - with newer equipment, more expertise and higher profit margins - will lead to safer flights.
As a result, the number of airlines in Taiwan has dropped from 10 to seven in the past 14 months. EVA no longer flies domestic flights: in June last year it merged subsidiaries Taiwan Airlines, Great China and UNI Air into a single independent carrier, UNI Air.
This month, CAL will merge subsidiaries Mandarin and Formosa into a single independent carrier keeping the Mandarin name. It will turn over all domestic routes to the new carrier. Mandarin, a 100%-owned subsidiary of CAL, was launched to fly to politically sensitive areas, where the Taiwan flag would be unwelcome. After CAL removed the flag from its aircraft in 1995, Mandarin's original reason for existence became unnecessary. Following the merger, CAL will own 95% of Mandarin, with the rest held by ADI, a computer company.
Because Mandarin has no aircraft (its Boeing MD-11s and Boeing 747SPs are owned by CAL), the new Mandarin fleet will consist of Formosa aircraft: seven Fokker 50s, three Fairchild Dornier 228s, two Saab 340s and two Fokker 100s. The Saabs will be retired by the end of the year, says Tony Lin, a Formosa executive who will join Mandarin. The airline wants to retire the 228s, but the government insists it continue to serve outlying island destinations, including Matsu, close to mainland China, Green Island and Chimei.
Mandarin will sell the Fokker 100s, which are just four years old, as soon as it takes delivery of Boeing 737-800s, possibly from parent company CAL. "We still have to discuss that with CAL," says Lin. "We may have to acquire some Next Generation 737s from the market." Mandarin will need at least three 737-800 or -700s by the end of the year, says Lin.
Further consolidation is likely. CAL and EVA, and their subsidiaries Mandarin and UNI, are in good shape, as is perennial money-maker FAT. But TransAsia and U-Land continue to lose money and U-Land's parent company, Rui-Lian Construction, is also struggling. Rumours have linked U-Land and TransAsia, but most observers feel bankruptcy is more likely.
Source: Flight International
