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China Airlines and EVA Air respond to massive change in Taiwan – but the foreign LCCs are coming

10th January, 2013

Profits have tumbled or become losses at China Airlines and EVA Air, Taiwan's two largest carriers and its only intercontinental ones. But the financials – affected by the usual suspects of high fuel and depressed freight and economic certainty – belie sound restructuring the carriers are making to respond to significant changes in the Taiwanese market, long one of the quietest areas in North Asia.

The opening of cross-Strait flights to China has, in a short time frame, delivered them an entirely new and very profitable market. It has meant pulling back elsewhere to pump capacity into the mainland - although additional aircraft were also acquired.

China Airlines is looking to permanently de-emphasise cargo's revenue contribution, sensing it to be too volatile, while EVA Air wants to increase its share. As the mainland market continues to expand, new growth (and competition) is also emerging from Japan after an open skies bilateral agreement. Further liberalisation across Asia will open new markets, but serving regional routes bears the risk of being pushed off if low cost carriers, much discussed in Taiwan - but mostly ignored - gain traction.

For all the change that has occurred, much more is inevitable in 2013.

China Airlines, indirectly owned via the government, and EVA Air, a private company, are Taiwan's two main carriers, supplemented by TransAsia, which has a growing niche on regional Asian routes. China Airlines has its Mandarin Airlines subsidiary while EVA Air has Uni Air.

Taiwan's airline history in some ways parallels that of South Korea. China Airlines and Korean Air were the respective long-established monopoly flag carriers until the late 1980s when respective governments permitted second entrants, which emerged in the form of EVA Air in Taiwan and Asiana in Korea, both privately owned.

They punched above their weight – EVA, from the massive Evergreen shipping company stable (a name it was prevented from using by the US freighter airline), was helped by a stronger safety record than China Airlines, which had a string of accidents in the late 1980s and 1990s;  meanwhile Asiana fared better than Korean Air – and the new private entrants were often more agile than their incumbent peers. In Japan, privately-owned All Nippon Airways was also far more efficient and innovative than state-owned Japan Airlines. (For international routes, Japan's airline history also reflected the changes in its north Asian neighbours; ANA, almost unknown outside Japan, had been the largest airline in the world by seats, but was only granted international access to compete with JAL in the late 1980s.)

Top 20 Airlines in Taiwan ranked by seats: 07-Jan-2013 to 13-Jan-2013

Rank Airline Total Seats
1 CI China Airlines 251,882
2 BR EVA Air 170,322
3 CX Cathay Pacific* 93,625
4 GE TransAsia Airways 72,272
5 AE Mandarin Airlines 51,858
6 KA Dragonair* 33,302
7 MU China Eastern Airlines* 25,758
8 JL Japan Airlines* 22,512
9 CZ China Southern Airlines* 17,336
10 CA Air China* 17,294
11 TG Thai Airways* 16,912
12 B7 Uni Airways 14,900
13 HX Hong Kong Airlines* 14,014
14 VN Vietnam Airlines* 11,820
15 NH All Nippon Airways* 11,424
16 TZ Scoot* 11,256
17 MF Xiamen Airlines* 10,200
18 3K Jetstar Asia* 10,080
19 NX Air Macau* 9,452
20 D7 AirAsia X* 8,558

High-speed rail's introduction in Taiwan all but obliterated the limited domestic market; 94% of airline seat capacity in Taiwan is on international markets; 73% of total seat capacity is directed to north Asia.

Taiwan international seats by region: 07-Jan-2013 to 13-Jan-2013

Southeast Asia is Taiwan's next largest market with 19% of capacity. The remaining 8% of seat capacity is sent to Australia, Europe and North America.

Six North Asian cities dominate the top 10 most popular cities for seat capacity, with the remaining positions rounded out by three Southeast Asian cities and Los Angeles.

Taiwan top 10 international cities by seats: 07-Jan-2013 to 13-Jan-2013

A similar pattern is evident in the largest countries serving Taiwan.

Taiwan top 10 international countries by seats: 07-Jan-2013 to 13-Jan-2013

In comparing China Airlines with EVA Air, China Airlines has a wide lead over EVA Air in the Asia-Pacific region, but elsewhere the two are neck-and-neck, although these are far smaller markets.

China Airlines and EVA Air destination comparison: 07-Jan-2013 to 13-Jan-2013

China Airlines and EVA Air frequency comparison: 07-Jan-2013 to 13-Jan-2013

China Airlines and EVA Air seat capacity comparison: 07-Jan-2013 to 13-Jan-2013

Cross-Strait flights to mainland China have fundamentally changed Taiwan aviation

Cross-Strait flights between Taiwan and mainland China have mushroomed in the tail end of the last decade. Weekend cross-Strait flights commenced in Jul-2008. In Aug-2009 flights were increased from 108 a week to 270, then up to 370 a week in Jun-2010. In Dec-2012 the sides agreed to boost flights further, from 558 to 616 in 2013.

Restriction-free operations are the ultimate objective but it is the Taiwanese side largely holding back, fearing their limited carriers will be over-run by the far more numerous and larger mainland carriers with their mighty domestic networks.

During this period the Hong Kong-Taiwan market has seen flat growth while Macau-Taiwan has nearly halved (Hong Kong and Macau were transit points between mainland China and Taiwan, where direct flights had been prohibited due to political reasons).

Annual seat capacity in select Greater China markets: 2003 to 2012

Cross-Strait flights have brought a fundamental change to the businesses of China Airlines and EVA Air.

China Airlines had exceptionally limited flights to mainland China in 2007, registering less than one-tenth of one percent of its seat capacity in 2007. In 2012 mainland China accounted for 13% of seat capacity. EVA Air had no scheduled flights to mainland China in 2007, OAG shows. In 2012 mainland China accounted for 16% of its seat capacity.

China Airlines and EVA Air have grown from 2007 to 2012: 40% for China Airlines and 22% for EVA Air. But mainland Chinese expansion did not occur through new growth as the carriers have scaled back their presence in some markets. China Airlines has cut 155,000 seats annually between Taiwan and Hong Kong (a 7% decrease), equating to about 11% of 2012 capacity to mainland China. Other markets that have seen cuts are 35,000 seats to Malaysia, 12,000 to the Netherlands, 270,000 to Thailand (a 32% decrease), 91,000 to the UAE and 250,000 to the US (a 25% decrease).

What these figures obscure is that as China Airlines faced a capacity shortage when the direct mainland market opened, other routes saw rapid cuts as China Airlines shifted aircraft onto the mainland – 747-400s commonly ply the one and two-hour routes from Taiwan to mainland China. It was largely in 2012 China Airlines received additional aircraft, to pump some capacity back into non-mainland China markets.

A similar pattern has occurred at EVA Air, which between 2007 and 2012 dropped 11,000 seats to Australia, 33,000 to Cambodia, 26,000 to India, 38,000 to Macau, 102,000 to Thailand, 27,000 to the US and 11,000 to Vietnam. New Zealand, with 27,000 seats in 2007, was dropped in 2010. As with China Airlines, the interim period saw bigger drops before capacity restoration efforts commenced around 2012: Macau dropped from 496,000 seats in 2007 to a low of 402,000 in 2010 before going up to 458,000 in 2012.

Although the cross-Strait market is still relatively new, a SkyTeam-aligned grouping of greater China carriers have aligned to form in Jan-2013 a regional alliance and increase their strength. This too will change the skyline from a competition perspective.

See related article: SkyTeam's Greater China airline members to form regional alliance in high-yielding market

With Open Skies agreement, the Taiwan-Japan market must change in 2013

Taiwanese carriers now look set to become engaged in a cat and mouse game of growth. Demand is pent up but cannot be quickly satisfied simply by acquiring aircraft; air service agreements need to be expanded, and calculating the timing on those is difficult. This is certainly not in sync with the typical two year or so lead period to acquire new aircraft.

From 2007 to 2009 China Airlines' seat capacity hovered around 1.1 million seats annually, increased to 1.2 million in 2010, 1.5 million in 2011 and then shot up 57% to 2.3 million in 2012. At EVA Air capacity between Taiwan and Japan hovered around 600,000 seats from 2007 to 2011 before shooting up 23% in 2012 to 700,000.

With the signing of the Japan-Taiwan bilateral, both carriers have outlined Japan as a major growth market, increasing capacity on existing services as well as adding secondary Japanese cities.

The Japanese side has taken less note, with most growth in the market to come from low cost carriers. Peach Aviation, the first of three new LCCs to launch in 2012, has begun double daily Osaka Kansai-Taipei services and consumer behaviour is changing rapidly in response. Additional growth could occur as Peach expands to new bases – Okinawa is likely – as well as when AirAsia Japan (currently serving Korea's Busan and Seoul as its sole international points) ramps up international services and Jetstar Japan launches international services from mid-2013.

Passenger revenue is growing while cargo proves difficult

Despite moves into new and more profitable markets, China Airlines and EVA Air's financial performance has been dragged down by high fuel prices, depressed cargo and the general gloomy global economic outlook.

China Airlines wants to reduce its reliance on cargo but building passenger contribution from about 55% in recent years to 70%. EVA Air meanwhile wants to achieve a 50:50 split between passenger and cargo revenue. In 2011, passenger revenue accounted for 58% of the total while cargo revenue accounted for 36%, down from a five-year high of 41% in 2007. 

Both carriers have mighty freighter fleets, some of the largest in the world with 20-odd widebodies, including 747Fs.

Monthly traffic reports from the carriers offer mixed signals, with passenger yields decaying in the latter half of the year, although this is likely linked to decreased travel to/from mainland China in advance of China's leadership changeover, which slowed down traffic considerably.

China Airlines monthly yields and traffic

China Airlines monthly passenger yield (TWD): 2010-2012

China Airlines monthly cargo yield (TWD): 2010-2012

China Airlines monthly passenger revenue (TWD): 2010-2012

China Airlines monthly cargo revenue (TWD): 2010-2012

China Airlines monthly freight tonne kilometres: 2010-2012

China Airlines monthly RPKs: 2010-2012

Eva Air monthly yields and traffic

EVA Air monthly passenger yield (TWD): 2010-2012

EVA Air monthly cargo yield (TWD): 2010-2012

EVA Air monthly passenger revenue (TWD): 2010-2012

EVA Air monthly cargo revenue (TWD): 2010-2012

EVA Air monthly freight volume: 2010-2012

EVA Air monthly RPKs: 2010-2012

Taiwanese airlines have a regional focus – but what happens when LCCs grow further?

The redirection by China Airlines and EVA Air of their long-haul services to focus more on regional Asia services raises the delicate matter of whether the growth in the long-term is sustainable.

Low cost carriers are making inroads in Taiwan, and a number of new carriers in 2012 – including high-profile launches from Peach and Scoot – have turned the future of LCCs in Taiwan into an unusually public discourse.

See related article: Taiwan looks to foster homegrown low-cost carriers

China Airlines and EVA Air have not embraced LCCs the way ANA and JAL did and there is a certain unreality about their attitudes towards the concept. Change in Taiwan's aviation has been so substantial that ultimately China Airlines and EVA Air have not had the time or resources yet to fully evaluate them, let alone create a strategy.

The carriers have asserted that some conditions are not yet right in Taiwan to support LCCs, and this is true: bilaterals are constrained and there could be progress of landing fee charges and low-cost facilities. But the carriers can, if they wish, push for bilateral expansion and other changes - although some are occurring without the carriers.

Plans are already being considered for a low cost facility in Taipei to open mid-decade, a possibility announced mere weeks after saying, with hints of ambivalence, that such a facility could not be available until the end of the decade. Carriers like TransAsia could evolve into hybrids and pose a challenge, too.

China Airlines has ordered an initial six 777-300ERs to replace 747-400s (although some of its 747-400s are quite new, and in some instances the last off the -400 passenger production line), but the reduction in international services does not bode well for having a fall back profitable market.

European and US carriers, and some Asian carriers as well, are dependent on profitable long-haul flights to off-set loss-making short-haul ones. China Airlines and EVA Air have good Asian feed, but not as significant as other carriers. Some airlines reckon Europe will have too much capacity from Asia even after the economy rebounds, giving the Taiwanese carriers an uncertain future there.

Fortunately for the incumbents no Middle East network carrier is in Taiwan – at least not yet, given the scores of widebodies on order.

Taiwan's government has tourism ambitions, but these are from a low base and will take time to mature.

Sixth freedom traffic from mainland China could be a boon as mainland Chinese would hold considerable interest in visiting Taiwan on a stopover. The society is comfortably familiar yet strikingly different, and for certain cultural parts – heritage attractions and museum items – something of a homecoming. But Taiwanese carriers cannot yet tap into sixth-freedom transits from mainland China.

While carriers need to have a solid current foundation and options for growth, they also need – as important, or perhaps more so – to demonstrate an ability to adapt and respond to the change that is occurring at breathtaking speeds.

However, neither has yet shown complete signs of being ready even to address the new challenges, let alone respond to them. One large test in 2013 will be how the market responds to the new LCC operations to Japan. It does still appear that Taiwan's major airlines are looking the other way, either because they are not operationally equipped to respond with narrow-body competition, or because they genuinely feel there is not a serious threat from the new entrants.

It would not be the first time that airlines in a new region have felt that way as liberalisation occurred. There is a certain consistency in outcomes in such cases too. There is, with the new wave of activity, a significant opportunity for EVA and CAL were they to seize it.

Alternatively, if they wait until the LCCs have captured the public imagination (and the tourism authorities' support), they risk suffering some pain.

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