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EVA Air, now in Star Alliance, looks to grow regionally and long-haul, increasing transfer traffic

27-Jun-2013

Taiwan has struggled to put itself on the tourist map but EVA Air plans to work around that, growing regionally around Asia and in long-haul markets, planning to increase its portion of transfer traffic above the current 50%. Growth will be helped now that EVA Air is in the Star Alliance, formally joining on 18-Jun-2013.

EVA has no single defining market. Rather it has a medley that it has managed to make work.

European flights mainly route through Bangkok and those services are mainly filled with Europe-Bangkok, not Europe-Taiwan, passengers. North America is performing well now that there is open skies with the US and a visa waiver programme. Much long-haul capacity will be focused on this market. In Canada, and Europe, EVA Air would like to grow but is limited by bilaterals.

Closer to home, where short-haul accounts for 82% of seat capacity, EVA complements large cities with smaller ones too. And then there are cross-Strait flights to mainland China, a market still in its infancy and, subject to continuing warm political relations, will grow exponentially.

EVA ticks some network boxes for Star. But until Taiwan's profile is raised, and mainland China becomes more important, the alliance membership benefits are in EVA's favour.

EVA Air, 96th largest airline, has small impact in Asia

As the world's 96th largest carrier by seats and 54th by ASKs, EVA Air's addition to Star Alliance as the 28th member, has an impact but not considerably so. Star's capacity share in Asia-Pacific increases by less than 1ppt.

Alliance capacity in Asia-Pacific before EVA Air's addition: 17-Jun-2013 to 23-Jun-2013

Alliance capacity in Asia-Pacific after EVA Air's addition: 17-Jun-2013 to 23-Jun-2013

In Northeast Asia the change is slightly more pronounced as Star increases its share by 1ppt.

Alliance capacity in Northeast Asia before EVA Air's addition: 17-Jun-2013 to 23-Jun-2013

Alliance capacity in Northeast Asia after EVA Air's addition: 17-Jun-2013 to 23-Jun-2013

Change is most noticeable in Taiwan, where Star goes from a fraction of the market to nearly a quarter.

Alliance capacity in Taiwan before EVA Air's addition: 17-Jun-2013 to 23-Jun-2013

Alliance capacity in Taiwan after EVA Air's addition: 17-Jun-2013 to 23-Jun-2013

In EVA's largest foreign market, Hong Kong, Star gains about a 2ppt share increase.

Alliance capacity in Hong Kong before EVA Air's addition: 17-Jun-2013 to 23-Jun-2013

Alliance capacity in Hong Kong after EVA Air's addition: 17-Jun-2013 to 23-Jun-2013

EVA hopes Taipei will be a hub – but no non-Asian Star airline serves Taiwan

EVA hopes to see Taipei become a major hub, boosting not only Taiwan overall but also resulting in airlines putting onward passengers on EVA flights. But this will have to be a long-term objective. Taiwan's main airport of Taipei Taoyuan sees service from all of Star's Asian members. But no Star carrier outside of Asia currently serves Taiwan.

United Airlines, which in the past has served Taipei from its Tokyo Narita hub, was due to launch a San Francisco-Taipei service in 2013. But this was delayed to Mar-2014 as the 787 grounding forced it re-deploy the Taipei aircraft to other parts of its network. Although the 787 is no longer grounded, United missed the start of the peak season and delayed the service so it could start on a strong note.

United presents an opportunity for EVA to receive connecting passengers, but United will also compete across the Pacific as EVA flies to San Francisco as well as Los Angeles, New York JFK and Seattle, all cities from where United can pull traffic. For Star's Asian carriers, they serve Taiwan as an end point. With the exception of some thin markets, they do not need help reaching other destinations.

Star's non-Asian carriers, except United, do not yet see Taipei as a potential destination in its own right. Nor do they see a need to develop a presence in Taipei for transfer traffic when they already have Thai Airways' Bangkok and Singapore Airlines' Singapore hub in Southeast Asia, most convenient to Star's European members.

Air China's Beijing, Asiana's Incheon and All Nippon Airways' Tokyo present transfer opportunities in North Asia. While traffic could theoretically be transferred in Taipei instead of other hubs, European carriers do not see Taipei sustaining enough point-to-point traffic to offset lower yielding transfers.

North America is different as Taipei can be reached non-stop and profitably from the US, unlike Bangkok and Singapore. There are strong Chinese visiting friends and relatives (VFR) ties in North America, plus United's planned San Francisco-Taipei route links Silicon Valley, the heart of technical design, with Taiwan, an epicentre of technical manufacturing. San Francisco is also United's main west coast gateway – a strong confluence of factors.

EVA Air well positioned in Taiwan-mainland China market – but can it gain scale with partners?

Another market in its infancy is mainland China-Taiwan. But unlike Taipei being a hub, there is a clear growth projector for flights between mainland China and Taiwan.

Barred for years due to political factors, schedules services commenced in 2006 and in 2012 capacity reached six million annual seats. Some of this growth has been at the expense of the Taiwan-Hong Kong market, in which EVA is a major player and which is experiencing over-capacity. But the benefits of cross-Strait flights outweigh downturns to Hong Kong.

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

The Taiwan-mainland China market is heavily regulated, with a cap not only on weekly flights but with governments carefully handling which airline flies to and from where, partially a result of slot restrictions in the region. Growth has been possible with political changes in Taiwan that favour a closer economic relationship with mainland China without getting upset over political differences.

See related report: Taiwan election result to benefit Taiwan-China services as airlines expand services for New Year

This market should grow as there is no sign that relations will cool – but this of course is a strong caveat, and something of which airlines are mindful. The cross-Strait story is not without setbacks.

Growth lately has been instructed to be at secondary points, especially in mainland China. These are still developing markets with weak or unprofitable performance. Airlines would prefer to concentrate on trunk routes but China's provinces want direct flights of their own and slot restrictions impede growth.

A complex arrangement is underway in Jun-2013 that could see private Chinese carriers Juneyao and Spring Airlines launch their first flights to Taiwan, from their Shanghai hubs, but only in exchange for Shanghai slots to be given to Taiwanese carriers.

Mainland China favours liberalisation but Taiwan is mindful of size differences. China Airlines and EVA are the two single largest carriers in the market, a result of each side having the same number of frequencies, but there are more Chinese carriers. And these are some of the largest in the world; China Southern is seventh largest in the world and China Eastern eighth (China Airlines clocks in at 70th and EVA 96th). They have the fleets to move around or grow with. Liberalisation could see an influx of mainland China capacity, disadvantaging Taiwan.

EVA also faces a question of how it can gain scale. In late 2012 SkyTeam's greater China members announced their intention to form a mini alliance – Greater China Connection – to have closer cooperation. Collectively they, with their subsidiaries, will account for just over 50% of the market. On key markets, SkyTeam's share would be even higher. As CAPA previously wrote:

The proposed alliance would comprise 59% of capacity between Shanghai and Taipei (all airports), 71% from Taipei to Guangzhou, 69% from Taipei to Shenzhen but only 32% from Taipei to Beijing (there Star's Air China and EVA will account for 61% of capacity).

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

EVA Air and Air China already codeshare while Star's only other greater China member, Shenzhen Airlines, is part of the Air China Group. Now that EVA is in Star it plans to work more closely with members.

But how Air China and EVA, with Shenzhen Airlines, can more closely cooperate to rival the SkyTeam collection will have to be seen. Indeed, it is not clear how exactly the SkyTeam members can gain scale since there is already some codesharing and frequent flyer/recognition reciprocity. Some members even suggest the alliance also serves the purpose of having larger recognition within SkyTeam management, which has a strong western anchoring from Air France-KLM and Delta.

Future potential: outbound Chinese market to the world

Taiwanese carriers are unable to sell sixth freedom tickets originating in mainland China (but they can sell connecting itineraries to mainland China). EVA, like its Taiwanese peers, hopes this will change sooner rather than later.

The potential upside is tremendous. The factors have aligned: Chinese carriers are firmly focused on the domestic market; even if the likes of China Southern have made an international splash, the amount of long-haul traffic is still proportionally small.

EVA and its peers can offer as a stopover Taipei, which for so long had been difficult to get to. There is significant tourism interest in Taiwan given historical ties as well as Taiwan being an epicentre of Chinese culture and also having many Chinese artefacts (although mainland China would like some of these to be handed over). There is a natural curiosity to see Taiwan and there are warm political feelings, unlike Chinese interest in Japan following a territorial flare-up last year. And Taiwan – unlike many countries – has a government and tourism industry ready to cater to mainland visitors.

Not only could sixth freedom traffic give a boost to EVA's existing network, it could also lead to new flights. One caveat is that to reach the full potential of outbound sixth freedom traffic from mainland China, there will need to be expansion in the cross-Strait market as current yields between mainland China and Taiwan are high due to limited capacity. This in turn reduces the ability for EVA to competitively price connecting itineraries. No doubt that EVA today could have incremental sixth freedom passengers from mainland China, but it will have far more as capacity expands.

EVA – unlike China Airlines – is profitable on long-haul flights

Taiwan's Transportation and Communications Minister Yeh Kuang-shih told the China Times that Taiwanese carriers' long-haul flights are typically not profitable. But EVA sharply rebukes this assertion, saying its flights are profitable – handsomely so. Its North American load factor so far in 2013 is 90%, above typical overall load factors of around 80%.

But that is not the case for China Airlines, which is indirectly owned by the Taiwanese Government. Relations are close: airline executives have gone into key political roles. China Airlines' network is disadvantaged by being operated with A340-300s and 747-400s, the latter of which EVA Air is rapidly phasing out.

China Airlines has started long-haul fleet renewal with a Dec-2012 order for six 777-300ERs. EVA currently operates 15 777-300ERs with a further seven on order, which will be delivered in quick succession from Apr-2014 through Jun-2014. (Top-up orders are likely.)

The additional aircraft will be used to boost existing North American services and possibly open new services. EVA Air would also like to use them to expand its Canadian and European footprint, but this depends on bilaterals.

EVA has been unique in offering a premium economy cabin, vying (depending on who is asked) with Virgin Atlantic for the title of first carrier to offer the service. EVA is also upgrading its business class product (it does not offer a first class) on 777-300ERs with lie-flat beds that have direct aisle access. EVA hopes in-flight connectivity, arriving on its next batch of 777s, will further raise its premium image.

Long-haul growth pegged in US; three daily Los Angeles flights

Los Angeles is the star of EVA's long-haul network with 18 weekly 777-300ER flights, moving to triple daily. This will make EVA one of the 10 largest foreign carriers in LA based on capacity and also the second-largest Asian carrier across the Pacific, overtaking Cathay Pacific.

Cathay typically has three daily flights to Los Angeles but has a lower-density configuration. Korean Air has 17 weekly flights – one less than EVA's Jun-2013 schedule – but operates a daily A380 and 747-400, resulting in higher trans-Pacific capacity.

Its entire US market will see increased frequencies over the next year with plans to move New York from five weekly to daily, San Francisco from 12 to 14 weekly and Seattle from five weekly to daily. EVA Air is also considering new services, with candidate cities including Atlanta, Chicago, Dallas and Houston.

Although EVA has strong connections from its Taipei hub, Chicago and Houston present opportunities to have inward feed as those are United hubs. But Houston will require a careful operational evaluation as it is slightly further from Taipei than New York, which has some weight restrictions.

Atlanta and Dallas may seem surprising as they are the fortresses of rival Delta and American Airlines respectively. But there is some precedent. Korean Air links Seoul with Dallas, and American in 2013 opened its own Seoul-Dallas service.

While Dallas is big for business and industry, American is also targeting the Latin America-Asia market. Turkish Airlines plans to enter the Atlanta market as an end-point destination. Atlanta is also big for business and sometimes starved of competition given Delta's dominance. Indeed, Delta has been aggressively targeting the Taiwan-originating market with low fares. (Delta links Taiwan with the US via its Tokyo Narita hub.)

A Delta response to EVA Air would likely be sharp. The Atlanta-Asia market is also being looked after by Korean Air, the largest trans-Pacific carrier. Atlanta would likely be more challenging than Dallas from a commercial view but also operationally, as a non-stop flight would be longer than Dallas-Taipei.

While EVA may be strong in LA with soon three daily flights, its Japanese and Korean rivals are opening or already serve secondary points in North America, including Boston, Las Vegas, San Diego and San Jose. Their closer distance to North America allows the Korean and Japanese carriers to use smaller long-haul aircraft to reach these points, but serving them from Taipei would push range limits.

Larger long-haul aircraft could reach the points but present too much capacity for the markets. EVA Air is looking at next-generation widebodies but this is not an immediate priority; first is narrowbody aircraft, which are needed as further access is granted to mainland China.

Outside of LA other Asian carriers are gaining scale: ANA has doubled Chicago and New York JFK flights to two daily while Cathay Pacific is at four daily in New York JFK (including one via Vancouver) while Asiana and Korean Air plan further increases as they receive more aircraft, notably A380s.

See related reports:

Connections Southeast Asia, in particular Manila, are popular from North America. EVA also sees healthy long-haul traffic from Hong Kong, where local carrier Cathay Pacific charges a premium for non-stop flights.

In the US, China Airlines serves Honolulu twice weekly from Taipei and daily from Tokyo Narita, Los Angeles 17 weekly, San Francisco nine weekly and New York JFK three times weekly via Osaka. EVA has been direct to JFK since Jun-2012, when it eliminated a stop in Anchorage and added a fifth weekly frequency. EVA used the new non-stop JFK service, which gives it a competitive advantage in the market, to introduce its new lie-flat business class product.

EVA accounts for about 4% of overall capacity between the US and Northeast Asia.

United States-North East Asia capacity by carrier (seats per week, one way): 19-Sep-2011 to 8-Dec-2013

EVA Air sees strong prospects in Canada but limited by bilaterals

EVA would like to increase its presence in Canada beyond three weekly flights to each Toronto and Vancouver but is limited by bilateral restraints. Canada has already shown itself sensitive to liberalisation, sharply limiting Gulf carrier access, but the two have flagged open skies discussions.

Canada has shown a warmer attitude to Asia, liberalising air services with Japan and Korea even if such accords have been to the advantage of foreign airlines, not Canadian ones. Canada, according to a government-commissioned report, has benefited overall as open skies arrangements have led to increase in volumes over 15% with Japan, Korea and Hong Kong. EVA noticeably lags behind Cathay Pacific, which has 14 weekly Vancouver flights and 10 weekly to Toronto.

EVA's competitor at home, China Airlines, has a single service to Canada, a daily flight to Vancouver. EVA accounts for about 5% of capacity between Canada and Northeast Asia.

Canada to Northeast Asia capacity by carrier (seats per week, one way): 19-Sep-2011 to 8-Dec-2013

European market swayed towards Bangkok, not Taiwan, and also limited by bilaterals

EVA Air serves four points in Europe: Amsterdam, London Heathrow, Paris and Vienna. All but Paris are served via Bangkok, and Paris is the exception due to bilateral constraints with France; a one-stop via Bangkok with local traffic rights would be preferred. EVA's European services, except from Paris, are mainly filled with Europeans terminating in Bangkok, a hugely popular destination that has proven largely resistant to internal political tension or natural disasters.

EVA's Europe-Bangkok fares tend to be lower than those from Thai Airways or local carriers but the carrier is beginning to see signs of upward pricing. Recognition is a problem: EVA's profile is low, as is Taiwan's. Geographically-challenged consumers sometimes confused Taiwan and Thailand or assume Taipei is in Thailand given EVA's flights from Europe stop in Bangkok.

EVA had served Paris with three weekly flights but in May-2013 increased that to four, reaching its bilateral limit. It is a similar scenario in Vienna, where EVA serves the Austrian city with three weekly flights and plans to increase that to four, again its bilateral limit. It would like to further increase Paris services.

EVA is the second-largest carrier (albeit by some distance) linking Europe with Thailand. First is Thai Airways and the remaining eight carriers are all European.

Top 10 Airlines ranked on seat capacity between Thailand and Europe: 17-Jun-2013 to 23-Jun-2013

Rank Airline Total Seats
1 TG Thai Airways 61,742
2 BR EVA Air 7,832
3 TK Turkish Airlines 6,072
4 UN Transaero Airlines 5,408
5 KL KLM Royal Dutch Airlines 4,970
6 LH Lufthansa 4,928
7 BA British Airways 4,396
8 OS Austrian Airlines 4,312
9 SU Aeroflot 4,228
10 AY Finnair 3,920

EVA sees limited continuation from Bangkok to Taipei and onwards to other Asian points; but this can involve a two-stop journey and one that is circuitous. From Asia EVA sees some long-haul traffic originate from Japan, one of the biggest markets for higher fares.

The LCCs are coming – and EVA is heavily exposed to short-haul

Some 82% of EVA's capacity is short-haul, 60% within Northeast Asia and 22% to Southeast Asia. Taiwan is now served by a dozen-odd LCCs and the last year has made LCCs a discussion topic in Taiwan as high-profile carriers like Peach and Scoot entered the market. Their capacity contribution is still overall small – 4% – but they are growing.

Further growth will come as Japanese LCCs expand, aided by open skies between Japan and Taiwan. Korea will inevitably feel the pressure, leading to an LCC revival that will have more LCC flights from Korea to Taiwan.

Taiwan international LCC penetration rate: 2001-2013*

Yet there is no local LCC in Taiwan. There are challenges: there is a lack of liberalisation and also government rules on new airlines that makes it challenging – perhaps even impossible – to launch a new airline without significant debt. There have been signs of progress with slightly looser but still difficult rules, and talk of having a low-cost terminal at Taipei.

With the factors not ripe, EVA Air is not actively considering an LCC, but it is watching the market. "They are coming," EVA Air president Austin Cheng says. But EVA has not pushed the government the way TransAsia has for the government to support LCCs or at least put the topic on the government's radar.

Even without an LCC – whether or not the government makes one possible – LCCs are challenging EVA on its biggest routes. There needs to be a competitive response. EVA is going for differentiation via a premium product and its five Hello Kitty-themed aircraft, but those are not fleet-wide, nor forever, or to everyone's taste.

EVA has significant long-haul expansion of its own to work on, and balancing premium long-haul with low-cost short-haul would be difficult as no other carrier in Asia does that, unlike in Europe and North America, where reduced offerings on short-haul flights are the norm. EVA is heavily exposed to short-haul (82% of seats) with a small long-haul network comprising 18% of seat capacity. Even with planned growth, this will be small compared to Asian network carriers: long-haul is 28% of seats for Cathay Pacific (this excludes regional subsidiary Dragonair), 24% for Korean Air, 30% for ANA and 34% for Singapore Airlines (this excludes regional arm SilkAir).

EVA international seat capacity by region: 17-Jun-2013 to 23-Jun-2013

EVA international seat capacity share (% of seats) by region: 17-Jun-2013 to 23-Jun-2013

Juneyao and Spring are due to bring competition to Shanghai while AirAsia Japan already serves Taipei from Tokyo Narita. VietJet is concentrating on the domestic Vietnamese market, but will gradually turn its attention to the international market.

Even if EVA has mainly connecting passengers, losing the higher-yielding point-to-point passengers to LCCs will impact overall profitability. It is true LCCs in North Asia are concentrating on trunk routes, but with time they will turn to regional markets and/or support connections from a regional city to major city for onward service. In Japan, for instance, EVA and its peers are betting on serving smaller cities, which the Japanese LCCs will not immediately link with Taipei. But Southeast Asia – and Europe – have shown this is not the status quo forever.

Mainland China is an important market and the mainland carriers are generally inefficient. Once they cut costs, they have the potential for very competitive cost bases.

EVA Air top 10 international routes ranked on seat capacity: 17-Jun-2013 to 23-Jun-2013

Some 18% of EVA's traffic is long-haul but overall 50% of all traffic is transfers. Even if every long-haul seat connects to another flight, there is still considerable transfer traffic within Asia. This could be moved to a low-cost platform. As LCCs open new city-pairs, that places yield pressure on connecting options.

The LCC business depends on ancillaries, which are difficult to support on global distribution systems. Mr Cheng says only about 10% of EVA's bookings come from its own website.

The next few years will be defining for Taiwan as IATA's New Distribution Capability empowers airlines while LCCs grow in North Asia and continue expanding from Southeast Asia. The latter will pressure Taiwan to have a more supportive environment for LCCs, plus will change EVA's short-haul profile, either as LCCs compete on routes to Taiwan or take passengers who used to take connecting options.

LCCs may not be at the forefront of EVA Air's mind now, but once Taiwan is ready for LCCs, EVA will want to be prepared. That requires starting preparations now.

Outlook: waiting on Taiwan's recognition, mindful transfer traffic is volatile

EVA is smartly growing long-haul to better diversify from short-haul. It is doing well in the US considering its size, and no doubt Canada and Europe will see additions when governments increase bilaterals. But transfer traffic is volatile and often a matter of who has the lowest cost.

Asiana, for one, competitively prices sixth freedom long-haul. Chinese carriers have great potential in the future. Japanese carriers, as well as SIA and Cathay Pacific, can rest on their brands and service. EVA may be increasing its service, but its brand is far from being on the same recognition level as others.

Taiwan's brand is also waiting to have its day. Taiwan is a worthwhile destination but has not yet gained traction. When one day it does, it will be to EVA's benefit. It is advantaged by having a number of different niches, isolating it from instability in a part of the world, but its exposure to short-haul is high and cannot remain as it is forever.

There is inertia in North Asia and changes – lie-flat beds, branding, global alliances – happen slowly. The alarm bell does not need to go off today, but the pace of change must increase.


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