The prospect of weekend "charter services" from Jul-08 across the Taiwan Strait, as pledged by Taiwan’s President-elect, Ma Ying-jeou, could kick-start the process of opening one of North Asia’s biggest air travel markets. Currently, non-stop services are only permitted in the four major holiday periods on the Chinese calendar.

Daily charter services could be introduced this Northern Winter and be replaced as scheduled services in 2009, under Ma’s proposal.

Airlines on both sides are moving quickly to take advantage of the opportunity.
Air China, for example, has applied to establish a representative office in Taiwan after Ma Ying-jeou is sworn in as President on 20-May-08.

EVA Air forecasts a 50% increase in passenger numbers between Taiwan and the Mainland after the first stage of expanding the charter operations. More than 1.5 million Taiwanese live on the mainland and are expected to travel more, if the inconvenience and added expense of a transit at a third point are removed. Furthermore, the Ma government proposes increasing ceilings on Mainland tourists, to help stimulate the island’s economy. Mr Ma plans to allow 3,000 Mainland arrivals per day to Taiwan from Jul-08, rising to 10,000 by 2012.

Shares in Taiwan’s leading carriers have surged in recent months in anticipation of the breakthrough.

But the expansion of cross-Straits services is a serious looming threat for airports in Macau and Hong Kong and the carriers based there that have built large revenues from transfer services between Taiwan and the Mainland.

In terms of seat capacity, Cathay Pacific is the most exposed. Cathay accounts for almost one quarter of seats across the Taiwan Strait (from Hong Kong and Macau) at present, or around 38% including Dragonair.

Capacity Share (% of seats per week) on Taiwan-Hong Kong/Macau services: Apr-08

*Week commencing: 14-Apr-08
Source: Centre for Asia Pacific Aviation & OAG

Taiwan-based China Airlines is the next largest carrier in the market, with around 30,000 seats per week.

Current capacity (seats per week*) on Taiwan-Hong Kong/Macau services: Apr-08

*Week commencing: 14-Apr-08
Source: Centre for Asia Pacific Aviation & OAG

But in terms of total network exposure, Air Macau has the heaviest exposure, with 45% of its weekly seats deployed to Taiwan and 42% to the Mainland. Dragonair generates over 20% of its weekly seats in the Taiwan market and 71.5% to Mainland China, with significant anounts of transfer traffic flowing over the Hong Kong hub.

Selected carriers’ proportion of weekly seats* (from their base) to Taiwan and Mainland markets: Week commencing: 14-Apr-08

Note: Cathay Pacific, Dragonair and Hong Kong Express departures from Hong Kong; Air Macau departures from Macau * Weekly seats based on non-stop, operating flight only, week commencing: 14-Apr-08
Source: Centre for Asia Pacific Aviation & OAG

Air cargo flows are also expected to be dramatically altered in North Asia as more direct services are allowed. China Airlines and EVA Air have strong international networks that could be fed with consignments from the Mainland. And Beijing has shown great willingness to be liberal wih fifth and sixth freedom cargo rights in the past.

Morgan Stanley estimates the potential upside for Taiwan’s airlines could be 500,000 tonnes in round-trip cargo flow between Taiwan and China (particularly Shanghai), and 250,000- 300,000 tonnes of incremental cargo flow between Taiwan and the US.

But, even if direct services are insitutionalised, there will be no throwing open of the floodgates. The initial process will be gradual and cautious, until both sides are satisfied that the commercial and political ramifications are not unsettling.