I've been kvetching recently about the tendency to view the China-Taiwan economic relationship in cargo-cult terms, and here today the Asian edition of the Wall Street Journal carried an article today cautioning investors on exaggerating the effects of direct flights (link is behind a pay wall):[Analysts] believe that even if direct China-Taiwan air links materialize -- the main hope behind the stocks' rise -- the airlines wouldn't benefit much.
This would hold true even in the most optimistic of scenarios, such as a doubling of traffic.
"Our calculations indicate that direct passenger links are only worth around NT$1 a share for both [Taiwanese] carriers," Merrill Lynch analyst Paul Dewberry wrote in a recent report. "In addition to susbstantial cannibalization of the Hong Kong route, the airlines will face stiff competition from Chinese carriers as well as suffer less-efficient use of assets."
The issue is still politics, though of a different nature. The distribution of the main revenue generator, destinations, is going to be based on negotiations. In fact, analysts point out, because direct links are verboten at present, Taiwan airlines are somewhat insulated from competition (Chinese competition, anyway). Since routes will be negotiated reciprocally, this means that all routes will be subject to (tough) competition from Chinese airlines. The analysts argue that even assuming that passenger traffic doubles to 16 million annually by 2012, up from 8 million currently between Taipei and Hong Kong (often claimed to be the busiest route on earth), China Airlines and Eva may at most carve out a 20% share of this market. Both airlines lost money last year, with China Airlines racking up a record deficit, attributable in part to rising fuel costs. These fundamentals, high fuel prices and competition, aren't going to change when direct flights happen.
Nor do analysts expect Chinese airlines to derive any great benefit. Airlines that are currently minting money on the ban on direct flights, like Air Macau and Cathy Pacific, can expect their share to plummet as up to 70% of passengers are expected to switch. Not mentioned is what will happen to Hong Kong's economy when many who might have stopped over for a day, switch to direct flights....
[Taiwan]
2 comments:
I've always suspected that one of the reasons Taiwan only gives 30 day landing permits, instead of 90 days like Hong Kong, was because the govt could easily squeeze additional revenue from each business person or tourist.
Since each seat cost at around Nt$6500~7500) instead of just $6500, the airlines (and govt) can make $19,500. Its always been unfair. It's also hindered some businesses from developing such as the Chinese language education market. If students could get 3 month visas here, studying Chinese would be much easier. No need to deal with corrupt language schools that held power over the students. Taiwan missed the boat on this industry.
And yep, HK is going to suffer from direct flights, no doubt. Throw in the new airports in south china and they will take a huge economic hit over this.
ps. want to buy a suit....
From an economic perspective alone, direct links make perfectly good sense. The reduced distance traveled would save two resources - fuel and time - resources that could be more productively used elsewhere.
As a stop between the two destinations, Hong Kong DOES stand to suffer, but then, that's not really a sufficient reason to maintain the system as it is now. Frederic Bastiat wrote a terrific economic parable about 150 years ago regarding this kind of situation, in order to debunk the notion that artificial stops in a railroad (or in Taiwan's case, an air link) are beneficial to the economy:
http://www.econlib.org/library/Bastiat/basSoph4.html#S.1,%20Ch.17,%20A%20Negative%20Railroad
More compelling arguments to me AGAINST direct links would be the security and national dignity considerations. Neither of which we've heard the KMT talk much about.
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