(Updated) China Airlines, EVA Air look beyond a lost decade

  • China Airlines to post first annual net profit since 2010
  • China Airlines/EVA Air lost a combined NT$28.24 billion since 2006
  • Cross-strait flights biggest & 2nd-biggest region by no. of seats at EVA Air, China Airlines
  • Shanghai Pudong dominates cross-strait market with 19.67% of seats
  • 58.55% of all cross-strait seats supplied to top 10 Chinese cities
  • China Airlines holds 25% and EVA Air 20.5% cross-strait market share
  • EVA Air’s pax revenue to reach parity with China Airlines’s this year
  • 6th freedom traffic to US from Nanchang via Taipei 400-500 miles shorter than Hong Kong stop-over
  • EVA Air should be careful in not chewing more than it can stomach

For Taiwanese carriers China Airlines and EVA Air, the year of 2016 has a promising start. Apart from the announcement that 6th freedom traffic right will be granted to them carrying connecting passengers from Chongqing, Kunming and Nanchang, this year will see them look beyond a lost decade in finance, during which the pair posted a combined net loss totalling NT$28.24 billion (US$847 million).

This is especially crucial for Star Alliance member EVA Air, which aims to develop Taipei Taoyuan International Airport into a transpacific hub capturing feed traffic from Southeast Asia and China, rivalling the roles of Cathay Pacific and Hong Kong.

But as this analysis shows, the cross-strait market is likely to remain China Airlines’s and EVA Air’s bread-and-butter alongside Japan, with their undiminished outsize importance. Despite their great ambitions in becoming an important connector ferrying Chinese passengers to the United States and Australia, it is questionable if the pair can overcome their latecomer status to the game.

Images Courtesy of Clay Lacy Astrovision Learjet

Images Courtesy of Clay Lacy Astrovision Learjet

Building on momentum of best year since 2010
The plummeting fuel price has provided a tailwind to every airline in the world, and Taiwanese carriers were no exception. In fact, 2015 was the best year for both China Airlines and EVA Air since 2010, propelling them from oblivion to being moderately profitable.

China Airlines posted a 2015 9-month net profit of NT$5.26 billion (US$158 million), reversing a decade plagued by perennial annual losses in all but two years. With a total revenue of NT$109.87 billion in the same period, this produced a 4.79% net margin. It is noteworthy that the SkyTeam carrier accounted for the bulk, or 86.9% of the aforementioned combined net losses between the pair, at NT$24.5 billion. While the airline, along with its arch-rival, does not break down gross and net fuel cost figures in its financial report, it is nonetheless safe to assume their falls were responsible for the 7.51% decline in total operating expenses from NT$111.81 billion in the first 9 months of 2014 to NT$103.4 billion a year later. As this outpaced the 2.28% year-over-year decrease in operating revenue, its 2015 9-month operating profit saw a 10-fold increase from NT$627.05 million to NT$6.45 billion, whereas the operating margin surged from 0.56% to 5.87%.

EVA Air, on the other hand, fared slightly better and managed to outperform the flag carrier on most occasions. EVA Air recorded a 2015 9-month net profit of NT$6.37 billion (US$191 million), on NT$102.08 billion of total revenue, producing a 6.25% net profit margin. Unlike China Airlines, EVA Air’s operating revenue increased by 4.00% year-over-year from NT$98.15 billion, which combined with a 1.13% decrease in total operating expense from NT$95.06 billion in 2014 9-month to NT$93.89 billion a year later, led to a 1.61 times soar in operating profit from NT$3.087 billion to NT$8.086 billion. Operating margin of 7.92% was more than double the prior-year period’s 3.15% and stayed consistently above China Airlines’s since 2010.

Fast forward to the present day, the convergence of the two airlines’ passenger revenue continues unabated. For full-year 2015, EVA’s passenger revenue of NT$81.872 billion was just 7.37% below China Airlines’s NT$87.909 billion. At present speed the gap will vanish completely by mid-year, if not sooner. As a consequence of EVA’s rapid international expansion, the 15.61% year-over-year increase in traffic to 35.28 billion revenue passenger kilometres (RPKs) far outweighed the 9.16% decline in yield to NT$2.32 per RPK in 2015, from NT$2.55 per RPK in 2014. The passenger traffic growth also dwarfed the 11.80% hike in capacity to 43.64 billion available seat kilometres (ASKs), thereby producing a 2.67 percentage points higher load factor at 80.84%.

Unfortunately the same cannot be said for China Airlines. Its 6.50% drop in passenger yield from NT$2.54 per RPK to NT$2.37 per RPK in 2014 negated the 3.32% rise in traffic from 35.89 billion RPKs to 37.08 billion RPKs in 2015. This resulted in a 3.38% year-over-year decrease in passenger revenue from NT$90.98 billion, despite a 1.2 percentage point higher load factor at 78.9%. The hike in capacity was also much more modest than EVA’s, at only 1.67% with 46.97 billion ASKs being slightly up from 2014’s 46.20 billion ASKs.

That said, the pair shares the same challenge in facing a bleak cargo outlook, at a time when Taiwan’s export orders fell for 8 consecutive months since April 2015, and at a quickening pace as the Chinese economic slowdown took its toll. At EVA, a 10.34% plunge in cargo traffic to 3.64 billion freight tonnage kilometres (FTKs) in 2015 versus 4.06 billion FTKs a year earlier, was compounded by a 6.90% drop in cargo yield to NT$7.16 per FTK versus NT$7.69 in 2014. These culminated in a staggering 16.54% year-over-year fall in EVA’s cargo revenue to NT$26.09 billion from NT$31.26 billion. China Airlines was not immune to the cargo doldrum, albeit its 7.55% decline in revenue to NT$39.92 billion from NT$43.18 billion was less severe, as its cargo traffic actually witnessed a 1.34% increase to 5.38 billion FTKs from 5.31 billion FTKs, offset by a 8.86% decrease in yield to NT$7.41 per FTK in 2015 from NT$8.13 per FTK recorded in 2014.

China Airlines EVA Air 10 years earnings

Top 10 cross-strait destions

Cross-strait focus will not be weaned away
There is concern that the latest change in government administration, from the ruling China-friendly Kuomintang (KMT) party’s Ma Ying-Jeou to the pro-independence Democratic Progressive Party’s Tsai Ing-wen (DPP), could fray ties and the cross-strait air transport market could be caught between a rock and a hard place. Admittedly, while political instability may prove to be a temporary and limited downside factor, the rebalancing Chinese economy will far outweigh this and lead to burgeoning air travel demand to the island, an attractive tourism destination for the mainlanders.

Moreover, this pessimistic view neglects the latest developments of the cross-strait market. Tsai was instrumental in consummating the mini-transport air link when she was the chairwoman at the Mainland Affairs Council, a precursor to the normalisation of cross-strait flights. Since the beginning of regularly scheduled flights in April 2009, the market has expanded exponentially from the days when 270 weekly flights, or around 28,000 annual flights in both directions were allowed. In 2014, the number of annual both-way cross-strait flights skyrocketed to 67,100. The latest cap of 840 one-way weekly flights was further relaxed to 870 in July 2015, with Huai’an, Yangzhou, Nantong, Yiwu, Yanji and Kashgar being added to the network covered by the air services agreement (ASA), bringing the total number of destinations to 61.

Airlines from both sides have wasted no time in capitalising on these fresh opportunities. China Eastern has commenced Huai’an-Taipei Taoyaun service in November onboard the 156-seat Airbus A320, hauling a total of 793 passengers on 8 flights at a load factor of 63.54%. A month later on 23rd December, Shenzhen Airlines started the Nantong-Taipei Taoyuan flights, initially once-weekly but ramping up to thrice-weekly from 25th January onwards. Air China is next scheduled to launch thrice-weekly Yangzhou-Taizhou-Taipei Taoyuan flights from 26th January onwards, with China Airlines soon to follow on the route with twice-weekly 737-800 flights beginning 1st February.

These markets are minuscule when compared to the top 10 cross-strait destinations in the Aspire Aviation database, which together account for 58.55% of all seats supplied. Of particular note is Shanghai Pudong, whose 2.15 million passengers carried on flights originating from Taiwan going there in the first 11 months of 2015 was the biggest destination with a 19.67% share by seats, at 79.35% full. With 10,567 both-way flights and 2.71 million seats supplied, this easily led the 2nd-biggest destination, Beijing, by a wide margin. Flights flying there totalled 2,914 with 888,695 seats, carrying 746,643 passengers which led to a 84.02% load factor. Shanghai Hongqiao, meanwhile, had 2,654 both-way flights with 789,786 seats, carrying 679,443 passengers, thereby producing a 86.03% L/F. These two cities alone took up more than 30% of the market, hardly a surprise given their financial hub and capital status.

China Airlines is the clear leader in this market, together with its wholly-owned subsidiary Mandarin Airlines. The group offered 12,763 flights and 3.38 million seats, with a 24.56% share by seats. With 2.63 million passengers flying the airline group, this produced a 77.91% L/F. Not far behind was EVA Air along with UNI Air, which together held another 20.46% market share. The EVA Air group offered 12,183 flights and 2.82 million seats, flying 2.32 million passengers, thus leading to a 82.29% L/F. The pair held roughly 45% of the cross-strait market, highlighting their significant clout. At third place was China Southern Airlines Group consisting of the namesake brand and Xiamen Airlines, which had a 14.94% share. With 11,176 flights and 2.06 million seats, Asia’s biggest airline by passenger numbers hauled 1.57 million cross-strait passengers at a 76.23% L/F. Air China Group comprising Air China, Shenzhen Airlines and Shandong Airlines, came in 4th with a 12.83% seat share and CEA Group comprising China Eastern and Shanghai Airlines, was 5th with a 12.48% share.

As EVA Air is introducing 6 high-capacity 184-seat Airbus A321s in 2016, integrating UNI Air as early as 2017, according to local reports, to improve operational efficiency; and both carriers adding flights, the China focus will not be weaned away. In fact, the World Travel and Tourism Council (WTTC) forecasted a 2.7% annual growth in direct contribution by the Taiwanese travel industry between 2015 and 2055, up from the 1.8% growth in 2015.

China Airlines:EVA Air regional share

China-US air travel 2015 Jan-Oct

Latecomers to international expansion & playing catch-up
On paper, this comprehensive cross-strait network in turn has laid a solid foundation for China Airlines and EVA Air to reap benefits from the soaring Chinese outbound travel, whose number of such travellers is estimated to double from more than 100 million in 2014 to 200 million by 2020 at CLSA and to 234 million by consultants Fung Business Intelligence Centre (FBIC) and China Luxury Advisors.

EVA Air is the frontrunner among the pair in becoming a transpacific specialist. After launching Taipei Taoyuan-Houston on 19th June, 2015, it is hiking frequencies on the route from 4 times weekly to 6 times weekly from 27th March, 2016 onwards; which will become a daily service beginning 10th October. Its Taipei Taoyuan-New York John F. Kennedy service will increase from 7 times weekly to 10 times weekly beginning 7th July. China Airlines, at the same time, is increasing frequency on the same route from 3 times weekly to 4 from 16th May, onwards, and to 5 times weekly beginning 30th May, according to Airline Route.

But EVA Air and China Airlines are quite late to the game and Chinese, US carriers have been adding direct flights to the world’s second-biggest economy, which saw 165 weekly flights by Chinese airlines and 138 by their US counterparts during the peak of August 2015. Even in October 2015 for which the latest data is available in the Aspire Aviation database, a traditional off-peak month, the 151 and 131 weekly flights by Chinese and US carriers, respectively, were a marked increase over October 2014’s 107 and 114 figures. The number of total passengers carried actually surged by 52.87% from 199,329 in October 2014 to 304,717 a year later, in spite of a seasonally weak 63.24% load factor.

EVA’s closest competitor in one-stop propositions from a geographical perspective is Hong Kong-based Cathay Pacific, which is understood to be considering a 5th daily Los Angeles flight, alongside 4 times daily flights to New York John F. Kennedy; daily to Newark and Chicago; 4 times weekly to Boston and 17 times weekly to San Francisco. Intriguingly, there are some merits to EVA Air’s claims of providing the most direct and convenient one-stop offerings to the US, from one of those 3 origins of Chongqing, Nanchang and Kunming slated to be on trial for 6th freedom traffic.

The advantage of a Taipei transit over a Hong Kong one is most pronounced for Nanchang in Southeastern China’s Jiangxi province, at around 400-500 miles shorter. A Nanchang-Taipei Taoyuan-New York John F. Kennedy journey is 8,228 miles long, versus Nanchang-Hong Kong-New York JFK at 8,540 miles long. For Chicago O’Hare a Taipei stopover takes a 7,877 miles journey, against a Hong Kong stopover taking 8,262 miles. For Los Angeles International Airport (LAX) where 24% of all Asian traffic makes its first stop, it is 7,219 miles long for a Taipei stopover against a 7,728 miles journey for a Hong Kong one. For the Southwestern cities of Chongqing and Kunming, a Taipei Taoyuan transit is a draw to the Hong Kong one, with the most significant difference over CKG-TPE-LAX of 7,750 miles being around 200 miles shorter than CKG-HKG-LAX’s 7,941 miles.

Hence EVA Air is adding 7 Boeing 777-300ERs to its fleet in 2016 to become a bigger player in a market where the Star Alliance carrier witnessed a 15% passenger volume growth, while getting other pieces of the puzzle in place, before a full 6th freedom traffic right with China comes. These include launching a 4 times weekly Istanbul service beginning 5th March 2016; Chicago and New Delhi at a yet to be announced date; a 4 times weekly flight to Cebu beginning 27th March.

Image Courtesy of China Airlines

Image Courtesy of China Airlines

In order to better compete in the Southeast Asia-US market, EVA Air is upping Taipei Taoyuan-Singapore frequencies from 11 to 13 times weekly from 27th March onwards and to twice-daily from 10th October onwards; adding 6th weekly service to Hanoi; boosting Bangkok frequency from 17 to 19 times weekly and a 2nd daily flight to Manila. China Airlines is also up-gauging its Hanoi route by replacing the A330-300 with 777-300ER, and on the Bangkok route by using a mix of 747-400 and 777-300ER instead of a combination of 747-400 and A330-300 aircraft. Another battle front being mentioned by China Airlines is the medium-haul China-Australia market, which has seen it launch the Taipei-Melbourne-Christchurch thrice-weekly service since October 2015.

That said, the key question remains: how will EVA Air and China Airlines punch above their weights and fight much bigger rivals much akin to a David-versus-Goliath face-off? This is particularly so after a lost decade in earnings and that EVA Air has just raised fresh capital in 2015. It is just a matter of time before China Airlines does similar capital-raising activities to replenish its war chest.

Indeed, EVA Air and China Airlines are very small in both the US and Australia markets. Based on actual passenger carriage data in January to November 2015, unlike others using schedule filings, the Aspire Aviation database showed the US market being EVA’s number 4 market by actual seats supplied with 1.558 million seats at a 11.87% share. This is after number 1, the cross-strait market, at 2.82 million seats supplied inclusive of UNI Air during the period at a 21.45% share, out of 13.13 million international seats. Its number 2 market, Japan, has a 19.35% share with 2.54 million seats, in which EVA Air president Austin Cheng said the carrier witnessed a 30%-40% growth in passenger volume owing to the depreciating Japanese yen. EVA Air is also mounting a massive 55% increase in the number of weekly flights to Korea to 34 times, which has a 2.88% seat share. Taipei Taoyuan-Seoul Incheon route leads with 21 weekly flights, Kaohsiung-Incheon 7 times, Taipei Songshan-Gimpo 4 times, and Taichung-Seoul Incheon twice-weekly.

For China Airlines, the regional focus is broadly similar: Japan is its biggest market with a 23.76% share, supplying 4.50 million seats inclusive of Tigerair Taiwan, which commenced Taipei Taoyuan-Osaka Kansai service in July 2015, and Taipei Taiyuan-Tokyo Narita last April. The namesake brand also launched flights to Ishigaki in Japan the same month. Cross-strait flights to China come next with a 17.82% share, supplying 3.38 million seats together with Mandarin Airlines. The US is only its 6th-biggest market with a 5.02% seat share, and Australia at just 1.34% with 253,357 seats, whereas EVA Air’s figure on Australia is even more paltry at 0.38% with 50,400 seats. These pale in comparison with Singapore Airlines’s 100,000 seats to Australia each and every month and Cathay Pacific’s more than 80,000 monthly seats on average.

Product-wise, meanwhile, both EVA Air and China Airlines are putting their latest products on the flagship Boeing 777-300ER aircraft. The 2014 and newer batch at EVA Air feature a New Premium Economy Class, dubbed the Elite Class, and a New Economy Class seat design, with the personal television (PTV) size enlarged from 9 inches to 11.1 inches. In the Royal Laurel Class the touchscreen size reaches 16 inches with multi-task gestures mimicking the usage on tablet computers. China Airlines has taken a step further, putting which is more than a conventional walk-up bar called “Sky Lounge” in front of the Business Class cabin, complete with bookshelves featuring popular Chinese and English books . It has also adopted a Business Class design based on the B/E Aerospace Super Diamond seat, along with individual reading lamp and a Song-dynasty theme throughout bringing a wooden and warm touch. In Economy Class, China Airlines has licensed the “Skycouch” concept from Air New Zealand and rebranded it as “Family Couch”, which turns 3 economy seats on the side of aircraft into a small bed.

Looking ahead, while the bottomless fall in oil price has brought a much-needed respite for EVA Air and China Airlines, thereby enabling them to look past a lost decade, the pair should be careful in not over-stretching themselves in expanding too rapidly at the expense of profitability. This is particularly true for EVA Air, whose latecomer status means playing catch-up and expanding faster than the incumbents to gain clout and size. Its 18 Boeing 787-10 Dreamliners on firm order, in addition to another 2 787-10s and 4 787-9s being leased from Air Lease Corporation (ALC), which will be mainly used to underpin its thin, long-haul new routes in addition to partly replacing the Airbus A330 fleet, represent a further hike in capacity.

The decline in EVA’s passenger yield is already accelerating, with five months of 2015 recording double-digit plunge. Simply put, not chewing more than it can stomach, in a business which is essentially a delicate balancing act.

Image Courtesy of Clay Lacy Astrovision Learjet

Image Courtesy of Clay Lacy Astrovision Learjet

Updated on 16th January, 2016 to reflect the result of Taiwanese presidential election; the role of Tsai Ing-wen in consummating predecessor of scheduled cross-strait flights; China Airlines and EVA Air operating performance updated to full-year 2015 from January-November 2015.

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