China Airlines

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China Airlines

131 Nanking East Rd., Section 3
Taipei
Taiwan
Telephone: 886 (2) 2715-2233
Fax: 886 (2) 2514-6005
Web sites: http://www.china-airlines.com
http://usa.china-airlines.com

Public Company
Incorporated: 1959
Employees: 9,200
Sales: NT$51.9 billion (US$1.61 billion) (1998)
Stock Exchanges: Taipei
Ticker Symbol: CAIR-TP
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation; 481211 Nonscheduled Chartered Passenger Air Transportation; 48819 Other Support Activities for Air Transportation

Although China Airlines (CAL) became something of a pariah when the United Nations recognized the People’s Republic of China as that country’s true government, the sheer power of the Taiwanese economy propelled it to become one of the world’s most profitable airlines, thriving even in global recessions. CAL also benefited from strong government support; however, critics charge that the “Retired Generals’ Club” that has controlled CAL for so long is responsible for its dismal safety record. CAL controls about a third of Taiwan’s international air traffic; more than seven million passengers a year fly the accident-prone carrier, which assures them, “We treasure each encounter.”

Nationalist Origins

As aviation historian R.E.G. Davies recounts it, CAL was founded on December 10, 1959, by a group of retired Chinese Air Force officers in Taipei, the Republic of China (Taiwan). Initial capitalization was NT$400,000. Operations began with two PBY-5A Catalina flying boats and 26 employees. Military charter work formed the bulk of its business. Within a couple of years, however, CAL had obtained a few war surplus C-47 (DC-3) and C-46 transports which it used to link several points around the island.

CAL was not Taiwan’s first carrier. Civil Air Transport (CAT) had been founded before the mass exodus of Chinese Nationalists from the mainland. In time CAT became Taiwan’s flag carrier, although the U.S. Central Intelligence Agency (CIA) owned 60 percent of it through the Pacific Corporation. It had been steadily losing influence when China Airlines was created. CAL, other regional carriers, and even Air America, also sponsored by the CIA, succeeded in parceling out CAT’s routes. After a few disastrous crashes, the Taiwanese government closed down CAT in May 1968. CAL subsequently became the official state airline.

CAL had meanwhile started its first international service to Saigon on a used Lockheed Super Constellation in December 1966. It also bought a couple of Boeing 727 jets to ferry Japanese tourists to Taipei and Hong Kong. Its fleet then numbered 32 and employment exceeded 2,000. Ben Chow was the company’s president.

The International Air Transport Association (IATA) admitted CAL in January 1969. However, the carrier automatically lost its International Civil Aviation Organization (ICAO) membership in October 1971 when the United Nations (UN) officially recognized the communist People’s Republic of China (PRC) as that country’s true government.

Growth in the 1970s and 1980s

CAL grew furiously—by a factor of 80 percent—in 1972 and 1973. However, a number of factors caused this growth to fall off sharply in the next two years. Japan and Malaysia canceled air agreements with CAL following the UN declaration. Losing access to Tokyo left CAL unable to fly to Korea as well. Within a short time, CAL lost access to Saigon due to the fall of South Vietnam. The 1973 oil crisis dealt another severe blow.

In the early 1970s, CAL began serving San Francisco first via Tokyo and Anchorage, then via Honolulu. In 1974, it dedicated a Boeing 707 freighter to a Los Angeles route as cheap exports poured out of Taiwan. The carrier had the confidence to lease a giant Boeing 747 for transpacific service in 1975, while it added three Boeing 737s for important regional routes. It left many marginally profitable short-haul routes to the likes of Far Eastern Air Transport and Yung Shing (“Forever Prosperous”) Airlines (later Formosa Airlines).

CAL was able to resume service to Tokyo (Haneda Airport) in October 1975. It also entered into tentative cooperation with Jordan for a westerly route network meeting in Bangkok. However, CAL was ditched in favor of Air Siam for this service. CAL did sign a similar, more lasting agreement with Saudi Arabian Airlines in February 1976. Chang Lin-tech assumed the company presidency around this time.

This western expansion extended into Europe by decade’s end. In 1978, CAL agreed to buy four Airbus A300 widebody jets, a deal rumored to help the carrier pry open the market there. Taiwan also allowed a couple of Luxembourg air freight companies to serve Taipei.

CAL posted its first ever loss in 1980 as rail and road transportation improved considerably on the island of Taiwan. The airline’s global expansion continued nonetheless. Cargo flights stretched all the way to New York City beginning in 1981, and the next year CAL added its first European cargo service, to Luxembourg. In 1984, CAL added a new around-the-world route via New York and Amsterdam for passengers and cargo. It also added the super-luxurious Dynasty Class. Tragedy marred these accomplishments, though, when CAL lost a Boeing 737 into the Taiwan Strait in February 1986, killing 13. Later that year, one China Airlines pilot—who formerly flew U-2 spy planes for the United States—hijacked his own Boeing 747 freighter, landing in his ancestral homeland at Canton.

As Taiwanese were allowed to visit mainland China in the late 1980s, CAL was able to fly them partway, to Hong Kong or Tokyo, where they continued on airlines of the PRC (Air China, China Eastern, China Southern, etc.) The pilgrimage attracted 750,000 in 1990. That year, another 257,000 flew to the United States.

Another of CAL’s Boeing 737s was lost in October 1989 when it flew into a mountain, killing 54 people. Five crew members were lost when a Boeing 747 crashed, again into a mountain, in December 1991. These incidents would not be the last.

1990s: Decade of Disaster

China Airlines had 7,200 employees as it began the 1990s. CAL was reorganized as a registered corporation in 1991, though it remained 84 percent government-owned through the China Aviation Development Foundation (CADF), created in 1988 as a kind of quasi-governmental holding company.

A new crop of local operators opened up the prospect of competition. The Evergreen shipping empire founded Eva Air in 1991, filling in points not easily reached by CAL. Eva Air was somehow able to connect to Great Britain, one of the first countries to accept Beijing’s sovereignty in 1957. Foshing Airlines, a small charter operator, changed its name to Trans Asia Airways and began flying shuttles around Taiwan with Airbus A320 jets in 1992. CAL reduced its domestic network to just the Taipei-Kaohsiung route, focusing on international expansion.

In 1992, CAL bought Mandarin Airlines, a two-year-old carrier formed to service countries which objected to CAL’s use of the word “China” in its name. Meanwhile, some European airlines (British Airways, Lufthansa, Air France), unable to fly to both mainland China and Taiwan, began to serve the latter through subsidiaries. Cathay Pacific competed with service to Hong Kong, from which it could fly to both China and Taiwan.

In spite of the crowded market and poor safety record, CAL had become one of the five most profitable carriers in the world. It earned profits of $125 million on revenues of $1.7 billion in 1993. Cargo contributed 20 percent of revenues. CAL had developed extensive maintenance facilities at Chiang Kai Shek Airport. It owned 19 percent of Far Eastern Air Transport. It also had hotel interests and continued to diversify. The company had 8,000 employees in 1993, when it was listed on the Taiwan Stock Exchange.

According to some observers, a huge trade imbalance in Taiwan’s favor pressured CAL into buying American, ordering ten U.S.-made jets. CAL lost a $145 million Boeing 747 in November 1993 when it overshot the runway in Hong Kong. Fortunately no one was killed in this accident. However, the next April, 264 died in Nagoya, Japan, after a copilot in training reportedly pushed the controversial “go around” button while landing, then fought the controls until the Airbus 300 stalled and fell to the ground.

Chairman Liu Ming-the and President Yuan Hsing-yuan resigned after the Nagoya crash, one of the ten worst air disasters in history. The two were replaced by Chiang Hung-i and Fu Chun-fan, respectively. The carrier’s close links with the military were placed under scrutiny, and Chiang was also a retired air force general. Critics believed the carrier skimped on flight simulators and training time. CAL’s profits fell to US$24 million (NT$642 million) in 1994.

CAL unveiled a new corporate identity in October 1995. While touting its devotion to safety, the carrier replaced the Taiwanese flags on its planes with less controversial pink plum blossoms (“We blossom every day”). Change purportedly ran deeper than the aircraft skin. CAL had shaken up its management and brought in Lufthansa Technik as a safety consultant. CAL remained focused on expansion. It ordered 15 advanced Boeing 737 medium-haul jets worth $750 million in December 1995, and acquired one-third of Formosa Airlines in 1996.

Company Perspectives:

We will be the most reliable airline.

Hong Kong, for decades a colony leased by Great Britain, reverted to Chinese ownership in 1997. CAL was able to continue flying to it, a fact which its softened image probably helped.

That year, CAL earned about US$90 million (NT$2.77 billion) on revenues of US$1.7 billion. It entered a code-sharing arrangement with American Airlines on transpacific routes. CAL was ranked one of the top ten cargo airlines in the world in 1997 and placed first in Taiwan, controlling one quarter of the market.

In spite of such impressive statistics, management struggled to cut costs as the number of new airline seats threatened to outpace traffic growth projections. However, the carrier still boasted impressive load factors (the percentage of seats filled). Meanwhile, the Taiwanese government, which then owned 71 percent of CAL, looked for a foreign investor to acquire 16 percent of the company.

Just as a recovery seemed in hand, a CAL jet crashed in Taipei in February 1998, killing 203. A few weeks later, a Formosa Airlines Saab 340 crashed with 13 on board. The accidents decimated traffic at the country’s 17 airlines, and at CAL in particular. Further, 130 flight attendants left the carrier after the crash.

Interestingly, the next president, Sandy K.Y. Liu, was the son of Liu Ming-the, the CAL chairman who resigned after the Nagoya crash—just one indication of the “revolving door syndrome” in Taiwan’s aviation industry. However, by this time, a third of CAL’s pilots were brought in from outside the country, thinning the ranks of former military aviators.

CAL still had a long way to go; critics charged that old military styles of thinking continued to dominate. In April 1998, a new $120 million maintenance facility opened. However, regulators found problems there as well, although CAL was aiming to increase third party work at this unit. The carrier obtained two senior pilots from Singapore Airlines (SIA) in August 1998 to direct flight safety operations. However, they both left a few months later, citing profound differences in flight training philosophies. SIA had also agreed to take an equity stake in the carrier, but soon canceled over a disagreement on the size of the stake. The government, through the CADF, began to shop around a 35 percent stake in the company, hiring Salomon Smith Barney to help find a buyer. Taiwan-based China Development Bank stepped up as a likely candidate, but insisted on having control of the management.

The Asian financial crisis ended a ten-year string of growth in departure traffic and CAL lost US$92.6 million (NT$2.96 billion) in 1998 on sales of US$1.61 billion (NT$51.9 billion). However, it restored profitability in the first half of 1999. CAL merged its Formosa and Mandarin airlines subsidiaries and on August 11, 1999, announced its largest order ever—$5.6 billion for 24 Boeing and 12 Airbus jets. It was Boeing’s largest order ever for dedicated freighters (17). Another CAL jet crashed on August 23. The MD-11 flipped over while landing in strong crosswinds at Hong Kong. Three people were killed and 200 injured.

Although some safety factors remained out of CAL’s control, such as Taipei’s suboptimal air traffic control system, the long string of accidents had observers asking how many crashes could a single airline bear. Still, CAL planned to spend $5 billion on new Airbus and Boeing jets. It was recognized for excellent customer service and attained ISO 9001 certification. In early 2000, Northwest Airlines and CAL discussed areas of cooperation short of an equity investment.

Principal Subsidiaries

Mandarin Airlines Ltd.; CAL-Dynasty International, Inc. (U.S.A.); CAL-Asia Investment, Inc. (BVI); Hwa Hsia Company, Ltd.; Hwa Sheng Investment Co., Ltd.; Abacus Distribution System Taiwan, Ltd. (95%); Taiwan Airport Services Company, Ltd. (58.35%); Taoyuan International Airport Services Co., Ltd. (55%); China Pacific Laundry Services, Ltd. (55%); Dynasty Holidays, Inc. (51%); China Pacific Catering Services, Ltd. (51%); Formosa Airlines Corporation (40.77%); Global Sky Express, Ltd. (25%); Asian Compressor Technology Services Co., Ltd. (24.5%); Spacehab Taiwan, Inc. (21.62%).

Principal Competitors

Cathay Pacific Airways Limited; Eva Air.

Key Dates:

1959:: Retired Chinese Air Force officers in Taiwan set up China Airlines (CAL).
1966:: CAL begins flying its first international route, to Saigon.
1971:: United Nations’ sanction of Beijing government limits CAL’s international markets.
1980:: CAL posts its first loss.
1993:: CAL shares are listed on Taipei Stock Exchange.
1994:: CAL suffers one of the worst crashes in aviation history in Nagoya, Japan.
1998:: Taiwanese government searches for a foreign equity partner for the airline.