AmCham arrow Publications arrow Topics Archive arrow Topics Archive 2008 arrow Vol.38- No.9 arrow Cover Story: High Speed, Low Returns?
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High Speed, Low Returns

Money Challenges for the High Speed Rail

Taiwan’s bullet train is satisfying passengers with its service, but the operating company is facing an intense financial crunch as revenue is falling far short of projections. A year before it needs to start repaying principal on its syndicated loans, the company is seeking to renegotiate terms with the banks to lower interest rates. It is also looking at all possible ways to increase ridership.


Both foreigners and Taiwanese rave about the bullet trains that that run swiftly and smoothly between Taipei in the north and the southern port of Kaohsiung, covering the 345 kilometers in up to 90 minutes. The service is invariably punctual, prices are reasonable, and the cars are clean and comfortable. The High Speed Rail is doing so well in attracting customers that it has driven most airline service along Taiwan’s western corridor out of business. Could there possibly be any problems?

Try the staggering burden of around NT$380 billion (US$12.5 billion) in debt derived from two syndicated loans and other corporate borrowing. The Taiwan High Speed Rail Corp. (THSRC), which operates the railway system on a BOT basis, is currently facing serious financial difficulties, with an apparent inability to fully meet interest obligations rates on these loans, let alone get in position to repay principal when the repayment schedule is set to begin a year from now.

The company’s monthly revenue, derived mainly from ticket sales, came to around NT$1.7 billion (US$ 55.7 million) in February this year. Over the summer season, the figure grew to NT$1.86 billion in June and NT$2.04 billion in July. But even July’s income was not enough to cover monthly interest payments of around NT$1.3 billion, plus operating costs of roughly NT$800 million, says Frank Fan, an associate director for corporate and fund ratings at Taiwan Ratings, an affiliate of Standard and Poor’s.

“They are less than breaking even,” he says. “If you look at it in terms of year-on-year comparisons, the growth is amazing, but if you look at the revenue and cost position, it is far below expectations,” says Fan. Hank Huang, director of the BOT Research Center at the Taiwan Institute of Economic Research, agrees with that assessment, saying bluntly that the situation is “terrible.”

Fan notes that under present circumstances, THSRC will need to double its revenue if it is to even start paying off the principal on its loans. The loan agreements with various banks mainly call for repayment within 15 years, to be managed in installments starting in November 2009. In other words, Fan says, THSRC will need to find ways to generate an extra NT$2.1 billion (US$69 million) a month in income on average to be able to start paying off its debt at that time.

The financial woes are in contrast to the system’s near-perfect record operationally. Since the railway began operations on January 5 last year, it has maintained a superb punctuality rate of 99.36% (trains more than five minutes late are classed as unpunctual). The rate in July, at 97.98%, was slightly lower than normal, but only because of a few typhoons. “We’ve calculated that the accumulated average delay (per train) is only 0.23 minutes,” says Ou Chin-der, THSRC’s CEO. “I know with Japan’s bullet train, it is 0.68 minutes, so this is very good.”

Passenger volumes have also shown healthy growth. According to THSRC, the number of riders in March last year – two months after operations began – was 919,000. The figure grew to 1.5 million by October last year and 2.3 million this March, and hit 2.8 million in July. That month, says the Ministry of Transportation and Communications’ Bureau of High Speed Rail (BHSR), an average of 91,000 people took the high-speed trains each day, with 25% of the passengers riding between the northernmost stations (Taipei or Banciao) and the southern terminus of Zuoying outside Kaohsiung, and another 18% going between one of those northern stations and Taichung. The number of trains per day currently ranges from 120 to 140.

“With our passengers, we’ve found the loyalty rate to be extremely high,” Ou says. “Ninety-six percent of our passengers say they would definitely come back.” TIER’s Hank Huang adds that bullet-train service has achieved acceptance by the Taiwanese public faster than did South Korea’s. After three months of operations, public satisfaction levels in Taiwan were around 70% to 80%, he says, whereas it took Korea’s bullet train a year to reach similar levels.

The rapid acceptance has been aided by the train system’s excellent safety record. No accidents resulting in injury and no major breakdowns or malfunctions have occurred. The BHSR says in the 19 months the system has been operating, it has recorded around 33 minor incidents (for example, 12 relating to malfunctioning fork tracks) that have resulted in only slight delays.

In essence, then, the corporation’s shaky financial situation is due partly to poor project management and partly to significant changes in the Taiwanese economy since the project was devised.

Missed deadlines

One major source of the project’s problems was the repeated delays in completing construction. The original target start-up date was October 2003. That was postponed to October 2005 and then to October 2006. Eventually it was January 2007 before service began. Contributing to the delay was a decision in 2000 – attributed to exchange rate fluctuations – to drop an agreement for equipment and systems supply by a Eurotrain consortium lead by Germany’s Siemens and France’s Alsthom in favor of a Japanese consortium lead by Mitsubishi and Toshiba. But the challenge of maintaining the construction schedule for such an immense project was also considered to be a large factor.

The delays clocked up billions of New Taiwan dollars in additional expenses, and brought the total bill for construction to around US$18 billion. “The key problem is that because of the project delays and cost overruns, the debt is much higher than originally expected,” says Fan of Taiwan Ratings.

More importantly, when the project was first conceived two decades ago, Taiwan’s economy was booming. It was envisaged that business executives – the train’s target ridership – would need to travel frequently between major Taiwanese cities, for example going from company headquarters in Taipei to visit branch offices in the south. Even in 1998, when THSRC signed the contract with the government to build and operate the line, with the stipulation that the project be transferred back to the government by 2033, Taiwan’s economic prospects seemed brighter than at present. Most of the HSR stations were therefore located on the outskirts of the cities rather than in urban centers because it was assumed that rapid economic growth would cause development to expand to those locations.

Over the past decade, however, Taiwan’s dynamic small and medium enterprises gradually moved their low-end manufacturing operations to China and elsewhere, reducing the need for business travel within Taiwan. Consumption has slowed as well, with the result that people now are generally less willing than before to pay an additional amount of money for the sake of saving time. “Originally, when the economy was better, travel along the western corridor amounted to two or three million people daily,” Ou says. “If only 10% of these took the HSR, the current load factor would be over 100%.”

As it is, the average load factor stands at 44% (in July it reached 47.12% because of the vacation season). Around 23% of passengers currently use the railway for sightseeing and leisure purposes, and the rest chiefly for business, according to BHSR.

While it has not been difficult coaxing higher-end airline travelers to take the cheaper HSR, it has been harder to boost ridership by attracting conventional rail travelers and motorists. The frequency of travel by conventional rail has fallen only 10% since the high-speed service began, the Bureau says. Fan notes that over half of all trips between cities in Taiwan still take place in a personal car, and it is difficult persuading motorists to switch, as driving offers “door-to-door” convenience. High oil prices and the option of taking the HSR caused highway traffic to decrease by around 30% between July 2007 and July 2008, says BHSR Director-general Pang Jar-hua – but that’s still not enough to boost HSR revenues dramatically.

The prospective arrival of more Chinese tourists is not likely to affect the situation much either, analysts say. So far, BHSR reports, the almost 5,400 Chinese who have visited Taiwan have had no identifiable impact on the system’s operations. Fan calculates that even if 3,000 Chinese tourists arrive each day and each one took the bullet train, the support to the load factor would be less than 4%. “And this is under the assumption that everyone takes the train,” he says. All analysts interviewed for this story point out that Chinese tourists prefer getting around by bus anyway, as they like to visit several locations around the island – including sites on the east coast inaccessible by bullet train – in a short period of time. “If someday many Chinese are here for business purposes, here for living purposes, maybe they could help the HSR increase its ridership,” says TIER’s Huang. “But if we think of tourism, there are no clear benefits.”

Currently, THSRC is attacking the financial challenge by pursuing a strategy of reducing ticket prices to increase ridership. “Once people are in the habit of taking the HSR, they will eventually raise ticket prices,” says Vice Chairman Hwang Wang-hsiang of the government’s Council for Economic Planning and Development.

In March this year, THSRC started offering business-class passengers a 36% discount if they traveled between Monday and Thursday, with a similar 20% discount on standard-class reserved seats. Travelers on standard-class unreserved seats received a 28% discount – meaning that Monday through Thursday it now costs only NT$1,070 to travel between Taipei and Zuoying. On Fridays and weekends, business-class passengers receive a 20% discount and standard-class unreserved seat ticket-holders receive a discount of 10%. THSRC is also offering various promotions in conjunction with travel agencies – including discounts on hotels or taxis – to encourage more people to use the service.

Currently, this strategy has significantly raised ridership, but not enough to increase revenues, which have been quite flat for the past several months, Fan says. THSRC is also seeking to make the railway service more convenient by offering free shuttle buses between city centers and the outlying stations. “We have a free shuttle bus to all stations,” says Ou, who notes that THSRC is negotiating with the bus companies to improve the quality and frequency of the service. He adds that his company also hopes that the government can help out in providing additional free bus services.

Renegotiating terms

Above all, Ou says, THSRC is engaged in negotiations with the banks and the government on restructuring the loans to reduce the interest burden. The first syndicated loan of around NT$323 billion (US$10.6 billion) from over 20 local banks has some parts of it structured at 8% interest, insiders said, while the second syndicated loan involves NT$65.5 billion (US$2.1 billion) from a handful of local banks. Overall, says Fan, the interest burden for all debt averages between 4% and 5%. Sources familiar with the situation say that THSRC, arguing that lenders face less risk now that the railway is operating smoothly, is hoping to gain a more manageable average interest of 3% on the loans.

When interviewed in August, THSRC’s Ou and BHSR’s Pang said that the banks had confidence in the project – as operations were stable and ridership was increasing steadily – and would be willing to lower interest rates. The main uncertainty at the time was the attitude of the new government under President Ma Ying-jeou, which lacked familiarity with the project and wished to be cautious about committing the state-owned banks to what the media might portray as a bailout.

Then, in early September, 20 of the creditor banks that participated in the NT$323 syndicated loan reached a consensus to lower the interest rate on their NT$279 billion portion to an average of 3.9757%. The arrangement was announced in a statement by the loan’s lead bank, Mega International; it said the deal would be formally inked in October.

In a telephone interview, Fan said he was pessimistic about this development, saying it would help the company save only around NT$100 million per month. “They still need to negotiate to lower the interest rate further or extend the starting date for debt payments,” Fan says.

Meanwhile, a representative for a bank involved in the second syndicated loan – T.C. Lee, managing director of DBS Bank Taipei Branch – says he is aware of the situation but has not yet been formally contacted about lowering interest rates. Singapore-based DBS has taken over the local Bowa Bank, which contributed NT$4 billion to this loan.

Under most interpretations of the BOT agreement governing the project, it is believed that the government would be obliged to buy back the system if it fails. But rather than risk assuming responsibility for the whole project, the government is more likely to persuade the local banks to support THSRC in lowering interest rates, says Daniel Hsiao, a director of corporate and fund ratings with Taiwan Ratings.

Further, Hsiao notes some gray areas in the contract between the THSRC and the government, raising some questions about whether a government takeover in case of failure of the project would be absolutely required. As a result of that uncertainty, US$300 million of convertible bonds issued by the THSRC in May 2007 in Singapore received only a B rating from Standard and Poor’s, he says. But beyond the strictly legal issue, Hsiao says, the government would find it virtually impossible to turn its back on the project in the event that THSRC fails. For the government to refuse to commit to paying off the syndicated loans could jeopardize the island’s entire banking sector. Further, now that few air flights are serving the western corridor, the HSR has become an indispensable transportation tool.

Over the longer term, some analysts argue, the high-speed railway service will undoubtedly be both useful and popular once Taiwan’s economic fortunes improve. For the HSR to meet its potential, says the CEPD’s Hwang, will depend less on the service than on the development of domestic industries and the overall economy. He cites the government’s plans to engage in widespread deregulation in an effort to better the business environment, including easing restrictions on Chinese investment, simplifying procedures and lowering the cost for foreign companies to rent land in industrial and science parks, and reducing various taxes.

When the next upswing in the business cycle begins, the HSR will be there to help provide the needed infrastructure, says Hsiao. “But they have short-term pressures to tackle first,” he says. “Overcoming the financial burden must be the company’s number-one priority.”

Developing Around the Stations

Progress has been slower than expected, but some investment is already taking place, especially in Taoyuan and Hsinchu.

Development of the land surrounding five of the Taiwan High Speed Rail stations – in Taoyuan, Hsinchu, Taichung, Chiayi, and Tainan – was one of the key elements in the HSR project. Progress on that front has been slow, but opportunities could abound in the future after the economy picks up, experts say, especially for the stations in the north.

The pace of development has been affected by changes in the island’s economy. The idea of developing the station areas was first conceived during Taiwan’s glory days of relatively rapid economic growth a decade ago. In expectation that the cities would be expanding outward rather quickly, it was decided to locate most stations well outside the existing urban centers. But more recently, the economy has slowed and much of the manufacturing has moved to lower-cost countries such as China.

As a result, aside from Hsinchu, not much significant business activity is occurring in the designated station districts. Collectively, the five districts comprise a total area of 1,506 hectares, says Tony Chao, managing director of Jones Lang LaSalle, the property consultants to the Bureau of High Speed Rail (BHSR).

Around 30 hectares of the total are owned by the Taiwan High Speed Rail Corp. (THSRC), which under the Build-Operate-Transfer agreement it signed with the government in 1998, must be handed back to the government along with the rest of the project in 2048. Chao says that THSRC (which declined to be interviewed regarding the land-development issue) has not yet made concrete plans for its share of the land.

The remaining land is mainly owned by the government, which Chao says has so far invested around NT$10 billion (US$328 million) in connecting roads and another NT$40 billion (US$1.3 billion) in other basic infrastructure. It plans to spend a further NT$10 billion on engineering work, Chao says.

Ever since planning and preliminary design work began in the late 1990s, portions of the districts have been earmarked for commercial/manufacturing parks, commercial zones, residential areas, parks, and even schools. The commercial/manufacturing parks are to be open to a wide range of businesses, including department stores and shopping centers, hotels, conference and exhibition centers, and cultural and educational facilities.

Chao explains that the cash-strapped THSRC does not have sufficient capital to engage in land development on its own at this time. At the same time, to attract outside investors for development activity, it is not enough for a station to be used frequently by HSR passengers; a greater inducement would be the presence in the vicinity of factories requiring additional manufacturing support (for components and materials, for example) or of residents who would be potential patrons for shopping or entertainment complexes.

Hank Huang, director of the BOT Research Center at the Taiwan Institute of Economic Research, says the slow progress in land development has been a major contributing factor in THSRC’s financial difficulties. “In the original proposal, they hoped to create half their income from land development,” he says, noting that in the late 1990s when the THSRC drew up its plans, the real estate market was expected to boom. Now, Huang predicts, selling development rights to investors will be a major challenge.

Chao, however, remains optimistic about the prospects, saying that it just needs time. “From the experience of Japan, we can see that it takes 20 to 30 years to develop station areas,” he says. In addition, he says development will be boosted when the government relaxes policies on Chinese investment, expected to take place later this year. Mainland investors are interested in the Taiwan market and tend to prefer large-scale developments suited to HSR districts, rather than the smaller-scale or residential projects preferred by Taiwanese developers. “I think the hottest time could be next year when the government relaxes more policies and after the Olympics,” Chao says. But he adds that compared with countries that have had similar experiences in promoting developments near transport hubs, such as South Korea, Taiwan is not spending enough on marketing.

Chao notes that the government is likely to be patient about leasing or selling the land if the right projects do not immediately materialize. Rather than settle for unattractive residential blocks that would spoil the look of the station environs for decades, the authorities would tend to wait for demand for commercial and industrial development to revive. “The lands are windows to each city, so there are stricter urban design and planning requirements,” Chao says.

The government is hoping to encourage foreign investors to help develop the station areas. Under the previous Democratic Progressive Party administration, the Executive Yuan created a fund of NT$47.86 billion (US$1.6 billion) from which qualified investors interested in developing the station areas’ commercial zones can apply for loan assistance.

Vice Chairman Hwang Wang-hsiang of the government’s Council for Economic Planning and Development says the CEPD has formed the ROC Urban Planning Academic Society – a task force composed of specialists in such fields as land use, transportation, and economics – to look at ways to guide industrial development in coordination with the stations. “If the industries are there, the stations will develop,” he says.

Hwang is most optimistic about the prospects for station districts in Taiwan’s northern and central regions. “Currently there is not enough land in the industrial and science parks [in central and northern Taiwan],” he says. “Demand is greater than supply.” He notes that business in these industrial parks ultimately spurs the creation of residential areas and other commercial activity nearby.

Recently, notes Hwang, many companies have been springing up in Hsinchu and Miaoli Counties to supply manufacturers in the Hsinchu Science Park, leading to expectations that more station-area development will be seen in three to five years. This process will be aided by government plans for deregulation to encourage more businesses to come to Taiwan, he says. Besides the Hsinchu station, the Science Park belt will also be served in the future by a Miaoli station, which is scheduled to open in 2013 along with two other new stations in Changhua and Yunlin.

Hwang says that some Taiwanese companies have recently been relocating part of their operations back from China due to rising labor costs on the mainland – with local media reports adding that stricter land acquisition policies and corporate tax laws in China have also been factors in this trend. But TIER’s Huang is more pessimistic about the possibility of attracting large numbers of companies to locate in the new commercial zones, since business activity in Taiwan tends to be concentrated around Taipei. “This is a very clear trend. We can’t be like Osaka and Tokyo or San Francisco and New York. In Taiwan we can only have one center.” It is hard, he says, to find companies willing to make large investments in central or southern Taiwan.

Individual stations

The government (through CEPD and BHSR) has identified the most suitable role that each of the station areas might play, with the Taoyuan station – considering its proximity to the international airport – positioned as a site for corporate headquarters, says Chao. He considers Taoyuan and Hsinchu (with its access to Taiwan’s main technology corridor) as the two station districts that will enjoy the most market demand in the foreseeable future.

The Taoyuan station district is about 490 hectares in area, including a 23-hectare industrial park. Chao recommends this park as the best site for foreign investors, and says that a number of international and local developers, as well as Chinese enterprises, have shown interest. The government, for its part, envisions this district as a place for developing aviation-related industries and back-office support organizations for companies with head offices in Taipei (but who wish to save rental costs for functions that do not have to be located downtown).

The BHSR says overall development plans for the commercial park have been completed and sent to the Taoyuan County government for approval. It expects to start soliciting private developers for a 4.4-hectare portion of it in October. But the viability of the plan also hinges on the fate of the proposed Taipei-airport MRT link, which is slated for completion in 2010. But according to a statement from the Taiwan High Speed Rail Bureau, recent government tenders for the project failed to attract bidders, putting that schedule in doubt. Some analysts also raise questions about the importance of the Taoyuan site’s nearness to the international airport now that cross-Strait flights are available from a number of other airports.

The Hsinchu HSR station district’s close proximity to the Hsinchu Science Park gives it an obvious advantage. Hsinchu was the first station area to start development, both residential and commercial Chao says. The 309.2 hectare-site is designated largely as a “bio-medical technology town.” The National Science Council purchased 38.3 hectares in its commercial park to create the Hsinchu Biomedical Science Park, which was inaugurated in March this year.

Former Park Director Huang Der-ray said at the ceremony that the facility will help to revive the nation’s economy because of the huge opportunities in the pharmaceutical industry. He noted that Taiwan currently has a mere 0.5% share of the US$200 billion market worldwide in pharmaceuticals, but that the park will help to boost that number substantially. The government plans to locate an incubation center in the park to nurture innovative enterprises, as well as to install facilities from the Department of Health’s Center for Disease Control and other top medical institutions there. Tax breaks and subsidized rents are being made available to foster growth, and local media reports say that a dozen or so foreign and local companies have expressed interest in investing. Sufficient land is being held in reserve to accommodate future expansion.

The Taichung station district is doing less well, mainly because of its remote location from Taichung city. Its area is 271.93 hectares, with 15.61 hectares devoted to a commercial/manufacturing park. The original concept was to position the district as a shopping/entertainment town, a consumption center for the six million Taiwanese living in central Taiwan. But Chao says the government’s current strategy is to concentrate first on attracting low-rise shopping facilities such as hypermarts. Chao says Jones Lang LaSalle has selected a five-hectare strip of land to start with.

The situation is looking the most dismal the Tainan and Chiayi station districts. “Nothing is happening,” Chao says. In Chiayi, the total area of the district is around 135 hectares, with 9.87 hectares devoted to a commercial/manufacturing park. The area, which is a jumping-off point link for the Alishan scenic areas and is near Formosa Plastics’ planned retirement community, has been positioned as a “leisure and recreation district.” The previous DPP government had also hoped that the Chiayi branch of the National Palace Museum, expected to be completed in 10 years, would act as a stimulus for development. Chao says interest in Chiayi might grow with the arrival of more mainland tourists. “There are pieces of land good for hotel and recreational development,” he says. “Eventually people will see the potential, but it will take time.”

Finally, the 299.7-hectare Tainan station district, close to the Southern Taiwan Science Park, has been positioned as an “academic and ecology” district. There are plans to construct various academic and research institutes using green building standards; among these would be a southern branch of the National Central Library, as the current facility in Taipei faces a shortage of space. While prospects for the southern areas right now seem bleak, the CEPD’s Hwang predicts they will be developed within a decade.

Big Impact on Domestic Airlines

The High Speed Rail combined with high oil prices has caused a sharp reduction in inter-city air travel, especially along the western coast.

The increasing popularity of the Taiwan High Speed Rail has had a dramatic negative impact on domestic air travel. In the face of competition from the HSR, Taiwan's domestic airlines have canceled most of their routes along the island’s western corridor and are looking elsewhere, especially to cross-Strait flights, to make up for lost revenue – and to survive in an industry suffering not only from tough competition but from soaring oil prices.

According to Taiwan's Civil Aeronautics Administration (CAA), however, blaming the HSR for all of Taiwan's airlines woes would be a mistake. As a result of higher fuel costs and improved highway transportation in Taiwan, the CAA suggests, domestic airlines were in poor shape even before completion of the bullet train. Domestic air traffic peaked in 1997. Between that year and 2005, passenger volumes fell 48.6% to a level of 95.7 million trips. At that time, two years before the opening of the new rail system, the airlines had a collective deficit of NT$446 million (US$14.6 million), notes a CAA report released in 2007. But according to a CAA-appointed consulting company mentioned in the same report, the opening of the HSR certainly exacerbated the situation. The report projects that the HSR will cause west coast airline passenger volume to fall by a further 67%.

There are three principal elements to the competition between the two modes of transportation – pricing, scheduling, and service, says Kevin Chung, deputy manager at Jih Sun Securities Investment Consulting, who has researched this question. He says the airlines are unable to compete effectively on price, especially under current conditions of high fuel costs.

With respect to scheduling, he says, the Taiwan High Speed Rail Corp. (THSRC) has been offering more and more trains each day while the airlines have fewer and fewer flights, giving HSR the upper hand for consumers looking for flexibility with regard to travel times. The railway has also been more responsive about meeting changes in scheduling demand – for example, during holiday periods, says Chung. THSRC boasts an on-time rate of over 99%, a rate that the airlines, with their weather-related and other delays, can never match.

As for service, the HSR enjoys a number of advantages over air travel, Chung says, including Internet service aboard the trains and free shuttle buses from the station to urban centers. Air travelers generally need to take a taxi into town from the airports, which also tend to be located away from city centers, but HSR users have the option of riding the free shuttle buses to connect with the local public transportation network.

In mid-2007, about half a year after the HSR started operations, the first domestic air routes were discontinued – the relatively short-hop service from Taipei to Taichung and Chiayi. That was followed in March this year by announcements from UniAir and Far East Air Transport (FAT) that they were terminating all of their west coast flights; not too much later, FAT went out of business when its existing business challenges were aggravated by a financial scandal. Then Trans Asia Airways ceased its remaining service to Tainan and Kaohsiung on August 1, leaving Mandarin Airlines – a subsidiary of China Airlines – as the only carrier continuing to serve a domestic route along the west coast.

For the time being at least, Mandarin Airlines has stuck with its Taipei-Kaohsiung route, though it operates at only 40-50% of its pre-HSR capacity, says Irving Hsu, the airline's public relations director. Previously, when several competing airlines were also operating on the route, Mandarin ran an average of 12 flights a day between Taipei and Kaohsiung, whereas now it only flies an average of six, despite having an effective monopoly for that route. But Hsu was not optimistic as to how long Mandarin will continue to maintain this service. He points to studies from Japan and Korea showing that airlines are not competitive against high-speed rail over the long term for routes of less than 400 kilometers. The distance between Taipei and Kaohsiung is about 335 kilometers.

Looking to new destinations

In response to the new competition along the west coast, the domestic airlines have sought to build up business to other destinations, increasing service to Taiwan's east coast and offshore islands, adding international routes, and engaging in the program for cross-Strait weekend charter flights. Citing the Mandarin Airlines example, Hsu points to the expanded business on the Taipei–Kinmen route, where the number of passengers has more than tripled since June 2008 when regulations regarding the “Mini Three Links” were further liberalized. Prior to that change, it was necessary to obtain legal authorization to travel on business from Kinmen to Xiamen across the bay. Now, since both Taiwanese and foreigners may take a ferry for the short distance between the two areas without special travel documents, flights to Kinmen from cities on Taiwan proper have become more popular.

Mandarin Airlines is also hoping to increase its cross-Strait flights. It is considering the option of establishing the first Taichung-Xiamen service as soon as this November.

An additional challenge, one facing the entire airline industry, is high oil prices. Interviewed at a time when international oil prices were around US$140 a barrel, Hsu said that if the price were to return to under US$100 a barrel, it would come as a major boost to the domestic airlines. While west coast routes would be unlikely to be restored, he said, at least service from Taipei to cities like Hualian and Taitung would be financially viable.

Janet So, Trans Asia's public relations manager, also sees the situation improving somewhat. Besides increased demand for its Kinmen flights, the airline has been expanding the frequency of its flights to the other outlying islands. It has also added a chartered route to Okinawa and anticipates growth in the cross-Strait flights. With the decline in fuel prices from their record highs, So says the airline looks forward to recovering some of its earlier losses.

In addition, the government has been taking a number of steps to help the troubled domestic airline industry. Landing fees at the Pingtung and Hengchun airports have been eliminated, for example, and those at other airports have been cut by 50%. Further, land and building rents at Pingtung and Hengchun have been reduced by 30% and at other airports on Taiwan's main island by 10%. And of course the industry has very much welcomed the Ma Ying-jeou government’s progress in improving travel connections with the mainland.

The airlines now hope that plans will materialize to expand the weekend cross-Strait charter flights to daily service by the end of the year, and to convert them into regular scheduled flights by as soon as next July. The International Air Transport Association (IATA) has estimated the potential market for mainland-Taiwan flights to be approximately 6 million passengers annually.
 
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