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China Airlines May Form Ties With Mainland Carrier (Update1)

By Irene Shen and Yu-huay Sun

June 23 (Bloomberg) -- China Airlines, Taiwan's biggest carrier, may consider an equity tie-up with a mainland carrier because of record fuel prices and the easing of a 59-year-long restriction on flights across the Taiwan Strait.

``It'll be an option in the future,'' Chairman Ringo Chao said yesterday in an interview in Guangzhou, China, adding that no talks are under way at present. ``Surging fuel costs are making life difficult for all airlines.''

Chinese and Taiwanese airlines have begun forming ties as they prepare to start limited weekend services across the strait next month. Chao is in Guangzhou to sign a deal with China Southern Airlines Co., the mainland's biggest carrier, to cooperate in areas including maintenance and catering.

``They have their eyes on daily flights in the future, when competition will intensify,'' said Charles Ma, an analyst at SinoPac Securities Co. in Taipei, who has a ``trading buy'' rating on China Airlines. ``With alliances, they won't engage in malicious competition and will be able to maintain ticket prices.''

Seeking Profit

China Airlines is banking on the start of mainland services to help it post a profit this year, Chao said. The airline's loss widened to NT$2.97 billion in the first quarter from NT$2.43 billion a year earlier, weighed down by jet-fuel prices that have almost doubled in a year. The airline is cutting about 10 percent of its flights and has raised surcharges in a bid to return to profit. Still, it has no plans to cancel plane orders, Chao said.

EVA Airways Corp., Taiwan's second-largest carrier, will cancel about 5 percent of its passenger services from Sept. 1 to Dec. 1, spokeswoman Katherine Ko said on June 9.

China Airlines, controlled by a government-backed foundation, gained 0.3 percent to NT$13.85 at 11:13 a.m. in Taipei trading. The benchmark Taiex Index dropped 0.6 percent.

Airlines will begin nonstop services between China and Taiwan on July 4, according to the flights agreement signed earlier this month. Taiwanese carriers will be able to make 18 round trips a week, as will mainland airlines.

The frequency of the flights may rise to 36 a week after several months, Chao said. Mainland services could eventually account for as much as half as China Airlines' profit if the market is fully liberalized, he added.

Cooperation Accords

China Airlines and China Southern are signing a cooperation accord today. Air China Ltd. and China Eastern Airlines Corp., the mainland's second and third biggest carriers, have also said they want to cooperate with Taiwanese airlines.

China Airlines and its Mandarin Airlines unit will start passenger services to Shanghai, Beijing, Guangzhou and Xiamen next month. The two carriers will offer a total of 29 round trips across the strait in July, China Airlines said on June 19.

The start of nonstop flights and a wider easing of relations between the two sides follows Taiwan President Ma Ying-jeou's win in the March election on a pledge to improve ties with the mainland.

The government in Beijing refused to deal directly with the administration of Ma's predecessor Chen Shui-bian, who advocated Taiwan's independence from China. The two sides have been ruled separately since a civil war in 1949.

China Airlines is one of a number of Taiwanese companies that has `China' in its name, also including China Steel Corp., the island's biggest steelmaker and Chinatrust Financial Holding Co., its fourth-biggest financial company by market value. Chen renamed the word `China' from the name of some companies and government entities, such as CPC Corp., the state-run oil refiner, as a mark of independence.

To contact the reporter on this story: Irene Shen in Shanghai at ishen4@bloomberg.net; Yu-huay Sun in Taipei at ysun7@bloomberg.net

Last Updated: June 22, 2008 23:39 EDT