Taiwan Freight Transport Report Q1 2008

A China Airlines (CAL) passenger plane suffered a serious accident on August 20 on the Japanese island of Okinawa. The Boeing 737-800 caught fire and burst into flames on the southern runway of Naha airport; all 165 passengers and crew were able to escape to safety sliding down the emergency chutes.

Analysts said that despite significant improvements the latest accident could undermine consumer confidence in CAL and affect its recovery, at a time of increasing competitive challenges. CAL said in late August that it had swung to a net loss in H107 on higher oil prices, though stronger travel demand boosted its second-quarter operating profit. Its net loss in the January-June 2007 period was TWD868.3mn (US$26.3mn), reversing a net profit of TWD128.1mn in the first half of 2006. Revenue in the period rose 5.1% to TWD59.56bn from TWD56.65bn. In this report, BMI concludes that the island's airfreight carried is likely to grow by a modest annual average of 3.9% in 2007-2011.

There are a number of reasons for this. There are growing signs that traffic is diverting to the mainland, with Shanghai emerging as an important Asian hub and taking business away from Taipei. While electronic components and equipment made in the mainland were previously exported by air via Hong Kong and Macau to Taipei, now they are increasingly being shipped out directly via Shanghai. Taiwan's carriers are adapting to the new reality. EVA Airways, the number two airline on the island, has formed a cargo joint venture with Shanghai Airlines, in which it holds a 25% minority stake. CAL has an interest in another Shanghai-based freight company, Yangtze River Express Airlines.

The rush of business into the mainland also affects some other freight transport modes. In shipping, the mainland boom is a factor holding back our traffic carried forecast to 4.4% per annum over the next five years. However, we feel a number of Taiwan-based shipping lines are somewhat ahead of the game, having established themselves as global players. Road freight traffic within the island will evolve moderately, with average growth of 2.7%. In this area Taiwan resembles a developed economy where traffic growth tends to trail, rather than lead, GDP expansion. We are also predicting modest rail cargo growth at around 2.1% per annum.

BMI gives Taiwan a composite score of 40.0 (out of a potential maximum of 70) in its freight transport business environment index. The country's strengths are quite evenly distributed across long-term economic and political risk, infrastructure growth, and the regulatory environment. Areas for potential improvement include the competitive environment, freight growth and the transport intensity index - a measure of the current and future dynamism of foreign trade.

Despite the competitive challenge from the mainland, we are still reasonably optimistic about the future for Taiwan's overall freight transport industry. The total value of transport and communications GDP will rise to US$37bn in nominal terms by 2011, representing 7.1% of Taiwan's GDP.