Crisis at FAT--Zero Hour for Taiwanese Airlines

In early 2007 there was great celebration at the inauguration of high-speed rail travel in Taiwan, but this was the beginning of a sad song for domestic air, rail and highway passenger transport. The drastic rise in international oil prices during the latter half of last year combined with the catastrophic snowstorms in China and cold weather in Taiwan during the peak Chinese New Year vacation period caused severe pain for the airline industry. The financial crisis at FAT was, in fact, foreseen by many.

There were several landmines waiting for FAT. Following the massive issuing last year of "cut tickets" (cheap, blank tickets sold wholesale to travel agents) that led to concerns in the industry, when FAT's check bounced the International Air Transport Association (IATA) notified its worldwide membership that because FAT owed the association's Clearing House (ICH) more than US$840,000, IATA was temporarily suspending FAT's membership. Unless otherwise agreed bilaterally, all joint activities with other IATA members would be terminated.

In addition to bank debts of over NT$5 billion, FAT also has a large amount of smaller, individual debts. For example, it owes more than NT$40 million to Taiwan's Civil Aeronautics Administration (CAA) in landing and airport service fees. Added to this are aircraft rental, engine maintenance, airline food and ground service fees, leaving the company running at a staggering loss.

FAT issued a statement saying that after it receives NT$700 million from Angkor Airways Corporation (AAC) for aircraft rental it will be able to clear all its debts and cover the financial gap. AAC is not actually in arrears, however, but simply paying its bills in line with extremely generous terms negotiated earlier. FAT has been unable to produce a detailed audited financial report. Thus the questions may be asked: how did the financial black hole come into being? Will it get larger? This awaits clarification.

After the crisis broke FAT applied to the court for bankruptcy protection to win time by preventing creditors from calling in their debts and avoiding seizure of its assets. FAT's second-largest stockholder (with a 5.73% stake in the company), and also one of its creditors, China Airlines (CA) insisted on its rights as a creditor and announced it was giving up its seat on the FAT board.

Meanwhile, Far Eastern Group-FAT's biggest stockholder at 18.5% and its principal creditor with an outstanding loan of NT$825 million to FAT from Far Eastern International Bank, FAT's biggest creditor bank-has been unwilling to clarify its position on whether it will extend assistance or even take over FAT, since it has never occupied a seat on FAT's board or been involved in the management of the company.

In fact, the slump in the domestic airline industry is of long standing. The reason is that under the "open skies" policy of 1987 the strictly controlled industry was greatly loosened up and little Taiwan had seven airline companies fighting over its domestic air routes. (One of them, U-Land Airlines, went bankrupt in 2000, and only six companies now remain). The ensuing ferocious competition was a severe test for FAT, the biggest fish in this small pond.

In the 1990s the industry went on a massive buying spree for new aircraft as companies eagerly geared up to take advantage of the expected opening of direct transport links with China. FAT bought six Boeing 757 passenger planes. Yet things have dragged and even today the policy has not been implemented. While other airline companies sold off their idle aircraft, FAT found no buyers for its outdated Boeing 757s.

When the large carriers CA and EVA Air were boosting their operating revenues with the help of the golden routes to Hong Kong, Macao and Japan, FAT's only popular route was to China via Cheju Island in South Korea, where passengers would transfer to Chinese airlines for the second leg of the flight.

In early 2007 high-speed rail service began. The trip from Taipei to Kaohsiung now takes only about one and a half hours, and the number of trains is constantly increasing. This caused domestic airline passenger traffic to plummet by 27% in 2007 over 2006. Most startlingly, Taipei-Kaohsiung air traffic dropped by 50% while Taipei-Tainan traffic dropped 52%. The industry still hoped to get over the hump by issuing shared tickets valid for any airline, but hemmed in by the Fair Trade Commission's refusal to allow them to use the opportunity to cut flights by more than 20%, they had to give up the idea.

With an inadequate passenger base, airlines could not sustain the losses. In view of this, the Ministry of Transportation and Communications authorized the termination of Uni Air's Taipei-Kaohsiung service, Mandarin Airlines' Taichung-Taitung service and FAT's Taipei-Tainan and Kaohsiung-Hualien services to stop the hemorrhaging. But terminating flights is not the answer. Even if direct flights to China become a reality, the likely fading of the golden routes to Hong Kong and Macao and the need to compete with Chinese airlines for a piece of the pie mean that Taiwanese airlines will not necessarily benefit. As for the "consolidation" long encouraged by the government, when no company wants to be bought up by another and none has the cash to stage takeovers, progress is difficult.

The crisis at FAT is just a harbinger. How can the Taiwan airline industry as a whole get out of its bind? This is the real question!