A Change Of Course At China Airlines

But can its new image attract foreign investment?

Gloom descended on China Airlines (CAL) in the months following the April, 1994, crash of one of its Airbus 300s in Japan, which claimed 264 lives. With a reputation for corporate arrogance and surly service, Taiwan's longtime monopoly carrier had scant public goodwill to fall back on. As a result, many Taiwanese travelers opted to fly with CAL's upstart private competitor, EVA Airways Corp. "The morale of company employees was so seriously hurt that we didn't know if we were still capable of running a company," says Lodge C. Low, a CAL executive who advises the company on improvements. "There was a consensus. Something had to be done."

With ticket sales falling, CAL embarked on a top-to-bottom makeover. The airline streamlined management, overhauled safety procedures, and raised cabin-attendant training standards. CAL hired Lufthansa as a safety consultant and tripled the length of the pilot-retraining program, adding state-of-the-art flight simulators. It also redesigned cabin interiors with bright colors, hired a French consultant to upgrade the wine list, and painted new plum blossom logos on plane tail fins. "We've rebuilt from zero," says Sandy K.Y. Liu, commercial vice-president.

The results are beginning to show. Earnings are forecast to more than double this year, from $57 million to $125 million on sales of $2 billion. Some of the gains are the result of lower insurance premiums and fuel costs. And as the Taiwan economy has improved, more people are flying--15% more in the first five months of this year, compared with the year before. CAL is getting more customers. The percentage of filled seats on airlines flying to Taiwan has increased less than 1%, to 71.2%, while CAL's improved 2.6 percentage points, to 74.4%.

The glowing figures should give a boost to CAL's efforts to attract a foreign buyer. It wants to sell a 16% stake, valued at $285 million, to help finance additional service, training, and management improvements. CAL has held preliminary talks with several airlines, says Shih Kuang-chih, secretary of the China Aviation Development Foundation (CADF), which owns and oversees the airline. But a long-rumored deal with British Airways is closest to fruition, says Shih. BA declined to comment. The CADF, which currently owns 71% of the company, plans to cut its holdings to below 50% in three years.

Part of CAL's image remake is an attempt to shed its shadowy military background. The airline was founded 38 years ago by a group of retired Air Force officers nominated by the government to be sole stockholders. In a key change, five of the CADF's nine directors were recently replaced by officials with close government ties, including the deputy premier. "Those (former directors) had been around for a long time," says Chih Fang, transportation analyst for ING Barings Securities in Taipei. "They weren't accountable, and they weren't professional in terms of knowing the industry."

ROUTE RIVALS. Thus, analysts think that having the board in government hands is a positive development, at least in the short run. It should clear hurdles standing in the way of the stock sale, which the government has held up over concerns that privatization might benefit private interests. The closer relationship with the central government should also give the company an edge in getting new routes--particularly if Beijing eventually allows direct Taiwan flights to mainland China. Under a new open-skies agreement between Taipei and Washington, both CAL and EVA have a shot at new routes to the U.S. But all route negotiations are carried out by Taipei, not the airlines.

Although EVA's popularity has grown, CAL still has a big lead in key markets. CAL has lucrative Hong Kong and Japan routes, with 105 weekly flights to Hong Kong, vs. EVA's 16. In Japan, EVA is shut out of Tokyo because new routes are restricted by treaty. It is therefore relegated to southern Fukuoka.

CAL is thinking big. It plans to expand its fleet from 44 to 67 by 2003, using most of the new aircraft to improve service on existing routes. If a deal with the mainland is approved, CAL will likely expand its fleet to 80 planes, says Liu. "Our corporate vision is to be the biggest and best airline in Taiwan and one of the best in the world," he says. And if CAL keeps its comeback on course, it just may get there.