Can China Air Climb Again?

A tragic crash aborts a comeback in the making

The wreckage told the story not only of the worst airplane crash in Taiwan's history but the second catastrophe in just four years for its leading carrier, China Airlines Ltd. The first time, 264 people died when a CAL A-300 crashed at Nagoya, Japan, in 1994. This time, as rescue workers gathered the bodies of the 203 dead just outside Taipei's main airport on Feb. 16, the manager of CAL's Kaohsiung office knelt weeping before victims' families to apologize--a startling image broadcast on national television. Many who were watching wondered how an airline could be so unlucky, or so poorly run.

Whatever the case, it may be impossible for the airline to complete what had been a painstaking attempt to rebuild its image. Since the Nagoya crash, blamed on pilot error and design flaws, CAL has overhauled everything from in-flight menus to top management. Particular attention was given to improving safety by retraining pilots and hiring Germany's Luft-hansa as a safety consultant. Now, with this new disaster and one of the world's worst safety records, CAL is back to square one. "People are not going to remember the improvements they made, but that they failed again," says Chih S. Fang, ing Barings Securities airline analyst in Taipei. "People have more choices now."

Those choices include upstart eva Airways Corp., which has the most to gain. Back in 1994, eva had only about a 10% share of the market in international flights from Taiwan. It now has 17%, vs. CAL's 29%--a figure that's up from a low of 23% after the Nagoya crash.

CAL looked to be on the rebound. It was filling a higher percentage of seats even as it added new planes. Earnings were up 60% last year, to an estimated $90 million, on revenue of $1.7 billion. Lower fuel and insurance costs, as well as management restructuring, had boosted operating profits. Now, all nine of CAL's A-300s have been grounded pending safety inspection, and CAL Chairman Chiang Hung-I has resigned. Some legislators want to disband CAL.

It's clear that the crash will have a serious effect on CAL for years to come. As Taiwan's former flag carrier in the midst of being privatized, it's still 71% owned by the government-linked China Aviation Development Foundation. CAL likely will have a harder time attracting a foreign investor to take a 16% stake. It probably will have to curtail expansion plans, and pay out $40 million in victim compensation. It also faces a vexing question: When you've already done everything you can to improve and it still isn't enough, what else can you do?