2022.09 The Taiwan Banker NO.153 / By Ingrid Chang
China Airlines flies relies on freight to make Taiwan's logistics flow smoothly despite headwindsBanker's Digest
Globally, the aviation industry is facingoperational difficulties due to the pandemic. China Airlines, a publicly owned Taiwanesecompany, has however been able to buck the trend and become one of the fewprofitable players in the industry. The key to its success has been its leader.At this critical moment, Hsieh Shih-chien, a senior executive who has been at ChinaAirlines for 43 years, is using new thinking to fight the headwinds of the pandemic.Started on the front lineIn its early days, China Airlines acquired second-handpropeller planes and two Boeing 707s from the US. After 62 years of operation, ithas reached nearly 100 planes, and it operates in 200 cities around the world. Itsemployees number in the tens of thousands, and its subsidiaries cover sectors suchas hotels, catering, low-cost airlines, and cargo warehousing. Its businesses arecomplex and highly international.Hsieh himself started from basic accountingwork and then moved to sales and marketing before the government appointed himas chair. He has also served as chair of related companies such as Sabre TW andTaiwan Air Cargo Terminal (TACT), and has also been stationed in branches inIndonesia, Australia and elsewhere. He is quite familiar with China Airlines’passenger and cargo business, domestic and foreign operations, and financialstructure.Hsieh once handled a labor strike, and heldopen consultations with the union. He humbly remarked at the time that theincident ended successfully thanks to the assistance of the Ministry of Transportand Communications, local government labor bureaus, and the Taoyuan CityGovernment. Nevertheless, it has not all been smooth sailing. As the industryfaces its worst time due to the COVID-19 pandemic, challenges have appeared inquick succession.Recall that when the pandemic broke out inearly 2020, global tourism ground to a halt. At the time, many thought that thefallout would not be too serious, and business might recover soon. However, basedon information sent from employees around the world, Hsieh soon determined thatthe situation would change the course of the industry, and an immediate responsewas required. With his financial background, Hsieh immediately started workingto raise cash reserves, and also sent out an SOS signal to let the outsideworld know that the industry needed a policy bailout to survive.However, Hsieh also says that before the globalaviation industry recovers, it must try to save itself, “securing supplieswhile also reducing expenditures, advancing on both tracks.” He turned to airfreight to protect Taiwan’s electronics and other supply chains, while alsomaintaining the foundation in passenger service for when tourism and businesstravel recover. With the support of the government and assistance of staff, thanksto Taiwan’s superior geographical location and his own accurate judgment, he eventuallycame to some strategic decisions.Flexible schedules to ensure on-timedeliveryThe key to pandemic response has been speed.In the past, there had never been a situation of an almost zero passenger loadfactor, and there was no past experience that could be easily replicated. Thebiggest challenge for the industry became survival. Hsieh deeply considered wherethe aviation industry would go, and the advantages of China Airlines in the newenvironment, and how to and use them to produce the greatest marginal effect. Hefelt overwhelming pressure during the decision-making process, but haspersisted in long-term thinking for the good of China Airlines, as well asTaiwan’s economy.The external environment has beenparticularly difficult over the past two years or so. Facing blows including supplychain disruption, geopolitical tensions, and high fuel prices, Hsieh recalledthe responsibility and mission of China Airlines as a public company, and implementedflexible flight schedules. It provided complete solutions whenever thegovernment needed to charter flights from overseas back to Taiwan forsemiconductor equipment, machines, automobiles, 3C products, agriculture,fishery and fresh food. International friends also successfully obtained Taiwan’sexcellent pandemic prevention materials as an alternative form of diplomacy,and domestically, imports and exports were also delivered on time.Hsieh said that during the height of thepandemic, global drug supply was a matter of life and death. China Airlines hadthe duty to use its dense cargo air network and logistics expertise to manage coldsupply chains. After delivering self-purchased COVID vaccines to Taiwan, it hasalso successfully sought re-export business opportunities to deliver vaccinesto other countries. So far, it has shipped more than 100 million doses aroundthe world, and assisted in transport of anti-pandemic materials such as rapidscreening reagents to the Asia-Pacific, creating revenue, doubling its coldchain transport business, and perceptively grasping the trends of the globalfreight market.Strengthened focus on transshipment huboperations and shifted focus to freightAt that time, delays in sea traffic were serious,and many important supplies had to be exported from Taiwan within a shortperiod. Hsieh said that this was also an important moment for China Airlines tohelp Taiwan’s economic development. The use of air freight will continue tostrengthen Taiwan's status as a transshipment hub, and will help companies in 5G,micro high-tech, automotive electronics, semiconductors and other industriesmake full use of their capacity. China Airlines has arranged irregular overtimeand charter flights in line with market trends and urgent cargo needs tomaximize its overall capacity.The reason why Hsieh acted so quickly anddecisively was that he asked the accounting department to report to him everythree days, so that he could constantly keep abreast of market changes. Afterthe focus of operations shifted to freight, starting in March 2020, passengerflights were dispatched to cargo delivery – not only increasing freightrevenue, but also reducing loss margins, helping overcome pressure on cash reservesduring the early stage of the pandemic.China Airlines also flexibly adjustedscheduling of passenger cabin cargo during the pandemic. With approval of civilaviation authorities, cabin seating areas of passenger aircraft can carryspecific cargo types to further increase the capacity. China Airlines mainlyuses cabin cargo for the highest-demand Los Angeles route.Long-haul routes including San Francisco,Los Angeles, Amsterdam, Frankfurt, and Sydney, all added cargo on passengerflights. Asian regional and cross-strait routes all strove for belly-hold cargoopportunities, flexibly dispatched passenger aircraft to support freightdemand, and assisted cargo aircraft to expand business in response to thestrong demand in the global freight market for items related to thestay-at-home economy. At one point, China Airlines used belly-hold cargo to flyas many as six or seven flights a day to Los Angeles, compared to the previous twoflights a day.Zero layoffsHsieh said that airlines were one of thefirst industries to be hit in the early days of the pandemic. The mostdifficult problem for China Airlines was how to retain outstanding staff. Atthat time, his goal in negotiating with domestic trade unions was to reduce short-termcosts, reducing salaries and shifts in order to prevent lay-offs. The companyfully demonstrated its commitment to employees’ rights. In the end, no employeewas laid off; rather, hiring increased. As for air cargo, Hsieh was grateful thatcrew members shouldered the heavy responsibility of vaccine and materialdelivery through cycles of isolation and service during the height of the pandemic,maintaining an important lifeline.Hsieh believes in the importance of a goodrelationship with workers. In the past, publicly owned companies often sufferedfrom labor disputes due to their heavy burdens. Hsieh felt that this would harmChina Airways’ normal operations and customer service. Therefore, after takingup the post of Chair, he instructed the management team to negotiate with thetrade union to resolve labor disputes as soon as possible, ensure themanagement principles of group consultation, labor and management equality,mutual respect and trust, safeguard the rights and interests of passengers, andmake good use of China Airlines’ advantages in operating scale and humanresources to establish connections with employees on the basis of mutual trust.Hsieh thanked the employees for cooperatingand persisting through the dark times. China Airlines made a profit of about TW$9.38 billion in 2021; its earnings per share (EPS) was NT$ 1.67, growth of 54times compared with NT$ 0.03 in 2020. Its EPS in the first half of the year reachedNT$ 0.58. The passenger business has begun to gradually recover. According todata from the International Air Transport Association (IATA), with variouscountries reopening their borders, by 1Q 2022, global transport capacity andvolume gradually recovered to 50% of the levels prior to the pandemic. Airlines’financial performance will continue to improve in 2022. North America is thestrongest performing region, and China Airlines will gradually adjust itsroutes and their frequency.Purchased new aircraft and optimizedregional routesLooking forward to 2H 2022, Taiwan has graduallyopened its borders from June 15, shortened the length of quarantine, easedrestrictions on total weekly entries, and allowed transfers at Taoyuan Airport.In response to market demand after the relaxation of these controls, ChinaAirlines planned passenger routes ahead of schedule. In addition to maintaininga stable schedule of key passenger routes, evaluating plans to restoredestinations, increasing numbers of flights, and adding new destinations, it isnow promoting six new round-trip fares to increase passenger revenue, includingNorth America and Europe to Southeast Asia, Europe to Oceania, and Oceania toNortheast Asia.Although fuel prices are soaring and theglobal tourism industry has not yet fully recovered, Hsieh had previouslypurchased new aircraft at market lows in order to prepare China Airlines forpost-pandemic tourism business opportunities, and has now also introduced the environmentally-friendlypassenger aircraft A321neo. The new fleet emphasizes zero-contact service andhigh specifications for pandemic prevention. In addition, the cabin service ofthe 737-800 fleet has been improved. Passengers can directly use their personalsmart devices to enjoy multimedia audio and video streaming services at highaltitude, reducing contact. “Zero-contact service” service has been expanded tothe entire fleet, and to protect flight safety China Airlines providesin-flight protective bags, including masks, alcohol disinfection wipes andother anti-pandemic items. It also provides a variety of digital services. Thewebsite has added an “Anti-epidemic Safe GO Zone” for one-stop searches such ashotel and car booking and hospital testing, and promotes online self-service check-in,luggage check-in, and electronic health declarations. Facial recognitionself-service boarding has gradually been enabled in some airports in preparationfor the restart of passenger transportation.Hsieh said that newly purchased A321neoaircraft are now being put into operation, optimizing regional routes andgreatly improving product competitiveness. Eventually, the A321neo will becomethe main aircraft for regional routes. China Airlines is also cooperating withThe Pokémon Company in Japan to launch “Pikachu Painter CI,” which willofficially leave the factory in the fall. By competing for tourism and businesstourists in Northeast and Southeast Asia to meet the gradually recoveringtravel demand, China Airlines is aiming to maintain its pre-pandemic operatingscale and profitability.