I. Introduction
1.1. Research Background
Analysis of the Impact of Direct Flight Policy on Taiwanese’s Aviation Industries
I. Introduction
This thesis research studies the impact of having Direct Air Transportation Policy signed between Mainland China and Taiwan. The purpose is to determining the effects of Cross Strait air policy have on the different Taiwanese Aviation Industries. In this research study, airlines industries and high technology industries would be the aviation industries studied. In this chapter, research background would be provided for further understanding for the reader. Research motivation and objective would be given for comprehension of the intention of this thesis research. Besides, research flow would be presented.
1.1. Research Background
With the globalization and industrialization, businesses are looking for more spatial expansion of their economy, this provoke the growth of trade and as consequence increase the demand for freight transportation.
Figure 1. Components in the Economic System
Source: The Geography of Transportation System
Jean Paul Rodrigue states that the realization of production and consumption cannot occur without flows of freight within a complex system of distribution that includes, modes, terminals, but also facilities managing freight activities, namely distribution centers.
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Production and consumption are interrelated through the conventional supply / demand relationship as shown in figure 1, Components in the Economic System.. 1
Regulation can control and/or restrict firm to develop a strong economy which mean that can lower the firm logistic productivity and as consequence can affect their customer logistic activities. Regulation is mostly the role of government. Regulation has different level such as national, state, and cities level. Hence if manufacturing firm wants to export their good to X countries, they could not do it without national public policy that allow the entry of the good to X countries. Airlines also have restriction entry to certain countries; airlines cannot to flight into those countries if there is no public policy. As well as, there are national public policies that restrict entry to others countries, inside the state and cities there are also policies that regulate the production, distribution and consumption activities. As the activities is take place in urban areas, mitigation plan exist to minimize externalities cause by economic activities. Policies restrict trade and transportation growth. Relaxing public policies would allow firms to invest in transportation and infrastructure by this way can help in the competitiveness and productivity of transportation and trade firm; this can bring a good movement growth. Surely, these economic activities would impact the land use, economy, distribution, community, environment and business.
Figure 2. Relationship among stakeholders
Source: The City Logistics paradigm for urban freight transport
The understanding of each stakeholder behavior can help to understand how a public policy would change shippers and carriers logistics system. In the relationship among
1 Jean Paul Rodrigue et al, The Geography of Transportation System, 1998.
2 CAO Report, Freight Transportation National Policy and Strategies can help Improve Freight Mobility, Jan 2008.
3 Wikipedia. February 08, 2012. <http://en.wikipedia.org/wiki/Cross-Strait_relations#Before_1949>.
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stakeholder, each group has its own objective and tends to behave in different manners. So, if conflict between stakeholders takes place, this cause the change in other stakeholder and may strongly affect the balance of the others.
In a general way, transportation improvement can spread reductions in cost and gains in productivity through all the economic sectors that produce or distribute good. Improvement in transportation policy and/or planning can be expected to have important economic effects on carrier’s performance, shipper’s performance and the whole region economy. In freight transportation system, carriers would be the first in be benefit with public policies. Then, carriers’ improvement would impact shipper performance decision and so on. As part of the freight transportation is developed in the city and/or nearby the cities, other consideration would be taken in consideration due that will affect communities and resident living nearby these economic activities.
Figure 3. Transportation and Economy
Source: Economic Effects of Transportation: The Freight Story
Cargo movement is very important to the performance of the national economy. Many studies suggest that increases in freight volumes have strongly relation with increases in productivity and the gross domestic product. Constant development and efficient management of the nation’s transportation system such as highways, rail lines, maritime, and air are
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important to sustaining the nation’s competitive position in the global economy.
Transportation system helps to connect international gateways and intermodal facilities to retailers, producers, and consumers.2
High technology producers are increasingly reliant on air carriers from around the world. In order to increase their profitability, producers are finding global markets for the sale of their products. Additionally, to control costs, producers often relies on prompt, timely shipments of materials in small batches and have implemented inventory management systems that lower overall costs by relying on prompt shipping of needed goods, instead of more costly warehousing.
An inefficient transportation system can led to a number of adverse effects causing higher direct economic costs for carriers, producers and consumers; and higher indirect costs, such as costs that can affect the quality of life of all transportation users. Growth of transportation demand, geographic barriers, transportation policies, transportation capacities, inefficiencies infrastructure are some factor that can contribute to constrained freight mobility. In the case of Taiwan, not having an air transportation policy with Mainland China harms the efficient flow of the nation’s goods and hence affects air transportation carriers and shippers.
The particular situation of Taiwan and Mainland China dates back to the year 1949.
Due to the civil war before 1949, the political relationship between Mainland China and Taiwan had been cut off and therefore their communication, transportation and trade had been affected since then. Since 1949, the relations between mainland China and Taiwan have been characterized by limited contact, tensions, and instability.3 For years, the political tension at Taiwan Strait has blocked any kind of direct air and/or maritime link for communication, transportation, postal and trade. The only ways to get to each territory side are by sea or air transportation mode; there is no road transportation mode link because Taiwan is an island located off the southeastern coast of Mainland China.4
In the absence of a direct air link between Mainland China and Taiwan, passenger flight and trade were usually made through a third parties connection link. The lack of direct air flight was the consequence of the mistrust after the Chinese Civil War. Then after the war, no direct flights were permitted between Taiwan Strait because of security concerns and to protect the sovereign of the Taiwan’s government.
2 CAO Report, Freight Transportation National Policy and Strategies can help Improve Freight Mobility, Jan 2008.
3 Wikipedia. February 08, 2012. <http://en.wikipedia.org/wiki/Cross-Strait_relations#Before_1949>.
4 Wikipedia. February 08, 2012. < http://en.wikipedia.org/wiki/Taiwan>
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The link between the two sides of the Taiwan Strait was routed through intermediate destinations. Passenger and cargo flight had been required to stopover in at least one transit airport before reaching to Taiwan or Mainland China. On those times, airline companies that flight Mainland China and Taiwan destination usually used Hong Kong, Macau, South Korea, Japan, or Southeast Asia countries as their intermediate destination. 5
According to Cheng Chang Lin and et al., on 2003, airlines companies that served the Taiwan-Mainland China link had their own exclusive and preferential transit airport to do a stopover before fly into Mainland China or Taiwan, as can mention:
FedEx used Subic Bay located at Philippine as its transit airport.
UPS, China Air, Cathay, and Dragon used Hong Kong as their transit at airport.
Eva Airway used Hong Kong or Macau as its transit at airport.
Figure 4. Cross Strait Air Transportation Policy history
Source: Eva Air(2012)
The economic development and the trend of global trade would make businessmen and aviation industries to claim for air transportation cross the Taiwan Strait.6 According to Mr.
Chong An-Jian, airlines usually provide routes where a demand market exist otherwise they will not risk their business. On 2008, air transportation began to open progressively according to the demand market and flight restrictions were removed allowing any citizenship to take
5 Cheng-Chang Lin, The integration of Taiwanese and Chinese air networks for direct air cargo services (Elsevier Science Ltd), 633.
6 Wang Lu, Liu Yumei, Li Hongtao Zhu Yaowen, The impact of direct air transportation link cross Taiwan Strait on air passengers transportation of China mainland, Taiwan, Hong Kong and Macao (CAAC), 1.
1949- 2002
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Cross Strait flight (Wikipedia). In July 2008, Cross Strait charter flights expanded to weekends.
Few months later, charter flights became daily. Then, weekly flights were established and the planes no longer had to travel through Hong Kong airspace, saving in travel times and operational cost.
Even though both of the Taiwan Strait sides have political problem, the Cross Strait trade exchange between Mainland China and Taiwan grew rapidly. There were many authors like Cheng-Chang Lin that stated that the two sides of the Taiwan Strait perform mutually dependent but complementary activities in the global manufacturing supply-chain. With the need to ease the mobility across the strait and with the growing economic ties, direct air links are inevitable.
Even before the direct air transportation agreement been signed between Mainland China and Taiwan, they were depending from each other in order to supply themselves with the different kind of commodities located at Mainland China or Taiwan market. Based on the table 1, Taiwan join more benefit with the exchange trade they have with its counterpart. This is due to the size of the market at Mainland China.
Table 1. Trade between Taiwan and China
Year Export from Taiwan to China Import to Taiwan from China Surplus Amount Percentage Growth rate
(%)
Amount Percentage Growth rate (%)
1991 6928 9.09 66.1 1126 1.79 47.1 5802
1992 9697 11.9 39.96 1119 1.55 -0.61 8578
1993 12,728 14.96 31.26 1016 1.32 -9.25 11,712
1994 14,653 15.75 15.13 1859 2.18 83.03 12,794
1995 17,898 16.03 22.15 3091 2.99 66.32 14,807
1996 19,148 16.52 6.98 3060 2.99 -1.02 16,088
1997 20,518 16.81 7.15 3915 3.42 27.96 16,603
1998 18,380 16.62 -10.42 4110 3.93 4.99 14,270
1999 21,221 17.5 15.5 4526 4.1 10.1 16,695
2000 26,162 17.6 23.3 6223 4.4 37.49 19,939
Source: The integration of Taiwanese and Chinese air network for direct air cargo services
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C.C.Lin has analyzed the supply chain between China and Taiwan, and he stated that China is a procurement market for products manufactured in Taiwan. Other reason stated by him is that China is Taiwan’s outdated machinery market. And third, he stated that Taiwan provides high technology parts for the Chinese domestic market.
Another cause that makes society claimed for direct flight, according to Chong An-Jian because of the lower labor and operational cost at Mainland China, many Taiwanese move their factories there. Usually their factories and industries center are located are located close to Jinhai area but recently because the salaries in those areas are becoming higher then industries began to move their business to the western part of china. As the western part of China only can be operated by China airlines, the Cross Strait air policy play an important role allowing airlines to form alliance and code share some route (Chong An-Jian).
In April 2009, a new agreement was created to permit cross-strait flights to become regular scheduled flights. After air liberalization and with the help of the ECFA that promote the liberation of trade between Mainland China and Taiwan, the Cross Strait Air Transportation Agreement seem to continue adding more destination point and flight frequency would increase across the Taiwan Strait.
The first step for improving air freight transportation system begins with the signing of the Cross Strait Direct Air Transportation Agreement. Immediate transportation cost reduction and travel time saving are gained by carriers and shippers. However, others effect would bring with the enhancing of transportation system.
But the enhancing of transportation system can affect positively others industries that relied on transportation for their logistics activities. Improvement in freight carriage can be expected to have important economic effect (ICF Consulting). In short, freight transportation improvement can spread reduction in cost and gains in productivity through all the economic sectors that produce or distribute good. So relaxing policies can be truly valuable contribution to the efficiency of the whole economy.
This thesis research would study the consequence that Cross Strait Air Transportation Policy has on air freight transportation system, high tech industries logistics and economy; and investigate which factors is more importance for each freight transportation stakeholders.
8 1.1. Research Motivations
China and Taiwan had no air transportation agreements mainly caused by political problems. The problem of not having air transportation policies to connect Mainland China and Taiwan affect freight transportation system and the whole economy. The constant pressure of aviation Industries has contributed with the signing of Cross Strait Air Transportation Agreement. Many literature and IATA studies state that relaxing restriction can allows airlines industries reorganize their industries and therefore let them provide better service quality to their customers.
Figure 5. Relationship between Air Service Liberalization and Economic Growth
Source: The Economic Impact of Air Service Liberalization- InterVISTAS-ga2
Figure 6. Air Service Liberalization and its impacts
Source: The Economic Impact of Air Service Liberalization- InterVISTAS-ga2 Airlines
Liberalization
Direct Impact aviation sector
Indirect Impact business and tourism
Catalytic Impact
role of air transportationin facilitating growth and productivity by increased trade,
business activity, and greater personal productivity
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Subsequently to air carrier improvement, many literatures suggest that improvements in freight carriage can be expected to have important economic effects and that improvement in freight transportation system would bring welfare also to carrier user such as manufacturing, distribution center, wholesaler, retailer and others. Since freight transportation facilities and activities usually are located nearby the cities or in the cities, others effect will influence the society in a direct or indirect way.
Figure 7. Effect of Air Service Liberalization on other Industries
Source: Economic Effects of Transportation: The Freight Story
The motivation of studying this topic is to know how an efficient and reliable freight transportation system helps to generate improvements in economic productivity. And improvement in carrier’s services can influence in the shipper industry performance and behaviors. My personal motivation for studying this topic is with the objective of gaining more knowledge about transportation management.
Manufacturing High-Tech Industries
logistics performance
location
market demand and supply
population and employment
others
10 1.2. Research Objectives
The objectives of this thesis research are listed as follows:
1. Identify the problem that carrier, shipper and society have to confront in the freight transportation system. The objective is to identify how the change in behavior of one stakeholder can influence in the economic activities of the other stakeholder.
2. Investigate the effect that can provoke Direct Air Transportation Policy on carrier, shipper and society. The study would try to investigate how airlines can maximize their profit benefit when no restrictions restrict them from improving their industry logistic performance. On the other hand, by improving logistic in airlines industry how transportation would influence on manufacturing and distribution productivity and logistics.
3. Establish criteria of the effect of Direct Air Transportation Policy for carrier, shipper and society. After reviewing literature about deregulation and freight distribution system, I would try to determine if in the Cross Strait any change have been produced.
4. Determine which criteria are more important for each aviation industries stakeholder.
5. Analyze each criteria and sub-criteria degree of importance of judgment.
1.3. Research Scope and Flow
Following, the research framework is presented in order to give lectors a view about the flow of this study.
Firstly, the air Cross Strait problem and literature review would go to be review for further understanding about the Cross Strait Air Transportation situation and stakeholder desire. Then, proceed with the content analysis where the determinant point is to establish within the area of interest what are the main reason, conflict and criteria that should be taken in consideration in the study of this research about having a Cross Strait Direct Air Transportation Policy.
After depth analysis, questionnaires would be formulated for the development of survey. After gathering of data, the analysis of the effect on Taiwanese Aviation Industries would be done using the AHP approach where methodology would be described on follow chapters. Finally, the result and conclusion would be given according to the data collected by the survey.
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Figure 8. Research Flow
Problem
Literature Review
Content Analysis
Survey
Assessment
Data Analysis
Result and Conclusion
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II. Literature Review
The literature review chapter would provide review about problem and behavior of carriers and shippers are facing. Besides, methodology literature and impact of having direct air transportation policy on aviation industries would be reviewed. This research study seeks to figure out the benefits generated by opening Cross Strait direct air transportation.
Improvement in airspace-freight carriage is one of the ways that government can make a truly valuable contribution to the efficiency of national economy.
2.1. Aviation Industries Development
This research study investigate the many ways that government policy decisions have affected (or could affect) the freight system. Potential effects include shifts in freight mode as well as changes in the following: costs to freight carriers, revenues to freight carrier, costs to freight shippers, freight volumes, freight service quality, freight operations, freight system safety and freight fuel use or emissions. Public Policies can relax or restrict freight transportation of having a good logistics and therefore would impact on their services quality.
As freight transportation become faster and more reliable, hence more predictable, the flow of good and the stocking of good can be managed more efficiently. In other words, policies allow firms to reorganize their logistic and consequently can help firms to maximize profit benefits. Nadiri (1996) uses a cost function approach to estimate the relationship between capital investment and productivity in US. After reviewing some literature, many studies found that the improvement in freight transportation logistics can help increase the productivity of manufacturing, and distribution in many ways.
As mentioned in the research background, in order to be able to enter country airspace air agreement is needed between both territories. Air cargo, of course, does not operate in a vacuum. Its economic impact can be contingent on numerous factors, including the country’s overall logistics infrastructure as well as the country’s broader commercial and policy environment in which the air cargo industry operates (Doganis, 2001). John Kasarda(2005) state that three factors that enhance air cargo’s positive impact are air service liberalization, improving customs quality, and reducing corruption.
Such implementation of Airline deregulation can result in stopping government controlling fare and determining which carriers can serve which market and among other restriction depending on each country public policies. Therefore, deregulation inevitable
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brings significant economic effects. The effect of deregulation cannot be assessed simply by comparing welfare before and after deregulation because change in key variables such as fares and profits from regulation to deregulation reflect input price changes as well as the regulatory change.
One must compare the welfare levels achieved under an actual regulatory regime with
One must compare the welfare levels achieved under an actual regulatory regime with