TAIPEI, TAIWAN - Direct weekend flights between China and Taiwan starting this week are likely to give a boost to carriers on both sides of the Taiwan Strait at the expense of Hong Kong, but probably not until all restrictions are lifted.

Beijing and Taipei on June 13 signed a deal to launch the first regular weekend flights since 1949 after a stalemate between the world's No 4 economy and the neighbouring island it claims as its own.

Most flights between China and Taiwan now need to stop at a third external destination such as Hong Kong or Macau, providing a boost for airlines in those hubs.

Over the long term, unlimited direct flights would wipe nearly a 10th off the bottom line of Hong Kong's flagship carrier, Cathay Pacific, which had hitherto enjoyed a large chunk of the business of flying passengers on the roundabout route, according to Nomura.

But the deal set to take effect this week will be relatively limited, allowing for a small number of direct flights only on weekends (defined as Friday through Monday) that still must pass through Hong Kong airspace.

Taiwan President Ma Ying-jeou has said that he wants to make the flights daily and more direct as soon as possible, with a broader deal possible as soon as next year.

Analysts say that Taiwan's China Airlines and Eva Airways and China's China Eastern will benefit most from full direct flights.

Other top Chinese airlines like Hainan Airlines, Air China and China Southern , have also clamoured to take business from Cathay.

"Certainly this represents a circuit breaker and growth opportunity for airlines in Taiwan," said Derek Sadubin, chief operating officer at the Centre for Asia Pacific Aviation.

He added that the shift will be gradual, noting that as long as the new routes pass through Hong Kong airspace, the time savings would not be huge.

China has claimed self-ruled Taiwan as its territory since the end of the Chinese civil war in 1949 and pledged to bring the island under its rule, by force if necessary. But relations have improved notably in the last two months under a newly elected China-friendly administration that took office in May.

The June 13 deal allows for up to 18 round-trip, chartered weekend flights starting from July 4, and for now analysts believe that demand for cross-straits flights will outstrip supply. But Nomura estimates that a non-stop cross-strait service will shave HK$600 million (S$105 million) off Cathay's bottom line after full China-Taiwan air links - about 8.5 per cent of its net profit of HK$7.02 billion last year. Cathay operates roughly 15 daily flights to Taiwan, and the routes account for about 8-10 per cent of its revenue.

Cathay shares have shed more than a quarter of their value so far this year, versus a 21 per cent loss for the broader market, indicating that investors are concerned.

"You can say it's one of our busiest flights," said Cathay spokeswoman Carolyn Leung.

Not all carriers set to gain from the deal will get the same lift as it is dependent on their hubs.

For example, China Eastern's hub is Shanghai, home to the biggest population of Taiwanese living in China. "The biggest beneficiary by far (in the initial phase) will be China Eastern because they will have four flights from Shanghai to Taipei, the most profitable route, and the most popular with business travellers," said Kelvin Lau, an analyst for Daiwa Institute of Research.

The new routes could give China Eastern a 229 million yuan (S$45.5 million) net gain to its bottom line in the first year of unlimited direct flights, Nomura says.

But for China Southern, based in Guangzhou, the gain would be a relatively paltry 35 million yuan, it estimates.
Beijing-based Air China could actually lose 260 million yuan of earnings in the first year because of its 17.5 per cent stake in Cathay Pacific and its 51 per cent stake in Air Macau, which will take a major hit, Nomura added.

On the Taiwan side of the strait, China Airlines could see a roughly 18 per cent boost in passenger volumes, while Eva might get a 13.5 per cent rise, experts say.

Another part of the June 13 deal allows up to 3,000 mainland Chinese tourists to visit Taiwan each day, with Taiwan hoping to boost that to 10,000 per day by 2012.

Assuming a 20 per cent market share each for the 3,000 tourists, Eva and China Airlines would see an extra 1,200 passengers a day, boosting daily passengers for Eva and China Airlines by 7 per cent and 3 per cent respectively, according to Merrill Lynch.

A continued warming of cross-strait ties and easing of restrictions could help double cross-strait traffic to 2.36 million passengers, up from 1.26 million last year, analysts say.

More than 1.5 million Taiwanese call mainland China home, and Taiwanese companies have invested up to US$100 billion there. -- Reuters