Future Looks Cloudy for Beleaguered China Airlines : Transportation: Overcapacity in the region and tougher competition are likely to continue in ‘95, the carrier says.

When a group of war veterans set up Taiwan’s China Airlines 37 years ago, all they had was $10,000 and contacts with former air force comrades in the government.

“They didn’t even have a license to fly down the coast to Hualien,” said Lodge Lo, the airline’s spokesman. “They thought they were running a taxi company.”

The airline was to become one of the most profitable in the world. But now, at the end of a disastrous year, shareholders may wish they had invested in something less risky.

“It’s been a very, very bad year,” Lo said, shaking his head. “We don’t think we will go into the red, but profits will be very, very small.”

In 1993, CAL made $119 million after taxes on revenue of $1.67 billion. Its 1994 profit may fall to $15.3 million on revenue of about $1.53 billion, Lo said.

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The bad luck started in November, 1993, when a CAL Boeing 747 crashed in Hong Kong Harbor during a landing attempt. Miraculously, no one was killed. Then last April, a CAL Airbus exploded on landing at Nagoya, Japan, and 264 of the 271 people on board died. The airline set aside $156,000 for each family in compensation.

A different kind of disaster struck in March, when 24 Taiwanese tourists were killed in an arson and robbery in China. The crime prompted Taiwanese tour groups to boycott China, and traffic levels on the airline’s highly lucrative Hong Kong route took a steep dive.

CAL says the problems are likely to continue next year because of overcapacity in the region and tougher competition.

“All we can say is that we are confident we won’t be in the red,” Lo said.

Analysts warn that the worst may be yet to come when, in 1997, the British colony becomes part of China again. The Taiwanese government bans direct transport links and official relations with mainland China, so CAL could be hard-pressed to continue the Hong Kong route, analysts say. CAL flies that route 204 times a week.

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“The Hong Kong-to-Taipei route accounts for 15% of their revenue, but 25% to 30% of earnings,” said Christine Lee, who follows the airline for Barings Securities.

Flights to and from Japan accounted for 20% of revenue, the airline reported last year. Flights to Hong Kong, Singapore, Bangkok and other Southeast Asia cities accounted for 42%.

Taipei has said it will consider Hong Kong a special region of China after 1997, and will attach special conditions to dealing with Hong Kong.

Nevertheless, Taiwan’s legislators will need some fancy footwork to maintain the myth of no direct transport links with China while allowing CAL and other carriers to fly into Hong Kong after 1997.

They will also have to get around the current ban on official talks if they are to negotiate with China on landing rights for Hong Kong after 1997, analysts said.

Lo said Hong Kong plans to extend the current landing rights, due to expire in 1995, until 1997 only. The crucial post-1997 rights for Taipei will have to be hammered out with Beijing.

“All these rules have to be untangled and we have to find a way through,” Lo said.

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Paradoxically, behind the bleak prospects in Hong Kong lies a tantalizing scenario: Taiwan may open up direct links with Chinese cities on the mainland.

Some tentative steps in this direction have already been taken, with Taipei commissioning non-government reports on the subject. CAL has sent teams to survey facilities at airfields in Beijing, Shanghai, Guangzhou and Chengdu, Lo said.

Up-and-coming rival EVA Airways, a subsidiary of the huge Evergreen shipping group, is also positioning itself for a shot at what promise to be highly profitable direct mainland routes, analysts said.