Stock Market Direction by Steve Zito Bulletin Board Appendix E

BULLETIN BOARD Appendix- Taiwan High Speed Rail- Chinadotcom Corp.- Nasdaq Big-Cap
Written by Steve Zito of Stock Market Direction - not to be copied without permission

China Airlines (Taiwan Stock Exchange symbol- 2610.TW)
April 21, 2002 Former China Airlines President Christine Tsung (53), a driving female force fueling CAL's fortunes has flown her coop (that is, left China Airlines), begging the question who will MARKET this Taiwan company? Is answer EMBEDDED in a February 20, 2002 Press Release in Taipei in which China Airlines announced NEW SERVICE from Taiwan to Delhi, India, to accommodate 11,800 passengers who in past years used charter service on that route. Expansion of CAL routes and merger with EVA Group could be on this year's agenda for Taiwan's 2 largest carriers. This could result in a substantial move in CAL's stock price (16). Some background is in order. Before August 1999, China Airlines, Taiwan's second largest carrier, was losing money and trying to expand operation noted for poor service, old-line militaristic management, and numerous crashes linked to pilot errors and mechanical failure. China Airlines was accused of buying 15 Airbus A-340 jets instead of Boeing B777's to gain European political favor since Taiwan is not recognized as independent, but considered a province of China. Getting recognition from ten small European countries goes a lot farther than formal acceptance from one large USA, which was not going to happen under the Clinton regime, notoriously in the back pocket of the Mainland. CAL pleaded "pricing and after-sales service" as decision-making criteria for ordering from Airbus. Boeing continued its harsh criticism, and on August 12, 1999, CAL placed the largest freight aircraft order Boeing ever received for 13 747-400 freighters ($2.5 billion) for delivery over 7 years. At the same time, CAL ordered almost $1 billion of General Electric's jet engines for new Airbus and Boeing aircraft. Why would CAL order so much in a period when its core airline business was losing money? Simply to expand service from Taiwan globally. Taiwan's electronics (semiconductor) foundries are the largest in the world, and CAL's freight service delivers the chips. At the same time, Taiwan's numerous small regional carriers were suffering from excess route capacity competition, forcing a CAL subsidiary, Mandarin Airlines to merge with Formosa Airlines, also 41% owned by CAL, to reduce route capacity between Taiwan's capital in the north, Taipei, and large southern Taiwanese port city Kaohsiung. Mandarin also flew to Canada and Australia with 3 planes, while Formosa had 14 planes on 14 routes. While this rapid consolidation was occurring, the neighboring countries took notice as Taiwan restricted foreign carriers route rights. The Philippines retaliated by canceling its air agreements with Taiwan claiming CAL and the largest Taiwan carrier, EVA Group, took advantage of Philippine local airlines. No more Taiwan flights to Manila, about three hours away from Taipei. On top of that, China Airlines was involved in 4 accidents, two major air disasters, where 202 people were killed near Taiwan's Chiang Kai-shek Airport as a CAL Airbus A300 hit a row of houses at the airport in 1998, and then in 1999, a CAL MD-11 jet from Bangkok to Taipei caught fire and crashed in Hong Kong's airport. Both were blamed on pilot error. All these problems were addressed when Christine Tsung (53), the daughter of a Taiwanese Air Force pilot, was named President of China Airlines in 2000, despite having no experience in aviation. Tsung had lived in the U.S. for 30 years before that and had an MBA from Univ. Missouri (ever heard of it). Tsung is a loyal supporter of and does have very close ties to Taiwan's President Chen, head of the Democratic Progressive Party, of which Beijing (Mainland China) recently welcomed for visits to China on reconciliation. Vice Premier Qian Qichen said as much in his speech Jan.24, 2002, differentiating the DPP from those who seek Taiwan's independence. Heading Taiwan's China Airlines operated by former military pilots loyal to the old-line Kuomintang party who had no respect for female executives, Tsung immediately encountered opposition to her authority. One of the first steps Tsung took was to email all 9,400 CAL employees and advise them her door was always open, and to come to her with "ideas for improving operations or cutting costs." Her bold gamble worked, and costs were reduced, morale soared, the airline turned profitable in 2001 (while most world airlines suffered). CAL became a classic financial turnaround. Then in Feb. 2002, Taiwan's President Chen Shui-bian named CAL President Christine Tsung as Taiwan's new Minister of Economic Affairs. Tsung tried to use her folksy charm on the completely male-dominated establishment in Taiwan's government, and after less than two months in the office, she resigned in bitter disappointment this April. Apparently, what works in airline management does not translate into Taiwanese government affairs, strictly a male establishment. In fact, Taiwanese society is centered on male dominance from cultural leadership to management of government affairs. It is not the United States. Tsung was hired to turn China Airlines around with her reputation as a financial genius in her career in the United States in municipal California government, as the finance director of the well-known Southern California city of Poway (I never heard of it). China Airlines two goals remain despite Tsung's departure. Cargo links with an ever-growing Mainland China, and initiation of the joint venture with Chinese airlines China Eastern and China Cargo. So how does CAL see its future as second largest carrier in Taiwan, a country totally dependent on export of semiconductor wafers, chipsets, and motherboards to the rest of the world? The Chairman of Taiwan's largest air carrier EVA Group, Chang Yung-fa, said that CAL and EVA should merge, and that Taiwan’s other domestic airlines should also merge to reduce oversupply. "Merger is the only key to survival for local carriers, and the most ideal solution would be having them consolidate into two," the Chinese-language United Daily News quoted Chang as saying. Taiwan still has 6 domestic operating airlines, with CAL and EVA operating internationally. Chang stated Taiwan’s local carriers lost $20 billion New Taiwan Dollars ($570 million) and will face severe competition from the THSRC high-speed rail line now under construction between Taipei and Kaohsiung to begin operation in 2005. The current 5 hour train ride will be reduced to only 90 minutes. I have a separate article on this project. The Chinese-language United Daily News wrote that the Taiwan government agrees with Chang's assessment on the need to merge Taiwan's airlines. Yu Fan-lai, Director General of the Civil Aeronautics Administration, said, "This consolidation is the direction which the world’s airlines are moving towards because it can make the most use of resources, lower cost and upgrade services." The mainland China is undergoing broad consolidation to merge many small carriers to 3 massive Chinese airlines, China Eastern Airlines, China Southern and Air China. New markets in India are seeing expanded service out of Shanghai which began March 31. Now that Christine Tsung, a driving female force fueling CAL's fortunes for the last two years has been grounded by the male-dominated Taiwan government elite, who will now MARKET Taiwan's second largest air carrier? Should China Airlines become a client for experienced CONSULTING services? New markets in fast-growing India (growth at 5.7% per year) are quickly being filled by a number of Greater China and American carriers like United Airlines which inaugurated service from Chicago to Delhi. After keeping a distance, China Airlines announced February 20, 2002 in a Press Release in Taipei NEW direct SERVICE from Taiwan to Delhi, India, to accommodate 11,800 passengers who flew CAL charter service in a prior year. MARKETING will show them the light. Expect to see Christine Tsung back as President of China Airlines (trades Taiwan Stock Exchange symbol- 2610.TW). The stock has a 52-week range of NT 18.40 to NT 8.90, a range achieved between September 1 and mid-October after the September 11 attacks sent world airline companies into a tailspin. Since October, China Airlines stock has advanced steadily from NT 8.90 to the current price of NT 15.70 on April 19, 2002. The current Price/Earnings is 21.2 and the last dividend paid was 0.28 (payable Sept. 3, 2001). Email Me for names of U.S. mutual funds holding China Airlines. Related Greater China airline companies trade on New York Stock Exchange and include China Eastern Airlines Corporation Ltd (symbol-CEA) and China Southern Airlines Company Ltd (symbol-ZNH). China Eastern is also traded on the Shanghai Exchange.

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