I’ve been kvetching recently about the tendency to view the China-Taiwan economic relationship in cargo-cult terms, and here today the Asian edition of the Wall Street Journal carried an article today cautioning investors on exaggerating the effects of direct flights (link is behind a pay wall):

[Analysts] believe that even if direct China-Taiwan air links materialize — the main hope behind the stocks’ rise — the airlines wouldn’t benefit much.

This would hold true even in the most optimistic of scenarios, such as a doubling of traffic.

“Our calculations indicate that direct passenger links are only worth around NT$1 a share for both [Taiwanese] carriers,” Merrill Lynch analyst Paul Dewberry wrote in a recent report. “In addition to susbstantial cannibalization of the Hong Kong route, the airlines will face stiff competition from Chinese carriers as well as suffer less-efficient use of assets.”

The issue is still politics, though of a different nature. The distribution of the main revenue generator, destinations, is going to be based on negotiations. In fact, analysts point out, because direct links are verboten at present, Taiwan airlines are somewhat insulated from competition (Chinese competition, anyway). Since routes will be negotiated reciprocally, this means that all routes will be subject to (tough) competition from Chinese airlines. The analysts argue that even assuming that passenger traffic doubles to 16 million annually by 2012, up from 8 million currently between Taipei and Hong Kong (often claimed to be the busiest route on earth), China Airlines and Eva may at most carve out a 20% share of this market. Both airlines lost money last year, with China Airlines racking up a record deficit, attributable in part to rising fuel costs. These fundamentals, high fuel prices and competition, aren’t going to change when direct flights happen.

Nor do analysts expect Chinese airlines to derive any great benefit. Airlines that are currently minting money on the ban on direct flights, like Air Macau and Cathy Pacific, can expect their share to plummet as up to 70% of passengers are expected to switch. Not mentioned is what will happen to Hong Kong’s economy when many who might have stopped over for a day, switch to direct flights….