AUGUST 18 , 2000 VOL. 26 NO. 32 | SEARCH ASIAWEEK

Chris Stowers for Asiaweek. The Military tradition served the airline well, but risk-taking combat aviators need to be restrained to become commercial pilots.

How to Repair a Carrier
Taiwan's China Airlines called in flight-safety consultants — and recently Installed a new leadership
By ALLEN T. CHENG Taipei

Even an outsider can feel the unease. "All of us department heads are on probation around here," whispers a supervisor at China Airlines (CAL). "No one knows for sure who is going to lose his job." Last month, Taiwan's new president, Chen Shui-bian, fired the state-controlled carrier's chairman and demoted its president. Although they had been doing an adequate job in reforming CAL, Chiang Hung-i and Sandy Liu are linked to the former ruling party Kuomintang or KMT. Their replacements are not. Newly appointed chairman Lee Yun-ling left China Airlines after 24 years to head domestic airline Far East Transport, which is 25%-owned by the American International Group. New CAL president Christine Tsai-yi Tsung, who has no background in aviation, is close to leaders of Chen's Democratic Progressive Party.

But at least one executive is sure to keep his job. His name is Alfred Kupferschmied and he is a 30-year veteran of Swiss Air. Hired as vice president of flight operations in February, Kupferschmied had led a team of consultants from an Air Lufthansa subsidiary that spent three years overhauling CAL's flight safety and pilot training programs. Lee, 68, and Tsung, 52, need him to see the reforms through. CAL must rebuild a reputation shattered by four major air disasters since 1993. The heartening news is that CAL's safety record has improved in the past 12 months. There was one accident last August, when a plane flipped upon landing in Hong Kong. But a preliminary investigation indicates that typhoon-force winds, not pilot error, was the main cause.

The new leadership needs to move swiftly on other issues. One is the long-delayed plan to sell off 35% of the airline, part of the 71% stake owned by the China Aviation Development Foundation, a non-profit entity controlled by the Ministry of Transportation and Communication. (The rest of the shares are held by CAL's management and staff, and listed on the Taiwan stock market.) The aim is to bring in a strategic partner that can strengthen CAL. Two years ago, Singapore Airlines agreed to buy up to 20% of CAL, but asked that it manage the company. The foundation's Kuomintang-dominated board balked. Salomon Smith Barney was later hired to sell 35% of CAL to a U.S. carrier, but disagreements over the price scuttled the deal. With the KMT out of the picture, says Hong Kong-based aviation consultant Jim Eckes, it is likely that a sale may finally happen.

Safety comes first, though. CAL's problems, Kupferschmied told Asiaweek, were caused mainly by an intransigent corporate culture rooted in military heroism and risk-taking. The Kuomintang, which fled mainland China after the communist victory there in 1949, created the airline for its aviation veterans. Founded in 1959 with 26 air force officers and staff, CAL got its start as a covert flight operative for the U.S. Central Intelligence Agency. The Vietnam War was starting and the Americans needed proxies to counter the communists in Indochina. CAL pilots air-dropped propaganda, food and ammunition for U.S.-backed guerrilla fighters. One of the aviators was CAL chairman Lee, who decades later would break with the Kuomintang to support Chen.

In all, more than a dozen CAL pilots lost their lives by the time the war ended in 1975. But the CIA money from the secret missions made it possible for the fledgling airline to expand — it bought more second-hand planes to supplement the amphibious aircraft turned over to it by the KMT. In the 1980s, CAL grew along with Taiwan as the island became an economic powerhouse. By the 1990s, the airline had more than 50 Boeing and Airbus jets flying to 39 cities in 20 countries. It was also consistently profitable. But because the company was built on the blood and sweat of its ex-air force pilots, CAL was run along military lines. The word of a former colonel or two-star general in the cockpit was obeyed without question — even if the crew felt he was wrong.

In fact, there is a wide gap between the skill sets required for flying a fighter jet and those for a commercial aircraft. Most military planes carry fuel that will last only an hour or two. Their pilots must be ready for risky maneuvers. Passenger jets must fly steadily and safely for many hours. "In a worst-case scenario, you could eject from a fighter jet," says senior CAL flight instructor Chou Yu-sen, who once trained F-104 and T33 combat pilots. "You can't do that in a commercial airplane." He was once a prime example of the military mind-set. Chou joined CAL in 1989 after 20 years with Taiwan's air force. "I complained when they sent me to Italy for conversion training," he recalls. "I taught combat pilots for 13 years, so why did I need to spend six months with Alitalia? But in Italy, I learned I was just a fighter pilot, not a commercial aviation pilot."

Kupferschmied and his consultants met the same kind of resistance three years ago. "But after the Airbus A300-600 accident at Chiang Kai-shek airport, the attitude changed in a positive way," he says. "CAL's Flight Operations Division started to accept new ideas and began to implement them." In that 1998 crash, 196 passengers and crew (including the Central Bank governor and his wife) returning home from a holiday in Bali lost their lives after their plane careened off the runway, rammed into a nearby neighborhood and exploded in a fireball. Seven people on the ground also died. Investigators blamed pilot error, the same cause of two previous accidents. "Since then, many things have changed for the better and these changes continue," says Kupferschmied. "The attitude of the flight crews and their perception of the [problematic] situation progressed in a positive way."

Among the new measures: sponsoring more student pilots for commercial-aviation training and extending the fighter-pilot conversion program from three weeks to six months. The mandatory flight-simulator training for all pilots was also lengthened from four to eight days every year. Kupferschmied and his consulting team created two Intranet web sites for staff to air their grievances and other comments anonymously. In a marked departure from past practice, every CAL flight is now evaluated for errors. Executives discuss the reports at weekly management meetings. "We had a very hot fight internally on whether or not to hide mistakes," says Samson Yeh, CAL's director of flight training. "We decided not to hide anything."

Kupferschmied also began a wholesale behavior-modification program. "You have to respect each other in the cockpit," he tells CAL's 740 pilots, roughly half of whom come from the Taiwan Air Force. (Some 140 are expatriates from other airlines.) "Captains, you especially have to treat your first officer as an equal partner, not as a subordinate." There's nothing wrong with tradition, says ex-president Liu, who came from the sales side. "Even though China Airlines is greatly influenced by its past, its air force traditions and code of honor, you've got to separate these from the realities of running a modern airline. We must have a reputation of being first and foremost a safe and reliable airline, and we must also be competitive enough to survive."

Named acting president in 1998 and given the formal title in April this year, Liu is credited with turning the airline around. After losing $65.4 million in 1998, CAL bounced back in 1999 with $85.1 million in earnings on sales of $1.9 billion. The carrier says it is on track to make $72 million on revenues of $2.3 billion this year. Its decision to expand its cargo fleet has been well-received. Last year, CAL agreed to pay Boeing $2.5 billion for 17 long-haul 747-400 planes, the largest freighter order in the U.S. plane-maker's history. "Sandy Liu was doing an acceptable job, but he was part of the old establishment," says aviation expert Eckes. "Almost every top manager at China Airlines is beholden to the KMT. You're going to see tremendous changes." Liu has been reassigned to CAL's cargo-terminal subsidiary as chairman.

Both Lee and Tsung declined to speak to Asiaweek. But they are expected to sweep CAL clean of KMT stalwarts and stop the practice of automatically hiring retired air force generals. "Politically, the new president and the vice president of Taiwan have very strong feelings about China Airlines," says Eckes. "It was always used as an arm of the KMT, which they've fought against all their political careers." Given his aviation experience, Lee is taking a hands-on approach while Tsung, a former finance director of Powey City in California, gets up to speed. One example: the chairman recently ordered retraining for a senior captain who mistook excess fuel burn for an engine fire, resulting in a 34-hour flight delay. That cost CAL $246,000, which is money better used elsewhere. Such as the airline's new $10-million "Change Will See Us Through" advertising campaign. It just might.

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