A China Southern Airlines flight from Guangzhou to Taipei today marks the start of a breakthrough series of weekend charter services (Friday to Monday) across the Taiwan Strait. A total of 36 charters each weekend will be conducted by carriers on both sides in what promises to be a surge in travel between the two sides as political relations improve.

Up to 3,000 Mainland tourists may now visit Taiwan each day, which promises to breathe new life into Taiwan's beleagured airline and tourism sectors.

China Eastern is the biggest beneficiary of the charters, with four frequencies each week on the most lucrative routes from Shanghai. The airline stated it needs only a 50% load factor to break-even on the services.

China Airlines and EVA Air are also expected to benefit, taking traffic away from traditional cross-Straits operators Cathay Pacific and Air Macau. Cazenove Asia forecasts Cathay will report its first loss since the Asian financial crisis in 1998, after the carrier this week forecast "disappointing'' earnings. Cazenove added, "Cathay is particularly vulnerable to the current uncertainties given that it has the most aggressive fleet expansion program among the Asian carriers".

The agreement is positive for Mainland carriers which have seen demand slump in recent months. The contraction in demand in May-08 was the first negative growth since the SARS outbreak in 2003.

And international traffic fell more heavily than domestic in May-08, according to CAAC data.

The Jun-08 traffic result is not likely to be much better, with China Eastern Chairman, Li Fenghua, stating this week that the May-08 downturn extended into Jun-08.

The Shanghai-based carrier added, "there is not sufficient air traffic demand now. Despite the rise in fuel surcharges, airlines will have to make more discounts in order to compete for passengers".

In these conditions, Mainland carriers can be expected to support further Taiwan service liberalisation, one of the few potential growth areas.