Thailand, one of Southeast Asia's most competitive markets for low-cost airline operations, is undergoing a period of major change as high fuel prices and weakening demand force much-needed restructuring.
The biggest change of late has been the recent grounding of domestic low-cost operator One-Two-Go. It claimed it was due to a need to restructure financially but Thai authorities insist it was a forced grounding due to preliminary findings of concern from the ongoing investigation into a fatal crash at Phuket a year ago.
A forced grounding or one that was coming anyway as a result of financial woes, One-Two-Go and most other Thai airlines have been facing troubled times of late, requiring quick corrective action. It is something they are not used to the country's three low-cost airlines - the others being Nok Air and Thai AirAsia - had all seen generally good times in terms of traffic growth since their launches in 2003 and 2004. The market has roughly tripled in size since then, from around 4 million passengers annually to more than 12 million.
In the weeks before its grounding, One-Two-Go had already parked some of its Boeing MD-80-series aircraft to help it cut costs. It said it was because of high fuel prices and weak economic conditions in Thailand that were impacting demand.
Udom Tantiprasongchai, chief executive of One-Two-Go's parent Orient Thai Airlines, told Airline Business sister publication Air Transport Intelligence that the carrier had been reducing operations "because the economy is so bad".
He said fuel price hikes had hit airlines in Thailand particularly hard as the country's carriers have to pay value-added tax on fuel, unlike in some other countries. But he also said the carrier will return some of its grounded aircraft to service when the peak tourist season begins later in the year. On its website it says it hopes to be flying again in September.
One-Two-Go is not the only Thai carrier that has radically reduced operations in recent weeks, however.
Nok Air, which is 39%-owned by national carrier Thai Airways International, has also been cutting back as a result of losses. It recently suspended its only international service, from Bangkok to Hanoi in Vietnam, and suspended services on several domestic routes. It also reduced frequency on many other domestic routes and will be reducing the size of its fleet.
The carrier, which has nine Boeing 737-400s and one ATR 72, is seeking to wet-lease aircraft out to other operators as a result of its cutbacks. It recently agreed a deal to wet-lease to Myanmar Airways International a 737 for international services between Yangon and both Bangkok and Kuala Lumpur. MAI had previously been wet-leasing an MD-82 from Orient Thai but this deal ended when its One-Two-Go unit was grounded.
Nok chief executive Patee Sarasin, a former advertising industry executive turned airline boss, told local media recently that if oil reaches $170 a barrel "I am better off selling noodles" - a joking reference to the fact that he owns a noodle restaurant in Bangkok.
The Sydney-based Centre for Asia Pacific Aviation says that "Nok's outlook is tenuous", adding in jest that as food prices have also been going up "Patee Sarasin might have just as much trouble selling noodles".
Analysts say one of the problems facing Thailand's low-cost carriers is they have focused so heavily on winning market share in the domestic market, which is particularly price sensitive. This has made it difficult for them to pass on higher fuel costs through increased fares as this has a particularly harsh - and immediate - effect on demand.
| Thai domestic market 2008-2004 | |||||
| Airline | ASK share August | ||||
| 2008 | 2007 | 2006 | 2005 | 2004 | |
| Thai Airways | 52.8% | 41.9% | 44.9% | 53.6% | 59.2% |
| Thai AirAsia | 23.2% | 17.0% | 13.4% | 10.1% | 8.1% |
| Bangkok Airways | 15.1% | 10.5% | 11.9% | 13.7% | 11.1% |
| Nok Air | 6.8% | 14.1% | 17.7% | 10.6% | 7.3% |
| Orient Thai/One Two Go* | 0.8% | 15.4% | 10.3% | 9.5% | 9.2% |
| Others | 1.4% | 1.0% | 1.7% | 2.6% | 5.1% |
| NOTE: *Orient Thai and One Two Go Airlines missing data for 2008. SOURCE: Innovata. | |||||
"The Thai domestic market is small and a big portion is transfer traffic from Bangkok which they can't get," says Mark Webb, a Hong Kong-based airline analyst. "It's hard to see how anyone makes money on it."
Nok and One-Two-Go have faced particularly tough times as they now rely exclusively on domestic operations (although One-Two-Go's parent Orient Thai operates limited international services).
Malaysian low-cost carrier AirAsia's 49%-owned Thai associate, Thai AirAsia, has also been losing money as a result of market over-saturation. Analysts have generally been critical of the carrier and its continuing weak financial state when compared to that of the main Malaysian operation, although some say it is in a somewhat better position than its rivals within Thailand as it also focuses on international services to better balance things.
AirAsia group head of finance Rozman Bin Omar says he sees things eventually turning better in Thailand as well as in Indonesia, where it has another 49%-owned associate carrier.
"Recently there have been some shake-ups in the industry in Indonesia and Thailand with some airlines cutting back capacity and even closing down," he says. "This bodes well for our Indonesian and Thai JVs. We remain strong in these two markets and our position will be even stronger as we replace the older 737s with the new Airbus A320s."
Full-service carrier Bangkok Airways, meanwhile, says it is not making cuts to domestic routes as a good portion of its traffic is feed from international services. It focuses more on this higher-yield traffic, much of it from foreign connecting passengers, and links several resort destinations. Analysts say this puts it in a better position than the budget carriers but they note that political instability could impact inbound tourism and in turn affect Bangkok Airways as well.
The airline says it is making some international route cuts to help it deal with increases in fuel prices, but stresses that this will enable it to allocate capacity elsewhere where demand is stronger. It adds that it will be suspending services between Bangkok and Shenzhen in China on 15 August and suspending services between Bangkok and Fukuoka in Japan on 1 October. In addition, Bangkok Airways will reduce frequency between Bangkok and Hiroshima in Japan on 1 October to two flights per week from three.
"Everyone has to tighten their belts now," says Bankgkok Airways. "We are going over all the routes that make the least money and we will adjust our network as we need to. But we are looking to increase our flights in other areas and we will announce those when they are ready."
Thai Airways, meanwhile, relies more than most other Thai carriers on international traffic, including those transferring to its domestic flights which it scaled back radically several years ago.
However, it too has been making international network cuts as a result of rapidly eroding earnings. It recently said it would sell its ultra-long-range Airbus A340-500s and has dropped non-stop services from Bangkok to New York. Bangkok-Los Angeles will also be switched to one-stop services soon and the carrier has reduced the frequency of services to several other international destinations.
Thai says that despite continuing increases in revenues, yields have been falling as its ticket and fuel surcharge hikes have not been able to keep up with fuel price rises.
| Thai domestic market 2008-2004 | |||||
| Airline | Weekly seats available August | ||||
| 2008 | 2007 | 2006 | 2005 | 2004 | |
| Thai Airways | 135,001 | 132,598 | 142,598 | 155,019 | 162,682 |
| Thai AirAsia | 54,552 | 50,820 | 38,962 | 26,866 | 22,344 |
| Bangkok Airways | 46,699 | 40,671 | 45,937 | 49,320 | 36,110 |
| Nok Air | 17,324 | 44,349 | 57,567 | 29,800 | 20,860 |
| Orient Thai/One Two Go* | 1,800 | 45,732 | 32,760 | 26,740 | 23,684 |
| Others | 4,880 | 4,354 | 6,352 | 8,890 | 17,116 |
| NOTES: *Orient Thai and One Two Go Airlines missing data for 2008. SOURCE: Innovata. | |||||
Analysts say Thai's business model, which is focused largely on long-haul leisure traffic, leaves it at a disadvantage in the current environment to other Asia-Pacific flag carriers. Singapore Airlines, for example, focuses far more on high-yield business traffic, which allows it to pass on fuel price hikes to passengers more easily.
Thai's board is increasingly concerned about the carrier's deteriorating financial state. In June, at a tense board meeting at which directors discussed how the national carrier is in "crisis" due to rising costs, president Apinan Sumanaseni was abruptly stripped of his management powers, which at Thai is the equivalent of being sacked.
The airline's chairman stepped in and managed to convince several fellow board members to reconsider the move and Apinan was promptly reinstated. But whether he will survive another ousting attempt by board members opposed to him remaining in the job is still in question.
The carrier said in a stock exchange announcement that Apinan will from now on be under "close monitoring by the board of directors". With the market undergoing such a dramatic period of uncertainty, this is probably something all other airline boards in Thailand are doing with their top managers as well.
Source: Airline Business
