Once again Thai Airways is prevented from realising its true potential through interference from the establishment leaving a credible strategy close to ruins, laments Tom Ballantyne.

If the president of Thai Airways International, Thamnoon Wanglee, is feeling the strain as he struggles to revive the battered reputation of his charge, he isn't showing it in public. But those close to the flag carrier's inner circle say he is a worried man.

Little wonder. Thai suffered a topsy-turvy 1996 and this year looks even less promising. Implementation of a US$5.7 billion five-year restructuring programme, aimed at putting the carrier on a firm strategic footing, is in abeyance following a change of government.

Over the past 12 months, politically inspired decisions by the airline's state owners have thrown plans into disarray, thwarted critical strategic moves, and delayed implementation of a desperately needed US$2.7 billion fleet modernisation programme.

To cap it all, 1997 was barely a month old when another central plank of the carrier's restructuring - the construction of Bangkok's new $5.2 billion international airport - was unceremoniously removed by a government decision to defer the project (see box).

On top of all that, Thamnoon is understood to be fighting for his own survival after failing to shake off the carrier's nemesis of political and military interference. Moves were underway in late February, with the apparent support of Thai prime minister Chavalit Yongchaiyudh, to install a replacement in October, when Thamnoon completes a four year term at the helm.

Sources suggest Chavalit has already earmarked a successor - Veerachai Vannikkul, the 61-year-old former managing director of the now defunct Air Siam.

But in typical fashion, the Thai Airways president remains unphased, saying there is no company statute limiting his term in office. He admits the airline has a policy of rotating staff who have served in the same post for four years, but adds the practice only applies to those below him.

Nevertheless, doubts over the future makeup of the management team only add to the litany of woes which have befallen Thai over the past 12 months, battering staff morale and crippling attempts to launch what is fast becoming an emergency survival programme.

Ironically, most of the setbacks have been outside Thamnoon's control. The state-owned carrier's strategic plan, to rationalise a mixed and uneconomic fleet, streamline management and cut costs, won board clearance as far back as February last year. The order for 21 new aircraft, envisaged in the five-year plan, would save the carrier an estimated US$125 million annually.

But implementation was delayed because the government, vacillating in typical pre-election fashion, refused to approve the programme before the national elections in late 1996 changed the political spectrum.

Enter a new coalition government, headed by former Army chief General Chavalit, which found itself nursing a stagnating economy and a ballooning budget deficit. Chavalit ordered an austerity drive, which produced a review of Thai's strategic plan. The proposed expenditure on new aircraft didn't fit in with the new economic policy and Thamnoon was instructed to lease the aircraft instead.

But the picture is far more complex for Thai's management than just having to contend with the effects of shifting political goalposts on the restructuring plan. With the plan in disarray doubts must now hang over how Thai will deal with the other serious challenges it is likely to face over the next five years. Apart from the threat of competition from domestic startups, the carrier will come under more pressure from its stronger regional competitors. The issue of privatisation has also been raised, as has the possibility of doing a 180 degree about-face aeropolitically and pursuing an open skies deal with the US. On top of that the carrier also has the shadow of safety lapses at Thailand's civil aviation authority hanging over it.

Last year's plan for Thai to take a 40 per cent stake in a new national cargo airline was abandoned after cargo staff at the flag carrier went on strike amidst concerns over future job security. Thai now faces the prospect of a new home-grown competitor eating into its cargo earnings, which are a big contributor to the airline's total revenue.

A second Thai flag carrier will also get clearance to enter the market sometime over the next two years under the government's liberalisation policy, though it is still unclear whether competition with the incumbent will be restricted.

Since the initial bidding process was scrapped, attempts to relaunch the tender have floundered as most prospective candidates refuse to take part, concerned that incumbent Thai will be favoured with the newcomer restricted to thin domestic routes. Whatever happens, sources indicate that the emergence of a home-grown competitor to Thai is only a matter of time.

Management will also have to contend with the fanciful idea by politicians of privatising Thai in its current state. The carrier is 93 per cent owned by the finance ministry and proposals appear to centre on reducing this holding to 30 per cent, probably in two stages. The first would lift public ownership to between 30 and 40 per cent, with a further share issue later taking the airline into private shareholder control. But contrast this with a statement in February by commerce minister Narongchai Akraseni in the context of financing the new aircraft orders under the austerity programme. He told a meeting of the carrier's finance and accounting department executives they should consider paying for new aircraft by the phased selling of 10 per cent blocks of the carrier's equity on foreign markets to match the delivery schedule.This would help the government both to reduce expenditure and to solve the country's current account deficit, he declared.

But the uncertainty created by remarks on privatisation and other areas of aviation policy, as well as damaging decisions such as the airport postponement, may force a rethink. Investor confidence has been hit and shares, which traded at US$2.34 immediately after the initial public offering of 7 per cent of Thai in 1993, now hover around $1.46.

More worrying may be the latest pronouncement of Prime Minister Chavalit, who appears to have decided Thailand should follow Singapore's lead by forging an open skies agreement with the US. Such a move would completely alter the dynamics of the market, introducing even tougher competition at a time when the flag carrier needs stability to push through its recovery plans. Thamnoon is openly critical of Chavalit's proposal, pointing out that Thai is already facing tough competition from foreign airlines, which has forced the airline into cutting costs to boost competitiveness.

To compound matters, the US Federal Aviation Administration has classified Thailand's aviation safety standards as category two, putting a stop to any expansion plans Thai may have had in the US market.

While the ranking applies to the civil aviation system - there is no suggestion the FAA has concerns over Thai's safety record - the concern is that the ranking will reflect on the carrier. FAA inspectors are due in Thailand in April to review their decision.

Other airline managers may pity Thamnoon the complex web of political intrigue that he finds himself entangled in, but many would envy the starting point from which he begins Thai's financial rebuilding. The carrier has reported profits for 32 consecutive years. Yet its performance has dipped badly. Rapidly shrinking yields and rising costs are compounded by the difficulty of operating an ageing and diverse fleet efficiently.

In its latest financial year, ending 30 September 1996, net profit rose a disappointing 4.6 per cent, up just $5.7 million to $132.5 million, on revenues of $3 billion. Moreover, year-on-year fourth quarter net profits indicate a more worrying trend - down a massive 75 percent to $12.9 million.

The universal complaints of rising fuel costs and falling yields, including a drop in cargo revenues, appear to be the crux of the problem. But a serious downturn in Thailand's economy hasn't helped. A 24 per cent increase in flight operation expenses saw costs rise faster than revenue, as yields fell for the first three quarters of the year by 1.6 per cent.

The results would likely have been even less impressive but for the sale of six B747s to US-based Atlas Air and two B737s to Pakistan's Shaheen Air International.

Morale is also low. Service standards, once the envy of the industry, have become the source of complaint and more astute competitors such as Singapore Airlines and Cathay Pacific are easily outpacing their rival.

Thai is also burdened by relatively low productivity levels. With its comparatively low wage rates it should enjoy an advantage over regional competitors, but it has 23,000 employees compared to SIA's 13,000 and Cathay's 15,000. Moreover, the airline is suffering a pilot shortage and currently employs more than 60 expatriate pilots - an expensive addition to the salary bill - who were supposed to be replaced by Thai nationals by 2000. This now seems unlikely.

'The company will be hard put to compete in a deregulated environment with its present structure and staff cutting is not an easy option because of strong unions and political patronage,' explains one Bangkok-based analyst.

The airport decision has also dampened optimism over the prospects of Thai developing its alliance with United and Lufthansa. It is envisaged that the pact will bring big cost benefits to Thai, which is already operating an array of codeshare services with Lufthansa and is looking to do the same with United. But without the new airport future alliance plans are likely to be limited by capacity constraints, particularly after 2003.

Analysts suggest that by that time, assuming it is privatised, Thai could also begin suffering the consequences of the aircraft leasing programme the new government is now pushing. Leasing may satisfy short term government requirements by trimming the current budget deficit, but in the longer term it could jeopardise the independence of the carrier by reducing its asset base and making it more susceptible to takeover bids.

Moreover, the complex business of rearranging the fleet renewal programme is also diverting management focus from reacting to the many challenges and threats faced by the carrier. The leasing option has already been imposed on management for the second half of an earlier 12-aircraft order, due to arrive between April and December this year. Thai originally planned to finance the $895 million order of two B747-400s and four B777-200s by borrowing 40 per cent of the funds domestically, with the rest being met by foreign funding. They will now be taken on 12-year operating leases.

Virachart Kasempibunchai, an analyst at Securities One in Bangkok, warns that the acquisition of the latest 21 aircraft - four B737-400s, six B777-300s, two B747-400s, five Airbus A300-600Rs and four A330-300s - on lease will have the effect of raising Thai's financing costs at a time when it is aiming to cut operating expenses. The plan envisages deliveries between 1998 and 2002, although this schedule is likely to slip.

Indeed, it is still not clear that all aircraft will be acquired on lease. The government is confusing matters by sending out conflicting signals over how the funds for aircraft will be sourced. The comments of commerce minister Narongchai on boosting Thai's capital in steps by selling equity on foreign markets followed another suggestion to use counter trade, under which at least 30 per cent of the total purchase price of the aircraft would be offset.

However those aircraft are funded, winning early approval for its restructuring plan is critical to Thai's chances of pulling out of its slump. The airline hoped to lift revenue 7.8 per cent to around $3.2 billion in the current year, producing profits of $230 million, but that target now seems unrealistic.

One part of the restructuring plan that has been acted on is the streamlining of management, which resulted in a board reshuffle in late February.

Moreover, the carrier is also adjusting its network in an attempt to improve capacity utilisation. Measures include increasing frequencies in the busy Indian market and switching some London services, which used to operate via New Delhi, to nonstop.

Despite all the deep-seated concerns, some analysts believe the carrier has a bright future. Peter Negline, vice-president and senior analyst of Salomon Brothers Hong Kong, says once the fleet modernisation and other restructuring is in place, the productivity of both Thai's assets and labour are likely to increase dramatically.

'The airline has enormous long-term growth potential and compared with other airlines in southeast Asia, it has the highest level of earnings growth projected for 1996-98 of 24 per cent,' he says. 'Lower operating costs from the new aircraft fleet would allow the airline to consider lowering air fares while maintaining profit margins, regardless of regional competition,' he adds.

With the number of aircraft types in the fleet falling from 11 to seven and the average age declining to about six years by 1998, the carrier should be able to boost utilisation from about 8.5 hours a day to possibly 10 hours within two years. Thai's earnings should also be boosted by gains from the sale of aircraft in the next two years.

Of course this all assumes management can push through the restructuring and fleet replacement programme quickly. Its biggest hurdle may be negotiating a path through the meddling by both the political and military establishments that still besets its day-to-day operations. The problem created by personalities in Thailand's aviation sector is illustrated perfectly by the positions held by the permanent secretary at the Ministry of Transport, Mahidol Chantrangkurn. He is also chairman of Thai Airways, and he sits on the board of the Airports Authority of Thailand, guides bilateral negotiations, and plays a key role in monitoring the bidding process for the second flag carrier.

Although it can work in Thai's favour at times, this blurring of interests can also cause the carrier huge problems and severely limit its freedom to act commercially.

Management must walk a tightrope as the various elements of the establishment, from the Prime Minister's office to the ministries of transport and finance and the Thai air force, jockey for influence and position in the running of the carrier. Thai management is hindered by a problem common to many state-owned airlines. It can formulate the best of plans but cannot act on them until the bureaucrats and politicians grant approval.

As Salomon Brothers' Negline puts it: 'The ministry of finance don't like the military, the military won't leave the company, and above all that infighting at board level, you've then got the political situation of which party is leading the government or the coalition and whether or not they've got military connections and so forth. Thai Airways' ultimate growth opportunities are probably the best in the region but I can't tell you when it's going to happen. It could easily be a year away. It could easily be 10 years away. It all depends on the political balance.'

  Nong you see it, now you don't

After three months of contradictory statements from the various levels of Thailand's government and bureaucracy, the country's aviation industry is still no closer to knowing whether Bangkok will get its much vaunted second international airport.

What it does know is that, for the time being at least, the planned US$5.2 billion airport at Nong Ngu Hao has been put on hold.

Instead, the current facility at Don Muang will be expanded in an attempt to cope with traffic demand after the year 2000, when it is forecast to reach the limits of its present capacity.

Meanwhile, the state-owned New Bangkok International Airport Company, responsible for building any new airport, is to carry out a full review into whether Nong Ngu Hao should be built at all and how much can be trimmed off the cost. It will also look at alternative sites.

The airport decision has caused a furore in Thailand, with debate at times reaching the level of farce. Deputy Prime Minister Montri Pongpanich even suggested 'a certain person' had taken bribes from a neighbouring country to sabotage the project. He resigned as vice-chairman of the Second Airport Development Board in protest. The Thai Air Force, already deeply involved in running Don Muang, has been accused of scuppering plans for the new airport, fearing it will lose influence if international flights are moved elsewhere.

The government also came under heated attack in parliament, with members insisting Don Muang's expansion is not viable and demanding the second airport be put back on track.

Critics believe the decision will damage Bangkok's standing as a prime hub in southeast Asia. Singapore's Changi airport, already regarded as Asia's best hub, is to get a third terminal by early next century and Malaysia's new airport at Sepang will open in 1998.

The postponement could also hurt tourism and hands a huge competitive advantage to regional rivals of national flag carrier Thai.

Controversy, cost overruns and construction delays had meant that Nong Ngu Hao would have opened in 2003, at least three years behind schedule. Thai prime minister Chavalit Yongchaiyudh decided expansion of Don Muang had to be given priority because of the delays.

Under the US$466 million development plan the Airports Authority of Thailand (AAT) will build new taxiways, aprons and expanded passenger terminals at Don Muang. The cost includes US$112 million in compensation to the Air Force, which will have to move part of its operations to make room.

Minister for Transport Suwat Liptapallop says work will be completed by 2000 when Don Muang will be able to cope with 65-70 flights an hour, up from 50 flights currently, and 45 million passengers annually, 12 million more than at present. However, he warned that if further expansion is required to cope with traffic to 2007 the total cost could rise as high as US$1.9 billion.

Analysts say there are limits to Don Muang's potential and a new airport will eventually have to be built. The decision to postpone construction could create a 'capacity gap' between 2005 and 2010, the earliest date by which a new airport could now be completed.

The government is studying several alternatives, including construction of a smaller second airport which would operate in conjunction with Don Muang. It is also looking at abandoning Nong Ngu Hao, east of Bangkok, and shifting the site to Bang Pu, 30km south of the city.

The Engineering Institute of Thailand says a site change would take at least three years. It wants the project at Nong Ngu Hao to proceed since fundamental infrastructure, including telecommunication, transport and flood prevention, is already in place.

Source: Airline Business