Air travel is a commodity. For most travelers, price is king, and fare competition is fierce. Over the years, the vicious circle of price wars has left a trail of airline casualties. Surprisingly, many other industries manage to thrive in a commoditized environment, and airlines can learn from them.
Millions of people are fleeing conflict in Syria, Iraq, Afghanistan and Ukraine, as well as persecution in areas of Southeast Asia and Sub-Saharan Africa. Why are people fleeing? Where are they going? How are host countries responding?Fleeing war-torn lands in search of safer, better lives, people have been leaving their native countries. A total of 9.6 million migrants fled the Middle East as of the end of 2015, up from 4.2 million in 2005 – a nearly 130% increase. This increase in emigration waves has been fuelled by arising conflicts mainly in Iraq, Syria, Yemen and Afghanistan creating the highest level of displacement since World War II. Worldwide migration pressures are expected to increase with the rise of war zones and demographic and economic differences between developed and developing countries. These waves of humanity will shape the future character of host countries.
In our growth markets series, we covered China, Turkey, Australia, Indonesia and South East Asia Aviation. Today, we take a look at Thailand.Last year, Thai Airways announced it was axing the Bangkok-Los Angeles route, in a move that put an end to 35 years of service to the US. Rome and LAX were two loss-making routes reported to be costing the airline $3 million a year. After a net loss of $445 million in 2014, Thai Airways’ debt skyrocketed to $5.9 billion, the highest among Southeast Asian airlines.
Once admired for its dream of competing with the likes of Singapore to become Southeast Asia’s global hub, Thailand has seen things changing fast. From the delivery of its flag carrier’s first A380 to the red stamp received by ICAO last year, Thailand seems to have lost its edge. Or has it? After all, Thailand’s airports have doubled traffic in six years, and carriers are ramping up with aggressive plans for expansion.
South East Asia Restructuring
Even excepting Malaysia Airlines, whose financial troubles were exacerbated by two major aircraft losses less than five months apart, Thai airlines are far from being the only ones to be in or near the red.
Cathay Pacific – whose shares reached a 7-year low this October - is the latest of these to acknowledge that massive restructuring will be needed if it wants to survive. In a post I wrote last year, I counted “less than five profitable LCCs (low cost carriers) in the region (for 24 actors), and barely ten FSCs (full service carriers) out of around 40 players”.
Even South East Asia’s flagship Singapore Airlines caught attention last year when it sent a scary message to investors:
SIA’s future is grim if it doesn’t change the way it do business. The days of Singapore and SIA being the long-haul hub for the ASEAN region is over.
- Mohshin Aziz, Associate Director of Equity Markets (Research) at Maybank Investment Bank
From this point of view, Thai Airways could be heading in the right direction. Its situation worsened in 2014, but now the airline appears to be in safe hands and its executives look confidently towards the future. After routes and staff cuts, the airline is now working on a 10-year expansion plan. All this is when its competitors are preparing bitter plans.
According to a Bangkok-based financial analyst quoted by Bloomberg, Thai’s “high costs, old fleet and inefficiency” kept the airline lagging behind budget and other FSCs in past years. But its management is convinced that "the worst is over".
Low Cost Takes All
Low cost carriers and Middle East carriers are usually blamed for the poor relative performance of legacy airlines in South East Asia. For sure, Bangkok is one of Middle East carriers’ top destinations. It is served by four daily flights each from Qatar Airways and Etihad, two from Turkish Airlines, and six flights a day from Emirates – as many as London Heathrow!
In 2014, Emirates carried 1.3 million passengers to Bangkok, making it the carrier’s second busiest destination. Thailand has also attracted long-haul LCCs Eurowings and Norwegian. That underlines how challenging it has been for Thai airlines to keep fares reasonably high and costs competitive, even with excellent offers. FSC Bangkok Airways, which once had plans to go for long haul cancelled its twin aisle jets orders long ago, and has since focused on profitable growth.
This is also the bet taken by Thai Airways when launching Thai Smile, a medium haul subsidiary launched to operate all single-aisle flights for its mother company. Thai Smile has lower operation costs - despite offering full service - and has allowed the group to keep expanding in Asia without hurting profitability.
Indeed, Asian medium haul traffic has been equally challenged by another kind of player: LCCs. Thailand has one of the highest low cost penetration rates in the world, comparable to Malaysia. On domestic routes, low cost penetration in Bangkok has grown from 40% in 2011 to 67% in 2016. Meanwhile, LCCs have a market share close to 30% for international routes out of Thailand.
As a result, in 2015 more than a third of passengers out of Bangkok are flying on an LCC. In Thailand, LCCs managed to stay relatively healthy, being either profitable (Thai AirAsia) or close to it and with positive margins (Nok Air). Nok Air would likely be profitable if the domestic market had not declined in 2014 following political instability.
In 2013, Thailand’s political unrest along with bombings in Bangkok made headlines. These had an impact on tourism, but despite that arrivals have consistently increased, more than doubling since 2009 with the exception of 2014 where tourist flows dropped severely. And although arrivals grew 11% on average in the past decade, still it is believed that some domestic and international routes have overcapacity.
About a year ago, following the fall of the previous government, ICAO downgraded Thailand’s aviation safety rating, after audits reported breaches and lapses. As a consequence, the US-based FAA as well as Japan and Korea are restricting Thai airlines from opening new routes. The FAA also prevents Thai airlines from expanding codeshares with US partner airlines.
Safety concerns could also have impeded the expansion of Thai airlines to internal destinations, but it is fair to say that the restrictions did little damage to Thai Airways: the airline has mostly cut routes these past years to reduce losses.
However, Thai Airways executives have confirmed that the airline will be looking for expansion soon. Getting the Thai civil aviation regulatory body back up to standards will be critical in making sure the airline can easily ramp up business on markets untouched during restructuring. The government is said to be working hard to restore the appropriate level of safety, allowing Thai airlines to expand on safer grounds.
Bangkok Airports Handle 80+ Million Passengers
Bangkok is an impressive aviation capital. With 83 million passengers flying in and out in 2015, the city is the 12th busiest aviation system in the world. Suvarnabhumi, the main gateway to Thailand, reached its full capacity of 45 million passengers five years ago.
Suvarnabhumi airport has been known to impede aviation growth in Thailand, and this year IATA CEO Tony Tyler called for the country to accelerate expansion and fix key issues. However, Airports Of Thailand (AOT) hopes to progressively double capacity to 90 million passengers by 2021 and has already taken "the first step in Suvarnabhumi Airport becoming an Asian hub," according to the Minister of Transport.
Construction work to expand the airport began this year. The first phase, to be completed in 2019, aims at increasing current capacity by 30%, to 60 million passengers. Two other expansion phases are planned that include the addition of a third runway and a second terminal.
When Suvarnabhumi airport first opened in 2006, it was to replace Don Mueang international airport, Thailand’s former international gateway. Don Mueang was closed in September 2006, after all operations moved to Suvarnabhumi.
Don Mueang Airport Reopened
But Don Mueang reopened shortly after following technical problems at Suvarnabhumi that reduced the airport’s capacity, and issues with high airport charges. By 2012, the Thai government ordered all LCCs to be moved out of Suvarnabhumi, in an attempt to reduce congestion.
It is important to recognize that 2012 was already a critical year for Suvarnabhumi Airport: it handled 53 million passengers - like in 2015 - despite its capacity of 45 million. Since then, Don Mueang has grown at the same rapid pace as LCCs carriers in Thailand. More than 30 million passengers passed through the airport in 2015, making it the world’s biggest LCC airport. Aided by the growth of carriers like Air Asia and Nok Air, Don Mueng airport reported a 21% year on year growth in September 2016. In less than five years, Southeast Asian LCCs have grown so fast they have saturated a 30 million-passenger airport reopened solely for low cost traffic.
Thailand’s biggest airports (Bangkok Suvarnabhumi, Don Mueang, Phuket, plus regionals Chiang Mai and Hat Yai) are operated by Thai public company Airports of Thailand (AOT). Most other Thai airports are operated by the Thai department of civil aviation. AOT’s six airports accommodate most of the country’s passengers and account for 110 million passengers (21% growth in 2015).
Thailand is also one of the few countries where private airlines operate airports. Bangkok Airways operates three airports at Koh Samui, Sukhothai, and Trat. Sukhothai and Trat are small airports, but Koh Samui handles 2 million passengers a year, making it the country’s seventh busiest airport; authorities have been weighing the construction of another airport there for a long time. Bangkok Airways built the airport several decades ago before Koh Samui became a busy tourist destination. Now, the authorities want to build a new publicly-owned airport to ensure that all airlines benefit from fair landing rights and competitive fees.
As this article was being written, freshly-released September 2016 figures show double-digit growth in almost all areas. A tough market, sometimes affected by political unrest, has troubled a few airlines in Thailand, but agile LCCs have managed to keep Thais travelling.
Most carriers are now focusing on restructuring and profitable growth, both domestically and internationally. Infrastructure will likely remain a concern as it is difficult for capacity growth to catch up with flight growth. But Thailand looks to be doing better than many of its ASEAN counterparts on this point.
The conclusion is that with an improved infrastructure and airline profitability, Thailand will likely soon be back on its way to becoming a major aviation hub in the region.
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The liberalization of ASEAN’s aviation sector will be a major catalyst for the region’s economic growth by 2030 - Liow Tiong Lai, Malaysian Minister of Transport
The Malaysian Minister of Transport’s thoughts are backed by strong arguments as aviation plays a vital role in developing business, trade, sales, innovation, investments and tourism, all facilitating economic growth. With South East Asia being one of the most dynamic areas in the world, a boost in tourism and trade should have astonishing effects and bring countless opportunities - and challenges - for all aviation players. Latest news indicate that the Single Aviation Market (SAM) is due to be signed by this year.
South East Asia Aviation Market
The Association of South East Asian Nations (ASEAN) is a political and economical organization gathering ten countries and about 9 percent of the world’s population or 625 million people. Taken as a whole, ASEAN would rank 7th in terms of GDP, before Brazil and India.
ASEAN’s core countries are Indonesia, Thailand, Malaysia, The Philippines, Singapore and Vietnam and are home to the biggest airlines in the region. Among them are rather large full service carriers (FSCs), most being under restructuring, like Garuda Indonesia followed by Singapore Airlines as ASEAN’s biggest. But ASEAN's aviation market is being dominated by low cost carriers (LCCs), the major being Air Asia Group and Lion Air Group, both on their way to reach a milestone of 50 million passengers carried per year.
Despite ASEAN's capacity growth shrinking from 30% in 2013 to 13% in 2014 in light of overcapacity concerns, LLCs account for about 60 per cent of the market and are growing faster than their full service carrier counterparts. Even if astonishing growth rates might get lower as markets get more mature, Southeast Asian carriers account for 15% of global aircraft orders (almost 2000 airplanes). In other words, nobody plans to leave the battlefield, no matter how large the cake will grow, and airlines have faith in their ability to grow and compete even beyond their borders.
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Contrary to Europe and the US where LLCs mostly emerged after full liberalization (in 1978 with the Airline Deregulation Act in the US, and in 1997 in Europe), ASEAN airlines’ ability to expand beyond their borders is still very much government-regulated. A major step was taken in 2008, when airlines based in a country member of ASEAN were granted the right to fly between the region’s capitals without restrictions. And in January 2011, this right was extended. Airlines of any of the ten countries were granted the right to continue to an extra destination of the country’s capital they are flying to (fifth freedom).
For airlines, it was not enough. To fulfill their desire of expansion in other countries, foreign airlines had no choice but to create local companies in joint venture with local partners, and to gain a national airline operating certificate (AOC) in the respective country. This allowed competition to develop even more rapidly, as shown for instance by Malindo, Indonesia’s Lion Air subsidiary in Malaysia which launched in March 2013. Malindo claims a 10%-market share on the Malaysian domestic market (versus 45% for rival AirAsia and 38% for Malaysia Airlines), where it operates 13 domestic routes and 13 international routes. Thus, despite various forms of protectionism observed in the past, airlines have been able to significantly expand beyond their borders. For Air Asia, which initiated this trend, international operations are now larger than its historical activity in Malaysia.
But this has come at the price of enormous complexity. Presently, there are 24 LLCs in Southeast Asia, 8 of which are affiliated to AirAsia and operate in more than 17 hubs in five countries. With a single aviation market, these local entities would no longer be needed, nor would be a local partner and AOC. Carriers could be more agile, hence opening new routes. As an example, the number of routes between Japan and Taiwan increased 5 times since an open skies agreement between Japan and Taiwan was signed three years ago, and in the European Union, the number of routes have been multiplied by more than five in twenty years of deregulation.
New ASEAN Competition
Beyond the opportunity of reuniting all local subsidiaries with their parent company with full ownership, an opened market will open doors for mergers and acquisition. This already started in the Philippines with the purchase of Tigerair Philippines by Cebu Pacific. Similarly, the strongest carriers in the region could take the lead and grab the opportunity to become bigger through external growth. But there aren't many. One can count less than five profitable LCCs in the region (for 24 actors), and barely ten FSCs (roughly 40 players). Some like AirAsia, which has only its Malaysian and Thai subsidiaries profitable, initiated a paradigm shift from growth to profitability. FSCs like Thai Airways are also undergoing cost cuts, while others are working hard to develop their low cost subsidiaries (currently six in the region). To say the least the airline industry in the region is not in its best health to welcome an increased level of competition. Yet, with liberalization, the possibility given to carriers to open new routes, and to easily switch planes to their most profitable markets, could help raise profitability and diminish fears of overcapacity. There are also underpenetrated markets like Myanmar. It has a low cost penetration rate of 27% and the country’s tourism is booming, which make it an easier market to conquer. The extra competition will not come without opportunities for the region’s carriers, even though the outcome (with airlines that could as well be stronger, even more aggressive and reluctant to cut capacity as fuel costs slump) will be interesting to watch.
An airline industry massively losing money is not the only matter to monitor as the Single Aviation Market arrives. Infrastructure use, including airport, runway, or air traffic systems capacity will feel a more intense pressure, while being extremely saturated in some countries already like in Indonesia. Lack of safety will be a worse bottleneck than national regulation and protectionism now.
Recently, Air Asia CEO repeatedly said that a change in mindset regarding infrastructure management in ASEAN is needed urgently. Tony Fernandes reminded everyone that his airline attempted to invest in infrastructure several times over the past years, but was always blocked by authorities. The creation of regional aviation regulatory bodies could help make things move forward, otherwise airport space and slots could be used as traffic rights, as Jetstar CEO recently warned.
ASEAN and Asia aviation in general are already among the world’s most competitive markets with 75% of the routes operated by more than three carriers. Besides enhancing direct competition and making air travel more affordable, open skies agreement deals in the past have enabled a huge increase in terms of city pairs flights. This is key to unlock new markets, and LLCs will probably fiercely want their slice of the cake. LLCs play a vital role in allowing a growing part of these countries’ middle class to fly. While most LLCs are losing money, the demand will stay strong: 7.7% on average for the coming 20 years.
With a single sky market, airlines can strategically choose their operational bases, and increase competition between national infrastructure providers. All in all, this matters a lot in this deal: with a single market comes the need for all the ASEAN countries to collaborate.
Hopefully, there will be a regional answer to current infrastructure problems. And other outcomes, such as the opening of bilateral negotiations to increase competition on long haul markets (which stand far behind competition levels seen on the regional market) will follow.
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