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.
Please leave your feedback or comment in the area below.