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Thai Airways delays launch of Thai Tiger Airways again; Thai AirAsia preparing strategies to compete

25-Nov-2010

Thai Airways has had a number of challenges in its plans to establish new LCC start-up, Thai Tiger Airways, under a JV with Singapore’s Tiger Airways. In its latest set back, the carrier has been forced to postpone the launch date of the LCC from Mar-2011 to late May-2011. However, the setbacks have not comforted competitors, with Thai AirAsia stating it is developing strategies to effectively compete with the new LCC.

Thai Tiger’s launch has been delayed to allow Thai Airways to secure funding approval from the Thai Transport Ministry and National Economic and Social Development Board to invest USD3.3 million (THB99.8 million) from its regular budget to pay for its 49.9% stake. Thai has also stated that once the LCC has officially registered as a corporation, the airline will apply for air operating license

This is the second delay in the launch of Thai Tiger, which Thai and Tiger Airways had originally planned to launch in Jan-2011. Tiger Airways has said it is not aware of a confirmed delay in the launch of Thai Tiger and both remain fully committed to the JV.

The move to use its regular budget to fund the JV has come after the Thai Transport Ministry rejected the carrier’s plans to use an THB99.8 million extraordinary budget to fund the carrier. Transport Minister Sohpon Zarum has been a key opponent to the LCC JV, as he is against a foreign carrier being a part owner in the airline. As a result, Thai has found difficulty having the LCC approved by the Transport Ministry, which must approve the JV deal and provide it with the necessary papers for it to launch operations.

The ministry has repetitively voiced its concerns over the JV, claiming Thai has failed to fully address some of its questions. In Sep-2010, the ministry established a joint committee to address the issue. The committee includes representatives from the ministry, Thai and the Office of Traffic and Transport Planning and Policy (OTP). The ministry has listed concerns as including how the LCC will impact Thai passengers, whether the ownership structure will grant aviation rights to a foreign airline and whether the new LCC will be in competition with Nok Air.

Thai insists Thai Tiger essential to remain competitive

However, Thai has insisted that the move is legal and vital to maintain its market share. According to Chairman Ampon Kittiampon the launch of the LCC subsidiary is a “strategic move to prevent further damage to THAI’s market share in the low-cost segment” and unless it goes ahead with the JV plans, “our share will continue to be eroded”. Thai now expects an approval of the THB99.8 million investment in the airline within one month. 

The LCC market within Thailand has certainly been growing over the past few years with the arrival of AirAsia and Jetstar Asia into the market. Thai Tiger will be a major threat to these carriers in the long run, both of whom are vying for regional dominance. Adding a strong international low cost operation to the Bangkok/Thailand mix is a major step up for Tiger and a big signal of added competition ahead.

Thai Airways President Piyasvasti Amarand and Tiger CEO Tony Davis believe there is huge market potential in Asia for LCCs as there are still a number of people in the region who have never flown. Mr Amranand stated the carrier selected Tiger Airways as its partner to launch Thai Tiger after looking at a number of options, including Jetstar, Dragonair, Cebu Pacific and Lion Air. Mr Amranand said Tiger was selected as it is financially the strongest and the two airlines have the “same business concept” and “same enemy”. The two are now revising a business plan, to include regional and domestic routes.

RyanAsia Singapore Principal Declan Ryan stated Thai Tiger is confident of taking 10% market share and handling 1 million-1.5 million passengers in its first year of operation. The LCC plans to launch operations with three to five aircraft, to be expanded to 35 in five years. Thai Tiger will operate a consistent A320 aircraft fleet in line with other airlines in the Tiger Airways Group.

Mr Ryan stated the growth potential for LCCs is “very positive in the Asia Pacific region when compared with Western markets, as operators here provide only 15.5% of overall air travel in this region, compared with 36% in Europe and 21.7% as a global average”. He added the growth potential is also huge due to the large population in the Asia Pacific region.

Further addressing the ministry’s concerns, Thailand's Department of Civil Aviation (DCA) stated Thai Tiger is entitled to use foreign-registered aircraft and overseas cockpit crew to launch operations in Thailand. The statement came after comments that the carrier's plans to operate with Singapore-registered aircraft and crew would be as good as providing domestic air traffic rights to a foreign carrier. Mr Amranand has also insisted the carrier will not be losing aviation slots to Tiger Airways as a result of the JV and that it will be operated as an entire different brand to Thai and present subsidiary Nok Air.

According to DCA regulations, Thai start-ups were permitted to use foreign aircraft and crew to operate domestic services for up to 12 months, after which they must operate Thai-registered aircraft operated by Thai pilots. Thai Airways stated it plans to have Thai nationals operating its aircraft when it launches Thai Tiger, with recruitment of staff and other personnel, including a CEO, to commence in the next two months, or when the LCC’s business plan is finalised.

Ownership structure decided

Also in its latest board meeting, the board agreed to have Thai Tiger staff members with a Thai citizenship to acquire a collective 1.1% share in the JV, to ensure the entity remains majority Thai-owned. As a result, Thai will hold a 49.9% stake in the company, while 39% will be held by Tiger Airways Holdings Limited and 10% by Ryan Asia Limited.

The structure of Thai Tiger’s board of directors was also adjusted from the original five members to consist of seven board members with representation, including four from Thai Airways, two from Tiger Airways and one from Ryan Asia Limited.

Insists the new LCC will not affect Nok Air

One of the Transport Ministry’s key concerns with the LCC JV is how it will affect Thai’s existing subsidiary, Nok Air. The carrier, established in response to AirAsia’s entry into the market, has always been something of a problem for the flag carrier, which never really knew how to manage the sometimes prickly relationship, in which it had only a minority control.

The future of Nok Air, in which Thai currently holds a 39% stake, remains uncertain, with Thai Airways stating Nok Air was unable to develop a marketing strategy to expand its operations and was not in a position to expand internationally.

Under Thai and Tiger’s agreement, Thai Tiger will operate international and domestic services from its base at Bangkok Suvarnabhumi International Airport, offering short-haul point-to-point services within a five-hour flying radius. Nok operates 13 domestic routes with Thailand.

Nok Air route network

Nok Air CEO Patee Sarasin has stated the establishment of Thai Tiger will have no affect on its business, nor would it be a competitor for Nok. He stated that while there may be some overlap in domestic routes, Thai Tiger will focus on bigger cities “where the demand for aviation services is high”.

Mr Amranand has also emphasised that Thai Tiger will be treated as a completely different entity and there will be no integration with Thai or Nok and no codesharing. He noted “we need to distinguish between the brands so as not to destroy them”. He added Nok was not considered for the new enterprise as “it was not a low-cost carrier”.

Despite the launch of Thai Tiger looking like it might be a way for Thai to move away from Nok, Thai has been considering plans to increase its shareholding in the carrier, with Krung Thai Bank (KTB) reportedly sending a letter to Thai Airways offering to sell a 10% stake in Nok Air to the carrier with the proposal valid until 30-Nov-2010. Thai previously offered to purchase 5 million shares held by the bank for THB13 per share as it seeks to gain greater control of the LCC.

However, the offer, which would increase Thai Airways’ stake in Nok to 49% is well below KTB’s assessment, which is reportedly THB40 per share. Thai Airways is evaluating the new offer as well as Nok Air's business plan and business risk factors. Nok Air has only moved into the black in the past year.

Nok to expand fleet as part of growth plans

Separately, Nok is also looking to expand its fleet as part of growth plans, which include consolidating its domestic market presence and resumption of regional services in 2012/13.

Mr Sarasin said: “We are not going to expand aggressively like AirAsia. Our mission is to set a strong foothold within in Thailand, which still offers considerable business opportunities. We have taken enough routes from them [Thai Airways] and would rather now develop our own.”

The LCC plans to lease four B737-400s and four ATR 72 turboprops in the short term, and six B737-800 aircraft in the long term. Nok will lease one of these B737-400s from AWAS and another from from GE Capital Aviation Services. It is in talks for the remaining two with other companies. The carrier expects to take delivery of the aircraft between Oct-2010 and Feb-2011, while the B737-800s are expected to be delivered towards the end of 2011. Nok operates a fleet of six B737-400s and two ATR 72s.

Mr Sarasin stated the carrier plans to grow “steadily and cautiously” in the next few years, mainly focussing on domestic operations, but will not necessarily be taking secondary routes from Thai Airways. It plans to resume international operations with a service to Bangkok. Mr Sarasin is also confident Nok will report a net profit of THB700 million this year, with revenue of THB3 billion. It expects a lower profit of THB200 million in FY2011, due to an expected rise in jet fuel prices.

Looking at plans for 'Thai Lite' as a back-up plan

There have also been reports Thai is looking to launch another airline subsidiary Thai Lite to operate regional flights. The carrier appears to back up plan in case the Thai Government does not approve Thai Tiger.

The wholly owned subsidiary would operate as a full-service carrier on routes within a six-hour flight radius from Bangkok, including southern China, India and Indochina. It will operate to destinations not already served by Thai, with potential destinations including Guilin and Siem Reap. Thai Lite may also take over some slow-traffic routes from its parent, such as Hyderabad. The carrier will operate a fleet of new-generation narrowbody aircraft configured with 150-180 business and economy-class seats.

The subsidiary has reportedly received backing from Thailand President Piyasvasti Amranand. Thai sees the new airline as a way to support its future business plan. It hopes to launch Thai Lite in the next year or two at the earliest.

Thai AirAsia developing strategies to compete against Thai Tiger

In response to Thai Tiger, Thai AirAsia CEO Tassapon Bijleveld has stated the carrier is now developing strategies to compete with the new LCC and “will not let any single percentage point of market share go to a new rivals”.

Under the strategies, TAA plans to increase its daily flights to/from Thailand from 140 to 172 in the next 12 months. The carrier also plans to take delivery of four new Airbus aircraft and will develop more marketing strategies, including more promotions. It also plans to seek further alliances with hotels, banks, service operators and entertainment firms.

Separately, AirAsia CEO Tony Fernandes stated Thai Airways should focus on being a premium airline rather than trying to get involved in LCC ventures, questioning the need for Thai to establish the JV airline. The CEO stated Thai is already a very strong premium airline and there are still significant growth opportunities for the carrier, without launching an LCC. He noted Cathay Pacific has remained successful without launching an LCC and while Singapore Airlines has a stake in Tiger Airways, it is not involved in its operations. He added Tiger Airways is an “odd” choice as a business ally as it is not making much money.

Thai AirAsia expects to handle 6.2 million passengers in 2010 to increase to 6.98 million in 2011, with the carrier expecting revenue of THB12 billion (USD402 million) and a net profit of THB1.2 billion (USD40.2 million) marking a turnaround from a loss of approximately THB300 million (USD10.1 million) in 2009. TAA handled 1.4 million passengers in 3Q2010, a 8.8% year-on-year improvement. However, load factor fell 1.0 ppt for the quarter, to 76%.

Thai AirAsia is the largest LCC in the Thai market and the second largest carrier after Thai Airways with LCCs having around a 40% capacity share in the domestic market. Internationally, Thai Airways remains dominant with a 34.3% capacity share followed by Thai AirAsia with a notably smaller 6.0% capacity share.

Thailand international capacity share (seats) by carrier*

Thai Airways is also the largest carrier domestically, but Thai AirAsia has a greater share of capacity than internationally.

Thailand domestic capacity share (seats) breakdown by carrier*

Airline

Percentage

Thai Airways

40.85%

Thai AirAsia

25.38%

Bangkok Airways

14.95%

Nok Air

12.30%

Orient Thai Airlines

5.38%

SGA

1.08%

But slowing growth next year

However, the carrier also plans to slow growth in 2011 after an aggressive expansion this year, to instead focus on improving service quality and improve staff skills. Mr Bijleveld stated the LCC will take delivery of only two aircraft for the year and launch just five new routes.

The move comes after an aggressive expansion this year, in which it took delivery of six new A320 aircraft. TAA operates a fleet of 19 A320 aircraft and has a further 21 on order. It has the youngest fleet of all commercial carriers registered in Thailand, with an average fleet age of one year. TAA plans to operate a fleet of 40 aircraft by 2013.

Opening new hub in Chiang Mai

TAA has also confirmed plans to make Chiang Mai its third hub on 24-Jan-2011, with the launch of daily services from the airport to Hat Yai and Singapore. The hub will also offers connections to Bangkok, Phuket and Kuala Lumpur. Other destinations under consideration include Hong Kong, Macau, Kunming and Krabi.

TAA will take delivery of a new A320 in Jan-2011, to be based at the airport. A second A320 may be based in Chiang Mai in Apr-2011 or May-2011, depending on demand.

Mr Bijleveld believes the carrier will operate at load factors of 85-90% on its services from the new hub as there are no other LCCs serving the airport at present. He added the new hub will allow TAA to exploit untapped traffic opportunities. TAA is also considering establishing hubs  in Hat Yai and Udon Thani.

Looking to expand in India

TAA is also looking to expand its international operations with a focus on present on launching India services. The LCC plans to launch four times weekly Bangkok-Delhi service and daily Bangkok-Kolkata service on 01-Dec-2010. The carrier aims to have 8-10% of revenue coming from its Indian services in the next five years. It also expects to have an international load factor of 85-90% when it launches the services.

Mr Bijleveld stated TAA may increase Bangkok-Kolkata frequency to twice daily in the next six to eight months, depending on how the market develops. The LCC is also considering launching a third Indian route, with daily Bangkok-Mumbai service, likely to be launched in 2H2011. Mr Bijleveld added the carrier is also considering services to Chennai and Bangalore.

The CEO noted TAA’s highest fares on the routes will be at least 20% lower than other carriers. Air India Express, Jet Airways, Kingfisher Airlines and Thai Airways operate on the route

The LCC also plans to launch services from Phuket to Mumbai and Kolkata by Dec-2011 if there is enough demand.

Jetstar Asia: new LCCs will only be 'playing catch up'

Qantas CEO Alan Joyce in Aug-2010 stated he is not concerned with the launch of Thai Tiger, stating any carriers that are looking to compete “head to head” with subsidiary Jetstar Asia will only be playing catch up. According to the CEO, Jetstar is “in a very good position in all lines” and is the leading LCC in the Asia Pacific region, in terms of revenue. Qantas expects the LCC to grow by 20% this year, following double-digit growth over the last four years.

Jetstar Group CEO Bruce Buchanan has also stated that although the launch of new LCCs in the region will increase competition, Jetstar will survive due to fleet and network expansion plans and further increasing brand awareness. Jetstar plans to take delivery of a further eight A320s and two A330s for the remainder of FY2010-11. Over the long to medium term, the carrier plans to grow its fleet of almost 70 aircraft to 120 over the next five years.

However, Mr Buchanan has noted the carrier needs to increase its Asian operations by more than 20% over the next five years to maintain its market share. Mr Buchanan stated market growth of up to 20% in the LCC segment presents a large opportunity for the carrier but added: "To be gaining relative share or position in our segment, we need to be growing faster than that. So the maths is pretty straightforward. We know the challenge, which is now finding the routes and growth opportunities."

Thai Tiger to pose challenge to existing LCCs

With Thailand’s growing reputation as a base for LCCs, Thai Tiger Airways is likely to become a strong force, especially as it is backed by Tiger Airways and Thai Airways. The JV is a major step in the increasingly three-way LCC competition, but also happily has the almost inevitable impact of accelerating the process of liberalising Asia’s often unbalanced and restrictive entry system.


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