07-Mar-2013 7:00 AM

Thai Airways faces challenging 2013 as competition within Asia increases

Analysis

Thai Airways has returned to the black, posting a small profit for 2012 despite challenging conditions on its long-haul routes. The airline group plans to again focus growth in 2013 on short and medium-haul routes within Asia, where market conditions are generally more favourable. The group now includes three brands, including LCC affiliate Nok and regional hybrid unit Thai Smile - both of which are entirely focused on the fast-expanding Asian market.

But Thai Airways is also now facing challenges on routes within Asia as competition intensifies. Thai AirAsia is pursuing rapid expansion, putting pressure on Thai. Rapid growth at Nok and Thai Smile will help the Thai Airways Group compete against LCCs but Thai Airways will need to reduce costs and make adjustments in order to achieve sustainable profits.

Thai Airway posts 2012 profit as load factor increases by over 6 percentage points

The Thai Airways Group reported on 28-Feb-2013 a net profit of THB6.51 billion (USD219 million) for 2012, reversing a loss of THB10.16 billion (USD342 million) in 2011. Group revenues were up 10% to THB213.53 billion (USD7.18 billion) but this figure is a bit misleading as Nok's revenues were included in 2012 but not in 2011.

Thai itself reported a 5% increase in revenues to THB204.26 billion (USD6.87 billion) and a net profit of THB4.43 billion (USD149 million). Passenger revenues for Thai were up 7% to THB165.49 billion (USD5.56 billion) while cargo revenues were down 5% to THB26.75 billion (USD900 million).

These figures include Thai Smile as Thai Smile is a unit flying under the Thai Airways operators' certificate and TG code, although there are plans to convert it into a fully-owned subsidiary. Thai also has three other business units covering cargo, grounding services and catering.

Thai Airways Group financial highlights: 2012 vs 2011

Thai Airways Group revenue highlights: 2012 vs 2011

The 7% increase in passenger revenues at Thai/Thai Smile was driven by a 10% increase in RPKs and a 12% increase in passenger numbers to 20.6 million. ASKs were up only 1%, resulting in a significant 6.2ppt improvement in load factors to 76.2%.

Thai Airways operational highlights: 2012 vs 2011

In releasing its 2012 results, Thai pointed out the 76.2% load factor marks its highest load factor in five years. But the higher loads came at the expense of yields.

Passenger yields (including fuel surcharges) were down compared to 2011 levels for nine out of the 12 months in 2012. However, they were up on 2009 and 2010 levels, when Thai reported profits.

Asia leads the way for Thai in 2012 and will again be the focus in 2013

Thai's focus on regional markets helped drive the improvement in load factors and profitability compared to its disappointing performance in 2011.

International passenger revenues within the Asia region increased by 13% in 2012 to THB65.74 billion (USD2.21 billion) while revenues in intercontinental markets (includes Australia and New Zealand) dropped by 4% to THB53.88 billion (USD1.18 billion). Domestic revenues were up 6% to THB14.69 billion (USD494 million).

Thai Airways passenger revenue by type of market: 2012 vs 2011

Thai Airways mainline reported a 5.5ppt improvement in load factors on regional international routes to 75.7% on a 17% increase in RPKs. Thai Smile reported an 82.3% load factor on its only international route, Bangkok-Macau.

Thai Airways mainline also saw a 4.5ppt improvement in load factor on domestic routes to 76.7% as RPKs increased by 4% while Thai Smile recorded an 81.6% domestic load factor in its first year of operation.

Australia also performed well, with Thai's load factor surging 10.5ppt to 77.7% on a 13% increase in RPKs. Thai will likely expand further in Australia, where it serves four destinations with 39 weekly return flights, as part of its increased focus on the Asia-Pacific region.

Thai is well positioned to take advantage of rapid growth in the Australia-Asia market but this is also a market being aggressively targeted by Qantas and the new Singapore Airlines-Virgin Australia combination. Both Qantas and its partner Emirates, which is by far the largest non-Asian carrier at Bangkok, serve Bangkok from Sydney.

Thai impacted by economic downturn in Europe

On European routes Thai managed to improve its load factor by 5.6ppt to 77.4%. But RPKs were up only 2% and Thai had to rely heavily on promotions to keep its flights to Europe full.

Thai has warned that it expects continued weak travel demand to and from Europe. In a Jan-2013 presentation, Thai said yields on European flights were below target in 2012 and it continues to offer promotions for travel over the next three to six months.

Thai relies heavily on inbound traffic, making it more exposed to the economic downturn in Europe than other Asian carries. The weak economic conditions in Europe were bad timing for Thai in that the carrier took delivery in 2012 of its first batch of three A380s. After initially operating the A380 on regional routes, Thai began operating its new flagship aircraft on Bangkok-Frankfurt in Dec-2012 after taking delivery of its second and third aircraft.

Thai Airways will take delivery of its last three A380s in 2013, with one aircraft slated to come in Mar-2013, one in Oct-2013 and one in Nov-2013. Thai plans to use the fourth aircraft to begin A380 operations on the Bangkok-Paris route from 30-Mar-2013. It will continue to use the A380 to Hong Kong and Tokyo, illustrating the importance of regional routes.

A380 investment caps fleet and product renewal initiative

The new A380, which Thai operates in three-class configuration with 507 seats, supports the carrier's increased focus on the premium end of the market. Thai has invested heavily in fleet renewal as well as cabin retrofits as part of an initiative to attract more premium passengers and increase yields.

The A380s are replacing ageing 747-400s on some long-haul routes. Thai currently operates 16 747-400 passenger aircraft but is phasing out four of the type this year. All of the 747s remaining in the fleet will be retrofitted with new seats and in-flight entertainment systems across all cabins by May-2013.

Thai is also taking delivery of six 777-300ERs in 2013, which will replace five 777-300ERs which are being returned to India's Jet Airways as sub-leases expire. Thai is committed to taking another six 777-300ERs in 2014 and 2015, which will give it a fleet of 14 777-300ERs compared to only seven currently. Its older fleet of eight 777-200s are now being retrofitted under a programme which is slated to complete in Jun-2013.

Thai also operates six 777-200ERs and six 777-300s. Its total passenger fleet currently consists of 97 aircraft including 27 777s (all types), 16 747-400s, three A380s, nine A300-600s, six A340-600s, 26 A330-300s, five A320s (operated by the Thai Smile unit) and five 737-400s. This includes one additional A330 and one additional A320 which were delivered from leasing companies in Jan-2013. Thai also operates two 747-400BCFs which were converted from its passenger fleet in 2012 and were used to replace more expensive wet-leased 777Fs.

Thai Airways aircraft delivery plan: 2012 to 2017

Thai Airways aircraft phase out plan: 2012 to 2017

Thai is improving its domestic and regional international product as it phases out its nine remaining A300-600s over the next two years. These will be replaced partially by A330-300s, which Thai operates within Asia-Pacific, and partially by Thai Smile's A320s. Thai's remaining fleet of five 737-400s, which are used on a small number of domestic and short-haul international routes, will also be phased out by the end of 2015 as Thai Smile takes over Thai's narrowbody routes.

Thai Smile is improving its premium product in 2013 by taking its additional A320s with a fixed business class. This will help improve Thai's overall regional product as an increasing number of Thai and Star Alliance passengers, including premium passengers, connect at Bangkok Suvarnabhumi to Thai Smile-operated flights. Thai Smile's hybrid model and fast-expanding network will be discussed in detail in a separate analysis article to be published later this week.

Nok has also been rapidly renewing its fleet, replacing 737-400s with 737-800s. Thai increased its involvement in Nok in late 2011 after upping its stake in the carrier from 39% to 49% and gaining additional seats on Nok's board. Nok is now being prepared for an IPO and for the resumption of international services, as CAPA reported in an analysis article which was published last week.

Nok and Thai Smile are important components of Thai's new multi-brand strategy, which is aimed at better capturing growth in the intra-Asia market while also fending off increasing competition. Thai mainline's operation will also continue to expand within Asia-Pacific as the group tries to reduce its reliance on the challenging European market. Europe now accounts for 37% of Thai's international ASKs.

Thai Airways international capacity share (% of ASKs) 04-Mar-2013 to 10-Mar-2013

Asia (excludes Australasia) accounts for 46% of Thai's international ASKs and 74% of its international seats. This will grow as Thai continues to expand within the region. The portion of the group's capacity which is allocated to the Asian market will also grow as Thai Smile and Nok pursues rapid expansion.

Thai's Asian expansion comes at a time when competitors are also expanding

But most of Thai's competitors are also growing in the intra-Asia market, some at an even faster clip. SIA regional subsidiary SilkAir and Cathay regional subsidiary Dragonair, both of which have models that Thai studied closely before deciding to establish Thai Smile, are growing at high double-digit clips. Malaysia Airlines (MAS) is also focusing heavily on its regional network as it similarly tries to reduce its reliance on long-haul markets.

Malaysia Airlines 2013 outlook clouded by intensifying competition and launch of Malindo

But LCCs pose the biggest threat to Thai, particularly Thai AirAsia. Thai AirAsia currently serves 13 domestic destinations and 19 international destinations, according to Innovata data. Its network will grow further in 2013 as it adds seven A320s for a total of 34 aircraft. Funds generated from a 2012 initial public offering are enabling Thai AirAsia to pursue accelerated expansion over the short to medium term.

Thai AirAsia already has surpassed Thai Airways as the largest domestic carrier in Thailand. Thai Airways is still a much larger carrier in the international market, offering over four times as many international seats. But AirAsia is now a bigger airline group in several key regional markets including Thailand-Malaysia, Thailand-Cambodia and Thailand-Indonesia.

According to Airports of Thailand data for the fiscal year ending 30-Sep-2012, Thai Airways accounted for 36% of passengers at Bangkok Suvarnabhumi while Thai AirAsia accounted for 12% and the overall AirAsia Group (including AirAsia Malaysia and Indonesia AirAsia) accounted for 14%. Suvarnabhumi handled 52.4 million passengers in FY2012, including 19 million for Thai Airways and 6.4 million for Thai AirAsia.

Bangkok Suvarnabhumi market share by carrier (% of passengers carried): year ending 30-Sep-2013

Thai and AirAsia talk about cooperation is not likely to amount to much

Thai Airways reportedly discussed possible cooperation with AirAsia during high level meetings in Feb-2013 involving Thai Airways' new president Sorajak Kasemsuvan and AirAsia Group CEO Tony Fernandes. But it is hard imagining significant cooperation between these competitors. In 2011 the AirAsia Group forged a partnership and stock swap with its Malaysia full-service rival MAS, but the deal was unbundled in 2012 and the two groups are no longer considering any form of partnership.

While a possible codeshare was reportedly discussed, this seems unlikely given Thai AirAsia on 01-Oct-2012 moved its entire base to Bangkok Don Muang Airport while Thai Airways has remained at Suvarnabhumi. As a result, it becomes very difficult for the two carriers to transfer passengers.

AirAsia's move back to Bangkok's old airport, which is closer to the city and less congested than Suvarnabhumi, could be seen as giving AirAsia a competitive advantage. But the Thai Airways Group also has a presence at Don Muang through Nok, and the AirAsia move has improved the situation at Suvarnabhumi to the benefit of its main user, Thai Airways. The airport had been operating above its capacity, leading to delays and higher operational costs for Thai Airways.

Thai AirAsia and Thai Airways are more likely to cooperate in the areas of aircraft maintenance and pilot training. The two carriers will certainly remain fierce competitors, with the Thai Airways Group using its mainline brand along with Thai Smile and an expanding Nok in an attempt to maintain its market share.

It will not be an easy battle as Thai AirAsia has a lower cost base than all of Thai's brands. While Thai Smile has a lower cost structure than Thai mainline as it has adopted some aspects of the LCC model, it is a hybrid carrier with a medium cost base. Nok also is not a pure LCC, offering some frills such as checked bags and snacks, and has a low to medium cost base. AirAsia is a pure LCC with one of the lowest cost bases in the industry.

LCCs have doubled passenger traffic in Thailand since 2009

While Thai will never be able to match AirAsia's costs structure, it needs to close the gap to be competitive. Thai recognises its costs are still too high despite years of reduction efforts. Thai has seen LCCs steadily expand their share of Thailand's market at the expense of Thai but has still not done nearly enough to try to combat this trend.

LCCs have expanded over the last decade from essentially zero to penetrating almost 30% of Thailand's total market. LCCs in 2012 accounted for 51% of domestic seat capacity in Thailand and 16% of international seat capacity, according to OAG data.

LCCs in the year ending 30-Sep-2012 accounted for 28% of passengers at major airports in Thailand, including about 50% of domestic passengers and about 16% of international passengers, according to Airports of Thailand data.

LCCs over the last four years have doubled their traffic at Thailand's main airports to over 20 million passengers, including 13.5 million domestic passengers and 6.9 million international passengers. The rate of LCC growth has been equal in both the domestic and international markets, sandwiching market leader Thai Airways.

LCC passenger growth at Thailand's main airports: FY2009 to FY2012

Thai Airways is again trying to further reduce its costs but will it be enough?

Recognising it needs to narrow the cost gap with LCCs, Thai says it is now deferring unnecessary investments and reducing personnel costs by cutting headcount and overtime expenses. It is also eliminating non-revenue tickets on high demand routes.

At the same time Thai is focusing on improving yield management by cutting unprofitable flights, adding frequencies on high demand routes particularly within Asia, adjusting flight timings to maximise demand, revising its fare strategy and driving its online distribution channel. Thai currently only sells about 10% of its tickets on the internet.

While Thai Airways has returned to the black, its profit margin for 2012 was only 3% and its outlook for 2013 and beyond is murky given the competitive landscape. The carrier has made the right moves in pursuing a multi-brand strategy and increasing focus on the regional market. But its lack of a true LCC will be exploited as LCC competition within Southeast Asia intensifies. Thai will also struggle to recoup its investments in improving its premium product as it does not have as strong of a product or as strong of a local premium market as SIA or Cathay.

Thai could potentially be squeezed at both ends as it faces increasing competition in both its short- and long-haul markets from carriers of all types. Thai has had its share of challenges over the last several years, including political instability, a spate of natural disasters, increasing competition in the Thailand-Europe market from Gulf carriers and increasing competition in the regional market from LCCs. 2013 will be no different and Thai could struggle to maintain its recently restored profitability.

Part Two

Part Two of this report, to be published later this week, will look at the 2013 outlook for Thai Smile, including the upcoming expansion of its network.