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Thai Smile strategy tweaked again as new hybrid continues to move upmarket

19-Dec-2012

Thai Airways has again adjusted the strategy of its new hybrid unit Thai Smile as the group struggles to determine the ultimate product mix and network. The latest changes include a dedicated business class cabin, which will be introduced in 2013 following delivery of Thai Smile’s seventh A320, and plans to convert the unit into a full subsidiary. Thai Smile also continues to tweak its network, dropping earlier plans to launch services from Bangkok to Hyderabad and Phuket to Singapore.

As Thai Smile represents an experiment for Thai Airways and the overall Asian market, it is not surprising to see almost continual changes to the operation. But all the changes reflect flaws in Thai Smile’s initial business model, which falls between low-cost and full-service. Thai Smile will likely evolve from a hybrid into more of a pure full-service regional subsidiary similar to Singapore Airlines’ SilkAir and Cathay Pacific’s Dragonair. 

Thai Smile launched services on 07-Jul-2012, initially operating two daily flights between Bangkok and Macau. The new Thai Airways unit, which for now is not considered a separate airline as it uses Thai’s TG code and air operators’ certificate, has since added domestic services from Bangkok to Chang Mai, Krabi, Phuket and Surat Thani. It also operates from Chang Mai to Phuket, the first of what is expected to be several point-to-point routes from Phuket and Krabi that bypass Thai’s Bangkok hub.

Thai Smile’s premium product strategy continues to evolve

The original business plan envisioned Thai Smile focusing on routes of two hours or less – with a couple of exceptions – and following a hybrid regional low-cost model. After looking at several options for its premium cabin, Thai Smile initially decided on a flexible business cabin similar to the product several major European carriers offer across their short-haul networks.

Thai Smile’s existing fleet of four A320s have standard economy seats in the entire 174-seat cabin but a movable curtain which allows up to five rows in the Smile Plus premium cabin. The first five rows offer slightly more legroom, with 33in pitch, compared to mostly 28in pitch in the back (some rows at the front of Smile class have 31in pitch). The Smile Plus product also includes light meals, a larger luggage allowance and bonus frequent flier miles.

Just prior to launch Thai Smile adjusted its premium product upmarket, deciding to block the middle seat in the Smile Plus cabin, which it originally planned to sell. The Smile Product at the same time was adjusted to include free alcoholic drinks (light meals and a 30kg luggage allowance were always planned as free).

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The Thai Airways Group has now made another much more major adjustment to the Smile Plus product by opting for a fixed business class cabin. Thai Smile’s original thinking was that normal economy class seats would be sufficient given its short routes. But the initial response from passengers was not overwhelmingly positive. The gap between Smile Plus and Thai’s Royal Silk business class product on regional routes has proven to be too big, particularly as Thai Smile flights are sold entirely under the TG code, which means all its flights fall under the Thai Airways and Star Alliance networks.

Unlike in the European market, Asian passengers are generally accustomed to a full business class service on short flights. While a lie-flat seat is not normally provided on regional routes within Asia, a fixed business class cabin and standard business class seat are expected along with a full meal service. Cathay and Singapore Airlines (SIA) make sure these are provided on their Dragonair and SilkAir subsidiaries as well as on their own regional widebody fleets. Asian full-service carriers that operate their own narrowbody aircraft – such as Malaysia Airlines and Garuda Indonesia – also have not followed European carriers and continue to offer a full business class product on their regional flights.

Thai Airways now recognises it must also offer a full business class service at its new regional brand to stay competitive in the Asian market. With over 20% of Thai Airways' revenues coming from its premium cabins, it cannot afford to risk losing premium passengers heading to markets that have been handed over or will be transferred later to Thai Smile. Offering a full business class is particularly important for premium passengers connecting to long-haul flights on Thai Airways.

Thai Airways revenue share (%) by class: Jan-2012 to Aug-2012

Thai Smile to introduce new dedicated Smile Plus cabin starting with seventh aircraft

In speaking to CAPA at the AAPA Assembly of Presidents in Nov-2012, Thai Airways EVP commercial Pandit Chanapai acknowledged that Thai Smile Plus “already has problems” and said Thai Smile is now planning to introduce “normal business class” with the introduction of its seventh A320. It is too late for Thai Smile to opt for a fixed business class on its next two aircraft, which Mr Chanapai says will be delivered in Jan-2013 and Feb-2013.

The latest Thai Airways Group fleet plan includes six leased A320s being added at Thai Smile in 2013 for a total of 10 A320s. Delivery dates for the final four A320s for 2013 have not yet been set but the aircraft are expected to be configured with fixed business class cabins. Thai Airways plans to lease five additional A320s in 2014 which again will feature the fixed business class cabins.

The group also placed an order in 2011 for five A320s, two of which are scheduled for delivery in 2014 and three of which are slated for delivery in 2015. These aircraft will also feature the new fixed business class cabin and are the last step in Thai Smile’s plan of operating 20 A320s by the end of 2015.

Thai Smile A320 fleet plan: 2012 to 2015

For now Thai Smile’s initial six aircraft will continue to be operated in the same configuration with a flexible business class. But Thai Smile could reconfigure the aircraft later.

A reconfiguration of the Smile Plus cabin would be logical to avoid confusion among customers and allow the carrier to interchange its aircraft on all routes. If the original aircraft are not reconfigured, Thai Smile would need to have two separate sub-fleets, one likely for domestic routes and the other for international routes.

Thai Smile model looks more and more like SilkAir model

In adopting a fixed business class, Thai Airways seems to be gravitating further towards the strategy used by SilkAir and Dragonair. Both subsidiaries offer fixed business class cabins and a full service in economy.

While Thai Smile is not yet offering a full service in economy, it comes pretty close as it includes a snack, a 20kg baggage allowance, advanced seat selection and 100% frequent flier mile accrual on Royal Orchid Plus or any other Star Alliance frequent flier programme. It would be logical for Thai Smile to upgrade its meal and drink service in economy (known as Smile Class), giving it an entirely full-service product.

From a network and operational perspective, Thai Smile is already following the SilkAir and Dragonair examples. Thai Airways plans to phase out its narrowbody fleet in 2015 and join SIA and Cathay as all-widebody operators. Thai currently only has five narrowbody aircraft, 737-400s, remaining in its mainline fleet. Thai Smile will be the group’s narrowbody operator and its A320s will be deployed on all of the group's thinner regional routes, particularly routes where competition against LCCs is intense.

SIA and Cathay now use their regional subsidiaries to operate A320 family aircraft on routes of up to five hours, such as Singapore-Kathmandu and Hong Kong-Rangoon (the latter launches in Jan-2013). Thai Smile has so far stayed away from such longer routes but this will likely change as Thai Smile moves upmarket. (Unlike SilkAir or Thai Smile, Dragonair also has a small widebody fleet consisting of A330s.)

As Thai Airways phases out its narrowbody fleet, the group will need Thai Smile to take over or launch medium-haul routes which otherwise are not viable. A full business class product is clearly needed on such routes to attract premium passengers, including point-to-point passengers.

Thai Smile adjusts network plans, dropping Hyderabad and Singapore

The Thai Airways Group plan since deciding in 2011 to establish a new regional unit (initially it was known as Thai Wing) has always been to use the new unit to take over Thai mainline routes as well as open up new destinations. The plan also has always been to operate a mix of domestic and international routes. Neither of these plans have changed dramatically although the portion of domestic versus international routes and of new versus existing routes has changed several times.

Since Macau was launched as the very first route on 07-Jul-2012, Thai Smile’s expansion has been entirely domestic. This is due in part to a decision to minimize costs and be conservative in the initial phase as international launches can be an expensive and risky proposition. But this did not drive the decision to not follow through on plans to launch what were supposed to be Thai Smile’s second and third international routes, Bangkok-Hyderabad and Phuket-Singapore.

Thai Smile in Aug-2012 set a 16-Sep-2012 launch date for four times weekly Bangkok-Hyderabad service. In early Sep-2012 the launch was pushed back to 29-Oct-2012. But in Oct-2012 Thai Airways decided not to proceed and instead have Thai mainline continue to operate the route.

Mr Chanapai explained that the group determined that “Hyderabad is not really a Thai Smile route,” partly because of the importance of cargo in the Hyderabad market. He said that initially Thai Airways planned to operate a dedicated freighter to Hyderabad at the same time as transitioning the passenger flights from Thai Airways A330-300s to Thai Smile A320s. But it subsequently decided cargo demand was not sufficient to support a dedicated cargo flight and that Thai Airways needed to continue operating widebody passenger aircraft to retain its presence in the Hyderabad cargo market.

He said Bangkok-Hyderabad was also a rather long route given Thai Smile’s current product. Under the initial business plan, Thai Smile was going to stick with routes of two hours or less with Bangkok-Macau, which is about three hours, the one exception. As a result the initial decision to take over Bangkok-Hyderabad, which is nearly four hours, was controversial. Hyderabad and other destinations in the three to five hour range will likely be re-considered once Thai Smile introduces its dedicated business class.

Singapore Changi slot issue prompts Thai Smile to revaluate Singapore market

Thai Smile initially unveiled plans in Jul-2012 to launch a daily flight between Phuket and Singapore starting on 01-Apr-2013. In Sep-2012 the launch date was moved up to 16-Jan-2013. But Mr Chanapai confirms the route has since been dropped entirely from Thai Smile's plans, explaining the carrier was unable to secure suitable slots at Singapore Changi Airport.

Changi has become heavily congested, particularly during peak hours, and is reluctant to authorise additional flights during certain times although exceptions are considered for new entrants operating totally new routes. As Phuket-Singapore is already well served – with SilkAir, AirAsia, Tiger Airways and Jetstar Asia combined currently operating 10 daily flights on the route – Changi declined to give Thai Smile the slot it requested. In addition to becoming more selective at approving new flights during peak hours, Changi has implemented a policy that blocks any additional turboprop flights from being added. Changi has a growing need for a third runway although there are also opportunities to increase movements by adopting European air traffic control standards and practices.

See related article: Singapore Changi’s decision to close budget terminal could backfire as need for third runway grows

Mr Chanapai said that Thai Smile, as it is not positioned as an LCC, is not interested in operating to Singapore at an off peak hour and as a result had to drop plans for Singapore when a slot at a desirable time could not be secured. If the slot situation at Changi changes, Thai Smile will put back plans to launch the route. Thai Airways does see room in the Phuket-Singapore market, which it served several years ago, for another carrier and believes Thai Smile is the right brand for the route. 

Thai Smile aims to open secondary hubs at Phuket and Krabi

Mr Chanapai claimed that despite the setback in Singapore Thai Smile still plans to use Phuket as a secondary hub and open point-to-point international routes from the island. The Thai Airways Group is keen to use Thai Smile to recapture market share lost at Phuket to LCCs over the last several years. Thai Airways now accounts for only about 25% of seat capacity at Phuket, including 3% for the Thai Smile brand, according to Innovata data. At its Bangkok Suvaranabhumi hub, Thai Airways currently accounts for 43% of total capacity, including 2% for the Thai Smile brand.

Mr Chanapai said Thai Airways is also looking at using Thai Smile to operate point-to-point international routes at Krabi, a resort destination on the mainland of Thailand that is about 170km from Phuket. Krabi is seen as an under-served destination with ample capacity while Phuket has become congested and cannot handle additional flights at certain hours. Krabi currently only handles about 14 daily flights from five carriers, including just two international services – Kuala Lumpur on AirAsia and Singapore on Tiger Airways.

Thai Smile now operates five daily flights between Krabi and Bangkok, making it the carrier’s largest route. Thai Smile has taken over entirely from Thai Airways at Krabi and one other domestic market, Surat Thani, where Thai Airways now offers two daily flights.

Thai Smile existing routes

Thai Smile supplements Thai mainline on Bangkok to Chang Mai and Phuket, which are the two largest domestic routes in Thailand. Thai Smile now operates two daily flights between Bangkok and Chang Mai and one daily flight from Bangkok to Phuket.

The Chang Mai-Phuket route is operated with one daily flight. This represents a new route for the Thai Airways Group although Thai operated it several years ago. Thai AirAsia also serves Chang Mai-Phuket with two daily flights.

While Thai Airways has not divulged financial figures for Thai Smile’s initial routes, from a load factor standpoint the operation has been successful so far. Bangkok-Macau had a load factor of 82% in its first month, Jul-2012, followed by 82% in Aug-2012, 71% in Sep-2012 and 82% again in Oct-2012. Thai Smile’s domestic operation reported load factors of 83% in Aug-2012, the first month domestic services were operated, followed by 75% in the typically weak month of September and 81% in October.

Thai Smile system-wide load factors: Jul-2012 to Oct-2012

Thai Smile eyes Luang Prabang service

While Bangkok-Hyderabad and Phuket-Singapore is out of the question, Thai Smile does plan to launch new international routes in 2013, including new markets for the group such as Luang Prabang in Laos. “We will do new routes because that is what Thai Smile is about,” Mr Chanapai said.

Thai Smile has requested authority to serve Bangkok-Luang Prabang but is currently waiting on final authorisation from the Laos government which is contingent on the opening of a new terminal at Luang Prabang. The Luang Prabang runway was recently extended, allowing for A320 operations, but the very small current terminal lacks the capacity to handle additional flights. Several carriers including SilkAir have expressed interest in launching services to Luang Prabang, which is a famous UNESCO heritage site, once the new terminal opens.

Thai Smile aims to launch Luang Prabang service in early 2013 but has not yet set a date or formally announced the new route. The service is intended to be seasonal as demand for Luang Prabang is relatively limited during the northern hemisphere summer season. Bangkok-Luang Prabang is now served by Bangkok Airways and Laos Airlines. Both carriers use ATR 72 turboprops on the route, with Lao Airlines providing one daily frequency and Bangkok Airways offering two daily flights in winter and one daily flight in summer.

Thai Airways already serves the Laos capital Vientiane with two daily 737-400 flights. Vientiane is one of several markets Thai Smile will likely take over as Thai phase outs its 737s and Thai Smile builds up its A320 fleet to 20 aircraft.

Other Thai Airways international markets prime to be taken over by Thai Smile include Penang in Malaysia and Phnom Penh in Cambodia. According to Innovata data, Thai Airways uses a mix of 737-400s and A300-600s on the Bangkok-Phnom Penh and Bangkok-Penang routes. The A300-600 is the smallest widebody in Thai’s fleet and, according to the group’s latest fleet plan, is scheduled to be phased out in 2014. Thai Airways currently operates nine A300-600s, primarily on domestic routes.

Potential new markets for Thai Airways Group that could be launched by Thai Smile include Siem Reap in Cambodia and Danang in Vietnam. There are also several new route opportunities in India and China should Thai Smile be used on longer routes, which will likely occur once the fixed business class cabin is introduced. SilkAir currently serves eight destinations in India and seven in China. The Thai Airways Group currently does not serve four of these SilkAir Indian markets (Coimbatore, Kochi, Trivandrum and Vishakhapatnam) and four of the SilkAir Chinese markets (Changsha, Chongqing, Shenzhen and Wuhan).

Danang, Penang, Siem Reap and Phnom Penh are also all SilkAir markets. Penang is one of a handful of markets which in recent years SIA has transitioned to SilkAir. On 18-Dec-2012 SilkAir unveiled plans to add a five daily flight on the Singapore-Penang route from the end of Mar-2013 as well as a fifth daily flight on Singapore-Phuket. The success of SilkAir on these two routes, where SilkAir is now much larger than its LCC competitors, provides hope for Thai Smile should it get its model and product positioning right.

See related article: Singapore Airlines regional unit poised for major growth after quietly emerging as SIA's gem

Thai Smile may not be low-cost but it can still be successful

Thai Airways initially established Thai Smile, thinking it could lower its costs on routes that had become unprofitable due to intense competition with LCCs. Thai Airways has particularly been impacted by the rapid expansion of Thai AirAsia. Thai Airways has seen its share on regional international routes from Thailand drop from over 40% to about 30% over the last decade while its share on domestic routes has dropped from over 80% to less than 40%. The Thai Airways Group is keen to use Thai Smile as well as expansion at its LCC affiliate Nok Air to recapture some of this traffic.

See related article: Thai Airways to use Thai Smile to fight back at AirAsia and rapid LCC growth in Thailand

Thai Smile ended up launching with a higher cost than Thai Airways Group executives initially envisioned, as many costs were simply passed on from Thai Airways to the new unit. But Thai Smile is still a lower cost operator than Thai Airways, just as SilkAir is a lower cost operator than SIA.

Thai Smile’s management team has been keen to avoid having Thai Smile branded as an LCC, saying it is only following the LCC model from an operational perspective. As CAPA reported in Mar-2012, following an interview with Thai Smile Managing Director Woranate Laprabang:

Mr Laprabang says the product is not designed according to the LCC model and Thai Smile aims “to capture the upper segment of low-cost”. He adds: “We don’t want to position ourselves as a low-cost. We are not a low-cost carrier. We are very much tied with the mother carrier, the mother brand. We even use the same TG carrier code. We cannot be too far away from the mother brand.”

He adds the advantage of Thai Smile is it has been built to adopt the LCC model on the operational side. With a LCC style operation (such as single fleet, high utilisation, quick turnarounds, maximum use of crew time and a lean organisational structure with a very small head office) Thai Smile is confident of meeting its goal of establishing a low to medium cost base, putting it below the medium to high cost base at Thai Airways.

An even lower cost structure from an operating perspective could be achieved once Thai Smile becomes a subsidiary company. In Nov-2012, Thai Airways announced that its board had “agreed in principle to establish Thai Smile as a subsidiary company”. The transition from a unit to subsidiary should not affect the brand’s overall position as the board decided that Thai Smile should still be positioned as “a regional airline operating short-haul flights with narrow-body aircraft that provides service to passengers with connecting flights on Thai, with its main operational base at Suvarnabhumi Airport”.

Thailand’s two main low-cost carriers, Thai AirAsia and Nok, now operate out of Don Mueang Airport, which further differentiates Thai Smile from LCCs. Don Mueang, Bangkok’s old airport, is closer to downtown and caters to point-to-point traffic.

A timeframe for transitioning Thai Smile to a subsidiary company has not yet been announced. Such a transition can take a couple of years to complete, as was the case with Citilink, which earlier this year became a subsidiary under Garuda Indonesia after initially being established as a business unit.

Transitioning Thai Smile to subsidiary structure is another example of following the models used by SilkAir and Dragonair, which are both subsidiaries. While network and other strategic decisions are made at these carriers at the group level, operationally they are independent, which allows them to have lower cost structures than their parent airlines. 

Thai Airways' outlook remains cloudy but Thai Smile should help

While Thai Smile moves upmarket and is positioned as a “light premium” carrier, the Thai Airways Group is backing accelerated expansion at Nok to capture the growth at the bottom end of the market. The group was originally planning to launch a second LCC brand which would have a lower cost base than Nok and be used primarily on international routes. But those plans were dropped earlier this year and Nok has unveiled new expansion plans that will see it launch international services in 2013.

See related article: Nok prepares to launch international operation in 2013 as Thai Airways drops plans for ultra LCC

A stronger Nok should give the Thai Airways Group sufficient coverage of the budget end of the market without having to pursue the ultra low-cost carrier it at one point aimed to establish with the Singapore-based Tiger Airways Group. The only potential component missing in the Thai Airways Group brand matrix would be a long-haul low-cost operator. But that could be achieved by launching a fourth brand or, more likely, expanding Nok into the long-haul sector. Thai Airways says expanding the Nok fleet, which now consists of 737s and ATR 72s, “to include widebody aircraft will be evaluated as opportunities arise”.  

Thai Airways Group brand matrix: as of Nov-2012

Thai Airways still has a mountain of challenges to overcome in implementing its medium and long-term strategy. The group’s strategy, including the strategy for the Nok and Thai Smile brands, has been in almost constant flux. Political changes in Thailand, which impact Thai Airways as the carrier remains primarily government owned, and frequent changes in management, makes it particularly hard for long-term planning. Thai Airways’ new CEO, Sorajak Kasemsuvan, has been only on the job for two months and is new to aviation, having previously worked in the media industry.

But the Thai Airways Group deserves credit for being willing to change and test out new models. Thai Smile should eventually become a successful carrier and subsidiary, matching – if it makes the right moves – the success of SilkAir. As the regional market in Asia remains strong, a failure would be inexcusable.


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