28-Nov-2014 11:47 AM

Bangkok Airways plans further expansion in 2015 with focus on Samui and international market

Analysis

Bangkok Airways has begun the first phase of its post-IPO fleet renewal and expansion programme with the 26-Nov-2014 delivery of its first ATR 72-600s. The Thai full-service carrier is also adding an A319 in Dec-2014, its fourth additional aircraft for 2014, giving Bangkok Airways a year-end fleet of 29 aircraft.

Bangkok Airways, which also expanded its fleet by four aircraft in 2013, plans to grow its A320 family fleet by another three aircraft in 2015 while replacing four of its ATR 72-500s. Further expansion of the fleet is expected in 2016 and 2017 using proceeds from its recent IPO.

The ATR delivery is a milestone for Bangkok Airways as it marks the first aircraft taken directly from a manufacturer. Bangkok Airways has ordered nine ATR 72-600s, which will be used primarily to replace its ATR 72-500 fleet, and is negotiating a potential order with Airbus for A320neo family aircraft.

Bangkok Airways takes first ATR 72-600

Bangkok Airways' fleet currently consists of 10 A319s, nine A320s, eight ATR 72-500s and one ATR 72-600, according to the CAPA Fleet Database. The ATR received on 26-Nov-2014 is the first of nine ATR 72-600s that was ordered earlier this year.

As CAPA previously outlined, Bangkok Airways initially placed an order in Feb-2014 for six ATR 72-600s. It subsequently lifted its commitment with ATR to nine aircraft by converting three options. All nine aircraft will be delivered by 2017.

Bangkok Airways president Capt Puttipong Prasarttong-Osoth told CAPA on the sidelines of the 18-Nov-2014 Association of Asia Pacific Airlines (AAPA) Assembly of Presidents that the first ATR 72-600 will be used as a growth aircraft. The remaining eight aircraft from the order, including four to be delivered in 2015, will be used to replace the carrier's eight ATR 72-500s.

Modest growth of the turboprop fleet is needed to support a new base in the northern Thai city of Chiang Mai which Bangkok Airways opened in late Oct-2014. Bangkok Airways now has one ATR 72-500 based at Chiang Mai which is used to operate three daily flights on three new routes - Udon Thani (double daily), Yangon (four times per week) and Mandalay (three times per week).

Bangkok Airways network diversifies with new Chiang Mai base

Bangkok Airways sees opportunities to potentially launch other new point to point turboprop routes from Chiang Mai and other secondary cities. But for now the new base at Chiang Mai is somewhat of an experiment. Bangkok Airways will assess in 2015 how the new turboprop routes are performing before deciding on potential expansion of the new point to point network.

Bangkok Airways has traditionally focused on routes from Bangkok and Koh Samui that have a high share of connecting traffic to foreign carriers. The four new turboprop routes at Chiang Mai as well as a new daily Chiang Mai-Phuket service, which was also launched in late Oct-2014 with A320s, mark a new chapter as previously Bangkok Airways' only route that did not touch Bangkok or Samui was Phuket-Utapao (served once daily with ATR 72s).

Bangkok Airways could potentially order more ATR 72-600s if its experiment with thin point to point sectors proves successful. But a more likely scenario would be to add more point to point routes using turboprops that are freed up as existing ATR routes at Bangkok and Samui are up-gauged to A320 family aircraft.

Bangkok Airways recent expansion has been primarily at Bangkok

Bangkok Airways' rapid expansion over the last two years has focused on additional flights at Bangkok and up-gauging flights at Bangkok and its second largest base, Samui. The up-gauging at Samui has involved transitioning flights from ATR 72s to A319s as Samui Airport cannot accommodate A320s due to runway restrictions. The up-gauging at Bangkok has involved transitioning ATR 72 flights to A319s and A319 flights to A320s as the carrier has expanded its A320 fleet.

Since Dec-2012 Bangkok Airways has added six routes from Bangkok (three domestic and three international) and increased frequencies to several existing domestic and international destinations. The new flights along with the up-gauging of several current flights have driven more than a 40% increase in seat capacity at Bangkok Suvarnabhumi over the last two years.

Bangkok Airways will offer about 140,000 weekly seats from Bangkok Suvarnabhumi in late Dec-2014, including 101,000 domestic and 39,000 international seats, according to CAPA and OAG data. This compares to 99,000 weekly seats for the same peak period in Dec-2012 including 67,000 domestic and 32,000 international.

Bangkok Airways currently accounts for about a 10% share of total seat capacity at Bangkok Suvarnabhumi. This includes nearly a 50% domestic share but only about a 4% share of the airport's much larger international market.

Its share of the Suvarnabhumi domestic market has increased significantly over the last two years due primarily to Thai AirAsia's move from Suvarnabhumi to Don Mueang Airport in late 2012. Thai Airways also has cut capacity in 2014 and moved some flights that are operated by its full-service regional subsidiary Thai Smile to Bangkok Don Mueang Airport.

Bangkok Suvarnabhumi capacity share (% of seats) by carrier: 24-Nov-2014 to 30-Nov-2014

Thai Airways LCC affiliate Nok Air and LCC start-up Thai Lion Air are also based at Don Mueang. Nok, Thai Lion and Thai AirAsia have all been pursuing rapid expansion in 2014, particularly in the domestic market, despite challenging market conditions.

Thailand's challenging domestic market impacts Bangkok Airways

Bangkok Airways is able to avoid competing with the Don Mueang-based LCCs to some extent as it relies heavily on offering short-haul connections with foreign carriers. But it does compete with the LCCs for local passengers as it cannot full up all flights with higher yielding connecting passengers. As a result Bangkok Airways has been impacted by the intensifying competition and overcapacity in Thailand's domestic market.

Bangkok Airways' domestic expansion also has come at a difficult time as it has coincided with rapid expansion from Thailand's LCCs and softening demand due to political instability.

The carrier's system-wide load factor was only 57.2% in 3Q2014 compared to 68.9% in 3Q2013. RPKs were up only 18% despite a 42% surge in ASKs.

The carrier's ASKs were also up 42% for the nine month period while RPKs were up 28%. Bangkok Airways' load factor for 9M2014 was 62.6% compared to 69.4% in 9M2013, an indication of the intense competition and weak demand in the Thai market as political instability impacted inbound visitor numbers and local consumer spending.

Bangkok Airways' load factors have traditionally been low due to day of the week and time of day imbalances as well as seasonal fluctuations. This is a consequence of its reliance on connections with international carriers, which generate higher average yields but make it difficult to achieve consistently high load factors.

For example there is stronger demand for short-haul connecting flights from Bangkok in the morning, when most long-haul flights arrive, while demand is stronger for short-haul arriving flights in the evening. As a result Bangkok Airways flights are often full from Bangkok in the morning but return relatively empty while in the evening flights on the same route are relatively empty out of Bangkok but full on the return.

Generally these imbalances are sufficiently offset by higher yields. However, this year load factors on some domestic routes from Bangkok have slipped below break-even due to a combination of overcapacity and weaker demand.

Bangkok Airways is wisely not planning further domestic capacity expansion at Bangkok in 2015. As the carrier has already expanded domestic capacity in the Bangkok market by 50% over the last two years it is sensible for the airline to give it time for this capacity to be absorbed - and for conditions to become more favourable - before it considers further expansion.

Bangkok Airways expansion at Samui has been much slower

Samui is a more attractive market for expansion as it is not served by any of Thailand's LCCs. Samui is Bangkok Airways' second largest base, accounting for about 34% of its total seat capacity.

Bangkok Airways top 10 hubs/bases/stations based on system-wide capacity (seats): 22-Dec-2014 to 28-Dec-2014

Bangkok Airways accounts almost 90% of total seat capacity at Samui. The airport, which is owned and operated by Bangkok Airways, is also currently served by Thai Airways, SilkAir, Malaysia Airlines (MAS) regional subsidiary Firefly and China's Lucky Air.

But Thai Airways operates only two daily flights to Samui from Bangkok, a route Bangkok Airways serves with up to 25 flights per day. Singapore Airlines (SIA) regional subsidiary SilkAir and Malaysia Airlines (MAS) regional subsidiary Firefly each operate one daily flight to Samui, from Singapore Changi and Kuala Lumpur Subang respectively. China's Lucky Air currently operates three weekly flights from Kunming to Samui, according to OAG data.

Bangkok Airways has been able to expand capacity at Samui by approximately 15% to 20% over the last two years. Bangkok Airways will offer almost 56,000 weekly seats from Samui in late Dec-2014, including 48,000 domestic and 8,000 international. This compared to 48,000 weekly seats in Dec-2012, including 40,000 domestic and 8,000 international, according to CAPA and OAG data.

Bangkok Airways has expanded at Bangkok over the last two years at a clip that is three times faster. Bangkok Airways would have expanded much faster at Samui but has been limited by slot constraints. The airport has been capped by Thai environmental authorities to 36 daily return flights in recent years. Bangkok Airways has only been able to add capacity by up-gauging flights from ATR 72s to A319s.

Bangkok Airways hopeful for opportunity to expand at Samui

As CAPA previously analysed, an expansion of the cap at Samui from 36 to 50 return flights has been under consideration by Thai authorities. Bangkok Airways had initially hoped approval to increase the cap to 50 flights would come prior to the start of the 2014 northern winter schedule but is still waiting for final approval.

Capt Puttipong told CAPA on 18-Nov-2014 that he is confident the cap at Samui will be increased by early 2015. This should enable Bangkok Airways to add flights at Samui before the start of the 2015 northern summer schedule.

Bangkok Airways is not planning a sudden increase of 14 daily flights but will gradually expand in phases. Bangkok Airways currently only operates the maximum number of flights during peak periods. But with a larger cap the carrier sees an opportunity to increase the off peak schedule while building up the peak season schedule to the new 50 daily flights figure. (Note: the cap includes the small number of flights operated by other carriers, which Bangkok Airways handles.)

Bangkok Airways eyes more capacity on Samui international routes

The initial focus will be on adding flights on existing routes rather than launching new services. Bangkok Airways foresees potentially adding one additional daily frequency on all three of its international routes from Samui - Hong Kong, Kuala Lumpur and Singapore. Hong Kong is currently served twice daily while Kuala Lumpur and Singapore are each served with one daily flight.

SilkAir also operates one daily flight on the Samui-Singapore route as part of a codeshare partnership with Bangkok Airways. The Samui-Singapore market could potentially support two daily flights from both SilkAir and Bangkok Airways as Changi is a popular connection point for Samui-bound passengers, particularly Europeans and Australians. (SilkAir may need to eventually hand over its Samui flights to Bangkok Airways as it plans to phase out its A319 fleet in a few years. SilkAir is transitioning its A319/A320 fleet to 737-800s, which cannot access Samui, but could potentially convert some of its 737-800 orders to the smaller 737-700 which can access Samui.)

Offering two daily flights to Kuala Lumpur is ideal as it would facilitate quick connections in both directions to several destinations. MAS is one of Bangkok Airways' 14 codeshare partners but quick connections in several key markets - such as Amsterdam, Frankfurt and Paris - are not available in both directions as they are via Singapore and Hong Kong. (While Firefly also serves Samui the MAS subsidiary operates from Kuala Lumpur Subang while Bangkok Airways is the only carrier linking Samui with Kuala Lumpur International, where MAS is based.)

Bangkok Airways also has seen high demand for Samui-Kuala Lumpur from its partners in the Middle East. Bangkok Airways codeshares with Etihad and Qatar while Emirates is its largest interline (and overall) partner. All three Gulf carriers have a large presence in Bangkok as well as Kuala Lumpur and Singapore.

Most of Bangkok Airways' connection traffic to Samui comes via Bangkok but several of the carrier's partners are keen to offer Samui through a combination of transfer points. The increase in slots at Samui should enable Bangkok Airways to significantly increase connection options to Samui. (Bangkok Airways also codeshares with Cathay Pacific, which provide options for Samui bound passengers originating in North Asia and North America.)

Domestically Bangkok Airways is keen to use additional Samui slots to add a second daily flight to Chiang Mai and Utapao.

Bangkok Airways also currently operates from Samui to Krabi and Phuket. The carrier would be keen to add more flights from Samui to Phuket, which is already served with five daily flights, but slot constraints at Phuket make a Phuket increase unlikely. (Bangkok Airways could potentially instead up-gauge some of its Samui-Phuket flights from ATR 72s to A319s although a turboprop is preferred as it is a very short sector.)

Bangkok Airways not yet ready to launch flights from Samui to mainland China

Bangkok Airways could also eventually use some of the new slots at Samui to launch services to mainland China. But for now Bangkok Airways does not believe there is sufficient demand for direct Samui-China services. The Samui-China market will instead continue to be served via Bangkok.

While Samui has started to attract upmarket Chinese travellers, Chinese visitors for now are generally travelling to Bangkok, Chiang Mai, Chiang Rai, Phuket and Krabi - with Bangkok Airways providing some of the domestic connections. Bangkok Airways believes the China-Samui market is not yet mature and Samui's hotels are not yet prepared for the Chinese market.

Samui has accommodated a small number of direct flights from Chinese carriers. But for now Samui's tourism sector seems to continue to be focused on other Asian source markets as well as Europeans and Australians. Over time inevitably this will change.

Bangkok Airways to add three more A320 family aircraft in 2014

Bangkok Airways continues to expand its A319 fleet in the anticipation of additional slots becoming available at Samui. Bangkok Airways plans to add one A319 in Dec-2014, giving it 11 of the type.

Bangkok Airways executives told CAPA the carrier is planning to further expand the A319 fleet in 2015. The carrier is negotiating leases on three additional A320 family aircraft for 2015 - a mix of A319s and A320s.

All of Bangkok Airways' A320 family aircraft are currently leased, according to the CAPA Fleet Database. Bangkok Airways for now continues to rely on leasing companies and stick with second hand aircraft. While it has previously leased new aircraft all of its additions in recent years have been used aircraft.

Bangkok Airways' A320 family fleet currently has an average age of about eight years. Its A320s are all between eight and 11 years old while its A319s between six and nine years old, according to the CAPA Fleet Database.

Bangkok Airways average fleet age: as of 27-Nov-2014

Bangkok Airways is seeking to reduce the age of its fleet over the medium to long term. The ATR 72-600 acquisition will reduce the average age of its turboprop fleet from 11 years currently to less than two years in 2017.

Bangkok Airways also is now negotiating with Airbus a potential order for new-generation A320neo family aircraft. A319neos and A320neos are expected to be acquired to replace current generation A319/A320ceos as well as to support continued growth.

The company expects to use most of the THB13 billion (USD400 million) of proceeds from its recent IPO, which was completed at the beginning of Nov-2014, to fund the acquisition of new turboprop and jet aircraft.

Bangkok Airways cuts capacity in Chiang Rai and Udon Thani markets

Bangkok Airways originally planned to add two A319s in 4Q2014 but Capt Puttipong said one of the lease deals was scrapped as the condition of the aircraft was not satisfactory. As Bangkok Airways will have fewer aircraft than originally planned for the peak northern winter season it has had to make some adjustments to its schedule. Bangkok Airways has elected to cut capacity to Chiang Rai and Udon Thani, its two newest domestic routes.

Bangkok-Udon Thani was launched in late 2013 while Bangkok-Chiang Rai was launched in Mar-2014. Both routes are being cut from three to two daily flights, a sensible move given the intense competition in Thailand's domestic market.

The Bangkok-Udon Thani market has particularly become intensely competitive as a result of a surge in LCC capacity, driven by additional flights from Nok and Thai AirAsia and the launch of service from Thai Lion. Bangkok Airways has had to rely heavily on local traffic in Udon Thani as there are significantly fewer international connections to these destinations than its other more longstanding domestic markets.

Bangkok Airways aims to restore a thrice daily schedule to Chiang Rai and Udon Thani later in 2015 as more aircraft are delivered. The carrier believes at least three flights are needed across domestic trunk routes to maintain loyalty from local business passengers. But maintaining such a schedule could prove to be difficult over the long-run in markets that do not have significant volumes of connecting passengers.

With the launch of Chiang Rai and Udon Thani, Bangkok Airways now competes in most of Thailand's major domestic trunk routes. Of the eight largest domestic routes in Thailand, Bangkok Airways only is now absent on two - Bangkok to Hat Yai and Surat Thani.

Bangkok Airways to focus on expanding international network and partnerships

Bangkok Airways has no plans for further expanding its domestic network in 2015. Chiang Rai and particularly Udon Thani have been challenging and need time to mature. Bangkok Airways is also keen to stay away from LCC competition, which will likely further intensify in the domestic market as Thai Lion, Nok and Thai AirAsia continue to pursue rapid expansion while a fourth LCC, Thai VietJet Air, prepares to launch services.

Bangkok Airways will instead focus on Samui and the international market as it continues to expand its fleet. Bangkok Airways has found the domestic market to be much more challenging this year than the international market. The domestic market will likely remain more challenging for at least the next year.

While Bangkok Airways is not looking at more domestic expansion from Bangkok it is planning to launch at least one international destination from Bangkok in 2015. New regional destinations within Southeast Asia are under consideration.

Bangkok Airways currently links Bangkok with three destinations in South Asia (Dhaka, Male and Mumbai) and previously served North Asia from Bangkok (China and Japan). But the carrier is better off growing its regional niche from Bangkok. This is sensible as its partners use Bangkok Airways for domestic and regional short-haul connections, particularly to neighbouring Cambodia, Laos and Myanmar. Cambodia, Laos and Myanmar account for over 60% of the carrier's international seat capacity.

Further expansion of the domestic network would be risky and increase Bangkok Airways' exposure to the most challenging sector of Thailand's market. As the airline starts to renew and expand its fleet the focus should be on cementing and leveraging its highly successful niche in providing connections to full-service carriers.

Bangkok Airways is looking to further grow its strong portfolio of partners and is in the process of completing a codeshare with Garuda Indonesia, which should become its 15th codeshare partner within the next couple of months. New partnerships and enhancements to existing partnerships should enable Bangkok Airways to continue growing capacity without having to increase its exposure to the highly competitive local market. The anticipated increase in slots at Samui should also boost Bangkok Airways' outlook in 2015 as it will enable the carrier to avoid having to again allocate most of its additional capacity to the more competitive Bangkok market.

Market conditions in Thailand have been extremely challenging in 2014 and are expected to only improve slightly in 2015. Bangkok Airways has been impacted by the political instability but remained profitable through the first nine months of 2014 despite a sharp increase in capacity. The airline should be able to improve its financial position in 2015 while continuing to expand by focusing on markets that are not suffering from overcapacity or irrational competition.

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