Bangkok Airways Part 2: Plans for further network, fleet & partnership portfolio expansion for 2016

This is Part 2 in a series of analysis reports on Bangkok Airways, which recently received the CAPA 2015 Asia Pacific Regional Airline of the Year award. The first report examined the financial performance of Bangkok Airways compared to other Thai carriers in 3Q2015 and the first nine months of 2015.

See related report: Thailand airline sector: Bangkok Airways again outperforms Thai Airways, Thai AirAsia, Nok Air in 3Q

This report will focus on Bangkok Airways expansion plans for 2016, including fleet growth, potential new routes and planned new codeshare partners.

Bangkok Airways to add three more A320 family aircraft in 2015

Bangkok Airways currently serves 11 domestic and 13 international destinations with a fleet of 30 aircraft. It currently has 18 routes from Bangkok (10 international and eight domestic) and eight routes from Samui (three international and five domestic).

The carrier plans to take delivery of three aircraft in Dec-2015, including two ATR 72-600 turboprops and one A319. The ATR 72-600s are replacing older model ATR 72-500s while the A319 is a growth aircraft. Bangkok Airways therefore plans to end 2015 with a fleet of 31 aircraft including 12 A319s, eight A320s, five ATR 72-600s and six ATR 72-500s.

Bangkok Airways SVP Peter Wiesner told CAPA on the sidelines of the 23-Nov-2015 CAPA Asia Aviation Summit that the carrier is now seeking to lease three additional A320 family aircraft for delivery in 2016. It is already committed to taking three more new ATR 72-600s in 2016 but these will replace three existing older model ATR 72-500s.

Bangkok Airways SVP Peter Wiesner discusses expansion plans for 2016, current market conditions and the upgrade of Samui Airport

Source: CAPA TV (23-Nov-2015)

Bangkok Airways expects to resume double digit passenger growth in 2015

Mr Wiesner stated that Bangkok Airways aims to carry 6 million passengers in 2016. It carried 3.9 million passengers through the first three quarters of 2015 and expects to end 2015 with 5.2 million passengers, representing growth of about 9% compared to 2014.

Passenger traffic growth is projected to accelerate to 15% in 2016, roughly matching 15% growth from 2014. Bangkok Airways recorded similar double digit growth in passenger numbers 2012 and 2013.

Bangkok Airways annual passenger traffic: 2011 to 2016*

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Note: *projected
Source: CAPA - Centre for Aviation and company reports

Samui will drive a large portion of the growth as 2016 will mark the first full year of Bangkok Airways' expanded schedule at Samui. As CAPA previously highlighted, Bangkok has been gradually adding flights in Samui since Mar-2015.

See related reports:

• Bangkok Airways outlook brightens as expansion at Samui Airport begins
• Bangkok Airways plans further expansion in 2015 with focus on Samui and international market

Passenger traffic at Samui growing again

Bangkok Airways reported 14% increase in its Samui traffic for 3Q2015 to 535,000 passengers. Samui accounted for 41% of its total passenger traffic in 3Q2015 compared to 40% in 3Q2014.

The growth at Samui in recent months ended a period of declining traffic. Bangkok Airways' passenger traffic at Samui declined slightly (about 1% to 2%) in 2014 and 1H2015.

Samui traffic is expected to further increase in 2016 as Bangkok Airways continues to add flights to the island, resulting in full utilisation of the new cap of 50 daily flights.

Bangkok Airways' domestic operation at Samui will expand with a planned second daily flight to Chiang Mai and even more flights to Bangkok. In recent months Bangkok Airways has already added capacity from Samui to Bangkok and Phuket, which it currently serves with up to 27 and six daily flights respectively. It also links Samui with Krabi and U-Tapao/Pattaya with one daily flight on each route.

Bangkok slowly expands Samui international operation

Meanwhile internationally Bangkok Airways is planning to upgrade Samui to Kuala Lumpur and Singapore service to double daily in 2016. It also aims to launch a daily flight from Samui to Guangzhou and is seeking slots at Hong Kong to support a third daily flight Samui-Hong Kong flight.

Bangkok Airways currently has 37 weekly international flights at Samui including 14 to Hong Kong, 12 to Singapore and 11 to Kuala Lumpur. In Mar-2015 Bangkok Airways increased Kuala Lumpur from seven to 11 weekly frequencies and Singapore from seven to 10 weekly frequencies. At the beginning of Dec-2015 Singapore was increased from 10 to 12 weekly frequencies.

The gradual increases on Kuala Lumpur and Singapore from seven to 14 weekly flights are sensible as it prevented a sudden surge of additional capacity. These are niche routes as Bangkok Airways does not serve Kuala Lumpur or Singapore from Bangkok. It also does not link Bangkok with Hong Kong or Guangzhou, which will be the first of several potential destinations in mainland China for Samui.

Chinese market could be key to future growth at Samui

Demand for Samui decreased in 2014 as total visitor numbers to Thailand decreased, in particular visitor numbers from China, due to political instability in Bangkok. But demand for Samui is now increasing significantly again, driven in part by China's booming outbound market.

Bangkok Airways now serves the fast growing China-Samui market via Hong Kong through a codeshare with Cathay Pacific and via Bangkok through interlines with several Chinese carriers. Over the last year Bangkok Airways has seen a huge increase in interline traffic from China Eastern and China Southern. It is now working on upgrading its China Eastern and China Southern interlines to codeshares, which should drive further Chinese passenger growth on Bangkok-Samui as well as on other sectors such as Bangkok to Chiang Mai, Chiang Rai and Krabi.

But even faster growth can be achieved by opening new direct flights from Samui to China, starting with Guangzhou. Several new routes from Samui to mainland to China could be launched if Bangkok Airways succeeds at persuading environmental authorities to increase the cap on flights at Samui to 75 daily return flights. With 25 additional flights, Bangkok Airways would have the flexibility to further boost capacity to existing destinations and launch new routes.

Bangkok Airways to upgrade and expand Samui Airport

Bangkok Airways is now investing in modernising and expanding the Samui Airport using some of the proceeds from its Nov-2014 initial public offering. It plans to start construction in 2Q2016 of a new terminal, which would enable the Samui Airport to accommodate more passengers and also facilitate connections. Bangkok Airways sees an opportunity to start using Samui as a hub but the current layout of the airport was not designed for connections.

Samui is an important differentiator for Bangkok Airways as it is virtually the only airline serving Samui. Currently there are only three other airlines serving Samui including Thai Airways with two daily flights from Bangkok, Singapore Airlines regional subsidiary SilkAir with one daily flight from Singapore and Malaysia Airlines regional subsidiary Firefly with four weekly from Kuala Lumpur Subang and three weekly flights from Penang.

In theory the airport can be accessed by other airlines. But high landing fees and runway restrictions make it highly unlikely Samui will be served by low cost carriers. The airport currently can handle A319s and 737-400s but not A320s or 737-800s. Bangkok Airways would not be keen in potentially accommodating larger aircraft as such an upgrade could open up the prospect of LCC competition.

Bangkok Airways is also able to minimise its exposure to LCC competition in the Bangkok market by focusing on codeshare/interline traffic and operating several routes that are not served by LCCs. As CAPA outlined in the first instalment in this series, carving out a niche that does not overlap with Thailand's fast expanding and highly competitive LCC sector has been critical for Bangkok Airways recent success and emergence as Thailand's most profitable airline.

Of Bangkok Airways' 10 international routes from Bangkok, six are not served by any LCCs - Dhaka (Bangladesh), Nay Pyi Taw (Myanmar), Luang Prabang (Lao), Male (Maldives), Mumbai (India) and Vientiane (Lao).

Bangkok Airways plans to add Vietnam and fourth Myanmar destination

Bangkok Airways plans to launch service in 2016 from Bangkok to Da Nang in central Vietnam, a route not currently served by any carrier. Da Nang would be Bangkok Airways' first destination in Vietnam, extending its international network to 10 countries. The Vietnamese island of Phu Quoc is also under consideration.

Bangkok Airways is not interested in serving Hanoi or Ho Chi Minh as these much larger Vietnamese markets are highly competitive. As Bangkok Airways looks to expand its international network it is more interested in secondary destinations in the Indochina region, in particular Vietnam and Myanmar.

In Myanmar a potential fourth destination is being evaluated. Bangkok Airways already has more flights to Myanmar than any other foreign carrier. It has more than doubled its seat capacity to Myanmar since 2013 and currently has almost 6,000 weekly one-way seats on five routes to Myanmar - Bangkok to Yangon, Mandalay and Nay Pyi Taw and Chiang Mai to Yangon and Mandalay.

Bangkok Airways one-way weekly seat capacity to Myanmar: Sep-2011 to May-2016

Source: CAPA - Centre for Aviation & OAG

Additional destinations will cement Bangkok Airways' strong position in Myanmar, where it is providing its partners access to an increasingly important market.

Technically Nay Pyi Taw, Mandalay and Yangon are the only designated international airports in Myanmar. But Myanmar is looking at opening up more secondary airports for international services and it is also possible for Bangkok Airways to negotiate access to a Myanmar airport on an ad hoc basis. For example an arrangement was made in 2013 and 2014 with Nok Air, which for slightly less than a year served Mawlamyine in western Myanmar with Saab 340 turboprops.

Bangkok Airways also provides its partners important offline access to Cambodia and Lao, two smaller but fast growing Indochina where Bangkok Airways is currently the second largest foreign carrier.

Bangkok Airways international seat capacity by country: 7-Dec-2015 to 13-Dec-2015

Source: CAPA - Centre for Aviation & OAG

Outside Indochina, Bangkok Airways is exploring potential new destinations in India. Bangkok Airways currently serves Mumbai, its only Indian destination although it also serves two smaller South Asian markets in the Maldives and Bangladesh.

Bangkok Airways competes against LCCs on nine of its Bangkok routes

None of the new potential international routes are currently served by LCCs. Bangkok Airways currently faces LCC competition on only 10 of its routes, including nine from Bangkok and from Chiang Mai to Phuket.

Domestically it competes on four trunk routes - Bangkok to Chiang Mai, Chiang Rai, Krabi and Phuket - with all three of Thailand's short-haul LCCs (Nok Air, Thai AirAsia and Thai Lion Air). It also has limited LCC competition on the much smaller Bangkok to Lampang route, which is also served by Nok Air.

Bangkok Airways does not compete against LCCs domestically from Bangkok to Samui, Sukhothai and Trat. Sukhothai and Trat are two small secondary cities where it also owns airports.

In the international market Bangkok Airways competes against Thai AirAsia on four routes from Bangkok to neighbouring Cambodia and Myanmar - Phnom Penh, Siem Reap, Mandalay and Yangon.

Phnom Penh (PNH) and Siem Reap (REP) are its largest international routes with five daily flight. Bangkok Airways plans to add a sixth daily frequency to Phnom Penh in early 2016. Bangkok-Yangon (BKK-RGN) is its third largest international route with four daily flights while Bangkok-Mandalay (MDL) is currently served with one daily flight.

Bangkok Airways top 10 international routes ranked by weekly frequencies (to/from): 7-Dec-2015 to 13-Dec-2015

Source: CAPA - Centre for Aviation & OAG

Bangkok Airways generally has enough high yielding connecting passengers from its partners to serve these markets without having to compete directly with LCCs. Domestic trunk routes that have mainly only local demand have traditionally not worked for Bangkok Airways. For example Bangkok Airways suspended services to Udon Thani in Oct-2015.

Udon Thani had been served from Bangkok for two years but was a challenge from the beginning as it is not a popular destination for foreigners. As LCCs rapidly expanded in the Udon Thani market Bangkok Airways simply could not compete and wisely withdrew, opting to redeploy capacity to market where it can generate sufficient yields to cover the higher cost structure which comes with its full service product.

As CAPA highlighted in the first report in this series, about 70% to 80% Bangkok Airways passengers originate from regions outside its own area of operations, which includes Thailand and nine countries (Bangladesh, Cambodia, Hong Kong, India, Laos, Malaysia, the Maldives, Myanmar and Singapore). Udon Thani was an exception as it relied almost entirely on price sensitive local passengers.

Bangkok Airways adds capacity on Chiang Mai-Myanmar routes

Bangkok Airways has had some success on smaller routes that rely almost entirely on local traffic but these have limited or no competition. For example Bangkok Airways is the only carrier from Chiang Mai to Mandalay and from Phuket to Hat Yai while it competes only against a Myanmar-based carrier on Chiang Mai to Yangon.

The two Chiang Mai routes were launched in late 2014 and recently increased, with Chiang Mai-Mandalay going from three to four weekly frequencies and Chiang Mai-Yangon going from four to seven weekly frequencies. With these routes Bangkok Airways has been able to leverage its strong presence in the Myanmar market as well as in northern Thailand. It is keen to develop more such point to point routes using its turboprop fleet as LCCs are unlikely to be able to penetrate these type of markets.

Phuket to Hat Yai was launched in Oct-2015 with one daily ATR 72 flight. This route is a rather unusual experiment as Bangkok Airways does not otherwise serve Hat Yai and is not interested in competing with LCCs in the Bangkok-Hat Yai market. Hat Yai, a relatively largest city in southern Thailand but with relatively limited demand from tourists outside Asia, replaced Udon Thani as Bangkok Airways eleventh domestic destination.

Bangkok Airways continues to grow portfolio of codeshare partners

Slightly over 30% of Bangkok Airways passengers fly on tickets sold by its airline partners through interlines and codeshares. Another 40% to 50% of its passengers come from outside the region but buy separate tickets which are issued by Bangkok Airways. Several of these passengers are familiar with Bangkok Airways as they arrive in Thailand on partner carriers.

Bangkok Airways has rapidly been expanding its portfolio of codeshare partners, enabling to grow codeshare traffic as it has continued to expand overall. Bangkok Airways currently codeshares with 20 airlines compared with just nine in early 2012.

Bangkok Airways has implemented four new codeshares in 2015 and plans to add at least five more in 2016. New deals with Austrian and China Eastern are now in the process of being implemented. Bangkok Airways is also now working on new codeshares with Philippine Airlines, Korean Air and China Southern.

The five additions will give Bangkok Airways partnerships with 22 foreign airlines in the Bangkok market. (Bangkok Airways also has a limited codeshare with Thai Airways, a codeshare with SilkAir which is limited to routes from Samui and a codeshare with airberlin which no longer serves Bangkok.)

Combined the 22 partners account for about 29% of international seat capacity at Suvarnabhumi, or nearly 50% of foreign carrier seat capacity.

Bangkok Airways existing/planned codeshare partners at Bangkok Suvarnabhumi ranked by weekly seat capacity

Rank	Airline		Total Seats	Capacity Share
1	EK	Emirates Airline	51,184	4.4%
2	CX	Cathay Pacific	37,352	3.2%
3	QR	Qatar Airways	30,366	2.6%
4	CZ	China Southern Airlines*	28,530	2.5%
5	EY	Etihad Airways	19,386	1.7%
6	BR	EVA Air	18,844	1.6%
7	CI	China Airlines	18,244	1.6%
8	MU	China Eastern Airlines*	17,004	1.5%
9	KE	Korean Air*	16,618	1.4%
10	MH	Malaysia Airlines	15,974	1.4%
11	JL	Japan Airlines	15,640	1.3%
13	SU	Aeroflot	11,256	1.0%
14	9W	Jet Airways	9,728	0.8%
14	PR	Philippine Airlines*	8,608	0.7%
15	AY	Finnair	7,760	0.7%
16	KL	KLM Royal Dutch Airlines	5,736	0.5%
17	GA	Garuda Indonesia	5,495	0.5%
18	OS	Austrian Airlines*	4,326	0.4%
19	AF	Air France	4,188	0.4%
20	QF	Qantas Airways	4,158	0.4%
21	BA	British Airways	3,528	0.3%
22	KC	Air Astana	2,230	0.2%
		TOTAL	336,155	29%

Notes: *planned codeshare partner
based on weekly seat capacity for week commencing 7-Dec-2015
excludes Thai Airways, which has limited codeshare with Bangkok Airways
Source: CAPA - Centre for Aviation and OAG

As CAPA outlined in the first instalment in this series, Bangkok Airways codeshare partners collectively grew seat capacity by 24% in 2015 at Bangkok, Kuala Lumpur and Singapore and are projected to grow capacity at these three gateways by a further 14% in 1Q2016. (While its main hub is at Suvarnabhumi, Bangkok Airways also codeshares with several of its partners from Kuala Lumpur and Singapore to Samui.)

Bangkok Airways expects to slow down its drive to add codeshare partners after 2016 but there still should be opportunities to grow traffic as its partners continue to expand. Mr Wiesner said the codeshare portfolio will likely not exceed 25 to 27 airlines.

For smaller carriers maintaining existing interlines is sufficient. Even for some existing smaller partners the volumes may not be sufficient to justify maintaining codeshares and could possibly be downgraded to an interline arrangement.

EU blacklist could impact Bangkok Airways

Bangkok Airways may also be forced to temporarily downgrade codeshares with European carriers to interlines should Thailand be placed on the blacklist by the EU. Thailand's DCA was already red flagged by ICAO in early 2015 and at the beginning of Dec-2015 it received a Category 2 safety ranking from the US FAA. Under a Category 2 rating Thai carriers cannot carry the code of any US carrier but Bangkok Airways was not impacted by the FAA downgrade as it does not codeshare with any US carriers.

Being placed on the EU blacklist would obviously impact Bangkok Airways' outlook for 2016 as it would no longer be able to carry the code of its five Western European partners. The EU could be placing all Thai carriers including Bangkok Airways on the blacklist as part of an update that is expected to be published in mid Dec-2015.

Bangkok Airways however should still be able to carry most of the passengers coming from European carriers through interlines or separate tickets. Europe also accounts for a smaller portion of its partnership traffic compared to a few years ago as the Gulf carriers have overtaken European carriers as Bangkok Airways' largest partners.

Overall Bangkok Airways has a relatively bright outlook as it continues to grow codeshare traffic, particularly from Gulf carriers and new partners in North Asia. The opportunity to further expand in Samui and niche markets such as Myanmar also put Bangkok Airways in a strong position.

Bangkok Airways has flexibility to adjust fleet

Another major strength of Bangkok Airways is its flexibility to slow down or accelerate growth should market conditions become unfavourable. Bangkok Airways typically commits to leasing additional A320 family aircraft only a few months prior to delivery, giving it the opportunity to adjust its short term fleet plan. It has this luxury as the carrier has mainly been expanding with second hand A319s, a type that is in relatively low demand but is needed for Samui.

For example Bangkok Airways was initially planning to add three A320 family aircraft in 2H2015 but ultimately only decided to commit to one aircraft. It also ended up adding one fewer A320 family aircraft in 2H2014 than originally planned.

Bangkok Airways fleet: end 2013 to end 2015

Aircraft	end 2013	end 2014	end 2015
Total:	25	27	31
Airbus A319-100	10	10	12
Airbus A320-200	7	8	8
ATR 72-500	8	8	7
ATR 72-600	0	1	4

Source: CAPA - Centre for Aviation

Bangkok Airways has been able to backfill some of the capacity by delaying the retirement of some ATR 72-500. It initially was planning to phase out its first two ATR 72-500s earlier this year as it took its second and third ATR 72-600. These aircraft are still operating, giving it a turboprop fleet of 11 aircraft.

Bangkok Airways still plans to entirely phase out the ATR 72-500 fleet in early 2017, at which point it will have nine ATR 72-600s. But more adjustments to the fleet plan are possible, including potentially an order for one or two additional ATR 72-600s, given its generally flexible approach to expansion.

Bangkok Airways also has decided against an initial plan to use some of the IPO proceeds to renew its A320 family fleet with new generation narrowbody aircraft. It has decided it is not worth acquiring A320neo family aircraft - at least not at the current low price of fuel - because its average stage length is too short to merit the investment in the new more efficient models.

Bangkok Airways should benefit as the price of used A320ceos, particularly A319ceos, drop. Bangkok Airways plans to add three to four A319/A320s annually over the next several years, resulting in steady double digit growth.

Such expansion should be feasible given its strong base of partners and leading position in attractive markets such as Samui and Myanmar. But Bangkok Airways has the flexibility to make adjustments if necessary, which should enable it to maintain profitability even in challenging times.