11-Jun-2014 1:42 PM

Bangkok Airways reattempts an IPO. Outlook brightens as Samui expansion opportunities open up

Analysis

Bangkok Airways is confident it can complete an initial public offering (IPO) in 3Q2014 despite the recent political instability in its home market. While market conditions remain challenging in Thailand, Bangkok Airways' long-term outlook is relatively bright, boosted by its strong and growing ties with foreign full-service carriers, along with a new opportunity to again pursue expansion at its crown jewel Koh Samui.

Proceeds from the IPO will support the full-service carrier's continued expansion of its fleet and network. Bangkok Airways has added four A320s and five destinations since the beginning of 2013 while adding four new codeshare partners and expanding ties with several of its existing partners.

The airline's A320 family fleet will expand by another four aircraft over the last seven months of 2014. Capacity at Samui, its second largest base, is expected to grow as Bangkok Airways closes in on approval to add flights at its island airport, which has been capacity constrained due to environmental regulations.

Summary

Bangkok Airways plans to complete an initial public offering (IPO) in 3Q2014 despite political instability in Thailand.
The IPO will support the expansion of Bangkok Airways' fleet and network.
The airline's A320 family fleet will expand by four aircraft in the last seven months of 2014.
Bangkok Airways is the fourth largest carrier in Thailand with an 8% share of current system-wide seat capacity.
The carrier has strong partnerships with foreign full-service carriers, which provide a competitive advantage.
Bangkok Airways is seeking approval to increase flights at its Samui base, which will allow for further expansion and new routes.

Bangkok Airways aims for IPO in late Jul-2014

Bangkok Airways is the fourth largest carrier in Thailand with about an 8% share of current system-wide seat capacity, including a 16% share of domestic capacity and 4% share of international capacity.

It is Thailand's largest privately held carrier as Thai AirAsia and Nok Air joined Thai Airways with listings on the Stock Exchange of Thailand in 2012 and 2013 respectively.

Thailand system-wide capacity share (% of seats) by carrier: 9-Jun-2014 to 15-Jun-2014

Bangkok Airways initially planned to complete an IPO in mid-2013 following a filing that sought to sell 730 million shares, including 520 million new shares and 210 million existing shares. This is equivalent to approximately a 25% stake in the parent company, which also owns three airports in Thailand and stakes in ground handling and catering providers.

But the IPO has been delayed for the past year due primarily to questions raised by Thailand's Securities and Exchange Commission over the company's method of accounting property. Bangkok Airways president and owner, Capt Puttipong Prasarttong-Osoth, told CAPA on the sidelines of the 2-Jun-2014 IATA annual general meeting in Doha that these issues have now been resolved and the carrier is submitting a new filing with the aim of holding an IPO in late Jul-2014. Once again Capt Puttipong's family, which owns 100% of the company, is seeking to sell about a 25% share.

Capt Puttipong says the amended filing of the company's financial statements show a net loss for the last two years due to the accounting of its property portfolio, which includes the Samui Airport. But he adds that on an operating level the revised statements still show a profit in 2012 and 2013 and that the net loss should not be a deterrent to potential investors as it is entirely tied to the property issue, something which is explained in the new filing.

Bangkok Airways seeks IPO at unlikely time

Capt Puttipong is also confident the IPO can be successful despite the recent political instability in Thailand. The 22-May-2014 coup has impacted passenger traffic for all Thai carriers, further weakening a market that has already struggled since late 2013 due to continuing civil unrest. But the political change that resulted from the coup could lead to a period of stability, giving all Thai carriers hope that the market will recover in 2H2014. Stock prices in Thailand have not tumbled as a result of the coup, an indication there is sufficient investor confidence in the country to consider new listings.

But the response to a new airline stock given the current conditions in the industry may not be so warm. Even with the political environment improving, Thailand has become an intensely competitive aviation market. Four new entrants (two of which have already launched, with the other two planning to launch in 2H2014) and rapid capacity expansion by most of the existing players threaten to put further downward pressure on yields and load factors.

Bangkok Airways however has a unique position because for the most part it is able to keep out of the crossfire of the intense competition. Almost all the capacity being added to the Thai market comes from low-cost carriers which are based at Bangkok Don Mueang Airport. Bangkok Airways competes for some LCC-type traffic as it is entirely a short-haul operator but its bread and butter is higher yielding passengers connecting from foreign full-service carriers at Bangkok Suvarnabhumi Airport.

Partnerships deliver a critical competitive advantage for Bangkok Airways

Bangkok Airways passenger traffic has grown significantly in recent years - and continues to grow in 2014 despite the challenges - as it benefits from the growth of foreign carriers in Bangkok. Several foreign carriers have temporarily reduced capacity to Bangkok but the market is expected to rebound, as it has previously after periods of political unrests or natural disasters.

The recent drop in visitor numbers to Thailand has been driven predominately by a sharp drop in tourist arrivals from other Asian countries. For example in 1Q2014, visitor numbers to Thailand from Asia were down 13% compared to 1Q2013, while visitor numbers from other regions were still up year over year albeit modestly. While Bangkok Airways only operates regionally within Asia it relies heavily on point of sales outside Asia. Nine of its current 13 codeshare partners are airlines outside Asia.

Bangkok Airways has rapidly expanded its codeshare portfolio over the past 14 months, adding Qatar Airways, British Airways, Cathay and most recently Qantas (implemented in Mar-2014). But it still sees more volumes through interlines. Bangkok Airways interlines with almost every full-service carrier serving Bangkok, including Thai Airways.

Europe has traditionally been Bangkok Airways' largest source market and the carrier continues to codeshare with five European carriers - Air France, airberlin, British Airways, Finnair and KLM. But Bangkok Airways now sees more feed coming from Middle Eastern carriers, which have rapidly expanded in Bangkok in recent years.

Emirates is now the largest foreign carrier in Bangkok while Qatar and Etihad are also among the top 10.

Bangkok Suvarnabhumi top 10 foreign carriers ranked by seat capacity: Aug-2014

Rank	Airline		Total Seats
1	EK	Emirates	48,888
2	CX	Cathay Pacific	42,492
3	QR	Qatar Airways	23,450
4	SQ	Singapore Airlines	20,202
5	CI	China Airlines	18,990
6	CZ	China Southern Airlines	18,446
7	BR	EVA Air	16,752
8	HX	Hong Kong Airlines	16,688
9	KE	Korean Air	16,142
10	EY	Etihad Airways	15,498

Abu Dhabi-Bangkok is Etihad's largest route based on current seat capacity while Dubai-Bangkok will be Emirates' largest route from Aug-2014, when the carrier plans to restore capacity to Bangkok. Doha-Bangkok was also Qatar's largest route until May-2014, when the airline cut capacity to Bangkok (Qatar will likely eventually restore capacity to Bangkok although its forward schedules do not yet indicate a restoration).

Nearly 10% of Bangkok Airways' traffic comes from Gulf airlines

Bangkok Airways codeshares with both Etihad and Qatar while Emirates is its largest interline partner. Emirates, Etihad and Qatar are Bangkok Airways' three largest partners, transferring about 27,000 passengers onto Bangkok Airways per month. This equates to approximately 8% of Bangkok Airways' total passenger traffic, which was about 4 million in 2013.

These figures will likely continue to grow as the Gulf carriers continue to add capacity at Bangkok. Emirates also recently expressed interest in upgrading its partnership with Bangkok Airways to a codeshare, which could lead to a further uptick in volumes. Emirates is already Bangkok Airways' largest partner overall with about 10,000 monthly passengers.

Emirates, Etihad and Qatar use Bangkok as their gateway to Thailand and the neighbouring countries of Cambodia, Laos and Myanmar. Bangkok Airways' Bangkok hub serves nine domestic destinations, only one of which (Phuket) is served by the Gulf carriers.

Emirates and Etihad do not serve any destinations in Cambodia, Laos and Myanmar while Qatar Airways serves two, Yangon in Myanmar and Phnom Penh in Cambodia. Bangkok Airways serves seven destinations in these three countries, which currently account for over half of its international network (which consists of 13 destinations) and 69% of its current international seat capacity.

Bangkok Airways international capacity share (% of seats) by country: 9-Jun-2014- to 15-Jun-2014

Bangkok Airways' international network also includes Hong Kong, India, Singapore, Malaysia, the Maldives and Bangladesh. But it has just one destination in each of these six countries compared to three in Myanmar (Yangon, Mandalay and Nay Pyi Taw), two in Laos (Luang Prabang and Vientiane) and two in Cambodia (Phnom Penh and Siem Reap).

Mumbai, Male and Dhaka generally cater to a different segment of passengers as they are in South Asia, making connections from European or Gulf carriers infeasible, and have a higher portion of point to point traffic. Mumbai and Dhaka are generally ethnic or labour markets and are served during overnight hours, resulting in higher average aircraft utilisation rates while Male is an upmarket leisure destination - making it more in tune with Bangkok Airways' boutique carrier positioning. Mumbai, Male, Dhaka and all of the carrier's destinations in Myanmar, Laos and Cambodia are only served from the Bangkok hub.

Samui base, featuring eight routes, is another important competitive advantage

Hong Kong, Singapore and Malaysia (Kuala Lumpur) are a different type of destination in that they are only served from Samui. But the strategy behind these routes is similar to the carrier's overall network strategy as they give Bangkok Airways the ability to offer connections to Samui, Bangkok Airways' most sought after destination, from major international gateways other than Bangkok.

Bangkok Airways codeshares with Cathay Pacific on Hong Kong-Samui, Singapore Airlines regional subsidiary SilkAir on Singapore-Samui and Malaysia Airlines (MAS) on Kuala Lumpur-Samui. It also works with other foreign carriers on these routes; for example, Qantas uses Singapore as its main connection point for Samui.

Samui is Bangkok Airways' second largest hub, accounting for 32% of its total capacity based on data for the week commencing 9-Jun-2014. Bangkok-Samui is by far the carrier's largest route, with 16 daily return flights and about 29,400 weekly seats. This one route currently accounts for about one-fifth of the carrier's total capacity and two-thirds of its Samui capacity, according to CAPA and OAG data.

Bangkok Airways owns and operates Samui Airport, where it currently operates a total of 27 daily flights. In addition to the 16 daily frequencies to Bangkok, it has four daily flights to Phuket, two daily flights to Hong Kong and one each to Chiang Mai, Krabi, Kuala Lumpur, Singapore and U-Tapao (near Pattaya), according to OAG data.

Koh Samui Airport is now capped at 36 return flights per day due to a restriction imposed by Thailand's environmental agency. Bangkok Airways accounts for 32 of these slots pairs and its Samui schedule will return to 32 daily flights in Jul-2014, according to OAG data. The Jul-2014 schedule features 20 daily flights on Bangkok-Samui while Phuket is increased to five daily flights. Samui will account for 35% of the carrier's total capacity the week commencing 7-Jul-2014 with the Bangkok-Samui route alone accounting for 23%.

Bangkok Airways bases/hubs/stations ranked on seat capacity: 7-Jul-2014 to 13-Jul-2014

Other carriers currently operate a total of four daily flights at Samui, including two from Thai Airways (from Bangkok), one from SilkAir (from Singapore) and one from MAS regional subsidiary Firefly (with four weekly frequencies from Kuala Lumpur and three weekly frequencies from Penang). While Bangkok Airways built, owns and operates the Samui airport it is required to allow other carriers to use the facility. But high airport fees have generally dissuaded other airlines from launching services to Samui, particularly low-cost carriers.

Bangkok Airways finally allowed to increase movements at Samui

Over the past few years Bangkok Airways has been trying to secure approvals to expand the cap on flights allowed at Samui. Bangkok Airways executives expect approval to be finalised within the next couple of months allowing for 14 additional daily return flights for a total of 50 flights.

The freedom to expand total movements at Samui by 39%, and by up to 44% for Bangkok Airways (assuming no increase by other carriers) instantly improves the carrier's outlook at an opportune time - just as it attempts an IPO. Constraints at Samui have limited Bangkok Airways' growth in recent years, prompting the carrier to expand more in markets which are more competitive.

Since late 2012 Bangkok Airways has added six destinations from Bangkok: Vientiane in Dec-2012, Krabi in Mar-2013, Mandalay and Nay Pyi Taw in Sep-2013, Udon Thani in Nov-2013 and Chiang Rai in Mar-2014. Meanwhile growth in Samui has been limited to up-gauging some existing frequencies from ATR 72s to A319s. More movements at Samui allow the carrier to begin focusing less on Bangkok expansion at a time the Bangkok market has been struggling due to the civil unrest while the rest of the country has been relatively more stable.

The opportunity to expand in Samui is also a competitive advantage for Bangkok Airways as it owns the airport and expansion at Thailand's other large beach destination, Phuket, is not possible due to airport congestion. (Phuket is now constructing a new terminal which will partially ease the current constraints. But without a second runway, which will take several years to build assuming it is feasible, the Phuket airport will continue to face growth constraints over the medium to long-term.)

With an increase in the cap on flights at Samui Bangkok Airways will be able to expand services further on the core Bangkok-Samui route, which will remain the primary option for international tourists heading to the popular resort island. It will also give the carrier the opportunity to launch several new Samui routes including new point to point international routes to other Asian destinations.

Potential routes from Samui to mainland China are particularly attractive given the huge growth in Chinese visitor traffic to Thailand and particularly at Samui. Such routes will also not significantly impact Bangkok Airways' local Bangkok-Samui traffic as its Gulf and European partners will continue to use Bangkok as its gateway for Samui (and other destinations in the region).

Long-haul services to Samui are not feasible as the runway currently cannot accommodate aircraft bigger than A319s. Bangkok Airways has already up-gauged most of its Bangkok-Samui frequencies from ATR 72s to A319s, leaving it with little opportunity to further increase capacity on the route without an increase in the cap on total movements. (Krabi and Phuket are still served from Phuket with ATR 72s but these are very short routes where jets are uneconomical while all the Bangkok Airways international routes at Samui are now served with A319s.)

Bangkok Airways adds four more A320 family aircraft

Bangkok Airways currently operates a fleet of 10 A319s and seven A320s along with eight ATR 72-500 turboprops. Capt Puttipong says the carrier plans to place into service two additional A320s over the next month and two A319s in 4Q2014, giving it a year-end fleet of 21 A320 family aircraft.

Bangkok Airways also plans to take delivery in 4Q2014 of the first of the six ATR 72-600s which it ordered in Feb-2014. Bangkok Airways' turboprop strategy and expansion plans, including a new base at Chiang Mai, will be analysed in a second report to be published by CAPA later this week.

Bangkok Airways fleet summary: as of 11-Jun-2014

Aircraft	In Service	On Order*
Total:	25	6
Airbus A319-100	10	0
Airbus A320-200	7	0
ATR 72-212A(72-500)	8	0
ATR 72-212A(72-600)	0	6

The A319s are earmarked for expansion in Samui as Bangkok Airways expects the cap on flights to be increased to 50 in time for the northern hemisphere peak season. It is now low season in Samui, which partly explains the current reduced schedule at Samui along with the reduction in demand caused by the political situation.

One of the additional A320s is being used to increase capacity on existing domestic routes such as Bangkok to Chiang Rai and Krabi.

The other additional A320 will be set aside for maintenance. Previously Bangkok Airways did all its heavy maintenance in the off season. But this has become increasingly difficult to manage as its fleet has become larger. With its fleet now up to 25 aircraft Bangkok Airways sees a need to have one aircraft out for maintenance at all times (with additional aircraft out during certain off peak periods).

Bangkok Airways does not plan any more new domestic destinations

Bangkok Airways has no intention of launching any new destinations in 2014, choosing to instead focus on new routes to existing destinations and additional capacity on existing routes. Bangkok Airways particularly does not see a need to further expand its domestic network as the Mar-2014 addition of Chiang Rai along with the 2012 addition of Krabi and Udon Thani gives it a domestic network of 11 destinations. (Three of these are Bangkok Airways-owned airports - Samui, Sukhothai and Trat - but the latter two are tiny small destinations with only three daily turboprop flights and rather limited growth potential.)

While Bangkok Airways still does not serve some domestic trunk routes such as Bangkok-Hat Yai, the un-served routes have limited international connection traffic and therefore could only be sustained with significant local traffic. Given the intensifying domestic competition in Thailand's fast-growing LCC sector, with over-capacity resulting in several markets including Bangkok-Hat Yai, it is sensible for Bangkok Airways to focus more on existing routes, particularly routes where it sees growing flows of connecting passengers from its codeshare and interline partners.

Udon Thani, which was launched in Nov-2013, represented an unusual route for Bangkok Airways as unlike Krabi and Chiang Rai it is not a popular destination for foreign tourists. The Udon Thani experiment has not been entirely successful and in future Bangkok Airways is unlikely to stray from its strategy of focusing its Bangkok hub on destinations with demand from international connection passengers (although Bangkok Airways remains committed to the Udon Thani market at least for now).

Bangkok Airways has a relatively bright outlook despite current challenges

Bangkok Airways may be a niche carrier but its niche continues to have plenty of growth opportunities. Strong partnerships with a wide range of foreign carriers and a strong regional network are its core strengths.

The carrier's partnership portfolio continues to expand and some of its largest partners will continue to expand in Bangkok (once the current period of instability is over). With this expansion will come an increasing need for feed.

As Thai Airways is primarily partnered with other Star Alliance members and Thailand's other carriers are based at Bangkok's LCC airport, making connections with foreign full-service carriers infeasible, the opportunities for Bangkok Airways to attract connecting passengers will continue to grow. New growth opportunities from a network perspective are also emerging as the cap on flights at Samui is raised and as demand for Cambodia, Laos and Myanmar - where Bangkok Airways is now the largest or second largest foreign carrier - expand further.

Bangkok Airways certainly has its share of short-term challenges as some political uncertainty lingers in its home market. And this is hardly the best time for an IPO. But the airline's long-term prospects should be bright enough to attract sufficient interest, giving Bangkok Airways fresh capital to pursue more expansion.

Background information:

In Apr-2014 CAPA published a six-part series of analysis reports on the Thailand market focusing on the outlook of Thai Airways, Thai Smile, Nok Air, Thai AirAsia and start-ups Thai Lion, Thai AirAsia X and NokScoot. See related reports:.