21-May-2015 6:25 PM

Nok Air, Thai AirAsia report growth in 1Q profits as Bangkok’s LCC penetration rate reaches 36%

Analysis

Thailand's two largest short-haul low-cost carriers, Nok Air and Thai AirAsia (TAA), reported improvements in their profitability in 1Q2015 as market conditions improved. LCC passenger traffic in the Bangkok market surged 41% in 1Q2015 as Nok, Thai AirAsia and Thai Lion all pursued rapid expansion, particularly domestically. LCCs now account for 36% of passenger traffic in Bangkok (both airports) compared to 28% two years ago.

Total domestic traffic in the Bangkok market was up 25% in 1Q2015, driven by a 45% increase by the LCCs. But domestic yields remain under pressure and overcapacity concerns are unlikely to ease given the continued rapid capacity expansion by all three of Thailand's LCCs along with the planned launch of Thai VietJet.

Thailand's short-haul international market is seeing a healthier demand-supply balance as demand has quickly recovered after a challenging 2014. A surge in visitor numbers from other Asian countries has particularly benefitted AirAsia, which is the largest player in Thailand's international LCC market by a wide margin. TAA profits increased nearly four-fold as TAA has a balanced domestic/international network while Nok's profits grew more modestly on a very low base as it relies almost entirely on the more challenging domestic market.

Summary

Thailand's short-haul low-cost carriers (LCCs) Nok Air and Thai AirAsia reported improved profitability in 1Q2015 due to market conditions and rapid expansion.
LCC passenger traffic in Bangkok surged 41% in 1Q2015, accounting for 36% of passenger traffic in the city.
Domestic traffic in the Bangkok market increased by 25% in 1Q2015, driven by a 45% increase in LCCs.
Thailand's short-haul international market is seeing a healthier demand-supply balance, benefiting AirAsia the most.
Thai Airways and Bangkok Airways also saw improvements in profitability due to the recovery in the short-haul international market.
Thailand's domestic market continues to grow rapidly, driven by LCC expansion, but overcapacity concerns remain.

Recovery in regional international market also drives profits for Thai Airways and Bangkok Airways

Surging demand in the short-haul international passenger market also has driven improvements in the profitability of Thailand's two main full-service airlines, Thai Airways and Bangkok Airways.

As CAPA analysed in a 20-May-2015 report, Thai Airways ended its streak of seven consecutive quarters in the red with a 1Q2015 net profit of THB4.541 billion (USD139 million) compared to a net loss of THB2.634 billion (USD81 million) in 1Q2014. The turnaround was driven by a dramatic improvement in Thai's regional international operation, which recorded a 12.1ppt surge in load factor to 76.9%. Thai's relatively small domestic operation also improved in 1Q2015 but its long-haul operation to Europe, where Thai still serves 12 destinations, continued to show signs of weakness.

As previously highlighted by CAPA, total visitor numbers to Thailand increased by 24% in 1Q2015 to 7.9 million, more than offsetting the 8% decline from 1Q2014 (based on Thailand Ministry of Tourism data). Other East Asian countries accounted for all the growth as visitor numbers from East Asia grew 56% to 4.9 million. As a result LCCs and full-service regional operators have been the main beneficiaries of the rapid recovery and resumption of growth in the Thailand tourism sector.

Bangkok Airways profits more than double in 1Q2015

Bangkok Airways, which only operates domestic and short-haul international services, saw its net profit grow by 110% in 1Q2015 to THB1.08 billion (USD33 million). Bangkok Airways clearly benefitted from a recovery in Thailand's tourism sector as its international passenger numbers grew by 26% to 396,000 and its international load factor improved by 6.7ppts to 65.9%.

Bangkok Airways' domestic passenger numbers grew by a more modest 6% to 1.0 million as its domestic load factor dropped by 0.6ppts to 76.2%. While Bangkok Airways' largest domestic route is Bangkok to the popular resort island of Samui, where it owns the airport and accounts for nearly all seat capacity, it competes on most of Thailand's main domestic trunk routes against rapidly expanding LCCs.

In the regional international market Bangkok Airways relies primarily on passengers connecting from foreign carriers, which insulates it somewhat from LCC competition. As foreign full-service carriers have enjoyed a recovery in their Bangkok traffic, Bangkok Airways has seen an improvement in its international load factor and yield.

Bangkok Airways' airline unit turned an operating profit of THB1.811 billion (USD56 million), a 28% increase compared to 1Q2014, as revenues increased by 9% to THB5.537 revenues (USD170 million). The company's total revenues, which includes airports, ground handling and catering subsidiaries, grew 11% to THB6.730 billion (USD206 million).

Bangkok Airways outperforms other Thai carriers

Bangkok Airways also performed relatively well in 2014 despite the difficult market conditions as it had the highest profit among the four publicly listed Thai carriers.

Of these four airlines, Bangkok Airways is the least exposed to the Bangkok market, an advantage in 2014 as the civil unrest was confined to the capital while other Thai markets were generally unaffected. Bangkok Airways currently allocates about 84% of its seat capacity to the Bangkok market compared to 87% for Thai AirAsia and about 99% for Nok Air and Thai Airways, according to CAPA and OAG data.

Thai Airways and Thai AirAsia (TAA) had bigger profits than Bangkok Airways in 1Q2015 but Bangkok Airways once again had the highest net margin - 16%. Bangkok Airways' airline unit also had an impressive operating margin of 32% in 1Q2015.

Thai AirAsia profits surge as yields recover and load factors improve

TAA saw its net profit grow nearly four-fold from THB245 million (USD8 million) in 1Q2014 to THB933 million (USD29 million) in 1Q2015. The carrier's net profit margin for 1Q2015 was 12% while its operating margin was 20%.

TAA revenues increased by 20% in 1Q2015 to THB7.734 billion (USD237 million). Note that figures used here are for Thai AirAsia rather than for parent company Asia Aviation.

Thai AirAsia financial highlights: 1Q2015 vs 1Q2014

TAA reported a 19% growth in passenger numbers in 1Q2015 to 3.7 million, including a 16% increase in domestic passengers to 2.3 million and a 24% increase in international passengers to 1.4 million. TAA seat capacity grew by 15%, resulting in a 3ppts improvement in seat load factor to 83%.

Thai AirAsia operating highlights: 1Q2015 vs 1Q2014

Yields also recovered as both average fare and RASK increased by 3%. TAA had seen a steady decline in yields over the last two years as competition intensified in the domestic market and as demand in the international market plummeted in 2014 due to the civil unrest.

Thai AirAsia RASK: 1Q2015 vs 1Q2014 and 2014 vs 2013 and 2012

AirAsia is well positioned to further grow in Thailand's international market

TAA has particularly benefitted from a recovery in the Thailand-China market. TAA currently accounts for 18% of total seat capacity between Thailand and China, according to CAPA and OAG data. Only Thai Airways/Thai Smile is bigger, with a 24% share, while China Eastern is the largest Chinese player with a 12% share.

Thailand's Ministry of Tourism reported a 96% increase for 1Q2015 in visitor numbers from China, its largest source market, to 2 million. This more than offset the 15% drop in visitor numbers from China in 1Q2014, resulting in 81% growth in 1Q2015 compared to 1Q2013.

Thailand monthly visitor numbers from China: Jan-2008 to Mar-2015

China is TAA's largest international market, accounting for about 34% of its international seat capacity. Other markets within Southeast Asia account for about 45% of TAA's international capacity.

Thai AirAsia capacity (seats) by country: 18-May-2015 to 24-May-2015

Thailand's short-haul international market within Southeast Asia has recovered, with visitor numbers from other ASEAN countries up 37% in 1Q2015. TAA is also by far the largest LCC in this market. As of the end of 1Q2015 TAA operated 30 international routes compared to only two for Nok Air and none for Thai Lion.

The AirAsia brand overall currently accounts for a 57% share of total international LCC capacity in the Thailand market, according to CAPA and OAG data. AirAsia is keen to leverage its leading position in the fast-growing and now fully recovered Thailand regional international market through expansion at TAA, new medium/long-haul LCC affiliate Thai AirAsia X and Malaysia AirAsia (MAA).

In Jul-2015 MAA is launching services from Kuala Lumpur to Pattaya and resuming services from Johor Bahru to Bangkok. Pattaya will become MAA's seventh destination in Thailand while Johor Bahru will become its eighth route in Thailand-Malaysia market (and the ninth Thailand-Malaysia route overall for the AirAsia Group as TAA operates Bangkok-Penang and shares the Bangkok-Kuala Lumpur route with MAA). MAA is already by far the largest foreign LCC in the Thailand market and currently accounts for a 13% share of total international LCC capacity in Thailand.

Nok Air profits improve by 36% but yields continue to decline

Thailand's second largest LCC, Nok Air, reported a much more modest net profit in 1Q2015 of THB56 million (USD1.7 million), representing growth of 36% compared to an even smaller profit of THB41 million (USD1.3 million) in 1Q2014. Revenues increased 12% to THB3.316 billion, resulting in a net margin of only slightly more than 1%.

Nok's significantly lower margin than the other Thailand-based publicly traded carriers can be partly attributed to its exposure to the domestic market. Nok is almost entirely a domestic carrier with only two scheduled international routes, one of which it launched at the end of 1Q2015.

Nok turned a larger net profit of THB416 million (USD14 million) in 1Q2013, when domestic market conditions were much more favourable. Nok had an industry leading 15% net margin in 1Q2013 while TAA had a 12% net margin in 1Q2013.

Nok Air financial highlights: 1Q2015 vs 1Q2014

When including subsidiary companies Nok reported a break-even figure for 1Q2015 (a net profit of less than THB2 million). This includes some of the start-up costs and losses at new long-haul LCC joint venture NokScoot, which has encountered lengthy delays in launching services to China, Japan and South Korea. The 20-May-2015 launch of scheduled services by NokScoot and the expansion plans for NokScoot and Scoot in Thailand's international market will be analysed in a forthcoming report.

Nok passenger numbers increased by 31% in 1Q2015 to 2.32 million. Almost all these passengers were in Thailand's domestic market. Nok's average load factor improved by 4.8ppt to an industry leading 84.7% but the increase in load factor came at the expense of yield.

Nok Air operating highlights: 1Q2015 vs 1Q2014

Nok recorded a 13% drop in passenger yield and 6% drop in unit revenues in 1Q2015. Nok's negative yield performance compared to rival Thai AirAsia, whose yields recovered, is of concern. Bangkok Airways also reported a 1% improvement in RASK (although its passenger yield declined due to the reduction in fuel surcharges).

Nok's relatively poor yield performance can likely be attributed to its higher exposure to the more competitive domestic market. Over 96% of Nok's current seat capacity is allocated to the domestic market compared to about 63% for TAA, according to CAPA and OAG data. (Bangkok Airways allocates 70% of its seat capacity to the domestic market but about a quarter of this capacity is in Samui, where there is no service from LCCs.)

Thailand domestic market continues to grow rapidly

Thailand's domestic market has seen extremely rapid growth since the beginning of 2014, driven almost entirely by LCC expansion including start-up Thai Lion Air. Thai Lion launched services at the end of 2013 and is currently operating only in the domestic market, where it has quickly built up about a 13% share of seat capacity.

Bangkok Don Mueang Airport - which is the base for Thai AirAsia, Thai Lion and Nok Air - recorded 39% domestic passenger growth in 2014 to 15.6 million. In 1Q2015 domestic passenger traffic growth at Don Mueang accelerated even further, reaching 47%, as 5.1 million domestic passengers were handled. LCCs account for 96% of domestic traffic at Don Mueang as Thai Smile also now operates three domestic routes from Bangkok's original airport while all domestic flights at newer Suvarnabhumi are operated by full-service carriers.

Bangkok Don Mueang monthly domestic passenger traffic: Jan-2008 to Mar-2015

Bangkok Suvarnabhumi, which is the hub for Thai Airways and Bangkok Airways, saw a 7% drop in domestic passenger traffic in 2014 to 8.3 million and a 3% drop in 1Q2015 to 2.3 million. Suvarnabhumi also saw a 10% drop in international passenger traffic in 2014 but recorded a 19% gain in international passenger traffic for 1Q2015.

More than anything else the domestic declines at Suvarnabhumi indicates the continuing rise of LCCs in Thailand's domestic market. LCCs have continued to grow their share of the domestic market but have also stimulated significant growth as lower fares persuade Thailand's expanding middle class to trade in bus and train journeys for flights. Total domestic traffic in the Bangkok market (includes both airports) was up by 27% in 1Q2015 to 7.5 million passengers.

Domestic competition however has become irrational on an increasing number of routes, with unsustainably low fares. Demand is growing but capacity in many cases is growing even faster. The overcapacity situation is unlikely to ease anytime soon as Nok, Thai AirAsia and Thai Lion are all continuing to pursue rapid domestic expansion.

Thai VietJet now plans Jul-2015 launch

The expected launch of Thai VietJet Ar could exacerbate the situation in 2H2015 as a fourth LCC enters an already extremely competitive market. Thai VietJet's launch is not a certainty as the start-up has repeatedly missed target launch dates over the last year, including most recently a late Mar-2015 date for the commencement of scheduled domestic services. But Thai VietJet is now preparing to launch services in Jul-2015 and is in the process of taking its second A320.

Thai VietJet has been operating a limited number of charters with one A320 since securing its air operators' certificate in Dec-2014. The carrier is now aiming to operate domestic and international scheduled services from Bangkok Suvarnabhumi from Jul-2015, including to China and India. But regulatory constraints will likely initially limit Thai VietJet to the domestic market, further pressuring yields on domestic trunk routes.

China has particularly become strict on LCC start-ups and is not likely to approve flights from Thai VietJet in the initial phase. Japan and South Korea are not part of the Thai VietJet business plan but would not currently be feasible as Japanese and South Korean authorities are not currently permitting any new services from Thai carriers until Thailand's DCA resolves the issues recently raised by ICAO.

Thailand's regional international market has huge growth potential for LCCs

In theory Thailand's regional international market should be more appealing than the domestic market to Thailand's fast-growing short-haul LCC sector. But for now it is mainly only Thai AirAsia and foreign LCCs pursuing these opportunities.

Total LCC international passenger traffic at Bangkok increased by 35% in 1Q2015 to 2.7 million. This includes 48% growth at Don Mueang to 1.7 million and 17% growth at Suvarnabhumi to just under 1 million. While Thai AirAsia, Thai Lion Lion and Nok all operate at Don Mueang along with its affiliates/partners (including Indonesia AirAsia, Malaysia AirAsia, Thai AirAsia X, Lion Air, Malindo, NokScoot and Scoot) almost all other foreign LCCs continue to operate at Suvarnabhumi.

The 1Q2015 figures show a recovery in the international market, driven by a surge in visitor numbers from other Asian countries. LCC international passenger growth slowed in Bangkok to a modest 6% in 2014 compared to 17% in 2013 due to the civil unrest in the Thai capital.

But LCCs have steadily continued to gain market share as FSC traffic in Bangkok declined in 2014. FSC traffic is now growing again but not as rapidly as LCC traffic.

LCCs accounted for 19.6% of total international passenger traffic in Bangkok in 2014 compared to 17.1% in 2013. In 1Q2015 the LCC share reached 19.7%, compared to 18.1% in 1Q2014.

LCC passenger traffic in Bangkok: 1Q2015

LCC penetration rate in Bangkok reaches 36%. Further increases are inevitable

Based on 1Q2015 Airports of Thailand data, LCCs also now account for 66% of domestic passenger traffic in Bangkok and 36% of total traffic (domestic and international). In CY2013 LCCs accounted for only a 28% share of total traffic in Bangkok, including a 55% domestic share and a 17% international share.

Thailand (or Bangkok) has still not reached the LCC penetration levels of neighbouring Malaysia (or Kuala Lumpur), an indication there is still plenty of room for growth, particularly in the international market.

The domestic focus by all of Thailand's short-haul LCCs - even Thai AirAsia is pursuing more domestic than international expansion in 2015 - will inevitably run its course.