NokScoot SWOT: SIA affiliation a strength, fleet a weakness

Summary

• Strengths: SIA Group, China, and Japan.
• Weaknesses: 777 fleet, second aircraft type, and financials.
• Opportunities: Korea; South Asia and beyond, downgauging, Nok partnership, and transit traffic.
• Threats: Intense competition, tourism slowdown, future of Nok Air.

NokScoot STRENGTHS

1. NokScoot is part of the Singapore Airlines family

The Singapore Airlines Group owns 49% of NokScoot through its wholly owned subsidiary Scoot, which launched operations in mid 2013 and was only a year and half old when the JV was forged establishing NokScoot. The SIA Group considers NokScoot an important component of a new diversified strategy that includes investments in airlines outside its home market.

SIA is a very strong partner. SIA has provided financial backing and clearly has the capital to help NokScoot expand. Having SIA as a major shareholder is particularly important considering the recent financial woes at Nok, which also owns a 49% stake. Nok has been unprofitable since 2014, requiring multiple rounds of recapitalisation.

SIA has also provided management support. Giam Ming Toh has been NokScoot's deputy CEO since early 2016 and is seconded from SIA. NokScoot's CEO, Yodchai Sudhidhanakul, has been seconded from Nok Air.

All five of NokScoot's 777s were provided by SIA and retrofitted by SIA Engineering. SIA operates nearly 50 777s. NokScoot benefits from leveraging several of SIA's 777 related contracts, providing economies of scale it would not be able to achieve on its own.

NokScoot naturally has a very close relationship with Scoot. The two airlines have interlined since NokScoot's inception and are both founding members of the Value Alliance. NokScoot currently sells Scoot-operated flights from Bangkok to Osaka, Tokyo and Singapore - as well as flights beyond Singapore.

Scoot has particularly helped NokScoot in China. NokScoot has leveraged Scoot's strong Chinese distribution network and is working closely with the same Chinese agents. All six of NokScoot's Chinese destinations are also served by Scoot, which has made it easier for NokScoot to build up local point of sales. NokScoot has also been able to leverage Scoot's ground handling contracts at Chinese airports, providing benefits for both airlines.

2: China: NokScoot has quickly developed a strong presence in China

NokScoot initially planned to focus on Korea and Japan but was forced to find alternative markets shortly after securing its AOC, when ICAO raised a red flag on Thailand, leading Korea and Japan to ban any new services from Thai carriers.

China is not an easy market for a new foreign airline to enter because of local regulatory restrictions. Initially therefore, NokScoot had to begin scheduled operations with a service to Singapore - an unprofitable route it had to operate temporarily to build up enough hours to secure Chinese approvals.

Bangkok-Nanjing was Scoot's first China route and second route overall (after Bangkok-Singapore), launching in Jun-2015. Qingdao was added in Nov-2015, followed by Tianjin in Jan-2016, Shenyang in Apr-2016, Dalian in Sep-2016 and Xian in Dec-2017.

Nanjing, Qingdao, Shenyang and Tianjin were all original Scoot routes that were launched by the Singapore-based long haul LCC in 2H2013 or 1H2013 (the first year of Scoot). Dalian was added by Scoot in 2016 - at almost the same time that NokScoot began serving Dalian. Xian was initially a Tigerair route, but Scoot had taken over Tigerair by the time NokScoot entered the Xian market.

NokScoot would have expanded faster in China but Chinese regulations strictly limit and control the number of services a new airline can add. NokScoot therefore suffered from very low average aircraft utilisation, impacting profitability, until it was able to spool up the Chinese operation fully in 2016.

Nanjing and Tianjin are now Scoot's biggest China route and are currently served daily. Nanjing was upgraded to daily in late 2016, and Tianjin was upgraded to daily in Apr-2018.

Qingdao and Shenyang are currently served with four weekly services, Xian with three weekly services and Dalian two weekly services. A fifth frequency to Qingdao and a third frequency to Dalian are operated during peak periods. NokScoot currently has a total of 27 weekly services to China, generating 11,205 weekly one-way seats.

NokScoot one-way seat capacity to China: Jun-2015 to Oct-2018

Source: CAPA - Centre for Aviation & OAG.

NokScoot has been fortunate in that demand in the Thailand-China market surged just as it shifted focus to the Chinese market. Chinese visitor numbers to Thailand have more than doubled since NokScoot entered the market: from 4.6 million in 2014 to 9.8 million in 2017. Chinese visitor numbers to Thailand were up another 21% in the first seven months of 2018.

3. Japan: NokScoot finally establishes significant presence in a key market

Japan has also now become a strength for NokScoot. ICAO lifted the red flag on Thailand in Oct-2017. Japanese authorities subsequently lifted their restrictions on Thai carriers, finally enabling NokScoot to launch scheduled services to Japan - which had been initially planned for 1H2015.

NokScoot started one daily service on the Bangkok Don Mueang-Tokyo Narita route on 1-Jun-2018, shortly after taking delivery of its fifth 777-200. The airline recently announced a 29-Oct-2018 launch date for its second Japanese route: a daily 777-200 service from Bangkok to Osaka Kansai. NokScoot is also adding four weekly Bangkok-Narita services in late Oct-2018 for a total of 11 weekly frequencies.

Singapore-based Scoot also plans to continue serving the Bangkok-Tokyo and Bangkok-Osaka routes, which it currently serves daily and three times weekly, respectively, using fifth freedom rights. Scoot launched Bangkok-Osaka in 2015 and Bangkok-Tokyo in 2016 (both flights originate in Singapore), providing NokScoot a back door option for entering the Thailand-Japan market while Thai carriers were unable to add services to Japan. NokScoot is continuing to sell the Scoot-operated flights, resulting in a total of 28 weekly services and nearly 8,000 weekly one-way seats in the Thailand-Japan market from the end of Oct-2018.

The Bangkok-Tokyo and Bangkok-Osaka markets are large enough to accommodate both NokScoot and Scoot. There are over 40,000 weekly one-way seats in the Bangkok-Tokyo market and nearly 15,000 weekly one-way seats in the Bangkok-Osaka market.

Japan is a huge and fast growing market from Thailand. Seat capacity between Japan and Thailand has doubled over the past six years.

Japan is the third largest international market from Thailand based on seat capacity and Thailand's fifth largest source market. Japanese visitor numbers to Thailand increased by 7% in 2017 and 6% in the first seven months of 2018.

Unlike the Thailand-China and Thailand-South Korea markets, the Thailand-Japan market is relatively balanced as Japan has emerged to be a very popular destination for Thais - aided by an easing of visa restrictions. Thai visitor numbers to Japan increased by 10% in 2017 and have increased nearly sevenfold since 2011. In 2017 there were 1.5 million Japanese visitors to Thailand and just under 1 million Thai visitors to Japan.

Fukuoka is NokScoot's planned third Japanese destination and could be launched by the end of 2018 using the airline's newly acquired 737-800 fleet. Nagoya and Sapporo are not in the plan for 2018 but are possibilities for 2019.

NokScoot (red) and Scoot (yellow) weekly one-way seat capacity from Thailand to Japan: Jul-2015 to Nov-2018

Source: CAPA - Centre for Aviation & OAG.

NokScoot WEAKNESSES

1. 777 fleet: not a good aircraft for an LCC

The 777 is not an ideal aircraft for an LCC. NokScoot is one of only two LCCs in the world operating 777s. The A330 and 787 are the most popular aircraft for medium/long haul LCCs. Its sister airline Scoot transitioned to an all-787 fleet in 2015 after initially operating six 777-200s.

The 777 is particularly challenging during periods of high fuel prices. NokScoot benefitted from low fuel prices in its first three years of operations, however fuel prices have increased significantly in 2018, leading to a higher loss in 1H2018 compared to 1H2017. They are expected to rise further.

NokScoot is evaluating new widebody aircraft types and should eventually follow Scoot in transitioning to a 787 fleet. However, it expects the two additional widebody aircraft it has in its fleet plan for 2019 will again be 777s.

All five of NokScoot's 777-200s have been obtained from Scoot's parent, Singapore Airlines. However, NokScoot is not required to take its future widebody aircraft from SIA.

NokScoot has been impacted by a Thai regulation barring the import of aircraft that are more than 15 years old. NokScoot has not been able to take any of the 402-seat high density 777-200s Scoot previously operated because they were more than 15 years old. NokScoot has therefore had to acquire slightly younger 777-200s that were previously operated by SIA in low density configuration, resulting in expensive retrofit costs.

Taking more 777-200s from SIA is not ideal, given that NokScoot may only operate the type for another two or three years, making it difficult to recoup the retrofit costs. There are also only two remaining 777-200s at SIA that are less than 15 years old, according to the CAPA Fleet Database. NokScoot will have to move quickly in acquiring these aircraft if it decides to go with ex-SIA 777-200s for the two additional widebodies in its 2019 fleet plan.

NokScoot is also considering other 777 variants. SIA has two 777-300s that are currently 13 years old and will soon be phased out by SIA.

Another option would be to acquire 777-300ERs from other sources. There are several early model 777-300ERs available on the leasing market, which are about 10 years old. However, the 777-300ER is a very large aircraft - potentially too large for NokScoot - and is relatively expensive to operate.

It would be sensible for NokScoot to phase out 777s as soon as possible and transition to a smaller new generation widebody aircraft. 787s or potentially A330neos, which are being acquired by the airline's competitors Thai Lion and Thai AirAsia X, would be sensible options.

2. Second aircraft type: 737s will add complexity

NokScoot is adding two 737-800s in 4Q2018. While the airline will benefit from deploying a narrowbody aircraft on some of its routes, having a mixed fleet is not ideal because it adds cost and complexity.

LCCs generally try to operate just one aircraft type, particularly smaller LCCs. Nok's total fleet will consist of only seven aircraft at the end of 2018; this does not provide nearly the kind of scale to support a dual fleet.

NokScoot plans to add four more 737s (additional NGs or MAXs) in 2019 but does not have ambitions to establish a large narrowbody fleet. Therefore, its narrowbody fleet will likely remain subscale compared to other LCCs.

The initial two 737-800s are coming from its sister airline Nok Air, which has been reducing its fleet as part of a restructuring. Nok has already reduced its 737 fleet this year by two aircraft (from 20 to 18) and also reduced the fleet in 2017 by two aircraft (from 22 to 20), according to the CAPA Fleet Database. Nok's restructuring focuses on increasing aircraft utilisation, which has enabled the airline to continue growing capacity, despite shrinking its fleet.

While the fleet reduction at Nok is sensible, the use of NokScoot rather than Nok to operate the flights being downgauged from 777s to 737s is questionable. Nok (at least, in theory) should be able to operate these flights more efficiently, given that it still has a relatively significant 737 fleet.

3. Financials: NokScoot has so far been loss-making

NokScoot has incurred more than THB2.2 billion (USD67 million) in losses since operations began in early 2015. NokScoot generated slightly more than THB15.1 billion (USD460 million) in revenues over the same period (1Q2015 to 2Q2018), resulting in a negative 15% margin.

Thailand's other medium/long haul LCC, Thai AirAsia X, has consistently outperformed Nok. Thai AirAsia X was in the black for the first time in 2017, posting a small annual profit.

Thai AirAsia X carried 1.6 million passengers in 2017 and 990,000 passengers in 1H2018. NokScoot is smaller, carrying 1.1 million passengers in 2017 and 620,000 passengers in 1H2018.

NokScoot's performance improved significantly in 2017 as it incurred a THB47 million loss compared to a THB612 million loss in 2016 and a THB1.223 million loss in 2015. However, NokScoot's losses have again widened this year - the airline incurred a loss of THB319 million in 1H2018, compared to a loss of THB118 million in 1H2017.

NokScoot's performance in its first year (2015) was impacted by very low aircraft utilisation due to regulatory delays and the inability to launch services to Japan and Korea, which was a focus in NokScoot's initial business plan, after ICAO raised the red flag on Thailand. As mentioned earlier in this report, ICAO lifted the red flag on Thailand in late 2017, finally enabling NokScoot to launch services to Japan, but NokScoot has still not been able to secure approvals for Korea.

NokScoot OPPORTUNITIES

1. Korea: flights to Seoul should finally become possible in 2019

NokScoot is hopeful of finally being able to launch services to Seoul in 2019.

South Korea is an important market for NokScoot because it is Thailand's second largest source market after China. South Korean visitor numbers were up 17% in 2017, to 1.7 million.

Korean authorities have not approved any new services from Thai carriers since ICAO lifted the red flag on Thailand in Oct-2017. While Korea's refusal, so far, to follow Japan in lifting restrictions on Thai carriers is disappointing, Korea has indicated it will lift restrictions if the US FAA restores Thailand's Category 1 rating. The FAA downgraded Thailand from Category 1 to Category 2 in late 2015 but is soon conducting a new audit of Thailand's civil aviation authority that could result in a restoration of Category 1 status.

NokScoot plans to add two widebody aircraft in 2019 (for a total of seven aircraft), which could be used to launch services to Korea and add more flights to Japan.

2. Downgauging: 737s enable more frequencies to China and open up new destinations

NokScoot plans to use its new narrowbody fleet to downgauge Taipei and some of its services to mainland China.

NokScoot has determined that the 777-200 is too large for Taipei and some of its China routes, particularly during off peak periods. The airline is planning initially to deploy 737-800s from Bangkok to Taipei and Xian. Both routes are slightly less than four hours, putting them very comfortably within the range of the 737-800.

NokScoot launched services to Taipei in Oct-2015 and has served the Bangkok-Taipei route daily since Mar-2017. Although Bangkok-Taipei is a relatively large market, the 777-200 is too large, and the other two LCC competitors - Tigerair Taiwan and Thai Lion Air - use narrowbody aircraft. NokScoot plans to operate one daily 737-800 flight to Taipei from Oct-2018, resulting in a 55% decrease in capacity, but could add more Taipei frequencies in 2019 as more 737s are delivered.

In China, NokScoot plans to use 737-800s to supplement 777-200s, enabling it to match supply and demand better. Some destinations such as Xian will likely transition entirely to 737s (potentially with more frequencies), while other destinations could be served with a mix of 737s and 777s. NokScoot is also assessing several new destinations in China, which would be served only with 737s.

Several Chinese destinations (a mix of new and existing destinations) will likely be served with 737s by the end of 2019. While NokScoot has so far committed to leasing only two 737-800s from 4Q2018, it has another four 737s in its business plan for 2019. NokScoot is considering the acquisition of additional 737-800s as well as 737 MAX 8s, which would give it the flexibility to operate longer narrowbody routes.

3. South Asia and beyond

NokScoot is looking to diversify its network, which is now entirely dependent on North Asia.

South Asia is a logical market for expansion, particularly India. NokScoot has already secured conditional rights for four weekly services to Delhi. NokScoot will be able to use these conditional rights once Indian carriers have expanded in Thailand to the point where they are using 80% of their traffic rights, which is expected fairly soon.

It will not be easy for NokScoot to serve other Indian metros as they are no available traffic rights (not even more conditional rights), and India is not likely to agree to another extension of the Thailand bilateral. However, other markets in South Asia are open (such as Bangladesh and Nepal) and are possibilities for NokScoot.

The Middle East, which is a relatively large source market for Thailand, is also a possibility. Thailand is a very popular destination for residents in several Middle East countries.

Europe is another major source market for Thailand. While Thailand-Europe is a very competitive market, the current LCC penetration rate is less than 3% - making it potentially attractive to Thailand's LCCs.

Thailand's other two low cost widebody operators - Thai AirAsia X and Thai Lion Air - are already preparing to serve Europe. Long haul services to Europe are not yet in the NokScoot business plan, but inevitably Europe will be considered as NokScoot continues to expand its widebody fleet.

The introduction of new generation widebody aircraft, which is expected within the next few years, will particularly open up opportunities to operate long haul routes efficiently.

4. Transit traffic

So far, NokScoot has relied almost entirely on point-to-point traffic. Given that it has over 400 seats on its 777s, NokScoot would benefit from feed.

Surprisingly, NokScoot has been very slow in partnering with its sister airline Nok, which has an extensive domestic network. Nok has 25 domestic destinations - which is more than any other airline in Thailand.

NokScoot finally began interlining with Nok in Aug-2018. However, so far the interline is limited to two domestic routes operated by Nok - Bangkok Don Mueang to Chiang Mai and Hat Yai. These two domestic connections are also only available from two of NokScoot's destinations - Taipei and Tokyo.

As the Nok-NokScoot interline is very new, it has not yet generated a significant number of transit passengers. NokScoot has an opportunity to generate significant transit traffic by expanding the new partnership with Nok and promoting domestic connections.

Although Bangkok is a very popular destination, a large proportion of North Asian visitors to Thailand are heading to other destinations. Chiang Rai, Phuket and Krabi are particularly popular, along with Chiang Mai.

NokScoot's inability thus far to work closely with Nok is a competitive disadvantage. Thai AirAsia and Thai AirAsia X offer a Fly-Thru product at Bangkok Don Mueang, providing seamless international to domestic connections, as well as international to international (sixth freedom). Thai Lion Air also has a transit product, enabling it to compete for network traffic.

NokScoot can also potentially work with other Value Alliance members in promoting connections beyond some of its international destinations. NokScoot is participating in the new Value Alliance website booking platform, which should provide opportunities to generate transit traffic in markets such as Japan.

NokScoot THREATS

1. Intense competition

Nearly all of NokScoot's routes are competitive.

Competition with other LCCs is particularly intense. While Thailand has a large and growing international market, it is also the only country with three widebody LCCs (NokScoot, Thai AirAsia X and Thai Lion).

NokScoot currently competes against both the Lion and AirAsia brands on two of its eight routes - Bangkok-Nanjing and Bangkok-Xian. However, NokScoot will likely have to compete against both brands on more routes in future, given the rapid expansion of all Thai LCCs.

For example, Thai Lion is planning to launch services over the next few months to Osaka and Tokyo, which will result in all three LCCs competing in these markets. Thai AirAsia X already serve both these routes with multiple daily frequencies.

Thai Lion also plans to start competing in the Bangkok-Seoul route as soon as Korean restrictions are lifted. Thai AirAsia X already serves the route with multiple daily frequencies.

NokScoot will also likely have to start competing against the LCC Thai VietJet, which is planning to launch services in the Bangkok-China market.

Foreign airlines also compete on all but one of NokScoot's routes. Only one of these foreign airlines is an LCC (Tigerair Taiwan on the Bangkok-Taipei route). However, several of the foreign airlines NokScoot is competing against are aggressive, and frequently offer LCC-like fares.

As NokScoot accelerates expansion, with eight aircraft slated to join the fleet over the next 15 months, it will have to deal with intensifying competition. Although there are opportunities in several markets, other airlines are targeting the same opportunities. Competition will be an issue anywhere NokScoot decides to deploy the additional aircraft.

2. Tourism slowdown

NokScoot and Thailand's other LCCs are all banking on continued rapid inbound growth. However, Thailand has previously experienced sudden drops in visitor numbers.

Political instability or other events outside NokScoot's control could significantly impact inbound demand.

NokScoot is particularly relying heavily on China. While Chinese visitor numbers to Thailand have grown rapidly since NokScoot's launch, the continued growth in the Thailand-China market cannot be guaranteed. In fact, Chinese visitor numbers to Thailand declined in Jul-2018 and Aug-2018 following a boat accident in Phuket on 7-Jul-2018 that killed 41 Chinese nationals.

3. The future of Nok Air

Nok Air has incurred large losses over the past five years. Two CEOs - both of whom had been with Nok since its 2004 launch and helped establish NokScoot - have resigned within the past year.

While Nok is trying to restructure, its future is uncertain. As Nok owns 49% of NokScoot, any troubles at Nok clearly have an impact on NokScoot.

Ironically, there could be an opportunity for NokScoot to fill any void that is left by Nok. NokScoot's launch of narrowbody operations helps prepare NokScoot for such a scenario.

However, a more likely scenario is Nok being taken over by Thai Airways, which already has a minority share in Nok. This would be a logical move for Thai and would mirror SIA's takeover of ailing Tigerair. (SIA subsequently merged Scoot with Tigerair, which, like Nok, had been a short haul LCC with a minority passive stake from a full service airline.)

Thai Airways taking over Nok could lead to uncertainty for NokScoot, given that 49% of NokScoot is owned by SIA. Although Thai and SIA are both in the Star Alliance, they are staunch competitors. Thai now only has a small indirect stake - and no control - in NokScoot. The current situation is already rather odd, as NokScoot is under SIA while Nok is somewhat under Thai.

In the meantime, overlap between Nok and NokScoot is increasing. Both airlines will soon be operating 737s in the Thailand-China market without any significant or formal coordination. This is hardly an ideal scenario and will have to be dealt with at some point. Unlike the licensing agreement distinguishing AirAsia X from AirAsia, there are no agreements preventing NokScoot from operating short haul flights or Nok from operating long haul flights.

Future developments at Nok, particularly relating to its relationship with Thai Airways and with NokScoot, should be a concern for NokScoot.