20-Jul-2014 3:00 PM

Thai Airways outlook weakens as political uncertainty lingers and competition intensifies

Analysis

Like some other longstanding flag carriers, Thai Airways is facing a critical juncture as the airline continues to struggle amid challenging market conditions. The government-owned flag carrier needs to make adjustments and restructure but implementation of a new business plan will be complex following turnover at the board and executive level.

Thai's traffic figures have been sharply down since late 2013 as prolonged political uncertainty has impacted inbound demand. Load factors continued to plummet in 2Q2014, dipping below 60% in May and June, despite capacity cuts.

Political turmoil has led to the delay in important strategic decisions, including critical fleet renewal. Meanwhile, competition in the Thailand market is intensifying with the launch of three new low-cost carriers, further weakening Thai's outlook.

Summary

Thai Airways has been facing financial difficulties since 2013, with consecutive quarterly losses and a cumulative loss of over USD500 million since April 2013.
The airline's load factors have been declining, dropping below 60% in May and June 2014, despite capacity cuts.
Political turmoil in Thailand has impacted inbound demand, particularly from

2Q2014 will mark the fifth consecutive quarter of losses for Thai Airways

Thai Airways has been in the red every quarter since 2Q2013, incurring cumulative losses since Apr-2013 of over USD500 million.

The group incurred a net loss of THB12.05 billion (USD392 million) in CY2013, compared to a net profit of THB6.23 billion (USD201 million) in 2012. Thai was also profitable in 2009 and 2010 but incurred a loss in 2011 as demand was impacted by floods in Bangkok.

Thai Airways annual net profit/loss (in USD): 2009 to 2013

In 1Q2014 Thai reported a net loss of THB2.63 billion (USD81 million) compared to a net profit of THB8.28 billion in 1Q2013 (USD254 million), as revenues dropped by almost 20%. Financial figures for 2Q2014 will not be reported until Aug-2014 but Thai is expected to see even steeper losses.

Thai Airways financial highlights: 1Q2014 vs 1Q2013

Thai's load factor slumps to 59%

Recently released traffic figures for Jun-2014 and 2Q2014 were dismal. RPKs for Jun-2014 were down 23%, outstripping a 10% decline in ASKs as Thai's system-wide load factor dropped 10ppts to 59.2%. May-2014 figures were similar, with RPKs down 16% on a 7% drop in ASKs resulting in a load factor decline of 6.6ppts to 59.8%.

The 59.8% and 59.2% load factor figures mark the first time Thai had a monthly load factor under 60% in four years. Thai's load factor for five out of the last six months came in below 2013, 2012, 2011 and 2010 levels.

(Thai's load factor briefly dipped below 60% in May-2010, when there were violent protests and a military crackdown. But the market quickly recovered as stability returned a lot quicker than the recent period of unrest.)

Thai Airways monthly system-wide load factor: Jan-2010 to Jun-2014

Thai needs to consider adjustments to European routes following weak performance

Europe has particularly been a weak performer with a load factor of only 56.3% in Jun-2014 and 54.6% in May-2014, representing year over year drops of 7.3ppts and 6.3ppts respectively. This is particularly concerning as Europe accounts for almost 40% of Thai's international ASKs.

Thai Airways monthly load factor on European routes: Jan-2010 to Jun-2014

Over the past eight months demand for international flights has generally has been impacted by Thailand's ongoing political crisis. But in 1H2014 tourist arrival numbers from Europe were still up by 6% (to 2.3 million) while arrivals from East Asia was down 18%. In Jun-2014 arrivals from Europe were down only 3% while East Asia arrivals were down 31%.

For 1H2014 Thai's RPK figures were down 6% on European routes, including a 16% drop in Jun-2014. Thai has been impacted by intense competition from Middle Eastern carriers, which now have more capacity into Thailand (about 100,000 weekly seats in Aug-2014) than Thai has to Europe (about 65,000 weekly seats).

Norwegian also launched services to Bangkok in mid-2013, becoming the first LCC in the Europe-Thailand market. Norwegian currently operates two weekly 787-8 flights from Oslo and three weekly flights from Stockholm, increasing to four weekly flights on both routes from late Oct-2014, according to OAG data. In Scandinavia, Thai serves Oslo, Stockholm and Copenhagen.

As tourist arrivals from other Asian countries have been most impacted by the turmoil since political protests erupted in Bangkok in Nov-2013, regional routes have accounted for most of the capacity cuts Thai has so far implemented this year. But the recent load factor figures suggest a cut in European capacity is also necessary. Thai's current seat capacity to Western Europe is flat compared to Jul-2013 levels at approximately 62,000 weekly seats, according to CAPA and OAG data.

Thai currently operates scheduled passenger services to 13 European destinations. Three of these destinations are currently served with more than seven weekly frequencies - Copenhagen (nine weekly), Frankfurt (11 weekly) and London (14 weekly).

Thai uses the A380 on some of its Frankfurt flights and on all flights to Paris, which it serves with daily frequency. While several European routes are operated with 777s, Thai continues to operate inefficient A340s and 747-400s on some Frankfurt flights and all of its London, Milan, Munich, Rome and Zurich flights. Capacity adjustments along with the accelerated retirement of A340s and 747s would be a logical response to Thai's current predicament.

Thai Airways is also performing weakly on Australia routes

Thai also uses ageing 747-400s to Australia, another market where it has struggled in recent months. Thai reported an average load factor of only 54.6% on its Australian routes for May-2014 and a load factor of 61.5% for Jun-2014.

For 1H2014 Thai's average Australia and New Zealand load factor was 69.9%, a 6.1ppts decrease from 1H2013, as RPKs were down 19%. In May-2014, Thai's RPKs to and from Australia reached their lowest level in at least five years.

Thai Airways monthly RPKs on Australia/New Zealand routes: Jan-2010 to Jun-2014

Thai currently operates 38 weekly flights to Australia including 14 777 flights to Melbourne, 10 747-400 flights to Sydney, seven 777 flights to Brisbane and seven A330 flights to Perth. It also operates four weekly 777 flights to Auckland in New Zealand.

Thailand reported a 2% drop in visitor arrivals from Oceania (primarily Australia and New Zealand) in 1H2014 including a 5% drop in Jun-2014. While a reduction in demand has likely impacted Thai's performance on Australian routes in recent months, Thai also has been impacted by intensifying competition in the broader Southeast Asia-Australia market.

Over the past two years there has been a significant impact on capacity from Australia to Singapore, Malaysia and Indonesia. While there has not been a similar increase from Australia to Thailand, Thai's competitors from other Southeast Asian countries have aggressively promoted connections between Australia and Thailand, particularly Malaysia Airlines and AirAsia. The overall Southeast Asia-Australia market is now suffering from overcapacity, impacting yields and load factors for all carriers.

Thai's share of the Australia-Southeast Asia market has also taken a hit, weakening its overall position. Thai currently has about 13,000 weekly one-way seats to Australia, compared to about 14,500 in Jul-2013 and about 13,000 in Jul-2012, according to CAPA and OAG data. Meanwhile total capacity in the Australia-Southeast Asia market has increased from 155,000 in Jul-2012 to 163,000 in Jul-2013 and 183,000 in Jul-2014, resulting in Thai's share dropping from over 8% to about 7%.

In 2012, Thai had more capacity to Australia than AirAsia X and only slightly less than MAS; currently both of these carriers have almost double the capacity of Thai.

In 1H2014, Australia and New Zealand accounted for 12% of Thai's total RPKs while Europe accounted for 37%. Asia accounted for 43% and domestic for 5% (includes Thai Airways and Thai Smile). Africa and North America - Thai has just one destination in each region - accounted for the remaining 3%.

Thai capacity cuts have so far focussed on regional routes within Asia

As CAPA reviewed in Apr-2014, Thai Airways implemented a 4% to 5% cut in ASKs in late 1Q2014. Most of the cuts however were on regional routes within Asia and as a result the number of weekly frequencies dropped by about 10%.

Thai was initially hoping to restore capacity levels in 3Q2014. But with market conditions continuing to remain unfavourable Thai has been extending some capacity cuts through Oct-2014.

Capacity is now slated to return to normal levels in late Oct-2014, according to schedule data from OAG. But this will likely be reviewed over the next couple of months and hinges on the market recovering in time for the typical northern winter peak season.

Thai meanwhile has continued to make frequent adjustments for Jul-2014 through Oct-2014 - although again the focus is on routes within Asia rather than long-haul services to Europe or Australia, despite the weaknesses in those markets. For example Thai recently adjusted capacity on five of its six Japanese routes, resulting in an approximately 15% reduction in total capacity to Japan for Aug-2014 compared to May-2014.

The cuts to Japan come as Thailand's two new long-haul LCCs, Thai AirAsia X and NokScoot, are both targeting Japan. Thai AirAsia X is already serving Japan with charter flights (with scheduled flights to begin later this year) while NokScoot also plans to launch services by the end of 2014.

Competition with LCCs is also intensifying in the domestic and short-haul market as Thai AirAsia continues to expand, with four A320 deliveries slated for 2H2014, and as start-up Thai VietJet Air prepares to launch services by the end of 2014. Thai's response so far to the steady rise of LCC traffic in Thailand has been to pursue expansion at its short-haul LCC affiliate Nok, enter the long-haul LCC market through its involvement (with an indirect stake) in NokScoot and establish regional full-service/hybrid subsidiary Thai Smile.

Thai needs to decide on Thai Smile expansion and strategy

Thai is in the process of transitioning to an all-widebody fleet as Thai Smile becomes the group's full-service narrowbody operator. Thai Smile, which has a lower cost structure than Thai but has evolved into essentially a full-service carrier, has mitigated losses at the group by taking over some unprofitable domestic and short-haul international routes. But Thai's new executive team and board will need to decide in the coming months on how to proceed with Thai Smile from both a strategy and growth perspective.

Thai Smile currently operates 14 A320s but has commitments for only six more aircraft, three of which will be delivered in 2H2014 and three in 2015. The group needs to decide on potential additional growth at Thai Smile for 2015 as well as expansion for 2016 and beyond, including the expected transition to new generation narrowbody aircraft. Commitments to acquire A320neos are likely.

The group also needs to decide if Thai Smile, which launched services in mid-2012, is the right vehicle to launch new routes. In its first phase of development Thai Smile has been used primarily to take over routes from Thai Airways mainline as Thai phases out its 737 and A300 fleets.

Widebody fleet decisions loom for Thai Airways

Thai also has been looking for some time at acquiring new long-haul widebody aircraft but over the last nine months has been unable to move forward with any acquisition due to the political turmoil. Accelerating the retirement of inefficient aircraft along with network restructuring could become a sensible solution - if not its only option.

Thai currently operates 12 747-400 passenger aircraft and six A340s. As CAPA observed in Apr-2014, Thai's current fleet plan does not envision the 747-400s being phased out until late in this decade, with the first two aircraft slated to be retired in 2017. But Thai has been looking at moving up the retirement of four to six 747-400s to 2015.

This would be a logical move; however it would still require Thai to continue operating six to eight 747-400s until about 2018. Further adjustments are needed but could be costly given Thai's financing commitments for these aircraft.

Rival Malaysia Airlines and Singapore Airlines have already phased out 747-400s in recent years, with SIA also phasing out A340s. Cathay Pacific is also now in the process of retiring its remaining 747-400s. Thai's 747 fleet is currently on average 17 years old, according to the CAPA Fleet Database.

Thai Airways average fleet age by aircraft type: as of 20-Jul-2014

Thai's A340-600s are younger, on average only eight years old, making it particularly challenging from a financial perspective to phase out the aircraft this decade. But Thai may be better off biting the bullet as part of a broader restructuring.

Thai would gain efficiencies by transitioning its fleet to twin-engine widebodies along with its six A380s. The A380s are not seen as a critical part of the Thai fleet but would be even harder to dispose of. Given the role Thai Smile is now playing, it would be sensible for Thai Airways to accelerate the phase out of its last two 737-400s from 2017 to 2015.

Thai could potentially acquire more 777-300ERs if it is able to accelerate retirement of four-engine widebodies and is also keen to place a 777X order to meet its long-term long-haul requirement. Thai currently already operates 10 777-300ERs, eight of which have been delivered since the beginning of 2013. It currently only has commitments for another four 777-300ERs, with one slated to be delivered in Aug-2014 and three to be delivered in 2015.

Thai's only other outstanding widebody commitment is for 787s - it took its first 787-8 in mid-Jul-2014 and has seven more on order (five 787-8s and two 787-9s) - but these are earmarked for regional routes.

Thai Airways waits for the new government to make decisions

Fleet renewal and expansion decisions were originally expected by the end of 2013 but have been delayed due to turmoil in the government, which remains Thai's majority shareholder. The previous government was ousted in May-2014 after six months of protests and civil unrest. But as is always the case when there is a change in government in Thailand, Thai Airways is not the immediate priority and addressing issues at the flag carrier becomes a very slow process. Meanwhile, the competitive environment is even more turbulent than Thailand's politics.

Thai also has not had a permanent president and CEO since Sorajak Kasemsuvan resigned at the end of 2013. The new government recently appointed Air Chief Marshal Siwakiat Jayema as acting president. Air Chief Marshal Siwakiat took over on 1-Jul-2014 from Chokchai Panyayong, a longstanding Thai executive who had been serving as Thai's acting president for the last several months.

Mr Chokchai for now continues to serve as senior executive vice president for strategy and business development, a key position where he has been instrumental at establishing and implementing Thai's current multi-brand strategy. Mr Chokchai sits on the Nok, Thai Smile and Thai Airways boards.

But Mr Chokchai is retiring from Thai entirely at the end of Sep-2014 when he reaches mandatory retirement age, adding to the uncertainty at the executive level. There are also several vacancies on the Thai Airways board since five members, including a former chairman, resigned in Jun-2014.

The eventual selection of a permanent president and several new board members will help determine which direction Thai takes. Thai would benefit greatly from continuity and an opportunity to restructure and make strategic adjustments without government meddling.

Mr Sorajak served as CEO for only 15 months, replacing Piyasvasti Amranand. Mr Piyasvasti was at the helm for three years, leading Thai through a strategic shift but was ultimately unsuccessful in an attempt to persuade the government to reduce its involvement in Thai. The government continues to own a 51% stake.

Over the years government meddling and a lack of continuity has prevented Thai from fully implementing a strategy that could potentially improve the carrier's long-term position. With Thailand's military now in control and not planning to hold national elections until at least 2H2015 it is again unclear how Thai Airways will evolve.

What is certain is that Thai faces a critical period as the flag carrier grapples with weak market conditions both in Thailand and in the broader Southeast Asia region, an ageing fleet, along with increasing competition from increasingly voracious LCCs.

In the absence of clear guidance for the flagship, holding together a multi-brand strategy has become the main lever the airline has to remain competitive in the marketplace. But that will need sophisticated handling, something that the imminent departure of Mr Chokchai threatens to make elusive.