Thailand outlook Part 6: Regional market expands - Kan Air takes ATR 72s & Nok Air adds Dash 8s

This is the sixth and final Part in a series of analysis reports on the dynamic Thailand market. This report analyses the outlook for the regional market - which includes point to point routes bypassing Bangkok as well as routes linking Bangkok with smaller communities.

The first four Parts analysed the outlook for Thai Airways, Thai Airways regional subsidiary Thai Smile, independent full-service carrier Bangkok Airways and Thailand's two new long-haul LCCs - NokScoot and Thai AirAsia X. The fifth report looked at the rapid growth across domestic trunk routes driven by expansion at Thailand's three short-haul LCCs - Nok Air, Thai AirAsia and Thai Lion Air.

See related reports:

• Thai Smile needs to focus on feeder role at Bangkok Suvarnabhumi as Thai Airways restructures
• Bangkok Airways outlook brightens as expansion at Samui Airport begins
• Thai Airways embarks on major network and fleet restructuring but long-term challenges remain
• NokScoot and Thai AirAsia X set back by new ICAO-driven restrictions from Japan and South Korea
• Competition in Thailand's domestic LCC sector intensifies further as Thai Lion, Nok & AirAsia expand

Thailand has a small regional aircraft fleet

There are currently only three airlines in Thailand with scheduled regional aircraft operations - Bangkok Airways, Kan Air and Nok Air. Three other regional carriers - Happy Air, SGA Airlines and Solar Air - have suspended operations since the beginning of 2014. Thai Lion Air also operated one ATR 72 for several months in 2014 but in late 2014 decided to transition back to an all-737 fleet.

Bangkok Airways currently operates a fleet of nine ATR 72s while Nok has a fleet of two ATR 72s and four Dash 8 Q400s. Kan Air currently operates two ATR 72s and one Cessna Grand Caravan.

Happy Air and SGA were both Saab 340 operators, with Happy Air operating only one aircraft and SGA operating six aircraft. Solar Air also previously operated a Saab 340 but most recently operated scheduled services using two Dornier Do-228 turboprops.

The current regional fleet of 18 aircraft represents less than 8% of the approximately 240 commercial aircraft currently in service in Thailand. These figures exclude aircraft including turboprops which are only used for corporate or VIP charters. There has not been any regional jets operating in Thailand since regional carrier PB Air suspended operations in late 2009.

Thailand's airlines ranked by number and type of aircraft in fleet: as of 15-Apr-2015

Rank	Airline and operating model			Widebody	Narrowbody	Turboprops	Total
1	TG	Thai Airways	FSC	79	2	0	81
2	FD	Thai AirAsia	LCC	0	42	0	42
3	PG	Bangkok Airways	FSC	0	19	10	29
4	DD	Nok Air	LCC	0	18	6	24
5	WE	Thai Smile	FSC	0	18	0	18
6	OX	Orient Thai Airlines	Charter	6	6	0	12
7	SL	Thai Lion Air	LCC	0	10	0	10
8	JF	Jet Asia Airways	Charter	5	0	0	5
9	E3	NewGen Airways	Charter	0	4	0	4
10	K8	Kan Air	Regional	0	0	3	3
11	XJ	Thai AirAsia X	LCC	3	0	0	3
12	RK	R Airlines (Skyview Airways)	Charter	0	2	0	2
13	HB	Asia Atlantic Airlines	Charter	2	0	0	2
14	O8	Siam Air Transport	Charter	0	2	0	2
15		NokScoot*	LCC	2	0	0	2
16		Thai VietJet Air*	LCC	0	1	0	1
17	DM	Asian Air	Charter	1	0	0	1
18	E8	City Airways	Charter	0	1	0	1
19	8K	K-Mile Air	Charter	0	1	0	1
20	8B	Business Air	Charter	1	0	0	1

Notes: only active aircraft are included
*NokScoot and Thai VietJet have not yet launched scheduled services. So far they have operated a limited number of charters.
Source: CAPA Fleet Database

Thailand's LCC and charter carrier sector has become very crowded

Thailand's regional airline sector is well positioned for growth as other sectors have become crowded and extremely competitive.

There are now six Thai-based LCCs, which gives Thailand more budget airlines than any country except the US. These six carriers expect to have a combined fleet of 106 aircraft at the end of 2015 - including 88 narrowbodies, 10 widebodies and eight turboprops. At the end of 2012 there were only 42 aircraft operating in Thailand's LCC sector and only two carriers.

Thialand's colourful leisure and charter carrier sector also has seen rapid growth. There are about 10 active airlines in Thailand operating under a leisure or charter model with several more in the start-up process.

Almost all these airlines primarily target the Thailand-North Asia market and have limited or no domestic operations. However, new restrictions on expanding in China, Japan and South Korea could force some of these operators to look at different markets.

Thailand also has two players following the traditional scheduled full-service model - Thai Airways and Bangkok Airways.

Bangkok Airways is Thailand's largest turboprop operator but growth opportunities are relatively limited

Bangkok Airways' roots are as a regional operator, initially launching as an air taxi company in 1968 and becoming a scheduled airline in 1986. Growth accelerated after Bangkok Airways opened an airport on the resort island of Koh Samui in 1989. Bangkok Airways added jets, initially 717s in 2000 and eventually A320 family aircraft in 2007, as the Samui Airport was expanded to accommodate jets.

Bangkok Airways has focused in recent years on expanding its A319/A320 fleet, which it has used to launch more domestic trunk routes and new international services. But it also remains committed to maintaining a turboprop operation, which is used on thin underserved or unserved routes from Bangkok (Lampang, Sukhothai and Trat) as well as point to point domestic routes from Samui (Krabi, Pattaya and Phuket) and Phuket (Pattaya and Samui).

Bangkok Airways also opened a new turboprop base in northern Thai city of Chiang Mai in late 2014, which it used to launch three point to point routes to Udon Thani, Mandalay and Yangon. The carrier expanded its turboprop fleet for the first time in several years - from eight to nine aircraft - to accommodate the new Chiang Mai base.

See related report: Bangkok Airways to expand turboprop operation and Myanmar network with new Chiang Mai base

Bangkok Airways currently operates two recently delivered ATR 72-600s and seven ATR 72-500s. It has an eighth ATR 72-500 which is expected to be out of service until 3Q2015 to repair damage caused in Feb-2015 when it was a hit in Yangon by a Korean Air A330.

Bangkok Airways is planning to phase out its ATR 72-500 fleet over the next two years as the seven remaining ATR 72-600s it has on order are delivered.

Bangkok Airways fleet summary: as of 15-Apr-2015

Aircraft	In Service	On Order*
Total:	28	7
Airbus A319-100	11	0
Airbus A320-200	8	0
ATR 72-500	7	0
ATR 72-600	2	7

Note: orders include known commitments for new aircraft from leasing companies
Source: CAPA Fleet Database

Bangkok Airways also still uses ATR 72s on some flights from Bangkok to Samui, which is by far its largst route, and on some international flights to Cambodia, Laos and Myanmar. But over time most of these flights have been up-gauged to A319s or A320s, a trend which is expected to continue. As more Samui and international flights are upgraded to jets Bangkok Airways should have opportunities to open new point to point regional routes, particularly if the experiment in Chiang Mai proves successful.

But new point to point regional routes are probably more suitable for Nok, given its LCC model, or pure regional carriers such as Kan Air. Bangkok Airways is focused primarily on Samui, where it has a competitive advantage, and feeding foreign carriers at Bangkok.

Nok expands its turboprop fleet

Thai Airways handed its turboprop fleet to Nok Air several years ago as regional domestic routes were highly unprofitable for the flag carrier. The group launched Thai Smile in 2012 as a hybrid regional carrier but Thai Smile is focusing on domestic trunk routes and short/medium-haul international routes using A320s in two-class configuration.

Thai Smile has no intention of serving secondary domestic destinations. As a result Nok, which is partially owned by Thai Airways, will continue to be the only Thai Airways Group brand competing in the domestic regional market.

Nok plans to add by the end of 2015 two Dash 8-Q400s, which it will use to further expand its domestic network as well as add frequencies on some of its existing regional routes. Nok plans to retain its two ATR 72-500s for now although these could be phased out and replaced with more Dash 8s in 2016.

Nok Air fleet summary: as of 15-Apr-2015

Aircraft	In Service	On Order*
Total:	24	17
ATR 72-500	2	0
Boeing 737-400	0	0
Boeing 737-8	0	8
Boeing 737-800	18	7
Bombardier DHC-8Q-402(NG)	4	2

Note: orders include known commitments for new aircraft from leasing companies
Source: CAPA Fleet Database

Nok is the launch customer of the new 86-seat version of the Dash 8-Q400 and took an initial four aircraft in 2014. The capacity generated from the expansion of the Nok-operated turboprop fleet in 2014 from two to six aircraft was used in part to replace the capacity that had been provided by six Saab 340s which been wet-leased from SGA Airlines.

Nok has taken over eight routes that were previously operated by SGA under the sub-brand Nok Mini. Five other routes - four of which were thin point to point routes bypassing Bangkok - were dropped entirely after Nok's partnership with SGA was terminated at the end of Mar-2015.

Nok was partnered for five years with SGA, which initially operated Cessna Caravans under the Nok Mini brand before transitioning to Saab 340s. Nok's ability to up-gauge most of the Saab 340 routes to much larger ATR 72s or Dash 8-Q400s is a refection of the growing demand in regional markets. Nok also has been able to up-gauge several turboprop routes to 737s over the years, including in 2014 as Nok needed to free up its own turboprop capacity to take over flights that had been under SGA.

Thai AirAsia uses A320s to add secondary domestic destinations

Thai AirAsia looked at taking over the SGA operation and using the Saab fleet to enter the regional market. But Thai AirAsia ultimately decided to stick with its all-A320 fleet and instead expand its domestic network to include more secondary destinations using its 180-seat A320. SGA subsequently folded.

Over the last three months Thai AirAsia has launched four new regional routes from its hub at Bangkok Don Mueang - Buriam, Loei, Nan and Roi Et. All four markets have seen a huge influx of capacity since Mar-2014 as they had been routes served by SGA under the Nok Mini partnership.

Nok initially added capacity in most of these markets in Apr-2014 as flights were up-gauged. Nok has added more capacity in some of these markets in recent months in response to AirAsia's entrance.

According to OAG data, Nok now serves Nan with five daily turboprop flights (three ATR 72 and two Dash 8 frequencies) and Roi Et with three daily turboprop flights (two ATR 72 and one Dash 8 frequency). Loei has become an all-jet operation with two daily 737-800 flights while Buriam is still only served with one daily ATR 72 flight.

Thai AirAsia is also serving Buriam with one daily flight while it serves Loei, Nan and Roi Et with two daily frequencies each. No other currently operates scheduled services in any of these markets.

More regional expansion is expected from Thai AirAsia and Nok

Thai AirAsia's regional push means Nok only serves four more domestic destinations than its competitor despite having turboprops in its fleet. As CAPA outlined in the last part in this series of reports, Thai AirAsia now has 20 domestic destinations compared to an industry-leading 24 for Nok.

Thai AirAsia plans to continue pursuing expansion of its domestic network, including new services to airports which are in the process of being upgraded to accommodate jets. Nok is also looking at potential new domestic destinations which would initially be launched using its turboprop fleet.

Thai AirAsia currently serves one domestic destinations that is not served by Nok - Narathiwat. Nok has five destinations that are still not served by Thai AirAsia - Chumphon, Lampang, Mae Sot, Phrae and Ranong.

Thai AirAsia is currently the only carrier serving Narathiwat. Of its five destinations which do not have service from AirAsia, Nok is currently the only carrier serving Chumphon, Ranong and Phrae. Nok was competing against Happy Air in the Bangkok-Ranong and Bangkok-Chumphon markets until Happy Air suspended operation in early Feb-2015. Solar Air also previously operated scheduled services between Bangkok and Chumphon.

Happy Air was based at Bangkok Suvarnabhumi and operated one Saab 340. It also operated a mini-hub at Phuket - with routes to Hat Yai, Nakhon Si Thammarat, Trang and Langkawi (Malaysia) - after it was initially established in 2009. Solar Aviation launched services in 2010 with a base at Bangkok Don Mueang. It also operated a Saab 340 at one point but most recently has been operating two 19-seat Dornier 228 turboprops, one of which is not active while the other is now being used for charters in Laos.

Bangkok-Lampang, which Nok launched in Oct-2014, is also served by Bangkok Airways. In the Bangkok-Mae Sot market Nok has been competing against Kan Air since Aug-2014. This is one of several routes Kan Air has added over the last several months. But Kan Air's expansion has focused mainly on point to point routes which are not served by any other carrier.

Nok currently only operates one point to point bypassing Bangkok - Chiang Mai to Udon Thani - which it serves once daily using 737-800s. Nok could potentially add point to point turboprop routes as it expands its Dash 8 fleet but the focus is primarily on continuing to build up the Bangkok hub, including linking Bangkok to new secondary domestic destinations. This leaves a void in Thailand's domestic market which Kan Air and other potential regional carriers are striving to fill.

Kan Air takes a leap with ATR 72s but drops JV with VietJet

Kan Air launched services in Sep-2010 from a base in Chiang Mai. For its initial four years it operated 12-seat single-engine Cessna Grand Caravans on short sectors within northern Thailand, primarily Chiang Mai to Mae Hong Son, Khon Kaen, Nan, Pai and Phitsanulok. It has generally been the only carrier on these routes except for Chiang Mai-Mae Hong Son, which was also served by SGA under the Nok Mini brand until Mar-2014. Kan Ai also has operated for some time a Hawker Beechcraft Premier, which is mainly used for VIP charters but is occasionally used on scheduled routes.

Kan Air's parent Kannithi Aviation made two major strategic decisions over the last two years in pursuing a joint venture LCC with Vietnam's VietJet and committing to lease 66-seat ATR 72-500. The idea was to use the new joint venture airline, Thai VietJet Air, to operate trunk routes using A320s while Kan Air expanded in the regional market using ATR 72s.

But Kannithi decided in early 2015 to sell its stake in Thai VieJet, citing a difference of opinion with its Vietnamese partner. Thai VietJet has since delayed the launch of scheduled services, which had initially been set for late Mar-2015 on domestic trunk routes.

Kannithi instead is now focusing its resources on expanding Kan Air. While it has launched services at Bangkok Don Mueang, Kannithi particularly sees opportunities in unserved point-to-point markets. This is a sensible strategy given the intense competition on trunk routes. Domestic trunk routes are already suffering from overcapacity following the launch of Thai Lion and rapid expansion from Nok and Thai AirAsia.

Kan Air expands in Chiang Mai and establishes a mini-hub at Pattaya

Kan Air took delivery of its first ATR 72-500 in late 2014 and used the aircraft to add capacity at its original base in Chiang Mai. Kan Air launched services from Chiang Mai to Nakhon Si Thammarat in early Feb-2015, which gave it 10 routes from Chiang Mai. This includes Mae Hong Son (three times daily), Khon Kaen (daily), Ubon Ratchathani (daily), Phitsanulok (four times weekly), Pai (thrice weekly), Hua Hin (thrice weekly), Nakhon Si Thammarat (thrice weekly), Nan (twice weekly), Mae Sot (twice weekly) and Chiang Rai (once weekly).

Some of Kan Air's Chiang Mai flights are still operated with smaller aircraft. Hua Hin, which is Kan Air's longest route from Chiang Mai at two hours in duration, and Ubon Ratchathani were initially launched in Aug-2014 and upgraded to the ATR 72-500 after the first ATR 72 entered service.

Kan Air's second ATR 72 was delivered in Mar-2015 and was used to launch several routes from U-Tapao Airport outside Pattaya, a beach resort about 200km from Bangkok. Kan Air launched flights on 10-Apr-2015 from Pattaya to Bangkok Don Mueang (daily), Ubon Thani (four times weekly), Ubon Ratchathani (four times weekly), Khon Kaen (three times weekly) and Chiang Mai (three times weekly).

The second ATR 72 is technically based at Don Mueang, where it overnights and operates a return sector to Mae Sot in the early morning before spending most of the day operating out of Pattaya. The Chiang Mai-Pattaya route enables Kan Air to swap the two aircraft and base either one at its main office in Chiang Mai.

Kan Air route map: as of 15-Apr-2015

Source: kanairlines.com

Kan Air is planning to launch several more routes from Pattaya as it adds two more ATR 72-500s, which are expected to join the fleet by the end of 2015. Kan Air is reportedly looking at serving Pattaya from Hat Yai, Surat Thani and Phuket, which would give it nine routes in total from U-Tapao Airport.

The addition of Hat Yai, Surat Thani and Phuket would also grow Kan Air's total network to 17 destinations. Its current network of 14 destinations already gives Kan Air the third largest domestic network in Thailand.

Thai carriers ranked by number of domestic destinations: as of 15-Apr-2015

Rank	Airline	Number of domestic destinations
1.	Nok Air	24
2.	Thai AirAsia	20
3.	Kan Air	14
4.	Thai Airways/Thai Smile	11
5.	Bangkok Airways	11
6.	Thai Lion Air	8

Source: CAPA - Centre for Aviation

Kan Air looks to create a new market at Pattaya

Bangkok Airways was previously the only airline with scheduled flights at U-Tapao Airport. Bangkok Airways currently serves U-Tapao/Pattaya with one daily ATR 72 flight from both Samui and Phuket.

The airport also accommodates several charter flights, primarily from Russia and other CIS countries. But most passengers heading to or from Pattaya typically drive to one of Bangkok's two airports.

Kan Air sees an opportunity to create a market in Pattaya. But it will also likely take some passengers from other airlines which serve the same destinations from Bangkok.

Kan Air should be able to stimulate demand and persuade some passengers who now travel to Pattaya by bus, particularly with its initial all-inclusive one-way fare of only THB990 (USD30) to all destinations except Bangkok. But such low fares are likely promotional and not sustainable. Kan Air operates under a full-service model with meals, drinks and checked bags provided. (Bangkok-Pattaya flights are being sold for even less, THB490, but this an extremely short flight that is used to reposition aircraft and crew.)

Kan Air builds an airport on resort island of Koh Phangan

Kan Air also aims to launch services to the popular resort island of Koh Phangan as it expands its ATR 72 fleet. Kannithi has been developing an airport on Koh Phangan since 2011, when it secured approvals from Thai authorities and began initial site work. Construction activities ramped up in 2014 and the airport, which was initially expected to open by the end of 2014, could potentially be completed within the next year.

The airport at Koh Phangan should give Kan Air a competitive advantage similar to the advantage Bangkok Airways has enjoyed in the Samui market since it built the Koh Samui Airport in the late 1980s. Koh Phanghan is a popular tourist destination but is currently only accessibly by ferry from Chumpon on the mainland or from Koh Samui.

Kan Air is reportedly targeting to carry 400,000 passengers in 2015. This would equate to only a slightly more than 1% share of Thailand's domestic market. But this is just the tip of the iceberg and Kan Air should be able to at least double this figure in 2016 if it succeeds at completing the airport at Koh Phangan.

Thailand's regional airline market has opportunities but also challenges

But successfully carving out a niche in Thailand's highly competitive domestic market will not be easy. Kan Air risks a larger competitor recognising opportunities on point-to-point routes and launching similar services to underserved destinations such as Pattaya. Kan Air also faces potential competition from new start-ups.

Most proposed new start-ups in Thailand continue to target the international market, particularly mainland China. But China's Hainan Group has been working on establishing a potential Thailand-based joint venture carrier which would focus on point-to-point regional routes using 50-seat Embraer ERJ-145 regional jets. The new yet to be named airline will likely acquire an existing air operators' certificate, which would enable it to launch more quickly, particularly as Thailand's DCA has decided to halt the processing of all new AOC applications until it resolves the issues raised recently by ICAO.

The new regional carrier will likely try to carve out a niche that is somewhat different from Kan Air's target market. ERJ-145s are smaller aircraft that require higher yields and therefore routes with business demand to sustain. The markets Kan Air is entering are primarily leisure-focused. While there are potential opportunities for both niches there will are also be numerous challenges.

Thailand has become a crowded and extremely competitive market. It is sensible for airlines to try to pursue something different. Regional operations can be attractive, particularly as economic and middle class growth in Thailand trickles down to smaller communities. But the big established players also have an opportunity to serve more secondary markets and potentially outmuscle any new regional operator.