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Thai Airways regional connectivity Pt 2: Thai Smile international expansion is a strategic necessity

Thai Airways' regional full service subsidiary Thai Smile is expected to accelerate international expansion over the next year as Thai Airways transitions to an all-widebody fleet. Adjustments in the group’s dual brand strategy are also possible as Thai Airways and Thai Smile could benefit from much closer integration.

Thai Smile currently only operates four international routes and allocates 90% of its seat capacity to the domestic market. However, the airline is poised to take over Thai Airways’ four remaining international narrowbody routes and should be used to expand the group’s presence in secondary cities in China, India and ASEAN.

This is the second part of a report on the Thai Airways Group's regional international network and strategy. The first part looked at how the group has fallen behind its rivals in Southeast Asia – particularly the Singapore Airlines Group – in improving regional connectivity. In this second part CAPA focuses on the strategy for Thai Smile and how the Thai Airways group could finally start to use Thai Smile to bolster regional connectivity.

See related report: Thai Airways falls behind Singapore Airlines Group with regional connectivity: Part 1

Thai Smile currently operates only four international routes

Thai Smile commenced operations in mid-2012, following a full service regional airline model and operating as a Thai Airways unit. In 2Q2014 Thai Smile secured its own operator's certificate and became a fully owned subsidiary while retaining a full service regional airline business model.

Thai Smile has steadily expanded over the last four years but has focused mainly on the domestic market. Thai Smile currently operates 31 weekly return flights in the international market compared with just less than 300 weekly domestic return flights.

Thai Smile’s international operation currently consists of only four routes: Bangkok to Changsha (CSX), Macau (MFM), Siem Reap (REP), and Yangon (RGN). Changsha, Macau and Siem Reap represented new destinations for the Thai Airways Group, while Thai Smile is operating alongside Thai Airways in Yangon.

Thai Smile international routes ranked by weekly capacity: May-2016

Macau was Thai Smile’s launch route when it commenced operations in Jul-2012. Macau was initially served with two daily flights but is currently only served with one daily frequency. Changsha was launched in Oct-2013 with three weekly flights and is currently served daily.

Siem Reap and Yangon are Thai Smile’s most recent route launches. Siem Reap commenced in Dec-2015 and is served with 10 weekly flights, while Yangon is served with one daily flight. Thai Airways currently serves Yangon with two daily widebody flights.

Thai Smile has made multiple adjustments to international network

Thai Smile has suspended several international routes since its 2012 launch and has also transferred several international routes to Thai Airways. Suspended routes include Bangkok to Ahmedabad, Luang Prabang and Mandalay and Phuket to Delhi, Kuala Lumpur and Mumbai. Transferred routes include Bangkok to Chongqing, Colombo, Delhi and Hyderabad.

All the suspended Thai Smile routes were new markets for the group. Thai Smile may resume service to Ahmedabad, Luang Prabang and Mandalay as it starts to focus more on international expansion. Resumption of the Phuket routes is not under consideration, since Thai Smile is now focused on feeding Thai Airways at Bangkok Suvarnabhumi rather than again experimenting with international point-to-point routes.

The Bangkok to Colombo, Delhi and Hyderabad routes were originally transferred from Thai Airways widebodies to Thai Smile A320s (in some cases not all frequencies) and now, again, are served with Thai Airways widebody aircraft. At one point the group also planned to transfer Bangkok to Kolkata and Xiamen flights to Thai Smile, but ultimately decided to maintain an all-widebody Thai Airways schedule in these markets.

Bangkok-Chongqing was initially launched by Thai Smile in Oct-2013 and is currently operated by Thai Airways using A320s that were initially intended for Thai Smile. Chongqing is expected to be transferred back to Thai Smile, which has also been evaluating new potential secondary markets in China.

See related report: Thai Airways 2016 Outlook: regional growth & focus on revenue management. Profitability a challenge

Thai Airways Group needs a bigger presence in China

Using Thai Smile to expand in China is necessary if the Thai Airways Group is to succeed at increasing its share of the fast-growing Thailand-China market.

Currently Thai accounts for only a 14% share of seat capacity between Thailand and China. The AirAsia Group also accounts for a 14% share of Thailand-China seat capacity, while the Nok Air Group (which is partially owned by Thai and includes NokScoot) has less than a 5% share.

The Thai Airways Group currently has seven destinations in mainland China and eight routes to China (Kunming is served from both Bangkok and Chiang Mai). AirAsia currently has 20 routes between Thailand and China including 12 from Bangkok. (The two groups differ in their equipment type and frequencies).

Thai Airways Group China routes ranked by weekly seat capacity: 9-May-2016 to 15-May-2016

Rank Origin Destination Total seats
1 BKK Bangkok Suvarnabhumi International Airport PEK Beijing Capital International Airport 7,196
2 BKK Bangkok Suvarnabhumi International Airport CAN Guangzhou Baiyun Airport 5,096
3 BKK Bangkok Suvarnabhumi International Airport PVG Shanghai Pudong Airport 4,648
4 BKK Bangkok Suvarnabhumi International Airport CTU Chengdu Airport 2,324
5 BKK Bangkok Suvarnabhumi International Airport KMG Kunming Airport 1,500
6 BKK Bangkok Suvarnabhumi International Airport XMN Xiamen Gaoqi International Airport 1,328
7 BKK Bangkok Suvarnabhumi International Airport CSX Changsha Huanghua International Airport 1,218
8 BKK Bangkok Suvarnabhumi International Airport CKG Chongqing Jiangbei International Airport 1,218
9 CNX Chiang Mai International Airport KMG Kunming Airport 600

As CAPA outlined in the first part of this report, the SIA Group has 23 destinations in China although Singapore is a much smaller market from China than Thailand. Chinese visitor numbers to Thailand grew 71% in 2015, to 7.9 million, while Chinese visitor numbers to Singapore increased by 21% to 2.1 million.

The Thailand-China and Singapore-China outbound markets are similar in size and relatively small (less than 1 million annual passengers). However, Singapore attracts significantly more China-origin international transit traffic than Bangkok. A very small proportion of Thai’s China traffic now connects to other international destinations. The Thai Airways group is keen to carry more Chinese passengers on its regional international network as it expands its Chinese network.

Thai Airways Group needs bigger presence in ASEAN

A larger Chinese network would also help support new or resumed Southeast Asian international destinations. As CAPA highlighted in the first report, Thai Airways/Thai Smile have 20 fewer Southeast Asian international destinations than SIA/SilkAir, and five fewer than the Malaysia Airlines Group.

A larger presence in ASEAN is sensible as Southeast Asia is a growing market for both outbound and inbound travel. More secondary destinations in the region could help the group's European sales as it would be able to offer more destinations that are not served by competitors from the Gulf. Thai would also be able to enhance its position in the highly competitive Australia market and offer more connections from India.

Siem Reap in Cambodia highlights the opportunities that are available regionally for the Thai Airways Group. Siem Reap is a relatively big and fast-growing inbound market with approximately 3 million annual passengers. However, until a few months ago it was served by SilkAir and Malaysia Airlines but not Thai Airways – although Bangkok is much closer to Siem Reap than Kuala Lumpur or Singapore.

Bangkok-Siem Reap is only the twelfth international route within Southeast Asia served by the Thai Airways Group.

Thai Airways Group Southeast Asia international routes ranked by seat capacity: 9-May-2016 to 15-May-2016

Rank Origin Destination Total seats
1 BKK Bangkok Suvarnabhumi International Airport SIN Singapore Changi Airport 21,400
2 BKK Bangkok Suvarnabhumi International Airport RGN Yangon Mingaladon Airport 10,836
3 BKK Bangkok Suvarnabhumi International Airport KUL Kuala Lumpur International Airport 10,192
4 BKK Bangkok Suvarnabhumi International Airport SGN Ho Chi Minh City Tan Son Nhat Airport 8,632
5 BKK Bangkok Suvarnabhumi International Airport HAN Hanoi Noi Bai Airport 8,184
6 BKK Bangkok Suvarnabhumi International Airport MNL Manila Ninoy Aquino International Airport 6,640
7 BKK Bangkok Suvarnabhumi International Airport PNH Phnom Penh International Airport 5,916
8 BKK Bangkok Suvarnabhumi International Airport CGK Jakarta Soekarno-Hatta International Airport 5,100
9 BKK Bangkok Suvarnabhumi International Airport VTE Vientiane Wattay International Airport 4,200
10 BKK Bangkok Suvarnabhumi International Airport DPS Bali Denpasar Ngurah Rai Airport 3,696
11 BKK Bangkok Suvarnabhumi International Airport REP Siem Reap Airport 3,480
12 BKK Bangkok Suvarnabhumi International Airport PEN Penang International Airport 2,436

Thai Smile to take over several Thai Airways international routes

Thai Smile is also expected to take over Thai Airways’ service to the Cambodian capital Phnom Penh. While the group is new to the Siem Reap market it is one of the most established players in Phnom Penh.

Bangkok-Phnom Penh is currently served by Thai Airways with 17 weekly A320 flights. Thai has more flights to Phnom Penh than any other foreign airline except SilkAir.

Thai Airways also currently operates A320s on two other international routes – Bangkok to Chongqing and Penang – both of which are served daily according to OAG schedule data for the week commencing 9-May-2016. It also operates A320s on five daily domestic flights, including three from Bangkok to Krabi and two from Bangkok to Chiang Mai.

The group is eager to transfer all these routes to Thai Smile along with the four A320s currently operated by Thai Airways. The group currently has a fleet of 20 A320s which were originally ordered for Thai Smile during the pre-launch phase. However, in 2014 the group had to start allocating a portion of the A320 fleet to Thai Airways after Thai Smile was unable to secure approvals from foreign authorities in some markets.

The group confronted unexpected regulatory restrictions after Thai Smile secured its own operator's certificate, requiring a new set approvals from every country that Thai Smile was already serving, or planned to serve, since all the original approvals were under the Thai Airways operator's certificate. The group does not face any regulatory restrictions on domestic route transfers but Thai Airways has been operating some domestic flights with A320s for better utilisation of the A320s that it has been operating internationally.

The A320 operation at Thai Airways was always considered temporary but has lasted longer than expected. The group continues to work on securing the required authorisations to enable Thai Smile to operate all the group’s intended narrowbody routes.

Thai Airways to transition to all-narrowbody fleet in 2017

Thai Airways also has a fleet of two 737-400s which are slated to be retired in 2017. These aircraft are currently used to operate two daily flights from Bangkok to the Thai island of Samui, and two daily flights to Vientiane in Laos.

The group had initially planned to transfer Bangkok-Vientiane to Thai Smile in 2014 but was unable to secure required approvals from Lao authorities. In 2014 the group had also initially planned to transfer the Bangkok-Phnom Penh route to Thai Smile.

Finally the group is hoping to be able to transfer the Phnom Penh and Vientiane routes to Thai Smile within the next several months. Penang is also expected to transfer to Thai Smile as Thai Airways transitions to an all-narrowbody fleet.

Transferring all of Thai’s A320 and 737 flights to Thai Smile will improve the group’s profitability as the Thai Airways narrowbody operation has significantly higher costs than Thai Smile’s A320 operation. Thai Smile should also enable the group to launch new international routes that would not be viable under Thai Airways mainline.

The group plans to resume expansion in 2017, having completed the initial phases of its transformation plan. While new or resumed long haul routes are also in the pipeline, the biggest opportunities are in the regional international market. Thai Smile is the better platform for pursuing these opportunities as most of the potential new markets in China, India and Southeast Asia are too small for widebody aircraft.

Thai Airways Group needs to tweak its dual brand model

Thai Smile does not currently have sufficient capacity or the model to exploit these opportunities fully. But adjustments in the group’s fleet plan and dual brand strategy are inevitable, and would provide the framework needed for the group to grow regionally.

The group has taken a rather odd approach to the dual brand strategy by separating Thai Smile and Thai Airways sales functions. While the two airlines do codeshare Thai Smile has a different reservation system, which complicates cross-selling.

In some overlapping markets the two airlines are not well integrated and are sometimes even cannibalising each other. For example, when Thai Smile entered the Yangon market in late 2015 it opened its own sales office.

SIA and SilkAir take a much more sensible approach to overlapping markets by having just one sales office. SIA and SilkAir are also completely integrated from a sales perspective. Thai Airways should embrace this kind of approach. Thai Smile has a full service product – it offers complimentary snacks, drinks, luggage, and seat assignments along with Thai Airways frequent flier miles – but the commercial strategy is far from ideal.

Thai Airways Group will need more narrowbody aircraft

A new fleet plan for Thai Smile is also necessary. The Thai Airways Group A320 fleet has expanded rapidly since the initial batch of four aircraft was delivered in 2012. Six aircraft were added in 2013, followed by seven in 2014 and three in 2015 (including two in 4Q2015). However, the group currently does not have any commitments for additional A320s or any other type of single-aisle aircraft.

The group can still expand regional operation over the next year by improving utilisation A320 utilisation rates. The Thai Airways A320s are particularly underutilised and will be used more once they transfer over to Thai Smile. The aircraft already at Thai Smile are also expected to be utilised more as more international routes are launched, particularly overnight flights to China. The current domestic focus limits utilisation of nearly the entire fleet to daytime hours.

However, the ability of the group to expand using the existing 20 A320s is relatively limited, particularly when it is taken into account that the narrowbody fleet will shrink by two aircraft when the last 737-400s are retired in 2017. Thai Smile will need a larger fleet if the group is to exploit the opportunities in the short haul international market fully.

In addition to several more A320s, two A319s may be acquired in order for the group to maintain its current Samui operation. Samui Airport currently cannot handle A320s – only A319s or 737-400s.

Thai Airways will cut back domestic operation further

Bangkok-Samui is one of only four domestic routes still operated by Thai Airways, along with Bangkok to Chiang Mai, Krabi and Phuket. Bangkok-Krabi, which is currently operated with three daily A320 flights, is also expected to be transferred again to Thai Smile. (Thai Smile initially launched Krabi in 2012.)

Thai Airways domestic routes ranked by weekly seat capacity: 9-May-2016 to 15-May-2016

Rank Origin Destination Total seats
1 BKK Bangkok Suvarnabhumi International Airport HKT Phuket International Airport 36,428
2 BKK Bangkok Suvarnabhumi International Airport CNX Chiang Mai International Airport 27,568
3 BKK Bangkok Suvarnabhumi International Airport KBV Krabi Airport 7,308
4 BKK Bangkok Suvarnabhumi International Airport USM Koh Samui Airport 4,200

Bangkok-Chiang Mai and Bangkok-Phuket will likely continue to be served with a mix of Thai Smile A320s and Thai Airways widebody aircraft. These are the largest domestic routes in Thailand and are currently the only domestic routes served by both Thai Airways and Thai Smile.

Thai Smile operates another 11 domestic routes that are not served by Thai Airways. Of these 11 routes seven were transferred to Thai Smile: Bangkok Suvarnabhumi and Chiang Rai, Hat Yai, Khon Kaen, Surat Thani, Ubon Ratchathani and Udon Thani; and Chiang Mai to Phuket.

In 2015 Thai Smile also launched a new route from the group’s Bangkok Suvarnabhumi hub – Narathiwat – and in 2014 it launched three domestic point-to-point routes from Bangkok Don Mueang – Chiang Mai, Khon Kaen and Phuket. The three destinations from Don Mueang are also served from Suvarnabhumi, but at Suvarnabhumi Thai Smile’s focus is to feed Thai Airways.

Thai Smile domestic routes ranked by weekly seat capacity: 9-May-2016 to 15-May-2016

Rank Origin Destination Total seats
1 BKK Bangkok Suvarnabhumi International Airport HDY Hat Yai Airport 14,616
2 BKK Bangkok Suvarnabhumi International Airport UTH Udon Thani Airport 12,180
3 BKK Bangkok Suvarnabhumi International Airport KKC Khon Kaen Airport 12,180
4 DMK Bangkok Don Mueang International Airport CNX Chiang Mai International Airport 9,744
5 BKK Bangkok Suvarnabhumi International Airport HKT Phuket International Airport 7,482
6 DMK Bangkok Don Mueang International Airport KKC Khon Kaen Airport 7,308
7 DMK Bangkok Don Mueang International Airport HKT Phuket International Airport 7,308
8 BKK Bangkok Suvarnabhumi International Airport UBP Ubon Ratchathani Muang Ubon Airport 7,308
9 BKK Bangkok Suvarnabhumi International Airport CEI Chiang Rai Airport 7,308
10 BKK Bangkok Suvarnabhumi International Airport CNX Chiang Mai International Airport 7,308
11 BKK Bangkok Suvarnabhumi International Airport URT Surat Thani Airport 4,872
12 BKK Bangkok Suvarnabhumi International Airport NAW Narathiwat Airport 2,436
13 HKT Phuket International Airport CNX Chiang Mai International Airport 2,436

Thai Smile can free up capacity for international expansion by dropping Don Mueang

The Don Mueang routes do not make sense for Thai Smile. All three of its Don Mueang routes are well served by LCCs, including the Thai Airways affiliate Nok Air. As CAPA highlighted in a Mar-2015 report:

Nok is the more appropriate brand for the point-to-point market and growing the Thai Airways’ Group market share at Don Mueang. Thai should view Nok as its response to the intensifying competition from LCCs. Instead it currently sees Nok as a completely separate and independent LCC.

Using Thai Smile in the sector Nok now competes in does not make sense. Thai Smile should be focusing on its feeder role, particularly given the challenges Thai Airways currently faces.

Thai Smile has had many twists and turns since it was first conceived four years ago. It is time for the group to decide on a coherent strategy for its regional subsidiary once and for all.

See related report: Thai Smile needs to focus on feeder role at Bangkok Suvarnabhumi as Thai Airways restructures

Thai Smile now allocates over 20% of its total seat capacity and three of its 16 A320S to Don Mueang. Transferring these three aircraft and the associated capacity to Suvarnabhumi would be sensible. The group strategically needs to expand its short haul international network from Suvarnabhumi.

Thai Airways has fallen behind its Asian rivals in leveraging its hub to become a stronger regional player. As the group completes its attempt at transformation and starts to evaluate expansion opportunities, regional growth should be the priority.

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