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Thai Airways SWOT: opportunities for growth, but challenges as competition further intensifies

Thai Airways is approaching a critical juncture as it completes a restructuring and seeks to resume growth. Its home market offers opportunities and an envious growth rate, but intensifying competition creates challenges.

Thai Airways is sandwiched between rapidly expanding low cost airlines and ambitious Gulf airlines. Its multi-brand strategy has so far proven to be a less than sufficient response.

In this SWOT analysis CAPA examines the Thai Airways Group’s strengths, weaknesses, opportunities and challenges.

Thai Airways Group - Strengths

A) Local market

Thailand is one of the world’s most popular tourist destinations. Visitor arrivals were up 20% in 2015 to almost 30 million.

While inbound traffic is by far the largest sector and is a critical component of Thai’s business, outbound demand is also growing. Thailand’s economy and middle class have been experiencing relatively rapid expansion.

So far the middle class growth has mainly benefitted Thailand’s LCCs – particularly in the domestic and regional international markets. However, as income levels continue to grow Thai Airways expects more Thais to trade up to full service airlines and start travelling outside Asia.

B) New commercial strategy

Thai has introduced a new commercial strategy focusing more on transit traffic. Schedules have been reworked and a new bank structure has been introduced at its Bangkok Suvarnabhumi hub for better support of connections. Yields are now improving, along with load factors.

The new executive team is commercially minded and has implemented several measures, including new revenue management tools, to boost sales. Thai has also been working on improving efficiencies and reducing costs, leading to an overall brighter outlook.

C) Star Alliance

Thai is a founding member of Star and the only founding member from Asia. It currently has codeshares with 13 other Star members and is now working to leverage these relationships better.

Star has enabled Thai to offer an extensive virtual network even as it has cut its own long haul network, including services to Africa and North America. A dozen Star members also serve Bangkok, which Thai is able to feed with domestic and regional international connections.

Thai Airways Group - Weaknesses

A) Mixed fleet

The fleet rationalisation exercise which was pursued as part of Thai’s recent restructuring did not go deeply enough.

Thai still operates seven types of aircraft in its mainline fleet (A330s, A350s, A380s, 737s, 747s, 777s, 787s), and eight types of aircraft at the group level (when the A320s operated by its full service regional subsidiary Thai Smile are included). In 2015 Thai Airways decided to postpone plans for phasing out 747-400s and is considering further extending its 737-400s. The rapid phase-out of the 747 and 737 fleets would be sensible, and would support an overall initiative to improve efficiencies as well as Thai’s on-board product.

Thai operates a small number of both 787s and A350s – a holdover from prior poorly thought-out and politically influenced fleet planning. Thai should be focusing on just one new generation small widebody type, but when the new management team and government took over it was too late to get out of the A350 commitment. The first batch of two A350s was delivered in 3Q2016, and its fleet of six 787s were delivered in 2014 and 2015. Thai also has a small sub-fleet of six A380s.

The group currently operates 95 aircraft, including 75 at Thai Airways mainline and 20 aircraft at Thai Smile. Its fleet has shrunk by only seven aircraft under Thai’s recently completed transformation plan. The group operated 102 aircraft at the beginning of 2015, just prior to the start of the restructuring exercise.

Thai Airways Group fleet summary: as of 1-Nov-2016

Aircraft In Service On Order
Total: 95 12
Airbus A320-200 20 0
Airbus A330-300 2 0
Airbus A330-300E 15 0
Airbus A350-900XWB 2 10
Airbus A380-800 6 0
Boeing 737-400 2 0
Boeing 747-400 10 0
Boeing 747-400(BCF) 0 0
Boeing 777-200 6 0
Boeing 777-200ER 6 0
Boeing 777-300 6 0
Boeing 777-300ER 14 0
Boeing 787-8 6 0
Boeing 787-9 0 2

B) Lack of a true LCC subsidiary

Thai Airways only has a minority 39% stake in the short haul low cost airline Nok and has not been actively involved in Nok since its launch in 2005. Thai also has only an indirect 19% stake in the medium long haul LCC NokScoot – a JV between Nok and the Singapore Airlines (SIA) subsidiary Scoot which launched in 2015.

Thai and Nok are not closely aligned and have not pursued synergies or joint purchasing. Several of Thai’s peers now have much more robust LCC strategies, including SIA and Garuda Indonesia. SIA has 100% stakes in Scoot and the short haul LCC Tigerair, while Garuda has a 100% stake in Citilink. Several North Asian FSC groups and Australia’s Qantas also now have majority stakes in LCCs.

While Nok should maintain independence, it needs to be embraced by the Thai Airways Group and be used to combat increasing LCC competition. LCCs now account for approximately 70% of domestic and 30% of international seat capacity in Thailand. LCCs have accounted for all of the domestic and regional international growth in recent years, and are now starting to penetrate the medium haul and long haul sectors. The opportunities at the bottom end of the market cannot be ignored.

C) Lack of a coherent multi-brand strategy

Thai Airways has struggled to identify a role for Thai Smile, which was established in 2011 and launched in mid-2012. Thai Smile was originally intended as an LCC but evolved into a full service regional airline following the model of the SIA full service subsidiary SilkAir. Thai Smile has helped the group minimise losses in the domestic market and some regional international routes as LCC competition has intensified. But Thai Smile’s cost structure – while lower than that of Thai Airways mainline – is too high to compete effectively against LCCs.

The group has adjusted Thai Smile’s network and product strategy several times over the last four years. Thai Smile now has a split network, with bases at both Bangkok Suvarnabhumi, where Thai Airways has its only hub, and Bangkok Don Mueang – a closer-in airport used almost entirely by LCCs.

Thai Smile now has three domestic routes and three A320s based at Don Mueang. The Don Mueang operation overlaps with Nok and should be dropped. Focusing on one role for Thai Smile and one hub is logical. Nok is the more appropriate brand for the point to point market and Don Mueang.

Thai Smile should focus entirely on feeding Thai Airways at Suvarnabhumi. Thai Smile would also benefit from closer coordination with Thai Airways. Thai Smile and Thai Airways have different reservation systems, complicating cross-selling. They are not well integrated and on some routes are even cannibalising each other.

The dual brand strategy at Thai is far from ideal. Thai would be better off following the strategy used by SIA with SilkAir and by Cathay Pacific with Dragonair.

Thai Airways Group - Opportunities

A) Expansion of regional network within ASEAN

Thai Airways has fallen behind its Southeast Asian peers in leveraging its hub to offer regional connectivity. Thai Airways/Thai Smile currently have 13 regional international destinations within Southeast Asia compared to 39 for Singapore Airlines/SilkAir. Local rival Thai AirAsia has 13 regional international destinations, while Bangkok Airways has 10.

Singapore Airlines/SilkAir also has more than twice as much regional international capacity within ASEAN. Singapore Airlines/SilkAir allocate approximately 34% of their international seat capacity to Southeast Asia, compared to 23% for Thai Airways/Thai Smile.

Thai Airways is now keen to build up its ASEAN network using Thai Smile, which until now has focused mainly on domestic services. Thai Smile is planning to resume services to Luang Prabang and is aiming to launch services to Cebu, Medan and Surabaya. However, even after the up to four new destinations Thai Smile has plenty of opportunities to expand further regionally.

A larger ASEAN network is critical for Thai Airways as it looks to diversify its long haul operation with more regional feed. A stronger ASEAN network would support Thai’s initiative to increase sixth freedom traffic with an increased focus on Australia-Southeast Asia and Europe-Southeast Asia connections. Diversifying its long haul business to include more regional connections is important for Thai: differentiating its offering compared to the Gulf competitors, which generally do not serve secondary points in Southeast Asia – many of which are experiencing rapidly growing inbound and/or outbound demand.

B) China: Thai is under-represented, with room for expansion

The Thai Airways Group currently operates scheduled services to eight destinations in mainland China compared to 25 for the SIA Group. Local rival Thai AirAsia has 11 mainland Chinese destinations. Thai AirAsia serves China from four gateways in Thailand, whereas the Thai Airways Group only serves China from Bangkok.

China is the largest and fastest-growing source market for Thailand’s tourism sector. Visitor numbers from China were up 71% in 2015 to 7.9 million. Thailand has again reported double-digit growth in Chinese visitor numbers every month so far this year.

Thai Airways/Thai Smile, however, is underrepresented in the increasingly important Thailand-China market, with only approximately a 15% share of capacity. Three years ago Thai Airways accounted for a 23% share. The group has an opportunity to regain market share and grow with the overall market. Thai Smile, in particular, can be used to launch services to secondary cities in China that are too small and leisure-focused for the main brand.

C) Order book: only 12 aircraft are on order

The group has commitments for only 12 additional aircraft: 10 A350-900s and two 787-9s. All 12 of these aircraft are slated to be delivered in 2017 and 2018.

The small order book gives Thai Airways the opportunity to further renew and streamline its fleet. The group has already phased out its A340 and 747F fleets (in 2015) and its A300 fleet (in 2014).

More A350s or 787s are likely, and possibly the 777X, to replace older-generation widebodies. The group could also acquire the A320neo family of aircraft as it has not yet committed to any new-generation narrowbody aircraft. A new long-term fleet plan is now in the process of being drafted.

D) Thai Smile can be used more effectively

While Thai Smile is not an LCC it has much lower unit costs than Thai Airways mainline. As a result, the group can use Thai Smile to open new destinations which would not be viable under the main brand.

Thai Smile is now operating all the group’s A320s as the remaining A320s at the parent airline were transferred to Thai Smile in mid-2016. The A320 operation at Thai Airways was significantly more expensive and unprofitable.

The group has only recently started to use Thai Smile – which initially focused almost entirely on domestic services – to expand its international network. Thai Smile gives the group an opportunity to pursue growth with a lower cost platform and provide a new source of feed for Thai’s long haul operation.

E) Transfer traffic has potential for growth

Thai Airways has historically had a much smaller proportion of sixth freedom traffic compared to Southeast Asia’s other main network airlines. Thai has an opportunity to boost yields – and also improve load factors – by targeting certain city pairs. Regional connections from Australia and Europe are now being promoted, as well as Thai’s one-stop product in the extremely competitive kangaroo route between Australia and Europe.

While sixth freedom traffic generally is lower-yielding than local traffic Thai believes it can actually improve yields by boosting transit traffic, since Thailand’s local market is extremely price-sensitive and consists mainly of leisure passengers. Business class sixth freedom traffic is particularly a target. Thai is a premium full service airline, but it has been underselling its premium cabin and believes it has an opportunity to up its game in this extremely competitive segment of the industry.

Thai Airways Group - Threats

A) Europe exposure is too large

Thai Airways pursued significant capacity and network cuts to its Europe operation as part of its 2015 restructuring. However Thai has added back the capacity, and has more capacity to Europe this winter than it did in 2013 and 2014.

The upcoming Dec-2016 resumption of Moscow, which was dropped in early 2015, gives Thai 12 destinations in Europe. Thai has also resumed twice-daily services to Frankfurt and London and scrapped plans to axe Rome.

Thai currently allocates approximately 38% of its international ASKs to the European market. In comparison, SIA allocates 29% of its ASKs to Europe.

Thai Airways international capacity share (% of ASKs) by region: 31-Oct-2016 to 6-Nov-2016

The Europe-Southeast Asia market has become intensely competitive, with the Gulf airlines being particularly aggressive. The market is also relatively mature. Yields and load factors will likely remain under pressure as Thai tries to maintain its market share.

B) North America is a high risk operation

Thai is aiming to launch nonstop flights to US in 2017, contingent on Thailand regaining a Category 1 safety rating from the US FAA. Thai dropped services to Los Angeles via Seoul in 2015. It had previously dropped nonstop services to Los Angeles in 2012.

While new-generation widebody aircraft (the A350 or 787s) are much more attractive than the A340-500s that Thai previously used for nonstops to Los Angeles and New York, the Thailand-US market still lacks the yield to support ultra-long range nonstop flights. Competition has intensified over the last few years, and the market consists mainly of price-sensitive leisure passengers who are willing to make a stop for a slightly lower price.

Nonstop flights to the US represent a big investment, and come with high risk. The risk is even higher as Thai is unable to use its A350s or 787s to operate nonstop flights to Los Angeles – where it had a presence for over three decades. Thai is instead evaluating San Francisco and Seattle – smaller markets from Thailand where it has a relatively weaker brand presence.

C) Intensifying competition from LCCs and Gulf carriers

Thai has been impacted by intensifying competition from LCCs at one end of the market and by rapidly expanding Gulf airlines at the other end. Both sectors will continue to grow rapidly, pressuring yields and making it difficult for Thai to expand profitably.

There are now more local LCCs in Thailand – six – than in virtually any other country. Thailand-based LCCs currently operate 118 aircraft compared to approximately 50 aircraft three years ago. LCCs have pursued rapid domestic expansion during this period and now account for approximately 70% of Thailand’s domestic market.

LCCs also now account for a majority of regional international capacity and are starting to penetrate medium haul routes, as well as some long haul markets. In addition to the six local LCCs, Thailand is served by 25 foreign LCCs.

At the same time all three Gulf airlines have pursued rapid expansion in Thailand. Emirates is now the largest foreign airline presence in Thailand, while Qatar and Etihad are also in the top seven. Bangkok is the largest destination for Etihad and is the third largest destination for Emirates and Qatar. Following the upcoming launch of services to Chiang Mai and Krabi, Qatar will have an astonishing four destinations in Thailand – more than any other foreign airline outside Southeast Asia.

Top 10 foreign airlines in Thailand ranked by weekly seat capacity: 31-Oct-2016 to 6-Nov-2016

Rank Airline Weekly seats
1 EK Emirates Airline 65,760
2 AK AirAsia 45,720
3 CZ China Southern Airlines 33,680
4 QR Qatar Airways 33,069
5 CX Cathay Pacific 32,495
6 BR EVA Air 25,192
7 EY Etihad Airways 24,956
8 TR Tigerair 23,976
9 KE Korean Air 23,970
10 MH Malaysia Airlines 21,440

D) Political intervention has been the bane of Thai's existence

Over the years the group’s main shareholder, the Thailand government, has repeatedly meddled in Thai’s affairs. The current military government has been refreshingly more commercial minded, but in Thailand intervention is always a possibility.

Previous instability, including riots and coups, has also impacted demand. Thailand is now enjoying a period of relative stability, but typically in Thailand there is never a period of more than a few years between major political events. Thai Airways will always face the risk of an unpredictable political event and, unless it is privatised, will always have to deal with the threat of government intervention.

Conclusion: some grounds for optimism, but much room for improvement

Thai Airways has completed a transformation initiative and is back in the black.

The group generated a small profit in 1H2016 and is on track to turn its first annual profit since 2012.

However, Thai Airways still faces huge challenges as it tries to carve out a sustainable long-term position. There are ample opportunities for growth in Thailand, but market conditions are not entirely favourable and competition continues to intensify.

Thai Airways is at a critical juncture. Strategically it needs to make more adjustments and execute these flawlessly.

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