After another year of political problems, a poor economy and a decline in tourist arrivals, the Thai airline industry is facing even more challenges in 2015.
The country’s four largest carriers, Bangkok Airways, Thai Airways, Nok Air and Thai AirAsia, are facing heavy competition from each other, as well as foreign carriers, while the domestic market has become oversaturated.
This has put pressure on profits across the entire industry. The Thai airline industry is at a critical point, and firms must reposition themselves to survive in an increasingly difficult market and compete in the ASEAN Economic Community (AEC).
Thai Airways Suffers Most
Thai Airways is a perfect example. The country’s flag carrier has underperformed for many years because of its poor management, inefficient cost structure, and intense competition from regional and Middle Eastern airlines.
The Euro’s depreciation and the general economic slowdown of the Eurozone is also a major concern since Europe accounts for 13% of Thai Airways’ traffic and 17% of its total revenue.
At the same time, Thailand’s long-lasting political turmoil has badly affected tourist arrivals. Around 50 different countries issued a travel advisory since the beginning of large anti-government protests in November 2013, followed by a declaration of martial law in May 2014.
Official numbers from Thailand’s Ministry of Tourism and Sports say that international arrivals fell by 10% to 17.6 million visitors during first nine months of 2014. Regional travel also suffered with visitor numbers from ASEAN and East Asian countries plummeting 16% over the same timeframe.
“Political violence in 2013 and 2014 was much lower than in 2010, yet the effect on tourism seems to have been much greater,” explained Fergus Evans, a managing partner at the Bangkok office of Clifford Chance, a multinational legal firm.
“Last year’s low season has seen much lower numbers of tourists than previous years, which has led to red ink at a number of the major airlines.” said Evans.
According to the Sydney-based Centre for Aviation (CAPA), all four of Thailand’s top carriers, which account for roughly 60% of total seat capacity in Thailand, incurred losses in the second and third quarters of last year. Only Bangkok Airways managed to stay in the black.
For Thai Airways, political instability has made its existing problems even worse. The airline has operated at a loss since the second quarter of 2013 and in the first half of 2014 alone, the company saw its losses widen to US$313 million from US$4.7 million in the previous year.
Poor performance has caused a management shakeup. Charamporn Jotikasthira, former president of the Stock Exchange of Thailand (SET), replaced interim president Air Chief Marshal Siwakiat Jayema in November of 2014 and is now tasked with turning the airline around.
Management shakeups are nothing new for Thai Airways. Over the past ten years, the carrier has had six different presidents and five chairmen and last year, five board members resigned to make way for members of the Royal Thai Air Force.
However, while the government owns a controlling stake in the airline, it has yet to be proven whether they have the ability to turn Thai Airways around. A five-year restructuring plan was commenced in the third quarter of 2014, but besides a downsizing in the company’s fleet and workforce, it has yet to be fully implemented.
Economic Problems Hurt Thai Airline Industry
Economic issues are sure to make things difficult for Thai Airways despite its turn-around plan. The Thai economy has faced a slowdown, the tourism industry has suffered, and the country has faced a rapid rise in household debt, which is now over 80% of GDP.
“Thailand’s economy continued its lackluster recovery in the third quarter of 2014, with growth picking up only slightly to 0.6% year-on-year from 0.4% the quarter before,” said Krystal Tan, an economist at Capital Economics.
“The Thai economy should gain a firmer footing in the coming quarters, but considering the disruption caused by the political crisis in late 2013 and early 2014, the recovery will remain disappointing. We expect growth of just 3.5% in 2015, compared with the consensus forecast of 4.0%.” explained Tan.
Low Cost Airlines Aren’t Spared
Thai Airways has begun relying on Thai Smile, a mid-range subsidiary, to improve its overall profitability. Launched in mid-2012, Thai Smile has had some domestic success front and has even seen profits on routes that Thai Airways originally held.
Meanwhile, Thailand’s domestic market is fiercely competitive and suffering from overcapacity. Many other airlines are seeing an impact on load factors, the percentage of seats sold on an aircraft, and pressure on yields – the average revenue per mile per passenger.
“Thailand has a very extreme case of overcapacity in the market and everyone is suffering at the moment,” said Narudh Cheramakara, consumer intelligence manager with Nok Air. “The main problem is the competition. This year, we’re going to see the introduction of Thai Vietjet airlines, everyone is importing new aircraft and increasing capacity”
Even Thailand’s largest low-cost carrier, Thai AirAsia (TAA), which has not seen an annual loss since 2009, suffered in 2014. The airline added more domestic capacity, but so did its two rivals, Nok Air and Thai Lion Air, putting pressure on TAA’s yields.
The airline turned a profit in the first quarter of 2014, but had net losses of $10m and $12m in the second and third quarters respectively.
Nok Air also had a large third-quarter loss to the tune of $11m. The amount was over double the loss in the second quarter, highlighting the problem of overcapacity in the market.
Although Thailand has potential for more domestic growth, Cheramakara said that seat capacity is growing faster than travel demand.
“As such, airlines are scrambling to maintain their competitive edge.”