The cabinet has approved a plan to establish Thai Smile Airways Co as a subsidiary of Thai Airways International (THAI).
A source in the Transport Ministry said the spin-off was mainly aimed at boosting operational efficiency and cutting losses for both airlines and the parent company.
At the end of April, the ministry sent back THAI's plan to set up Thai Smile as its subsidiary. The ministry ordered the company to submit more details.
Thai Smile aims to tap into the market between budget carriers and full-service airlines. The source said operating Thai Smile as a separate company would reduce costs for the national airline and boost profits. Thai Smile, which launched in July 2012, would remain entirely owned by THAI.
The source said the separation of operations was needed, or THAI would lose an estimated 300 million baht this year.
The spin-off would generate a profit of 64 million baht for the airline this year, and roughly 8.6 billion baht in total over the next five years, the source added.
Running Thai Smile as a subsidiary would result in separate payrolls and balance sheets and would reduce both airlines' financial burdens.
Thai Smile would also be free to design its own business strategies to augment its revenue.
The source said that once the subsidiary is up and running, the national carrier would gradually transfer 14 domestic and international flight routes it currently operates to Thai Smile.