Aviation: The End Of The ‘Low Cost' Era

The conversion of Thailand's aviation sector from a controlled, regulated market to a deregulated free-for-all may have pleased consumers by driving down fares but is now coming up against the reality check of spiralling costs and high oil prices.

While free competition may be a good thing under orderly, stable market conditions with a steadily growing cake, it can degenerate into vicious throat-cutting when financial turbulence strikes and business turns downwards as a result of unforeseen events like the 26 December 2004 tsunami.

With a new airport coming up in Bangkok next year, Thai aviation authorities need to help offset its financial costs by encouraging more airlines to fly here. This means liberalising aviation traffic rights agreements and providing more access.

But more airlines mean more competition. While there is no shortage of potential passengers in the Asia-Pacific, aviation analysts say the present scenario of higher costs and lower fares, topped up only by aviation fuel surcharges, is unsustainable as a business model.

The 26 December 2004 tsunami worsened the situation, leading to massive pullout of scheduled and charter flights to Phuket, as indicated by the table below.

As of August 2005, there were eight airlines operating in Thailand: national airline Thai Airways International and its low-cost subsidiary Nok Air, plus privately owned airlines Bangkok Airways, PB Air, Orient Thai Airlines (and its subsidiary One-Two-Go), Thai AirAsia, Phuket Air and the latest entrant, Thai Sky Airlines.

Even as these airlines battled each other on key routes, they were also competing against foreign airlines flying to Thailand. The result has been a rush to seek profitable routes with no guarantee that competing airlines will not quickly join the bandwagon, dragging down prices and affecting profitability.

Perhaps the most visible example of this scenario was Thai Airways International itself.

In the third quarter of its fiscal year 2005 (1 April - 30 June 2005), the airline announced that its operating expenses had increased by 22.7% or 7,462 million baht, thanks largely to an average of 55.1% increase in fuel prices over 3Q04.

After accounting for various other factors like higher personnel expenses, foreign exchange losses arising from the weaker baht, etc., the company's net result for 3Q05 was a loss of 4,779 million baht, exceeding last year's loss of 913 million baht for the same period.

The company also reported that its marketing expenses had risen 24.5% to 1,154 million baht, thanks to increased advertising and public relations to promote the new New York flight and to stimulate sales during low season.

An unhappy board of directors relieved the airline's President Kanok Abhiradee of his management responsibilities and handed them over to acting President Somchainuk Engtrakul, the Finance Ministry Permanent Secretary.

Other airlines were also undergoing similar difficulties.
l Phuket Airlines announced plans to launch flights to Bali, Kathmandu and Amsterdam, and to boost flights to London. This year, it ran afoul of safety concerns and was shocked to land up on a French government airline blacklist. The airline was forced to pare back all its international flights and retrench hundreds of staff, suffering the additional ignominy of having one of its aircraft impounded in Seoul over alleged non-payment of bills.

l PB Air announced plans to start flying to Beijing and Shanghai but within a few weeks had dropped both, citing excessive competition. The airline continues to fly from Bangkok to Haikou and Danang as well as a number of internal domestic routes.

l Thai Airways, too, announced plans to start flying to Johannesburg and Moscow this winter but later pared this back to only Moscow, deferring Johannesburg until further notice. It is now working to offload more of its money-losing domestic routes to subsidiary Nok Air.

The two airlines that seem to have been less affected are Bangkok Airways and AirAsia, each for clear but very contrasting reasons.

Bangkok Airways has the advantage of owning its own airports in Samui, Sukhothai and Trat. Samui benefited substantially from diversionary traffic from Phuket after the tsunami.

Because no other airlines fly to Samui, Bangkok Airways enjoys a virtual monopoly on this route. In April 2005, it began flying Hong Kong – Samui and also announced plans for Kuala Lumpur – Samui by October 2005. Both are monopolies. It also announced plans for another monopoly route, Hiroshima – Bangkok, as of December.

Thai Air Asia is a subsidiary of Malaysian-based AirAsia. While it was affected by the business downturn on its Thai routes, the group as a whole was cushioned by its lack of dependency on the Thai routes.

Said the airline in a report to investors: "The financial results from our operations in Thailand and Indonesia (both tsunami-hit destinations) are insignificant as compared to the operations of the Group. The Group's operations are conducted predominantly in Malaysia."
Here are some of the major trends taking place in the industry:

l The pursuit of aviation gateway status will put continued pressure on Thai airlines as foreign airlines seek to use Bangkok as a hub to operate to China and other regional points. New African airlines like Air Zimbabwe are seeking this, as are some Asian airlines like Sri Lankan. Emirates, too, is operating to Australia and Singapore Airlines to Tokyo, both via Bangkok. The aviation department is offering these fifth freedom sectors very liberally, which is certain to put pressure on Thai airlines.

l The Tourism Authority of Thailand is offering heavy subsidies to tour and charter operators to fly to Phuket, mainly from Europe. Some of the companies being enticed thus are MyTravel, Thompson Holidays, Britannia Airways, Finnair and Thomas Cook.

l New airlines are continuing to open flights to Thailand – Tiger Air from Singapore to Chiang Mai, Air Nepal from Kathmandu, Air Paradise from Bali and Air Zimbabwe from Harare.

l India will be a major boom market of the future. Indian Airlines has already boosted its services to Bangkok to 51 a week from nine Indian points, including main gateways and secondary cities. Many new low-cost airlines are emerging in India, all of which will be seeking international access over the next few years. If they survive, points in Thailand and Southeast Asia will be a natural target.

The Thai government has no choice except to encourage the growth of new airlines both to meet its target of 20 million visitors by 2008 and to help offset the costs of building and operating the mammoth new Bangkok airport.

This alone should ensure growth in visitors. While the fortunes of individual airlines will wax and wane, the growth prospects remain positive based on the overall growth expected in the tourism industry.