One plus for Thamnoon is that he can concentrate on his two-pronged strategy - developing the alliance with Lufthansa and United Airlines and outsourcing non-core operations - without having any apparent financial worries. Pre-tax profits for the six-month period ending 31 March, 1996, amounted to 3,450 million baht (US$137 million) on total revenues of 40 billion baht, up 45.4 per cent and 10.9 per cent respectively over the same period the previous year. This was the result of a 2.2 percentage point rise in load factor to 69.8 per cent and an increase in yield from 16.2 baht to 17.1 baht per RTK.
But the financial situation appears to be Thamnoon's only plus - despite such a significant improvement in finances, the Thai stock market is continuing to treat the carrier with disdain. Since the initial public offering of 7.24 per cent of Thai's stock at 60 baht per share in early 1992, the value has been mired at around 50-55 baht. The government has plans to list a further 200 million shares, but Thai's vice president finance Amnuay Chanya says the sale will only proceed when the share price hits 70 baht. Stock market analysts say such a price surge is unlikely to happen until the government relinquishes control of the carrier - a classic chicken-and-egg situation.
Indeed, Thai's president is still walking the tight rope and faces a formidable array of different interests. The airline is 92.86 per cent owned by the finance ministry, but falls under the administrative purview of the transport and communications minister. Its 15-strong board is chaired by Air Chief Marshall Siripong Thongyai and includes 11 government bureaucrats and the chief of police, which only reinforces the perception among Thai's staff that the airline is run like a government bureaucracy. But tinkering with the makeup of the board is anathema at the moment.
So, Thamnoon must try to implement his two-pronged strategy with one hand tied by red tape and interference from both politicians and the military. The development of the co-called 'LTU alliance' and the 'vertical de-integration' of the airline are aimed at increasing revenues and cutting costs.
The immediate saving grace is that the carrier currently boasts the strongest alliance partners in the region. Singapore Airlines is sending out conflicting signals: maintaining its equity link with Delta Air Lines, while pursuing a codeshare agreement with rival American Airlines. Cathay Pacific remains unaligned and faces an uncertain future with Hong Kong reverting to Chinese rule next year. Malaysia Airlines is linked with smaller airlines like Virgin and Ansett. Perhaps the biggest threat comes from Qantas through its links with British Airways and the potential mega-alliance should American join the party.
Thai's extensive route network spanning 31 Asian cities is key to the 'LTU alliance.' The most progress so far has come in developing links with Lufthansa. Since October 1995, the German carrier has put its codes on Thai's domestic services to Phuket and Chiang Mai and on beyond sectors from Bangkok to Yangon, Phnom Phen and Auckland. Not surprisingly, the alliance has also helped the carriers remain dominant in the Thailand-Germany market. Lufthansa's executive vice president alliances, Friedel Roedig, notes that the two partners carry 68 per cent of the 425,000 passengers on the Bangkok-Frankfurt sector annually.
Elsewhere in Europe, Thai will suspend services to Brussels and convert the flight into a daily codeshare via Frankfurt from October. At the same time Amsterdam, now served by Thai with four services a week, will go up to a daily frequency with the addition of three codeshare flights via Frankfurt. The carriers are also seeking Austrian government approval to codeshare to Vienna.
The link with United is less well developed because of the five-year stalemate in US-Thai bilateral talks. But with that issue settled in January 1996, Thai will start codesharing from October on its US partner's services beyond Los Angeles to San Francisco, Denver, Seattle, Dallas-Fort Worth and Atlanta. Other domestic codeshares are planned but will depend on whether good connections are possible.
In turn, United will codeshare with Thai from Taipei to Bangkok as well as from Bangkok to Phuket, Haad Yai and Chiang Mai. Codeshares are planned to Indochina too, but these are subject to bilateral talks between the US and the countries concerned.
But Thai's partners are concerned about the carrier's falling service standards. And Capt Prija Thawornpradit, senior vice president operations, is more than willing to admit that the carrier has fallen behind. 'Service is improving but at a slower rate than the competition. We had not in the past been sensitive enough to address the specific needs and expectations of each individual market and customer segment.' And officials from the German and US carriers point out that, while they do not intend to interfere in Thai's internal affairs, issues affecting quality have to be consistent across the entire alliance.
Management at the core airline should have more time to focus on quality once Thai's structure has been slimmed down. This month, Thai will link up with Amadeus and two government telecommunication monopolies to set up a 16 million baht company to market the CRS in Thailand. Linked to that, in early 1997, it is planning to hive off the carrier's entire information technology department into a wholly owned subsidiary.
Similarly, the carrier will also incorporate its cargo operation as a separate company, in which Thai will eventually reduce its share to 49 per cent. The highly profitable catering operation, which in 1994/95 generated 2.65 billion baht in revenues from 49 customer airlines, is also to be spun off as separate company. Technical and maintenance services will follow a similar line.
This process will allow the airline to focus on its core activities and most important, the associate companies will not be government enterprises and should escape the regulatory strait jacket that has impeded the airline.
Restructuring of the fleet is also a major priority, after years of military interference left the carrier with 14 aircraft types and three engine types on the rationale that there needed to be 'competition' among manufacturers. The huge outlay in maintenance, training, and spares associated with the diverse mix played a major part in pushing up Thai's costs.
Thamnoon aims to reduce the fleet to six aircraft types and two engine types. Under the carrier's five year plan, Thamnoon plans to spend 142 billion baht (US$5.7 billion) to finance new aircraft purchases. Of this, 58 per cent will come from external funds, including those raised from the planned sale of 31 aircraft, and the rest will come from internal financing. The carrier took delivery of its first two B777-200s in March and another six B777-200s and three more B747-400s are to be delivered by December 1997.
The carrier has also recently redesigned business and first class. As a clear indicator of how far behind Thai has fallen in the last few years, it only fitted its first business class in-seat videos in March 1996, well after Singapore Airlines was unveiling its interactive entertainment systems even for economy class passengers. In a further sign of corporate change, a US$50 million revamp of Thai's corporate colours and signature is planned, although the distinctive orchid logo will be retained.
Thamnoon acknowledges that all this outlay will mean nothing unless the airline can regain its service culture and plans to push the carrier through what is dubbed 'virtual privatisation.' The programme will revamp internal structures and procedures to further cut costs, increase productivity and improve service. To help him devise the strategy, Thamnoon brought consultants Booz Allen & Hamilton in May 1995 to diagnose the deep internal problems and put together a restructuring programme.
Booz Allen executives admit that re-engineering Thai has been 'one of the most complex exercises ever undertaken.' When they first went in, not only did they have to confront the attitude that there were no serious problems, but there was also a deep resistance to change.
One of the key 'untouchable' manifestations of the government-enterprise status is that staff cannot be fired. Moreover, the process of hiring and promotions had become so closed as to lend itself readily to abuse. One of the consultants' recommendations is to re-roster employees into more productive areas, for example retraining surplus baggage loaders as data-entry personnel.
Thamnoon's two bigger concerns are long-term. The first is the upcoming second airline which will seek rights to fly many of the secondary and potentially most lucrative routes in Asia. At the moment, Thamnoon is taking comfort from the fact that Thailand has used up most of its traffic rights to Asian destinations and will have to renegotiate the bilateral aviation agreements to gain more frequencies if the second airline is to get off the ground. 'Thai does not object to the second airline getting a part of the increased traffic rights, but will object only if the government tries to take away existing rights from Thai and give them to the second airline,' he says.
The second concern is the continued uncertainty about Bangkok airport, the Asian hub of the 'LTU alliance' and gateway for about 70 per cent of Thailand's tourist arrivals. Now served by 71 scheduled airlines, the airport is facing serious congestion problems as passenger movements grow at the rate of 10 per cent a year. Bangkok will face strong regional competition in the next few years from two new airports due to open in 1998 in Kuala Lumpur and Hong Kong, together with further expansion at Singapore's Changi airport.
Lufthansa officials have publicly identified the congestion at Bangkok as being the main obstacle to full implementation of the alliance. A second international airport is on the drawing board but already delayed well beyond its initial target opening date of the year 2000. To handle the congestion, Thai authorities last year opened a 80,000m2 extension to the existing terminal, extending its shelf life until 2000.
Now, with the second airport delayed, consultants have already been called in to squeeze a few more thousand square metres of space out of the current airport. That could take some doing. But finding quick solutions is something the Thais are not noticeably good at, until the problem degenerates into a crisis.
Source: Airline Business
