One carrier has already been grounded and other players are finding the going difficult as fuel prices cramp growth
Thailand, one of Southeast Asia's most competitive markets for low-cost airline operations, is undergoing a period of major change as high fuel prices and weakening demand force much-needed restructuring.
The biggest change has been the grounding of domestic low-cost operator One-Two-Go. It claims it was due to a need to restructure financially but Thai authorities insist it was a forced grounding due to findings of concern from the investigation into a fatal crash at Phuket a year ago.
A forced grounding or one that was coming anyway, One-Two-Go and most other Thai airlines have been facing troubled times of late, requiring quick corrective action. It is something they are not used to. The country's three low-cost airlines - the others being Nok Air and Thai AirAsia - had all seen generally good times in terms of traffic growth since their launches in 2003 and 2004. The market has tripled in size since then, from around 4 million passengers annually to more than 12 million.
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" If oil reaches $170 a barrel, I am better off selling noodles"Patee Sarasin |
In the weeks before its grounding, One-Two-Go had already parked some of its Boeing MD-80s to help it cut costs. Udom Tantiprasongchai, chief executive of parent company Orient Thai Airlines, says this was "because the economy is so bad". He said fuel price hikes had hit airlines in Thailand particularly hard as the country's carriers have to pay value-added tax on fuel, unlike in most other countries. But he also said the carrier will return some of its grounded aircraft to service after the temporary grounding order is lifted.
One-Two-Go is not the only Thai carrier that has radically reduced operations, however. Nok, which is 39%-owned by Thai Airways, has also been cutting back dramatically as a result of losses. It recently suspended its only international service, to Hanoi in Vietnam, and cut several domestic routes. Chief executive Patee Sarasin joked recently that if oil reaches $170 a barrel "I am better off selling noodles" - a reference to the fact that he owns a noodle restaurant in Bangkok.
Analysts say one of the problems facing Thailand's low-cost carriers is they have focused so heavily on winning market share in the domestic market, which is particularly price sensitive. This makes it difficult for higher fuel costs to be passed on to passengers through increased fares.
"The Thai domestic market is small and a big portion is transfer traffic from Bangkok which they can't get," says Mark Webb, a Hong Kong-based analyst. "It's hard to see how anyone makes money on it."
Nok and One-Two-Go have faced particularly tough times as they now rely exclusively on domestic operations. Malaysian low-cost carrier AirAsia's 49%-owned Thai associate, Thai AirAsia, has also been losing money as a result of market over-saturation. Analysts have generally been critical of its continuing weak financial state when compared to that of the main Malaysian operation, although some say it is in a better position than its rivals within Thailand as it also focuses on international services.
AirAsia group head of finance Rozman Bin Omar says he sees things eventually turning better in Thailand as well as in Indonesia, where it has another 49%-owned associate carrier. "Recently there have been some shake-ups in the industry in Indonesia and Thailand with some airlines cutting back capacity and even closing down," he says. "This bodes well for our Indonesian and Thai JVs. We remain strong in these two markets and our position will be even stronger as we replace the older 737s with the new Airbus A320s."
Full-service carrier Bangkok Airways, meanwhile, says it is not making cuts to domestic routes as a good portion of its traffic is feed from international services. It focuses more on this higher-yield traffic, much of it from foreign connecting passengers, which analysts say puts it in a better position.
It is making some international route cuts to help it deal with increases in fuel prices but stresses this will enable it to allocate capacity elsewhere where demand is stronger. "Everyone has to tighten their belts now," says the carrier. "We are going over all the routes that make the least money and we will adjust our network as we need to."
Thai Airways, meanwhile, relies more than most other Thai carriers on international traffic, including those transferring to its domestic flights. But it too has been making international network cuts as a result of rapidly eroding earnings. It is trying to sell its Airbus A340-500s and has dropped non-stop services from Bangkok to New York. Bangkok-Los Angeles will also be switched to one-stop services and it has reduced the frequency of services to several other destinations.
Thai says that despite continuing increases in revenues, yields have been falling as its ticket and fuel surcharge hikes have not been able to keep up with fuel price rises.
Another Asia-Pacific market, Indonesia, has been having its own troubles recently too: flightglobal.com/indonesia
Source: Airline Business
