Buckling up for turbulence
Buckling up for turbulence
Propelled by a consistent rise in demand, airlines have been able to sustain their growth but soaring oil prices continue to pose a major threat to their profitability
Airlines in Thailand grew in terms of traffic, network and financial performance in 2007, driven by stronger traffic growth. But high oil prices that are likely to persist into 2008 could slow traffic growth and seriously affect their bottom lines. With jet fuel prices topping $100 a barrel, well beyond the industry's forecasts, carriers worldwide are taking a much more cautious approach to the way they operate.
The International Air Transport Association (IATA) in September revised up its forecast for oil prices for 2007 to an average of $67 a barrel, from $63 in June. However, the Geneva-based organisation is reported to be tweaking the figures again to reflect the market realities evident in the final months of the year.
Costly fuel and its negative consequences are prompting several airlines to put a brake on their overheating expansion and further tighten their belts.
The operating environment is becoming more hostile, requiring the industry to radically rationalise and consolidate in order to survive.
For starters, spiralling oil prices are likely to slow global economic growth and that in effect could curtail the rise in passenger traffic below the annual 6-7% rate projected by IATA.
The new paradigm is that carriers can no longer gamble on new routes and have to think twice before adding new aircraft capacity. They also need to consider terminating poorly performing flights or trimming frequencies on low-traffic routes.
Due to strong cost pressures, airlines are forced to attain a higher load factor, up to 80%, from 65% previously, in order to make a route viable.
With rising fuel prices, the contribution of fuel cost to operating expenses, now in the range of 25-30%, could be inflated further. Thai Airways International reported that fuel accounted for 33% of its costs in the financial year to Sept 30, 2007.
In line with punitive oil prices, IATA has revised down its 2008 net profit forecast for the world's airlines to $7.8 billion from $9.6 billion. The estimate of $5.9 billion for 2007 was also in jeopardy.
Thailand's airlines, from full-service to budget carriers, have been adopting various strategies to meet the challenges, as outlined below.
BANGKOK AIRWAYS
The kingdom's largest privately owned carrier has resolved not to put any new aircraft into service in the short term beyond what it has already committed _ seven brand-new Airbus 319s being acquired through an operating lease.
The 39-year-old airline will introduce fewer new routes, especially in the region, as it is running out of new domestic points that are popular with tourists.
The airline did not have a very successful 2007, with a projected loss of more than 100 million baht. However, high traffic in December could help the airline recoup the loss to report a full-year profit of 150-200 million baht, according to founder Prasert Prasarttong-Osoth.
NOK AIRLINES
The budget carrier is also going through a rationalisation and consolidation. This is due not only to spiking fuel prices but also cut-throat competition, oversupply of aircraft seats, the entry of new competitors and the costly lesson from its first overseas flights between Bangkok and Bangalore.
After five months of struggling operations, Nok Air in October suspended the daily Bangkok-Bangalore flights.
Chief executive Patee Sarasin felt the airline may have rushed too much in the second half of the year and now needs to take stock and become more cautious in what it would do next.
He spoke about the need for a radical revamp of its strategic plan before it moves forward.
That covers all major issues such as expansion of overseas flights, switching from deploying ageing, fuel-thirsty aircraft to new fuel-efficient and more capable jetliners, beefing up its workforce and implementing better cost controls.
However, the airline's earlier plan to add another four jets in 2008 is now on the back burner.
Nok Air is expected to end 2007 with ''a little'' profit and on course to carry three million passengers as targeted.
THAI AIRASIA
Though it's feeling the same pinch as its peers, nothing seems to be stopping the no-frills leader from expanding aggressively.
TAA continues to bet on new routes such as Bangkok-Ranong, after terminating loss-ridden services _ Bangkok-Khon Kaen, Bangkok-Nakhon Si Thammarat and Bangkok-Langkawi (Malaysia) earlier in the year.
By December 2007, TAA, 49% owned by Malaysia's low-cost carrier AirAsia, was due to put into operation its third brand-new A320, joining two similar jets, each capable of seating 180 passengers, delivered to the airline earlier in the year.
Thus, TAA's fleet as of December 2007 comprises 15, including 12 fuel-thirsty B737-300s. It is due to receive three more A320s in February, July and August 2008.
The remaining forty A320s that TAA has ordered from the European plane maker Airbus would be shipped over three years at the rate of six units a year.
As new domestic destinations are running out, plans are under way for TAA to fly to Chinese cities including Guilin, Chengdu, Chongqing, as well as Hong Kong.
ONE-TWO-GO AIRLINES
Despite the Sept 16, 2007 crash of one of its MD 80 jets in Phuket that left 89 dead and 41 injured, the budget airline continued in service.
One-Two-Go chief executive Udom Tantiprasongchai insisted that the airline was still financially viable but decided to delay plans to launch flights from Bangkok to Kathmandu, Macau and Phnom Penh.
With a tougher operating environment including soaring oil prices, it may take longer for One-Two-Go to embark on new routes. It has also opted to consolidate its domestic flights, being served by seven MD-80 series jets.
THAI AIRWAYS INTERNATIONAL
While soaring oil prices are a major cause of concern, the national carrier is taking a long-term view to sustain its growth. Its board in September 2007 committed to a major fleet modernisation costing more than 400 billion baht.
The plan involves retiring 47 aircraft and acquiring 65 new ones. From 2008 to 2017, THAI will buy or lease 16 long-haul jetliners with seating capacity of 300-500 passengers each; 29 medium- to long-haul jets with seating capacity of 250-350, and 20 narrow-bodied aircraft, each with a capacity of 150-250 passengers. The modernisation plan includes six Airbus A380 superjumbos and eight Airbus A330-300s that the airline ordered earlier in 2007.
THAI finished the 2007 fiscal year to Sept 30, 2007 with a nearly 30% fall in net profit to 6.34 billion baht, from 8.99 billion a year earlier. Factors behind the decline included lower gains from non-operating items such as foreign-exchange conversion _ 1.2 billion baht compared with 6.22 billion in the previous year _ and sales of used jetliners.
Sales of retired aircraft, which had a zero book value, were only around 500 million baht, versus about two billion in the previous year, due to the poor used-aircraft market.
Total revenues in the last fiscal year edged up to 182.98 billion baht, up from 170.08 billion. The average load factor was 77%, up from 75.4%, in spite of fierce competition spurred by capacity increases industry-wide.
THAI carried about 20 million passengers during year, up 3% year-on-year, while operating costs grew 5.3% to 179.2 billion baht.
Thanks to soft oil prices in the early part of the year and the strength of the baht, the airline managed to marginally reduce its fuel bills to 59 billion baht, from 60 billion.
Analysts said earnings for the 2007-08 fiscal year should pick up, as three new aircraft, due to be delivered late in 2007, would help boost passenger traffic. As well, THAI increased its fuel surcharges n December.
While its capacity is set to increase by 5%, the airline aims to raise revenues from the core airline business to 174 billion baht for 2008, up 12% from 2007.
Analysts project a net profit of 8.12 billion baht for the current year.
AIR TRAFFIC
Air traffic through Thailand's six major airports for the year to September grew robustly, driven primarily by low-cost carriers and increased tourist flows.
Passengers through Suvarnabhumi, Don Mueang, Chiang Mai, Chiang Rai, Phuket and Hat Yai increased 7.95% year-on-year to 56.02 million, while air movements _ take-offs and landings by 106 airlines _ soared 11.40% to 390,300.
However, cargo volume through the airports, which are operated by the majority state-owned Airports of Thailand Plc (AoT), showed a mere 0.6% rise to 1.25 million tonnes, 1.14 million tonnes of which were international (up 1.47%).
Thailand's growth rates generally mirrored global trends.
According to the IATA, global passenger traffic demand in the first 10 months of 2007 rose 7.3%.
That indicated that consumer demand for air travel remained robust in most regions even as some economies, notably the US, slowed, and furthermore, the credit crunch had yet to dampen demand, the IATA noted.
But economic volatility is having a more immediate effect on international air freight, which rose 4% in 2007.
Passenger traffic through Bangkok's Suvarnabhumi and Don Mueang airports, increased by 6.52% to 45.12 million, while air movements rose 9.45% to 307,244.
Phuket showed the most robust growth, with a 22.6% increase in passenger traffic to 5.47 million and flight movements rising 32.34% to 38,368, indicating the southern island's tourism industry has fully recovered from the 2004 tsunami.
Hat Yai was not so fortunate, given continuing concerns about the security situation in southern Thailand. Passenger growth was 3.28% in 2007 to 1.33 million, though aircraft movements grew 11.55% to 11.748.
Suvarnabhumi remains Thailand's gateway, handling 41.93 million passengers, 267,555 take-offs and landings, and 1.18 million tonnes of cargo, in its first full year of operation.
As of September 2007, Suvarnabhumi served 32.68 million international passengers and 9.24 million domestic travellers.
Don Mueang, the 93-year-old airport that was closed in September 2006 and reopened in March 2007 for non-connecting domestic flights, dealt with 3.18 million passengers and 39,689 aircraft movements.
SUVARNABHUMI AIRPORT
The first year of operation of Suvarnabhumi was a turbulent one, with several deficiencies that have attracted harsh criticism from passengers and airlines alike being addressed, albeit slowly.
The airport, which suffered from problems such as cracked runways and insufficient washrooms, has begun to work more in line with original expectations, but considerable work remains to be done before it can enter into the top 20 airports in the Airports Council International (ACI) survey, a status to which AoT aspires.
Both IATA and the Airport Operations Committee (AOC), which represents 68 international airline managers stationed in Bangkok, gave Suvarnabhumi a passing grade but noted many deficiencies remain.
Airlines are critical about the increased service charges including the 15% jump in landing and parking fees and concession fees levied by AoT on ground-handling companies being passed on to the airlines.
They charged that the higher charges had made turnaround costs in Bangkok higher than in Kuala Lumpur and Singapore, yet the service level was lower.
The Board of Airlines' Representatives in Thailand (BAR), an industry group representing 64 international carriers, warned that Bangkok was losing out to neighbouring countries in the race to become Southeast Asia's aviation hub due to the lack of sound airport policy and regimes.
BAR's criticisms echo previous industry concerns that inconsistent airport policy, the uncertainty over future airport expansion and punitive user charges are hurting tourism by deterring airlines from adding flights to the kingdom.
While airlines are unanimous that authorities stick to the original policy of having Suvarnabhumi serve as Bangkok's sole airport, AoT and some transport officials were spearheading the opening of Don Mueang airport for international and low-cost carrier flights, in addition to non-connecting domestic services.
AoT is eager to see Don Mueang become a fully fledged secondary airport to relieve traffic congestion at Suvarnabhumi, now reaching its capacity. Don Mueang used to deal with more than 36 million passengers a year.
AoT used that reason, coupled with AoT's budgetary constraints, to advocate a delay in Suvarnabhumi's phase-one expansion that requires an outlay of 67 billion baht for a mid-field terminal and third runway to raise the capacity to 60 million passengers a year.
But airlines vigorously opposed that, insisting that they want to stay put at Suvarnabhumi and urging authorities to proceed with expansion of the new airport immediately.
The malignant effects of Suvarnabhumi caused AoT's net profit for the year to Sept 30 to plunge 90% year-on-year to only 1.09 billion baht.