Tense Competition in the Airline Industry

Industry Outlook

TRIS Rating views the airline industry in Thailand as stable outlook. We believe that air traffic will have steady growth in the next few years, particularly with the recovery in the Chinese tourist. However, some airline operators may struggle for profitability due to rising fuel prices and tough competition.

TRIS Rating expects fuel prices in 2017 will be higher than 2016. Competition in the airline industry in Thailand has increased. Some new airline operators use an intense price cutting strategy to gain market share in a very short time. TRIS Rating expects the leverage of airline operators to increase as they need to invest in fleet capacity and efficiency. The key factors to success in this business are cost management, route accessibility, price-quality ratio, and customer relationships.

Air passenger growth in 2017 will continue along with improving Chinese tourist arrivals

The number of air passengers in Thailand is expected to maintain growth of around 10% over the next couple of years. In the first half of 2017, the total number of air passengers was 66.1 million, 8.2% higher than the same period last year. The growth of air passengers slightly softened after the Chinese zero-dollar tour crackdown policy was instituted in Thailand in October 2016. Furthermore, most celebrations and events were cancelled or postponed during the mourning period after the death of King Rama IX on 13 October 2016.

In the last quarter of 2016, the number of Chinese tourists dropped about 20%. Considering that the Chinese tourists make up over 35% of total tourists, the drop noticeably affected the air traffic as well. Though the number of Chinese tourists was low earlier this year, there is an evidence of recovery after May 2017. Therefore, it is likely that the number of air passengers will increase in the second half of this year.

For 2018, the prospect for passengers could be even more positive if the International Civil Aviation Organization (ICAO) lifts the red-flag status after a re-evaluation of Significant Safety Concern (SSC) in October this year.

Increase in airline operators brings competition

The success of low-cost airlines in Thailand has led to more competition. Most of the new operators are joint venture (JV) airlines. The JV model essentially supports the newcomer in competing with existing players by paring with a foreign partner with expertise in the airline business. For example, Thai AirAsia, founded in 2003, is a JV of AirAsia Berhad from Malaysia and Thailand's Asia Aviation. Thai AirAsia’s success is due to the introduction of an online system linked with the AirAsia Group, in addition to the low-cost airline business model.

Recently, competition in Thailand’s airline industry has been ramped up after many airline operators began employing a price cutting strategy. Consequently, Thai Lion Air and Thai Smile Airways are two new operators who recently experienced impressive growth. They had six times more passengers in 2016 than in 2014. In 2016, Thai Lion Air contributed a 7.6% share of passengers traveling via Suvarnabhumi and Don Muang airports, while Thai Smile Airways contributed 4.7%.

Airline business encounters financial risk in profitability and leverage

As of August 2017, TRIS Rating rated two airline operators in Thailand, Thai Airways and Thai AirAsia. Their operating margin fell in the first half of 2017, and the full year figure is also likely to drop. After having an upside gain from low fuel prices during 2015-2016, fuel prices in the first half of 2017 were much higher than the same period last year. The increased fuel price and the ticket price competition keep pressure on the operators’ profitability. Therefore, the margin of the two rated airline operators dropped in the first half of 2017. Thai Airways’ margin decreased to 10.6% from 16.3% in the same period last year. Thai AirAsia, as a low-cost airline, was confronted with severe price-competition. This resulted in the company’s margin falling to 9.7%, lower than the margin in first half of 2016 by 8.2 percentage points.

From the International Air Transport Association’s (IATA) views on the global airline industry, overall profit of the airline industry in 2017 will be around US$ 29.8 billion, falling by 16% from 2016, if the Brent crude oil price goes up to US$55 per barrel this year. For the first six months of 2017, average Brent crude oil price was US$53 per barrel.

TRIS Rating expects the leverage of the two rated airline operators to increase in the next couple of years. The debt to capitalization ratio of Thai Airways was 84.5% in the first half of 2017, slightly higher than the same period last year. This resulted from the company’s capital falling greater than its debt. For the next few years, we expect Thai Airways’s debt to rise because of the fleet rejuvenation program. The fleet rejuvenation program aims to replace inefficient aircraft during 2015-2018, in order to improve fuel efficiency and reduce maintenance costs.

Thai AirAsia’s debt to capitalization ratio also increased to 62.1% in the first six months of 2017. The debt increase was due to fleet expansion. Thai AirAsia has had more than doubled the number of aircraft in the past five years, and the company plans to continuously add more aircraft. It is typical to have rising debt during an investment period, but the bigger fleet would generate more income which will eventually lower the leverage.