INDUSTRY OUTLOOK: NEUTRAL
TRIS Rating holds a “neutral” outlook for the airline industry. We forecast the number of air passengers in Thailand could grow by more than 5% per year over the next two to three years. The major positive factor for the airline industry is a strong growth potential of Thai tourism sector. Moreover, fuel prices are expected to stay low and price competition between carriers is expected to ease. As a result, airlines may achieve fatter margins in 2019 and 2020.
On the other hand, there are some potential risks. If the global economic growth slows down, spending on travel and trade would grow at a slower pace. Carriers have high leverage, mostly from expand and improve their fleets. This investment type in the industry is inevitable and recurrent overtime in order to enhance operating efficiency and minimize cost.
MARKET RECAP
In 2018, airline companies in Thailand had poorer performance due to intense market competition and higher fuel prices. The averaged operating profit margin of four major airlines in Thailand (Thai Airsways, Thai AirAsia, Nok Air, and Bangkok Airways) in 2018 was 10.6%, down from 16.9% in 2017. However, air traffic grew. The total number of passengers through Thailand’s six international airports reached 140 million in 2018, up 5.5% from the year earlier.
Despite the rise, the number of passengers in 2018 was less than expected. One reason for the shortfall was due to a sharp drop in the number of Chinese tourists. Forty-seven Chinese tourists died in a boat accident near Phuket on 5 July 2018. Chinese tourist arrivals tumbled in the second half of 2018, sliding by 9.6% y-o-y. As Chinese tourists make up over 25% of foreign tourists visiting Thailand, the sharp drop noticeably affected the number of passengers through airports in Thailand. In the second half of 2018, the number of air passengers rose by just 2.7% year-on-year (y-o-y) after climbing by 8.4% y-o-y in the first half of 2018.
KEY OUTLOOK FACTORS
Global economy weakening
TRIS Rating believes a weaker global economy could limit the growth in the number of airline passengers and trade. In January 2019, the International Monetary Fund (IMF) forecast world gross domestic (GDP) would grow by 3.5% in 2019. The forecast has been revised down repeatedly. The trade tension between the United States (US) and China affects the world economic outlook. Both countries are also the major trade partners of Thailand, accounting for 29% of the country’s total trade value. Moreover, the economy in Europe could be further affected by the Brexit transition. Consequently, weaker GDP in China, Europe, and the US would slow spending on air travel and trade. The International Air Transport Association (IATA) forecast lower growth rates in 2019 in terms of revenue passenger kilometers (RPK) and cargo tonne kilometers (CTK).
Tourist arrivals rebound
TRIS Rating believes the prospects of the Thai tourism sector remain strong. We expect the number of international tourists in 2019 will rise, including increases in tourist arrivals from China and nations. After the fatal boat accident in 2018, the Thai government worked vigorously to bring back the Chinese tourists. Maritime safety standards were raised to ensure passenger security. Many new travel campaigns were launched in late 2018. For example, in November 2018, the Thai government waived visa on arrival fees for 20 nationalities until April 2019. We expect that these actions and others will boost the total number of tourist arrivals in 2019. The Ministry of Tourism and Sports forecasts a 7.5% rise in tourist arrivals in 2019.
Less price competition
We expect a reduction in price-cutting by low-cost airlines in Thailand. Ticket prices may even rise by 3% to 5% annually over the next three years. In the past, major low-cost airlines employed a price cutting strategy in order to gain market shares. However in 2018, a rise in jet fuel prices caused a steep drop in profitability of airline operators. Therefore, the price-cutting showed signs of abating recently. For example, in January 2019, Thai Lion Air stopped allowing free checked baggage in economy class and reduced the baggage allowance weight for premium economy class. Its ticket prices have also gradually risen.
Fuel prices falling
TRIS Rating believes jet fuel prices in 2019 will be slightly lower than in 2018. The price of jet fuel is forecast at US$77-US$82 per barrel, assuming Dubai crude oil prices stay at US$60-US$65 per barrel. During the last quarter of 2018, oil prices fell rapidly. The drop reflects an increase in oil supply from OPEC and Russia, and the unexpectedly strong rise of the US shale oil production. The threat of an oil glut may keep oil prices from rocketing in 2019. This will be a positive development for carriers, as fuel cost is approximately 25%-35% of the total cost of an airline.
FINANCIAL HIGHLIGHTS
Profitability improves
TRIS Rating expects profitability of the airline industry to improve by 3-5 percentage points in 2019-2021. The supported reasons are lower fuel prices and higher ticket prices. Most of airline carriers suffered from huge margin drops in the second half of 2018, due to a rise in fuel price and a drop in passengers. Therefore, we believe carriers will cut price promotions over the next few years.
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