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The impact of the Bankruptcy Act rehabilitation of Thai Airways on the Thai aviation sector22 May 2020

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Thai Airways International (TG) is expected to enter into Bankruptcy Act rehabilitation this month and could emerge from rehabilitation by the end of the year. What would a rehabilitated TG mean for the Thai aviation sector?

Fasten your seatbelt

The market conditions which led to the Bankruptcy Act rehabilitation of TG predate the COVID-19 pandemic. The collapse of inbound Chinese tourism, excess capacity, aggressive competitors and the impact of the strong baht on other key tourist markets all resulted in the exit of a number of smaller airlines and the weak performance of a number of other airlines. The measures introduced to prevent the spread of COVID-19 only accelerated the impact of these market conditions on Thailand’s airlines.

"Fierce competition in a saturated and stagnant domestic market has prevented any sense of complacency amongst TG’s competitors."

Many of TG’s Thai competitors have developed and expanded their networks more nimbly and profitably than TG and have been able to move quicker and more effectively to respond to changes in demand. Their cost bases are also lower than TG’s and their networks and fleets more closely reflect demand, yields and economic viability. Fierce competition in a saturated and stagnant domestic market has prevented any sense of complacency amongst TG’s competitors, but this also means that a rehabilitated TG faces competitors who are far more familiar with aggressive competition.

It may take Thailand’s airlines 12 to 18 months to recover from the dramatic drop in demand for domestic travel resulting from the COVID-19 measures and the ban on foreign visitors. It appears increasingly unlikely that foreign tourists will return until end of the year. The resulting short to medium-term dependence on domestic travel and tourism is likely to lead to further consolidation and reduced operations for all Thai carriers, which will need to adapt their operations to a primarily domestic market. The loss of lucrative interline and codeshare passengers will affect some carriers more than others, notably TG.

New is old is new is old again?

The rehabilitation of TG will have a significant impact on the Thai aviation sector beyond the airline itself and the rehabilitation of TG cannot be viewed in isolation or solely from the perspective of the changes in TG’s cost base and operations. A protracted rehabilitation process would allow some of TG’s competitors to restructure and be ready to compete even more effectively with TG. TG’s competitors will not sit idly during the rehabilitation or once the airline emerges from rehabilitation.

The competitors of TG in the Thai aviation sector will be watching the rehabilitation very closely. In particular, they are likely to focus on how the rehabilitation plan addresses the following:

  • Cost base;
  • Renegotiation of contracts and agreements;
  • Labour costs and staffing levels;
  • Fleet costs and structure;
  • Route network and aircraft utilisation;
  • More commercially focused operations and management; and
  • Debt levels and servicing costs.

"If the rehabilitated TG cannot compete with Thailand’s LCCs on costs, network and fleet, the rehabilitation is unlikely to result in TG as a viable domestic airline in the medium to long term."

A critical factor will be the extent to which the rehabilitation plan reduces the cost base for TG, including by reducing debt servicing, the renegotiation of aircraft leases and other contracts, and reductions in labour costs and staffing levels. If the cost base can be reduced to levels which allow the rehabilitated TG to compete more effectively with Thailand’s other airlines, these airlines will come under some pressure to reduce their cost bases to compete with TG. The extent to which TG’s cost base can be effectively and sufficiently reduced will depend on the extent to which commercial objectives and requirements take precedence in the rehabilitation plan.

If the rehabilitated TG cannot compete with Thailand’s low-cost carriers (LCCs) on costs, network and fleet, the rehabilitation is unlikely to result in TG as a viable domestic airline in the medium to long term.

A limited reduction in TG’s cost base would allow its competitors to continue to compete with TG with more minimal changes to their operations and cost base, particularly if the focus of the new TG management is on building domestic market share in a weak market and in the absence of international travel.

While reducing lease costs may appear an attractive and effective way to reduce TG’s cost base, this can only produce some of the reductions required. The rehabilitation will also need to ensure that contracts with other suppliers are renegotiated to produce more competitive costs and improved services. A further key factor is the extent to which the rehabilitation plan will result in a more efficient and smaller workforce with more efficient and cost-effective work practices. This may prove more difficult to achieve, although the conciliatory position of TG’s unions may allow for some workplace reforms.

A further key factor will be the extent of changes to TG’s route network, the aircraft used to fly these routes and their levels of utilisation. Unlike its competitors, TG has a fleet more focused on long haul destinations, which it serves with wide body aircraft. If TG is able to negotiate significantly reduced lease costs for its aircraft, notably the A350 and B787 fleets, these could be used on domestic routes, pending the return of demand for international travel.

"In current global market conditions, repossession is effectively an empty threat."

Lessors to Thailand’s other airlines may come under pressure to provide further lease rate reductions and payment suspensions to match or exceed those negotiated by TG. This is where TG is able to negotiate significant discounts and suspensions in particular. Some of Thailand’s other airlines may be able to achieve greater lease discounts and suspensions than TG through their market position, fleet size and relationships with lessors. In current global market conditions, repossession is effectively an empty threat and lessors may have little alternative but to respond to demands for discounts and suspensions from other Thai lessees. The extent to which discounts and suspensions are achieved will depend significantly on the extent to which TG is able to negotiate discounts and suspensions.

Contracts with airports and suppliers are also likely to be a target for savings and improved terms, particularly where these are not competitive or at market rates. Whilst any savings will benefit the rehabilitated TG’s financial position, these will need to be comparable to the rates paid by its competitors and the terms on which these services are provided to those competitors. Realistically, TG’s competitors are likely to use current market conditions to seek to improve their contract position and achieve greater discounts on such contracts. If they are able to do so, the impact of any costs savings on TG’s competitive position may be limited.

"In current market conditions, it may be more effective for the rehabilitated TG to begin operations with the Thai Smile fleet, product and cost base."

If TG were to use its long-haul fleet on domestic routes, it would be able to offer significantly more capacity than its competitors. This may be advantageous if restrictions on the sale of seats, to allow for social distancing, remain in force for the next three to six months. Although these aircraft were not intended for such routes, it would allow TG to increase its market share. Whether this will be to TG’s benefit will depend on the extent to which TG’s competitors can compete on cost and frequency.

The status and role of Thai Smile Airways (Thai Smile) will also have a significant impact on the extent to which TG can compete in the domestic market. The rehabilitation plan should address Thai Smile’s market position and role, particularly whether it should become an LCC, to compete more effectively with Thailand’s LCCs, or remain a hybrid carrier. In current market conditions, it may be more effective for the rehabilitated TG to begin operations with the Thai Smile fleet, product and cost base. This may allow TG to compete more effectively with Thailand’s other carriers.

The rehabilitation plan will also need to address TG’s uneasy and ambiguous relationship with Nok Air (Nok). Absorbing Nok into TG would eliminate a potential rival and provide the basis for a lower cost and more efficient operation. If this cannot be achieved, TG will need to decide whether to remain a shareholder in an airline with which it will need to compete for passengers and traffic.

The current absence of international travel should allow TG to restructure its international route network in advance of a resumption of international travel. In short-haul and regional markets, it will be critical to be able to either compete on costs and frequency or offer a full-service product for which there is sufficient demand. The latter is unlikely to be possible in the near to medium term. In addition to competing with other full-service carriers, TG will also need to compete with LCCs and their lower cost bases and more efficient sales and distribution networks. This will require an objective and critical analysis of routes and markets to determine which routes should be terminated and where routes should be served by smaller and more efficient aircraft. Demand for short-haul and regional premium products is likely to be low for the next 12 months given broader economic conditions.

"Competition is likely to be even more intense once international travel is again permitted."

The rehabilitation may result in a reduced regional and short-haul network, particularly given current and projected demand. A smaller TG may not be able to respond once demand returns for regional and short-haul travel, particularly given the operations, networks and fleets of TG’s competitors.

In medium to long-haul markets, TG increasingly competes with LCCs as well as full-service carriers with greater shareholder support and expertise. This competition is likely to be even more intense once international travel is again permitted and the extent to which TG can compete effectively and profitably in the medium to long term will depend on the extent to which the rehabilitation results in sufficient and significant changes to TG’s medium and long-haul network, fleet and cost base.

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