Tough Love For Thai Airways

[george]

Tough Love For Thai Airways

BANGKOK: You have to wonder exactly what Thai Prime Minister Thaksin Shinawatra is planning for his country's airline industry. Just a week before his government arranged a share offering designed to bolster the finances of Thailand's flag carrier -- Thai Airways International PLC -- the Prime Minister's family company announced it was investing in a no-frills upstart airline. The new venture's plan: Take on Thai Airways with cheap fares.

What gives? Thai Airways was once praised as having the best service in Asia but has seen its reputation decline in recent years. So Thaksin may be giving it a bit of tough love. The love part is a Nov. 19 public offering in which Thai expects to float 23% of its shares, adding to the 7% of its stock that already trades. The offering could raise up to $600 million, which will be used to build passenger and cargo terminals at the new $3 billion Suvarnabhumi Airport outside Bangkok, scheduled to open in late 2005. The airline also plans to add 15 new wide-body jets to its fleet. And it has budgeted $188 million over the next two years to improve service, install more comfortable seats, and upgrade entertainment systems on its jets, according to a prospectus for the share offering. Thai Airways officials declined to comment for this story on the grounds that the airline is in a quiet period for the offering.

The toughness comes in the form of more competition for Thai. Thaksin says he wants to make Bangkok a regional hub for air services to stimulate tourism and help keep Thailand's economy growing. To hear his aides tell it, it's all part of Thaksin's dream to develop an American-style "open skies" regime in Asia, the absence of which is keeping Asian airfares high. The Prime Minister "believes in more competition in Thai air space and in the region," says Suranand Vejjajiva, spokesman for Thaksin's party and his former chief of staff.

"KICK IN THE BUTT"

Thaksin's family is adding to the competition. Shin Corp., a conglomerate founded by Thaksin and still controlled by his family, on Nov. 12 announced a venture with Malaysian no-frills budget airline Air Asia. The new carrier, to be called AirAsia Aviation Co., will be 51% owned by Shin and will serve five Thai destinations from Bangkok. In August, Air Asia itself won landing rights in Bangkok and Phuket from the government. Air Asia "may give [Thai Airways] a kick in the butt," predicts Steve Miller, director of Trinity Aviation, a consultancy in Hong Kong. Suranand says Thaksin wasn't involved in either the Shin deal or in the landing rights decision.

So will Thai Air get enough of a kick to make its shares worth buying? Prospective investors will find that the carrier has undergone substantial changes since September, 2001, when the entire board resigned. In May, 2002, Thaksin named Kanok Abhiradee, a friend who had run the state-owned Small Industry Finance Corp., CEO of the airline, with the task of making it world-class. Thai now serves 72 destinations in 35 countries, up from 66 a year ago. Last year net profits jumped fivefold, to a record $242 million, despite a slight drop in passengers. And the airline's revenue for every ton of cargo and passengers it flies increased 7% year-on-year during the nine months ended June 30.

Many analysts, however, are less than thrilled by the offering. Thai Airways, some say, is a management headache. Its hodgepodge of Airbus, Boeing (NYSE:BA - News), and other jets makes maintenance far more expensive for Thai Airways than for many of its peers -- 28% higher per ton of capacity than at Singapore Airlines Ltd., says Kannan Ramaswamy, a professor at the Thunderbird business school in Arizona. Thai also employs more than twice as many workers per passenger-mile as Singapore. And even after the new offering, it will still be controlled by the government, which means its heavily bureaucratic culture could remain unchanged.

Then there's all that competition Thaksin is ginning up. In addition to Air Asia, there's Orient Thai Airlines, a private carrier that flies from Bangkok to Seoul and Hong Kong. It plans to start a discount airline in Thailand in December and is seeking approval to fly to the U.S. Bangkok Airways has applied to the Ministry of Transport & Communications for "national flag carrier" status, which would allow it to fly any international route out of Bangkok, subject to the availability of landing rights. Phuket Airlines Co. and Thai Pacific Airlines are also seeking permission to fly international routes. To fight back, Thai Airways is forming a discount carrier of its own.

Thaksin's vision is to make Bangkok an Asian air hub that would rival Singapore and Hong Kong. So in January, construction started in earnest on Suvarnabhumi, which will have a capacity of up to 45 million passengers a year compared with 36 million at the current Bangkok airport. The plan dates back to the 1980s but fell dormant after Thailand plunged into a financial crisis in 1997. "Thaksin has been able to take the bit between his teeth," says Sriyan Pietersz, head of research at J.P. Morgan Securities (NYSE:JPM - News) Thailand. Bangkok has one edge over Hong Kong and Singapore: The country has a thriving tourism industry, from the northern mountains of Chiang Mai to the southern beaches of Phuket. "The strategy is that it would make sense for an airline to use Bangkok as a hub because you have a domestic base" -- which neither Singapore nor Hong Kong has, says Chin Lim, an airline analyst at Morgan Stanley (NYSE:MWD - News) in Singapore. So, while Thai Airways may face increased competition, luring carriers to Bangkok would mean more connecting flights for passengers arriving from overseas, which would ultimately boost its business.

If the strategy works, Thai Airways could give Singapore Airlines and Hong-Kong-based Cathay Pacific Airways Ltd. a run for their money. Thai Airways, which carried 12 million passengers and 405 million tons of cargo last year -- making it the sixth-largest carrier in Asia -- is half the size of Singapore and a third smaller than Cathay Pacific. But the airline could become a real competitor in the region, and "institutions might actually start buying," says Mark Matthews, head of Thai equity sales at CLSA Securities [Thailand] Ltd. in Bangkok. They just might start to love Thaksin's tough love.

Source: BusinessWeek

[Guest IT Manager]

I was intrigued by the view of a guest at the Hotel when we were discussing this issue.

This man has no axe to grind and no knowledge of politics. His comment..."distasteful in the extreme".

Pithy but accurate IMHO.