How should Thai Airways renew its widebody fleet?

Hello All,

A number of aircraft in Thai Airways International’s fleet are up for replacement. Such order should have been placed last year but was postponed due to political instability: the airline didn’t receive approval yet from the government to place a Request For proposal. The latest plan involves ordering 38 aircraft either from manufacturers or lessors. In this post we will investigate how the airline should renew its fleet.

Thai Airways’ current state of affair

Below are the carrier’s financial results over the last five years (in billions of USD):

Year	2014	2015	2016	2017	2018
Sales	6.5	5.8	5.7	6.0	6.5
EBIT	(0.6)	(0.0)	0.2	0.2	(0.3)
Operating Margin	-8.9%	-0.6%	3.4%	3.3%	-4.6%
Net Income	(0.5)	(0.4)	0.0	(0.1)	(0.4)
Passengers (mm)	19.1	21.2	22.2	24.6	24.3
Load Factor	68.9%	72.9%	73.4%	79.2%	77.6%
Cargo % of total Revenue	12.2%	9.9%	10.1%	10.3%	11.0%

Like numerous flag carriers in Southeast Asia, Thai Airways is struggling financially. The carrier lost money in all but one of the last five years. The carrier’s load factor is below the 83% average of the Asia Pacific region. At around 10% cargo activities represent a decent portion of revenues but not at the level of Cathay Pacific or Korean Air (more than 20% of revenues for both carriers).

Thailand is one of the world’s most visited countries (inside the top 10) so there is lots of leisure traffic. However demand is quite seasonal and Thai Airways faces ruthless competition from an increasing number of low cost carriers. On the Bangkok – Phuket route the following carriers compete for traffic: Thai Airways, Thai Smile, Thai Lion Mentari, Thai Air Asia, Bangkok Airways, Nok Air and Thai Vietjet Air. Fares are comparable if not lower than the cost of taking a cab from downtown Bangkok to Suvarnabhumi Airport.

Thai Airways’ fleet replacement needs

Below is the airline’s fleet with delivery and age data from planespotters.net.

Model	Fleet Count	Deliveries			Capacity
		Years	Avg Age	Leased
A330-300	15	2009-2013	8.6		299
A350-900	12	2016-2018	1.9	8	321
A380-800	6	2012-2013	6.7		507
B747-400	9	1993-2003	20.3		375
B777-200	6	1996-1998	22.5		309
B777-200ER	6	2006-2007	12.3		292
B777-300	6	1998-2000	19.7		364
B777-300ER	14	2012-2015	5.5	8	348
B787-8	6	2014-2015	4.6	6	264
B787-9	2	2017	1.8	2	298
Total	82

The following aircraft need to be replaced in the near future: 9 747-400s, 6 777-200s and 6 777-300s. The carrier should also consider replacing its 6 strong 777-200ER fleet. While young it would probably not hurt the carrier to replace its A380s with smaller widebody aircraft if it can agree with Airbus to buy them back like Lufthansa did.

Below are the fleets at subsidiaries Thai Smile (fully owned) and Nok Air (21.8% owned):

Subsidiary	Count	Delivery Years	Avg Age	Leased
Thai Smile	20 A320	2013-2016	5.5	15
Nok Air	1 ATR72	2012	12.3	1
Nok Air	15 737-800	2012-2017	6	13
Nok Air	8 Q400	2014-2016	4.2	8

Thai Airways’ route network

Where do the aircraft up for replacement fly? Below is the carrier’s route network, with frequencies taken during a week in November 2019 and aircraft that currently operate them:

Domestic Network

Origin	Destination	Daily Frequencies
		Thai	Thai Smile
BKK	CNX	5	5
BKK	CEI		3
BKK	UH		5
BKK	KKC		6
BKK	UBP		3
BKK	NAW		1
BKK	HDY		6
BKK	URT		2
BKK	KBV	2	1
BKK	HKT	8	5
CNX	KHT		1

Europe, Middle East and Oceania destinations from Bangkok

Destination	Weekly Frequency	Distance	Aircraft
LHR	14	5,178	A388, B77W
FRA	11	4,866	A359, B77W
MEL	11	3,950	A359x2
DXB	7	2,651	A359
CPH	7	4,668	B77W
MUC	7	4,756	B77W
OSL	7	4,686	B77W
CDG	7	5,107	A388
ARN	7	4,483	B77W
ZRH	7	4,894	B77W
AKL	7	5,156	B789
SYD	7	4,051	B744
PER	7	2,863	A333
BRU	5	5,007	A359
MXP	5	4,908	A359
VIE	5	4,568	B788
FCO	4	4,798	A359
BNE	4	3,916	B772

Distance in nautical miles

Asia destinations from Bangkok

Destination	Weekly Frequency	Distance	Aircraft
HKG	42	912	A320*, B773, A330x3, A359
SIN	32	761	A359x2, B773x2, B772
ICN	25	1,978	B744, B772, A359, B788
NRT	21	2,511	A388, A333x2
TPE	21	1,344	B77W, B789, B772
KUL	21	656	B744, B773, A320*
VTE	21	278	A320x2*, A333
DEL	20	1,592	B788, B744, B772
RGN	18	330	A320*, A333x2
PNH	18	272	A333
HND	14	2,479	B744x2
NGO	14	2,343	A359, B788
KIX	14	2,247	B77W, A388
PEK	14	1,787	B773, A359
PVG	14	1,563	A359, B77W
MNL	14	1,183	B772, B773
CAN	14	920	A359x2
DAC	14	845	A333, B772
HAN	14	536	B788, A330, B772
SGN	14	387	B788, B772
CGK	14	1,234	A333,B788
BOM	12	1,638	B744, A320*
FUK	10	2,011	A333
GAY	10	1,113	A320*
CTS	7	2,739	B772/B773
KHI	7	2,014	A333
LHE**	7	1,801	A333
DPS	7	1,592	B744
BLR	7	1,347	B773
HYD	7	1,310	B772
MAA	7	1,204	A333/B772
KTM	7	1,202	B772
CTU	7	1,026	A333
CKG	7	1,013	A320*
CCU	7	883	B772/B773
KMG	7	685	B772
LPQ	7	380	A320*
PUS	6	1,996	A333
CMB	5	1,292	A333
CSX	5	1,113	A320*
ISB**	4	1,923	A333
XMN	4	1,180	B772, A333

Distance in nautical miles

* operated by Thai Smile ** temporarily suspended due to closure of Pakistani Airspace

All aircraft up for replacement (747 and 777s ex -300ER) fly inside the Asia Pacific region. Apart from Sydney and Brisbane none of those flights are long haul. It is worth noting that the A350-900 and 777-300ER operate the bulk of long haul flights for the carrier.

Fleet replacement discussion

How should the carrier replace the aging widebody aircraft it operates on intra-Asia routes? One should note that unless there are substantial cargo revenues narrowbody aircraft have lower unit costs than widebody ones on flight comfortably within range of the former. Thai Airways’ smallest aircraft is the 787-8, seating 264 passengers. This is less than ideal to fly into smaller markets or those without meaningful cargo revenues. Lastly smaller aircraft are better to deal with seasonality in passenger demand.

Therefore the carrier needs to order narrowbody aircraft to lower cost on thinner routes. One should note that unlike some other Asian carriers the A321XLR isn’t of much interest to Thai Airways. The aircraft wouldn’t have the range in practice to fly to Eastern Australia and the A321LR can fly to all of the carrier’s Asian destinations from Bangkok. The 737MAX would also be able to fly to all Asian destinations, with perhaps the exception of the 737-10 to Hokkaido.

Therefore both the A320neo and 737MAX are acceptable choices for Thai Airways. On paper the A320neo has an advantage because Thai Smile already operates the A320. However the carrier might face excessive wait times until a delivery slot is available for A320neo family aircraft. Due to earlier availability the 737MAX has a real shot at winning an order from Thai Airways, assuming the aircraft returns safely to service.

This order is an opportunity for Thai Airways to dramatically cut operating costs and reduce fleet complexity. At the moment the carrier’s fleet is more complex than the larger Singapore Airlines or Cathay Pacific. Ordering aircraft by lots of six was a mistake in the past. Going forward an order should result in at least 25 aircraft of a given family to bring economies of scale. Given the ruthless competitive environment the carrier needs to reduce operating costs in any way it can.

Going forward unless there are congestion issues or substantial cargo opportunities Thai Airways should operate narrowbody aircraft on intra-Asia routes. Cargo does not represent a very large proportion of revenues at Thai Airways. Therefore ordering the 777X is probably not a good idea for the carrier: it wouldn’t justify the increased fleet complexity. Having said that some dense Asian routes will still require widebody aircraft, whether for cargo or due to slot congestion. Which widebody would serve the airline best?

A Midsize Airplane Conundrum

It will depend on the airline’s long term goals that go beyond the timeline and scope of the current order. Long term the airline should aim at operating three aircraft families at most: a narrowbody (neo or max), a long haul widebody (A350 is the obvious choice, more on that below) and a larger intra-Asia aircraft. The carrier should also keep ordering from both Airbus and Boeing. Should the larger intra-Asia aircraft be Boeing’s New Midsized Airplane or a proper widebody like the 787 or A330neo?

Let’s assume that Boeing launches the NMA. If Thai Airways decides that it is better served by a less cargo oriented business model and there are enough routes to justify a 25 strong NMA order, Boeing’s aircraft would be an excellent choice. The NMA would replace 787’s once the latter reach the end of their lease. The NMA could fly to all of Asia Pacific and the Middle East except New Zealand. Either more A350s or the A330neo would be acceptable for intra-Asia cargo heavy or thinner long haul routes. There is flight crew commonality between the A350 and A330neo. Since a lot of A330-200s will come off lease in the near future, they are an attractive stopgap until the NMA enters service.

Alternatively if Thai Airways thinks it is better served by a business model more focused on cargo, ordering more Dreamliners is the best option. The 787-10 is an excellent intra-Asia cargo aircraft: it can carry its maximum 57 metric tons payload up to 4,200nm, more than enough for all Asian missions. The aircraft also has the added benefit of having enough range to fly to Europe, albeit without much cargo. It would be suitable for routes with more passengers, while the A350 has better cargo capabilities on long haul flights. The carrier would also order smaller 787s for thinner intra-Asia routes, which would replace A330-300s down the line.

Having said that there is one caveat to another 787 order. Thai Airways was hit hard by the Rolls Royce Trent 1000 issues. It has strained an historically strong relationship. It remains to be seen whether this will have an influence on future orders.

The airline flies the A380 to London, Paris, Osaka and Tokyo. To lower fleet complexity the carrier should try to dispose of them. The ideal replacement would be the A350-1000. The larger A350 variant would also replace 777-300ERs down the line. As discussed before the A330neo could be an attractive option, depending on the business model. A combined A350-1000, A330neo and A320neo order might be enough to persuade Airbus to buy back A380s, especially if it prevents Thai Airways from ordering the 777X.

Summary

To summarize the airline urgently needs to increase profitability. This involves improving load factors and drastically reducing fleet complexity. Ordering a narrowbody is a must to reach higher load factors and better competitiveness, with both the A320neo and 737MAX acceptable choices. Thai Airways does not carry as much cargo as the likes of Korean Air or Cathay Pacific so the 777X would probably not justify the increased fleet complexity. The airline is better served by ordering more A350s, especially if A380s can be exchanged for more fuel efficient A350-1000s.

The other aircraft to order will depend on the airline’s long term business model. It is a tricky question to answer for the carrier because cargo isn’t a huge component of revenues but is clearly not negligible. If the airline wants more cargo revenues the 787, especially the -10 variant, is the ideal choice for intra-Asia routes. If cargo is less important the NMA would be ideal for denser routes, along with more A350s and the A330neo. Second hand A330-200s would serve as a stopgap measure.

In any case Thai Airways should probably wait until Boeing makes a final decision on whether to launch the NMA before finalizing its order. Unless the carrier elects to proceed with a business model more focused on cargo.

Credit: Thai Airways International