How can Thai Airways do a cost-efficient fleet renewal?

Hello All,

After poor financial results in the first 9 months of 2019, Thai Airways decided to again postpone the plan to purchase 38 aircraft. The government and numerous company employees had concerns about the new purchase: it would saddle the carrier with an extra 156bn Thai Baht (approximately $5bn USD) on balance sheet at a time when revenues were lagging.

With that in mind, Thai Airways went back to the drawing board to devise an alternative plan. As outlined in a ch-aviation article, the plan involves replacing all older aircraft: 7 747-400s, 6 777-200s, 6 777-200ERs, and 6 777-300s.

In this blog post, we will show that Thai Airways should do something radically different than exclusively splurging on brand new widebody aircraft.

A strained balance sheet

Thai Airways is feeling the pressure financially. The airline hasn’t had a meaningful profit since 2012 (and even then it was $200m). In spite of two capital injections totaling 28.5bn Thai Baht in 2004 and 2010, the airline has less equity than in 2001.

Below is a plot of Thai Airways’ shareholder equity, and an alternative plot of the equity had there not been equity injections.

It is clear that without capital injections the airline would have negative equity and be technically bankrupt. More alarmingly, losses have accelerated over the last two years. The airline now has 12.5 Bn Bath in equity, or barely more than $400m. The asset to equity ratio is an alarming 20.7. If the current pace of losses continue and there are no equity injections, the airline will be technically bankrupt by the end of 2020.

Thai Airways was right to call off the plan to purchase 38 aircraft for $5bn. It would represent an average price of $138m, which is around what a 787-9 costs. Had the airline proceeded, it would have made the same mistake as Air India: saddle the airlines’ balance sheet with expensive aircraft without adequate revenues to repay the investment. The purchase would have represented more than 50% of the airlines’ current assets.

Competition highlights inadequate business model and fleet

Thai Airways, a flag and legacy carrier, has suffered from the intense low-cost competition in the leisure-oriented Thai market. It competes with local subsidiaries of AirAsia, Lion Air, and VietJet Air among others. Two new low-cost airlines, Thai Summer Airways, and Thai Easter Jet enter the market this year.

However, a large part of the airline’s suffering is self-inflicted.

Apart from its Thai Smile subsidiary, Thai Airways is an all-widebody operator. The airline flies a 747 between Bangkok and Bali. While this business model worked in the 1990s, it cannot survive the low-cost competition in a market where the passenger mix is increasingly less premium-oriented.

To make matters worse, Thai Airways’ widebody fleet is even more complex than the largest airlines in the world. It ordered aircraft by batches of six, which is highly inefficient. Below is the airline’s fleet:

Model	Fleet Count	Deliveries			Capacity
		Years	Avg Age	Op. Lease
A330-300	15	2009-2013	9.1		299
A350-900	12	2016-2018	2.5	8	321
A380-800	6	2012-2013	7.3		507
B747-400	7	1993-2003	20.8		375
B777-200	6	1996-1998	23		309
B777-200ER	6	2006-2007	12.6		292
B777-300	6	1998-2000	20.1		364
B777-300ER	14	2012-2015	5.8	8	348
B787-8	6	2014-2015	5.1	6	264
B787-9	2	2017	2.3	2	298
Total	80			24

The airline operates six aircraft families, which can be at most four cockpits (A330 and A350 can have a common pilot rating, like the 777 and 787). Other than 19 out of the 25 aircraft up for replacement, the airlines’ fleet isn’t old. However, not operating narrowbody aircraft is a huge disadvantage against low-cost competition.

We will now look at how the airline should replace its 7 747s and 18 older 777s.

Aircraft up for replacement do not fly long-haul

As highlighted in an earlier post on Thai Airways, the aircraft up for replacement mostly operate intra-Asia flights. Brisbane (BNE) and Sydney (SYD) are the only two long-haul destinations where Thai Airways operates an aircraft up for replacement. One should note that the airline operates the A380 to London (LHR) and Paris (CDG).

So the airline effectively needs efficient short and medium-haul aircraft. The previous purchase plan, which involved lots of widebodies, would have been financially inefficient. It is overkill to operate 787-9s and A350-900s on intra-Asia routes. There are cheaper options available than state-of-the-art widebodies.

New aircraft don’t have to be brand new

As mentioned earlier, Thai Airways should use the opportunity to buy narrowbody aircraft. The airline needs for cost-efficient aircraft compete against low-cost airlines.

Unless the destination airport suffers from heavy congestion or cargo revenues are particularly profitable, the airline should switch to narrowbody aircraft. This blog thinks that an order for 25 units should be the minimum.

For the congested or cargo-heavy routes, there are lots of A330s coming off lease in the near future. Their lease rate is similar (if not lower) than an A320neo family aircraft. Even if we account for the maintenance overhauls and refurbishment costs, second-hand A330s are far more cost-efficient than state-of-the-art widebody aircraft on intra-Asia routes.

The airline could switch the A350s and 787s it operates on shorter intra-Asia routes to long-haul destinations. In this blog’s opinion, the only brand new widebody that would make on intra-Asia routes is the 787-10. The largest Dreamliner variant is very cost-efficient for routes with plenty of passenger and cargo demand.

Thai Airways could consider ordering A350s under one condition: Airbus proposes an attractive price to buy back its A380 fleet. Disposing of the A380s would do a great service to the carrier to simplify its fleet.

Keeping fleet streamlining in mind for aircraft choices

As mentioned earlier, the airline cannot afford to operate so many widebody aircraft families. By aircraft family, we mean one that can have the same common pilot rating. Long-term, the airline should have at most one long-range widebody, one midsize capacity intra-Asia aircraft, and one narrowbody.

Given the fact Thai Airways already operates 12 A350s (vs 8 all-leased 787s) and 15 A330s, the long-range Airbus aircraft is the best candidate to become the long-range widebody. Down the line, the A350 should replace all A380s and 777-300ERs when the latter age.

If it needs capacity for some Asia-Pacific routes, Thai Airways could consider the 787-10. However, the airline should lease those to keep long-term fleet flexibility. The A330 is another acceptable intra-Asia aircraft. Until Boeing clarifies its long-term plans for a new aircraft, it is too early for Thai Airways to commit to the A321 XLR. Depending on Boeing’s plan, Thai Airways could keep or dispose of its 787s.

Both the Airbus A320neo and Boeing 737MAX family are acceptable narrowbody aircraft options. However, once the 737 MAX returns to service, Boeing might price some deals aggressively to gain new orders. While Thai Airways isn’t as prestigious a carrier as before, the order would be a welcome shot in the arm for the embattled program. Since the A350 seems the better long-haul fleet choice, to keep orders from both manufacturers Thai Airways should order the 737 MAX.

Money better spent on cabin refurbishment

The fleet revamps outlined above would be very cost-efficient. If Thai Airways order 25 737 MAXes and 10 second-hand A330s, with an average cost of $50m per aircraft (including refurbishment and maintenance), the revamp would cost around $1.8bn. This is much better than $5bn. Ordering a few 787-10s would bring the total to around $2.5bn, which is still a lot better.

Thai Airways could spend the remaining money to upgrade its 777-300ER cabin. Given the leisure-oriented passenger demand into Thailand, the airline should move the Economy class to 10-abreast and install a premium economy section. This would probably cost around $10m per aircraft. The airline should also consider improving the intra-Asia A330 cabin to bring a consistent product.

Summary

To summarize, Thai Airways’ fragile financial situation means that it cannot afford to spend $5bn on state-of-the-art widebody aircraft. Instead, the airline should take something out of Delta Air Lines’ playbook. Passengers care more about aircraft that look rather than are new. The aircraft up for replacement mostly operate intra-Asia routes.

With that in mind, Thai Airways should renew its aging 747s and 777s with a combination of narrowbody 737 MAXes and second-hand A330s. The airline could consider 787-10s and A350s if attractive pricing for the former, and Airbus buys back A380s for the latter. A320neos instead of 737 MAXes are also an acceptable option, but the point is that ordering narrowbody aircraft is a must.

The airline should wait for Boeing’s long-term new aircraft plan to decide on future aircraft to replace the A330 on dense intra-Asia routes. Those aircraft are on average 9 years old so there is no rush to make a decision.

With this cost-efficient fleet renewal, the airline would have money to refurbish the cabin of other aircraft.

What the airline should not do is spend a fortune on A350-1000s and 777Xs. The Airbus and Boeing salesforce will try hard to sell those models. Should the airline buy those, it would be an alarming sign for future profitability.

Credit: Thai Airways International