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13 Oct, 2003

Brutal Cost-Cutting To Come as Thai Airways Cracks Revenue Whip

Thai Airways International served notice last week that its suppliers and associated can expect some hard bargaining as it strives to cut costs and boost revenues in preparation for additional privatisation in 2004.

Airports, global distribution systems, travel agents and oil companies are among the groups expected to be targetted as the airline moves both individually and collectively with Star Alliance partners as well as foreign airlines serving Bangkok to cut costs and boost profitability.

The airline’s president Mr Kanok Abhiradee indicated at an airline conference that airports could be a particular target in the wake of a global studies showing that even as airlines’ operating profits were being severely affected by the various crises, airports were still making money.

“Airlines need to put in place tougher bargaining and have to demand a fairer share of the profit. We are the ones working our butts off but everyone else is enjoying the profits,” he said.

He noted that his position was in line with that of International Air Transport Association director-general Giovanni Bisignani who told a recent conference in Montreal that airlines pay US$ 40 billion annually to airport and air navigation service providers. On international traffic, it represents about 10% of airline costs.

Mr Kanok declined to specify whether he planned to take up the matter with the Airports of Thailand plc, operator of Thailand’s international airports. However, other airline sources said IATA’s regional office in Singapore is working on a cost-yield relationship comparison study between Thailand and other Asian cities as part of an effort to show that airport charges in Thailand are way too high.

International airlines in Thailand are also upset that AOT plc did not offer any pricing relief to the airlines during the recent SARS crisis, unlike Singapore, Kuala Lumpur and Hong Kong airports.

Mr. Kanok said talks with insurance companies have already resulted in savings of 620 million baht in premium charges for THAI next year.

He said he had sought outside expertise in assessing “who is making how much” among all these complementary services supplying goods and services to THAI. “We have to improve our negotiating and bargaining (position). The industry attached to us may have worked harder than us, or bargained better. And those are the areas that we will be looking at in order to gain a fairer share of the profit.”

Mr. Kanok said the airline had done a major analysis of future risks and come up with 43 items, of which the top five were: 1. Increase in the price of jet fuel; 2. Government policy impacting THAI corporate policy; 3. Delays in the completion of the new Bangkok airport; 4. Fluctuations in currency exchange rates; and 5. Impact of world events, e.g. Korean conflict, Palestinian issue etc.

He noted that cost-cutting would also be accompanied by a major drive to boost revenues. He confirmed that THAI would extend its buy-one get-one-free offer for first and business class tickets after its expiry in October, but would amend it to include only specific routes over a specific time-frame.

Though the offer has been heavily criticised by foreign airlines in Bangkok on the grounds that it has diluted their yield, Mr. Kanok said it had helped THAI generate new forms of traffic, such as elderly passengers who wanted the extra comfort of more seating space but could not afford it in the past.

“We have to find ways and means to create value added (services),” he said. “We have found that talk of adding value usually includes inflight systems and all the hardware and software one can put in. I don’t think that is adequate.

“THAI has adopted other ways like improving segmentation, focusing on end customers much more. We are going ahead with much more segmentation strategies. We are learning much more about how our passengers behave and will aggressively target (them) to respond to their needs and meet their service requirements.”

Mr. Wallop Bhukkanasut, THAI’s newly appointed Vice President, Marketing Planning and Management, said the airline is awaiting approval for a major overhaul of its pricing and fare structure in order to drive direct bookings online, the cheapest form of attracting bookings because it helps airlines avoid paying travel agents commissions or global distribution system booking fees.

He said the system would help THAI generate an estimated 10 % of its systemwide bookings over the Internet by 2005. However, that is still well below the volumes being targetted by European and US airlines.

Mr. Kanok said THAI had been severely affected by the SARS crisis, with passenger levels falling to only 910,521 in May 2003, the lowest since May 1996. THAI lost nearly 10 billion baht in revenues due to SARS but he claimed it had made a rapid recovery, reinstating its normal schedules as of July and regaining traffic to the extent where it would report “its best ever” year when the financial results for fiscal 2002/2003 are published in a few weeks.

In this current fiscal year, which began this month, the new strategies are designed to help THAI prepare for the increasing competition that will come from the country’s start-up airlines and the entry of low-cost airlines like Malaysia’s Air Asia.

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