CEO Interview - Growing Toward Efficiency
Thai Airways International Public Company Limited (THAI) President, Piyasvasti Amranand, explains that it is possible to manage growth while also becoming more efficient.
What are the biggest challenges at THAI right now?
The biggest challenge is making the company financially strong and sustainable, efficient and at the same time ensure that we offer safe and world-class services. Last year we were ranked fifth in the Skytrax ranking of customer satisfaction, up from the 9th place the year before.
In the current environment, though, it won’t be easy. Fuel prices remain very high. Last year we saw a record for the average price of jet fuel and in 2012 it could be even higher. For us, fuel now accounts for 40% of cost. There is also very fierce competition from premium Middle East airlines. Given that, at the moment, nearly 50% of our revenue passenger kilometre is from Australia-Europe routes, we face a very tough test. And in domestic and regional markets there is competition from low cost carriers (LCCs). Our market share has been eroded over the last ten years.
But I remain confident that we will find a way to improve customer services and keep costs at a level that allow that us to be competitive.
Fuel being 40% of cost is higher than the industry average. Why is that?
It’s not higher than average, but fuel efficiency may be lower than many of our competitors. This is mainly due to the age of our fleet, which is quite high at around 11 years, one of the highest in the Asia Pacific region. The type of aircraft also contributes to higher fuel consumption. For example we are losing heavily on routes using A340-500's . From the second quarter 2012 onwards, we will be grounding these aircraft as we will be taking delivery of a number of new aircraft this year.
Is your customer service moving in the right direction?
Surveys such as Skytrax tell us that our passengers in general are happy. They praise our cabin services and our lounges at Bangkok Suvarnabhumi Airport. They are also happy with the food. Last year we were number one in the Skytrax ranking for economy class cuisine. Seats and In-flight Entertainment are where we need to improve and that is why we’re retrofitting 20 aircraft with better seats and IFE systems.
Along with the retirement of older aircraft and the retrofit of seats and IFE, we are taking delivery of 56 new planes during the next six years with 12 new aircraft being delivered in 2012 alone. This means we will be able to keep our product quality consistently high by the end of this year. For example, there will be no more 747s on long-haul routes with old seats and the big, common screens for movies. And all of our new aircraft will have lie-flat seats in business class. We’ll also have an improved first class on our six A380s and on six retrofitted 747s.
You’ve got a great geographical position, especially for the growing Indian and Chinese markets. How can you exploit that?
Yes, our geographical position is great but there is strong competition for these markets. If you look at the Indian carriers, they are facing some serious financial problems. This is because of too much capacity and competition in the market that yields for the operators are very low. In China, it is a similar situation and yields there are also low.
Most of our profit will come from places like Korea, and Japan. We have good margins on those routes. Most of THAI’s profits come from this area. We have already shifted capacity from Europe to better exploit the region. This year we plan new destinations in Asia but not in Europe.
Will ASEAN liberalization make the region even more competitive?
We’re already seeing lots of airlines expanding in the region. I would think the area is very competitive already.
But there are sectors of the market for which THAI, as a premium carrier, isn’t the right fit. That’s why we’re launching a new light premium service called THAI Smile in July this year. It will compete in the middle segment of the market. THAI Smile isn’t going to be a separate entity from THAI. It will be complementary. So, a passenger flying from London to Chiang Mai, for example, will transfer in Bangkok from THAI to THAI Smile.
THAI Smile will have lower product quality and service level. Even so, there will be free snacks and you still get 20kg baggage allowance. It will, however, have a very competitive price. So THAI Smile isn’t low cost but somewhere in the middle.
For the very low end of the market, competing head on with the LCCs, we are planning a completely new entity for the end of 2012 or early 2013. Low cost carriers have a good share of the Asian market already but if you look at Europe and North America, there is clearly going to be further growth in this sector in Asia.
Plenty of legacy carriers have tried low cost subsidiaries and failed. What makes you think you can succeed?
We are looking at this project in conjunction with a partner that is very familiar with the low cost market. If we tried to do this ourselves, transferring the THAI culture to the low cost carrier, we might get into trouble. So this project would be completely separate from THAI.
What is your view on the European Union Emissions Trading Scheme (EU ETS)? How will it impact THAI?
The financial impact on THAI won’t be so large because we are reducing capacity to Europe and those routes we do keep will have the new, fuel-efficient aircraft.
But we still strongly oppose the EU ETS—not because of the money but because of the principle. It is not a well thought-out scheme and it will not help at all in reducing global greenhouse gas emissions. If that is what the EU wants to do there are far better policy options. The EU ETS will simply impose a burden on airlines. I wouldn’t mind paying if it was done differently. As is, it creates an uneven playing field between long-haul carriers and those that fly into Europe from just outside the territory.
The Thai government is supporting us and has sent a letter to the EU and our Ambassador is fully engaged in the discussion.
Will biofuels play a big part in your environmental strategy?
If we want to reduce aviation’s CO2 emissions 50% by 2050, then second or third generation biofuels are inevitable.
We did a demonstration flight at the end of last year to set in motion the process of developing aviation biofuel in Thailand, I think Thailand could be a leader in this field. Already, we have one of the highest penetrations of biofuels in Asia in the area of road transport. This was achieved by active assistance and promotion by the government. As the production and consumption of biofuels grew over the past 7 years, production cost has come down substantially, and eventually I think the cost of biofuel without government subsidy will be competitive to fossil fuel. To build a sustainable biofuels industry for aviation, I believe that we will need to take a similar approach.
Having said all of this, if you asked me as a former Minister of Energy how to reduce CO2 emissions by 50%, I would not contemplate starting with aviation. There are many more efficient ways to achieve this. And if you look at Europe, which has several countries looking to reduce their reliance on nuclear energy, they are taking measures that will, eventually, increase their CO2 output. I think that the whole system and way that we look at this problem needs a review.
That does not lessen my commitment to biofuels. I certainly believe that aviation will need to do its part in carbon reductions. And THAI will continue to be in the forefront. So, we will continue with test flights to show our willingness more intensively to use biofuels when the cost becomes affordable.
Distribution is an issue that is getting some attention. There seems to be some frustration among airlines that the GDSs are not meeting airline needs for innovation and cost efficiency.
The former IATA Director General made a couple of famous speeches on GDSs. I don’t want to comment specifically, but I will say that I fully agree with how Mr. Bisignani colourfully characterized the arrangement.
IATA is building consensus on its Checkpoint of the Future. Do you support the concept too?
The Checkpoint of the Future is something I support. For Thailand, the security process is not so bad but in the United States, for example, it is very invasive.
But security is not the issue when it comes to encouraging people to fly. Access to countries is the major problem. People from developing countries feel this a lot more. If we can remove the visa obstacle, I think we will see even stronger growth for the industry. As a Thai, I have to get a visa for Japan but I don’t need one for Korea. It is no surprise that tourism from Thailand to Korea is growing strongly.
For me to get a Shengen visa is ridiculous. The last one that I got was to go to Davos in Switzerland. And I was issued a six month multiple entry visa. I have ten year visas for the United States and the United Kingdom. Europe could help reverse its economic situation immediately if they relaxed these restrictions.
How would you describe the company culture at THAI?
THAI has a peculiar culture. It’s not Thai, it’s not international. It has a long history of enormous government involvement too. So managing this company is complicated.
Over the last few years, I have finally achieved a recognition that things have to change in order to compete. Sometimes people aren’t too happy with change but we have no choice if we are to ensure the future existence of THAI. For example, when the government has a holiday, THAI employees have a holiday. When the private sector has a holiday, THAI employees have a holiday too. Combined, that’s a lot of holidays! I’ve managed to cut one day of holiday so far—the Royal Ploughing ceremony day. It will save $1.4 million (THB43 million) in overtime pay. That is very significant.
We’ve also had to deal with a personal vacation issue for senior management that goes back to the SAS days. They used to have 28 days entitlement and we’ve managed to get that reduced to 24 days. It is still a lot more than the Thai government standard of 10 days.
What is your vision for THAI?
THAI will be at the center of a group of companies or business units, such as THAI Smile and a new LCC for the domestic and regional market.
We want to be efficient and more productive with lower unit costs. We have a very clear plan in place. In five years’ time we will have a fleet of 105 modern aircraft. All of this will allow us to be a leaner company and yet we will still be able to offer a better product and be more profitable.
For more information, visit www.thaiairways.com