THAI’S COOL OPERATOR

Thai Airways International has embarked on the biggest restructuring in its history, with new president, Charamporn Jotikasthira, telling staff they can choose to work harder or leave.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

May 1st 2015

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When Charamporn Jotikasthira (57), a former president and chief executive of the Stock Exchange of Thailand, took charge of Thai Airways International (THAI) last December, he chose as his first task to deliver a sobering message to the carrier’s 25,000 plus employees. Read More »

The airline was in “a critical situation”, he told them last December and its government owners would not be bailing out the carrier this time around. His message was pressed home with the screening of a 90-second video featuring the country’s prime minister, Prayut Chan-o-cha, a retired army officer and head of the Thailand’s National Council for Peace and Order (NCPO), who added political heft to Charamporn’s speech.

'There is a lot of fat everywhere and some of it will touch on the headcount. That will have to be done carefully'

Charamporn Jotikasthira President Thai Airways International

“The prime minister said: ‘if the staff or the union did not take heed of the need for change, the government would close down the airline, like any other airline in any other country or sell Thai International to foreigners’,” Charamporn told Orient Aviation. It brought the reality of the airline’s business home, he said.

There is no doubt that the new president, who has spent most of his working life in the private sector, and the junta government, are not making idle threats. They are fully aware of THAI’s fragility so they are insisting that THAI’s staff understand that the carrier’s radical management and operational strategy must succeed.

For the fiscal 2014 year, THAI reported an after-tax loss of $482 million, which followed losses of $392 million in 2013. Revenue has declined by 10%, with much of the drop the result of Thailand’s months-long political upheaval. As the country’s vital tourism industry stuttered and budget competition increased, THAI reported seven consecutive quarters of losses. Four months into this year, it is still not making money.

In April, the carrier took a significant step forward in its recovery. It commenced offering voluntary early retirement packages to some 2,000 employees. To be eligible for the package, airline staffers must have worked for the airline for at least 15 years and be older than 50. To date, the package excludes cockpit and cabin crew.

The eventual goal is to cut staff by 20%, to 20,000 workers, by 2017. The other critical elements of the re-structuring are the downsizing of the fleet by 22 jets in 2015, introduction of a network rationalization plan that will cut out the deadwood in the route network and a cost reduction program across the entire airline.

Charamporn told Orient Aviation in an exclusive interview, he is confident that by sticking to the plan his goal of a recovery by 2017 will be achieved. There is no questioning the new president’s financial credentials for the task at hand. Aged 57, he holds an MBA from Harvard University in the U.S. and is a graduate in electrical engineering and computer science from the Massachusetts Institute of Technology.

Before taking charge of the Stock Exchange of Thailand, he was the president of leading securities and asset management firms and served as chief information officer of the Siam Commercial Bank.

As a result, Charamporn is unfazed by THAI’s recent management history. It has had six presidents and five chairmen in the last decade and has frequently suffered from political interference. He has been given carte blanche by the country’s military rulers to run the company as a commercial enterprise.

“That is part of the reason I took the job,” he said. “The government had a clear mission. Its support for the restructuring was approved on January 22 on the condition we followed the transformation program strictly. This is pretty much what a commercial private entity would do. Basically, we have to be strictly on this road only and not wander off.

“There are several fundamental things that we haven’t done properly. For example, we were still flying on non-profitable routes without making quick decisions. The first thing we did was identify loss-making routes with the aim of cutting capacity about 15%, to 20%.

“So far, we have reduced it by 10% compared with last year. Some of our routes have been losing money for 10 years. They were kept flying in the hope they would turnaround rather than make the tough decision to let them go.

“If we cannot turn them around within the next 12 months, we will turn them off for the time being. We have cut about a dozen routes and by doing that alone, you stop the bleeding.”

‘We are shrinking to grow. We should go back to about 100 aircraft by 2018 or 2019’

An illustration of how quickly Charamporn is moving was the decision to terminate the Johannesburg service in January, a month after he arrived at THAI. Moscow followed in March. London and Frankfurt will be reduced from two daily flights to one in July and Madrid will be suspended in September. If THAI can make them profitable they will be re-activated, he said.

Another mistake at THAI has been the operation of a diverse fleet of aircraft types. “A lot of THAI’s costs come from our decision to have so many types of aircraft. We have 101 aircraft and 11 types,” he said.

“We already have 20 aircraft on the ground and we are decommissioning another 22 this year. As a result, the number of types will drop to eight. Towards the end of next year it will be six - easily. That will be a more reasonable fleet for us.”

The end result will be a THAI wide body fleet of 69, rather than 100, with 20 narrow bodies flying its budget subsidiary, Thai Smile. Also grounded in March was the carrier’s B747-400F freighter. THAI will continue to carry cargo in the bellies of its passenger fleet.

But fleet renewal remains part of the re-structuring plan. Two more B777s will arrive at the carrier this year and 12 A350s will be delivered from 2017. The new aircraft will bring welcome savings in operating costs, particularly fuel, but orders for more aircraft are not planned for now.

“I would want to see a lot of financial stability at THAI before we write more orders. We are shrinking to grow. We should go back to about 100 aircraft by 2018 or 2019, but we don’t have to think about it now. Sometimes the opportunity comes earlier or later than you expect so you must keep a close watch on the situation,” he said.

Charamporn also believes the airline has not been sufficiently aggressive in selling its product. “Our cabin factor was 68.9%. That was our target. It was never planned to be higher. The commercial team has a new target, in the 80s, like the rest of the industry,” he said.

“It’s not a magic thing. If anyone can do it we can do it. It’s just that we did not focus on it at all. There is still a long way to go, but as a result of a new commercial strategy, it’s already up to 76% and that’s in three months. It proves we can do it if we want to.” The airline’s sales unit is being revamped to achieve the new load factor targets.

Costs are being cut in every department and all supplier contracts are being renegotiated. “Some will be quick wins, some we will have to do long-term, but the cost reductions will be across the board,” he said.

“Compared with others [airlines] our costs are at least 20% to 30% higher on a same department basis. There is a lot of fat everywhere and some of it will touch on the headcount. That will have to be done carefully.”

In March, Charamporn launched the Mutual Separation Program (MSP), which gives staff the option of leaving voluntarily. How many will go is problematic because under regulations covering state-owned enterprises you can’t simply sack staff.

“We cannot point a finger and fire someone. It has to be mutual. We’d rather not put a number there and instead put a cost reduction target on non-fuel costs of 20%. Whatever the headcount (of those agreeing to leave) that comes out, so be it.”

In essence, 2015 is a year of consolidation. It won’t be profitable because there will be severance pay for down-sizing staff, renegotiating contracts, closing down some overseas stations and selling aircraft.

“We are stuck with an asset, which is 42 aircraft to be sold. The 20 on the ground since the end of last year are pretty much impaired. All the impairment was done since last year so we don’t expect much loss from selling them.

“However, the 22 that we will begin decommissioning in April - 14 initially and eight more in October - still have some book value. If the market price is not too good we’ll take a hit. So this year, there could be a loss according to this as well as losses from the MSP program. About 5.5 billion baht, or $169.5 million, has been budgeted for it.

“It will be a one-time hit, but we will recover that one time hit easily in the next year. Towards the end of this year, it should all be done, which is why there will be more profit after one year. You have to go over a few potholes to get these things out of the way.”

Charamporn said towards the end of the two-year plan, month-on-month from January 2017, THAI should be achieving at its full potential. “This year is a year of change. We are moving from a negative position month-on-month to a positive one.”

He added there has been “a tail wind” in recent times with the fall in the fuel price. “In 2015 alone the benefit from the fuel price will be around 20%, which is about 16 billion baht ($493 million),” he said.

“In 2014, our losses were about 15 billion baht ($462.2 million). So while we are changing the fundamentals of our business, which will take a year at least, the fuel price has been helping. From January 2016 the figures should be in the black.”

The THAI president is not losing any sleep over the possibility of being short of cash, despite the government’s stance on a bail-out if the re-structuring goes wrong. THAI is issuing hybrid bonds to raise seven billion baht ($215.7 million).

“There are other options. “We own property in London, Sydney, Copenhagen and elsewhere. We could sell them all and the unrealized gain would be at least 15.5 billion baht ($477.5 million). That offsets the loss of selling aircraft if we need to. “Capital-wise, we are not worried about it. All the money we need this year is already in place,” he said.

As he deals with the complexities of the restructuring, Charamporn must also pay attention to the competitive threats the carrier faces. It has steadily lost market share to budget operators, which last year accounted for 35% of passengers in the Bangkok market, up from 28% a year earlier. The combined market share held by THAI and Thai Smile dropped from 31% in 2013 to 28% in 2014.

Part of the re-building strategy will be to hand over loss-making regional routes to low-cost Thai Smile. “First of all, I’m glad I’m in this part of the world because this is where the most competition is. If you really want to manage the airline properly you have to be in this environment,” said Charamporn.

“This is the toughest competition. You will learn the best management you will ever need right here. Strategically, Thai Smile is an extension of THAI for domestic and short regional routes. Its cost base is designed to be much less than us.

“Commercially, if they can sell better with a cabin factor of 70% to 80%, with the same yield, then by giving them the route, the whole cost of the operation is reduced. The costs will go down and the profits will go up. If THAI’s costs are high and Thai Smile’s are low, then instead of cutting a route, we can continue to fly it with Thai Smile. That’s the benefit of having a low-cost affiliate.”

On another front, the competition from Gulf carriers, Charamporn said: “They have a reasonable advantage location wise with existing plane technologies. They can fly anywhere in the world from that geographical location.”

To combat the threat, the THAI president said the airline has to deepen its collaboration with its Star Alliance partners so network access is increased for the airline’s customers.

“Thailand is always going to be a regional hub to connect to anywhere in Indo-China, Southeast Asia and southern China. We have to make better use of our advantages, which we haven’t done that much. We kept selling point-to-point and have been happy with that, which is why our cabin factor is so low,” he said.

“We haven’t been selling our network. We need more affiliates in Europe so anyone from this region wanting to go to any secondary city in Europe will have to come through our network and vice versa.”

While opportunities to grow THAI through Star offer a “quick win” solution, he said options are available to co-operate with non-alliance carriers, especially when the airline is reducing its fleet and network.

“The more partners we have, the more we will solve our problem in the short run. Our loyal customers are still going everywhere in the world. We have to have a solution for them,” he said.

THAI has identified China and India, like most other carriers, as major growth markets.

How important is China? “Massively,” said Charamporn. “This year alone there has been a 25% increase in tourists from China on our flights. It’s very good business. I must say they find full-service is very attractive because Chinese tourists have money.

“They may make their first flight on an LCC, but after that they want to experience good service. I strongly believe the more low-cost airline penetration there is, the better for us because there’s an upsell,” he said.

He sees India as a big opportunity because the easiest way for anyone flying from the sub-continent to China or North Asia is via Thailand.

Three months into the restructuring, Charamporn said the staff realise they cannot do the same work with the same routine as they did three months ago. They know they will not survive.

“I believe this is not a dream. The mission is possible. THAI’s business is not that bad. We are still able to compete, even with those strong Middle East players, but we have to do what we have to do immediately,” he said.

For Charamporn, the ultimate target is to make THAI “the first choice carrier”, rated in the top three airlines in the world. “Even while shrinking we are not lowering standards of service. We are embarking on an improvement of Business Class. We should finish the project by the first quarter of next year,” he said.

And does he expect to be there longer than some of his predecessors? “Well, my term is only two years and two months, which is slightly longer than the transformation plan so this is my focus,” he said.

“My aim is to get the transformation done. It’s an exciting industry, especially in this part of the world. Quite dynamic. But if we have slightly fewer surprises it would certainly be better.”