Thai Airways International is still looking for a strategic partner to set up a subsidiary and operate a regional low-cost airline based in Thailand. JEREMY COLSON traces its thinking on the subject and speculates on its possible choice of partner.

Thai Airways International’s (THAI’s) interest in the low-cost airline (LCA) concept was precipitated mid-last year when prime minister, Mr Thaksin Shinawatra, announced he was thinking of asking Singapore Airlines (SIA) to establish an LCA in Chiang Mai.

By playing on the long-standing rivalry between THAI and SIA, the prime minister more or less pushed THAI into looking at a trend in which it had previously shown only an academic interest. THAI’s knee-jerk reaction was to announce it was “looking at the possibility” of setting up a low-cost carrier offering a no-frills service on domestic and intercontinental routes.

The idea of operating medium to long-haul routes was dropped fairly quickly and by the beginning of this year, THAI was beginning to embrace the idea of a regional network. But it was not keen on adopting the AirAsia model, which had become successful by focusing on domestic flights only.

The reasons are obscure. Political influence cannot be discounted, but the result was that THAI began to focus on setting up a regional LCA using Chiang Mai, Phuket and Ubon Ratchatani to launch flights into neighbouring countries.

THAI also made it clear it would not be going into this on its own. It was not convinced such a venture would be profitable and wanted to hedge the risk by setting up a joint venture with one or more partners.

The partnership could be with other Thai carriers such as PB Air and Air Andaman, or with foreign carriers, and SIA was not being ruled out at that stage.

But it was clear THAI was in no hurry. It kept on trying to please the prime minister by saying the new venture would boost business to Chiang Mai in the north, and to the other designated new hub, Phuket, in the south.

THAI said it would have a firm plan by March or April and its subsidiary would be operating by December. Mr Thaksin continued to promote the idea that SIA was interested in setting up in Chiang Mai, prompting THAI to announce that in its winter schedule starting November 2003, it would reroute several intercontinental flights to include Chiang Mai and Phuket.

By the end of February, THAI had concluded it needed partners with experience of applying the low-cost concept, and the focus switched to independent no-frills companies such as AirAsia and Virgin Blue.

The emphasis still seemed to be on a regional route network as opposed to a domestic network, and THAI said demand for a no-frills service would be particularly strong from Hong Kong, Singapore and mainland China.

When the SARS crisis broke out in March, THAI went into survival and recovery mode.

But in July it got something of a shock when it was revealed by TTG Asia (July 18–24, No. 1383) that Orient Thai had a detailed plan and was preparing to launch a no-frills airline that would operate from Bangkok, offering fares one-third less than established operators.

There would be 14 flights a day to Chiang Mai and Phuket; six flights a day to Hat Yai, Chiang Rai, Khon Kaen, Udon Thani and Ubon Ratchatani; and two flights daily to Surat Thani and Phitsanulok.

Just days later THAI said it had been approached by several interested parties. Details were still sketchy but it seemed THAI was still focusing on regional routes as opposed to a domestic network. This was confirmed when it announced in early August that Phuket-Langkawi could be the first international route for the proposed no-frills subsidiary, which it still hoped would start operating by the end of 2003.

THAI vice-president for marketing planning & revenue, Mr Chanchai Singtoroj, said there was a “good chance” the route would be featured, but he was not sure if weather conditions in Langkawi would permit a year-round service.

Also in August, THAI president, Mr Kanok Abhiradee, said he had shortlisted an unspecified number of companies seeking to partner THAI in an LCA and he confirmed THAI would hold no more than a 50 per cent stake in the new venture.

Not much else was heard about budget airlines until September 30 when it was learned that Malaysia-based no-frills airline, AirAsia, had applied to Thailand’s Department of Aviation (DoA) for permission to set up business in Thailand and operate a daily service between the two countries.

A DoA spokesman said it had no objection to the application, which also stated AirAsia’s interest in operating a daily service from Kuala Lumpur to Bangkok, routed through Phuket, starting on December 1.

Could it be that AirAsia is the partner THAI has been looking for, or is AirAsia just trying to muscle its way into Thai domestic aviation through the back door?

Mr Kanok told BTN Asia-Pacific he had met with AirAsia CEO, Mr Tony Fernandes, but it was just a general discussion and not specifically about THAI’s proposed subsidiary.

It seems unlikely LCAs were not discussed in some detail, but it may be that both parties will wish to wait until Thailand’s aviation regulations can be changed to allow a foreign carrier a significant shareholding in the new company.

Under existing aviation law, a foreign company can own no more than 30 per cent in a Thai aviation company. Thailand’s transport minister, Mr Suriya Jungrungreangkit, told reporters the regulations could and would be changed.

In a one-to-one conversation with BTN Asia-Pacific, Mr Suriya confirmed he would have no objections if AirAsia were to operate in Thailand, but he declined to be drawn on the big question: if THAI is not about to get into bed with AirAsia, who is it hoping to seduce?