We recently hosted a group of university business undergraduates from Australia and set them the task of evaluating the privatization of Thai Airways. Their final recommendation will shock you, but let’s save that for later.
Thai Airways was privatized some 24 years ago, raising an additional 12 billion Thai baht (US$ 480 million) for the government coffers. No doubt for nationalistic reasons, it was only partially privatized with the Ministry of Finance retaining 51% of the shares.
A very similar situation occurred in 2001 when the government partially privatized PTT, but the results have been polar opposites. PTT is a highly profitable company with rising share values while Thai Airways has been in decline for decades.
Obviously, the first presumption is that the government retaining a majority shareholding in state enterprises being privatized has no bearing on the end result. This is not true. It is all about how the government uses its shareholding to influence the company direction and profitability.
This article explores the need to fully privatize Thai Airways, and ensuring such shares are broadly spread throughout the local or global market. The key outcome is to eliminate Government control over the airline.
Successive governments have failed to address the problems of Thai Airways, many of which are of their own making. For example, the board of directors is nearly twice the size of any of its main competitors, and predominantly made up of government officials with little or no airline experience.
The company has had 19 presidents over the last 24 years, which is odd for a position with a normal tenure of four years. While the latest, Charamporn Jotikathira, appears to have identified the major problems impacting the airline, it is questionable whether the board will support him while he administers the bitter medicine that is required. The last president to shake up Thai Airways enough for it to turn a profit, Piyasvasti Amranand, was dismissed half way through his tenure for ‘lack of communication’. Piyasvasti was employed in October 2009 and dismissed in June 2012. Have a look at results during that period compared to Singapore Airlines, and then afterwards:
Government employees purchase tickets for official business at 5% below the break-even cost. In other words, every government ticket is sold at a loss to Thai Airways and therefore its public shareholders. Additionally, domestic flights are held back on the tarmac for government officials running late. The cost impact is phenomenal.
Another major issue is the unions which have grown so strong over the years and, of course, are well supported by their members — Thai Airways employees who are the beneficiaries. Currently Thai Airways has around 25,000 employees, with industry experts suggesting 6,000 (25%) are excess. A relatively simple way to demonstrate this is by comparing Thai Airways with other Star Alliance members. We have also included Air India for comparison purposes:
As can been seen above, Thai Airways has nearly double the number of employees per aircraft compared to Singapore Airlines. The numbers look even worse compared to United or Air Canada. Whilst it can be argued that labor costs in countries such as Thailand or India are much lower than in Western countries, the table still demonstrates how many people are actually needed to operate an airline.
British Airways suffered a similar situation before its privatization with high employment costs and low productivity. The high cost situation of Thai Airways is demonstrated below:
CASK is a commonly used measure of unit cost in the airline industry. CASK expresses the cost to operate each seat kilometer offered, and is determined by dividing operating costs by the available seat kilometer (ASK). To make a more pertinent point in terms of excessive costs, especially employee costs, we have compared Thai Airways to other local operators.
Finally, we have charted below the cost of employees against the revenue passenger kilometer (RPK), compared against similar international carriers:
By this measure, Thai Airways needs more than twice as many employees as Qantas on a RPK basis, and about 75% more than Singapore Airlines, to generate the same amount of revenue. As already mentioned, the current president has identified many other problems that Thai Airways must address, including:
All of the above factors affect profitability, or the lack thereof. The following slide shows the cabin load factor (CLF) of Thai Airways compared to three competitors:
CLF, measures the capacity utilization of airlines and is used to assess how efficiently an airline fills seats, or capacity, and generates fare revenue. Within the industry the worldwide average is around 79.5%. Break-even on profitability is generally around 75%. Thai Airways currently hovers around 68.9%.
The solution is neither easy nor palatable, but it is imperative that the problems are addressed realistically under this military government. Once elections take place, no political party will be willing to tackle the issue.
Firstly, the Ministry of Finance must sell its shareholding in Thai Airways to the general public. Investors can be local or global. If we start hearing a nationalistic outcry against foreign ownership, it is important to realize that foreigners can never own more than 49% of a listed company in Thailand so, essentially, Thai Airways is sheltered from alien investors. Global investors can take their holdings above 49% but such shares have no voting rights. The government can also enact protectionist clauses before selling, similar to the Qantas Sales Act of 1992 that limited foreign investors. Whatever the foreign ownership after full privatization, control could always be Thai. The alternative is to have a full privatization restricted to only Thai investors. The return might be smaller, but it would address nationalistic issues. The main problem with fully privatizing Thai Airways is its history. No new investor, Thai or foreign, will be interested in the airline until it can demonstrate it has overcome its existing problems. Investors have simply done badly out of Thai Airways. The share price has dropped 74% since privatization in 1991, from 60 baht then to 12 baht today. The dividend history has also been exceptionally poor at 1.4% per annum over those 24 years. The real dividend return is even poorer when measured against the original share price.
For privatization to succeed, Thai Airways must spend about two years on reorganization. The board needs to be replaced with business specialists, and industry professionals must be recruited to upgrade virtually every area of operation.
Most of the existing fleet is overdue for retirement or updating, which adds to the financial pressure on the company. Fundraising may be difficult.
Regardless, the most difficult issue continues to be excess employees. The strong unions will be hard to overcome, and a successful outcome will require fairness, cooperation and understanding. Presently there are some 25,000 employees.
Choramporn has already identified a number of areas within Thai Airways which underutilize existing employees, and will be looking to grow income in a number of areas. Increasing business is a proactive way of reducing the numbers needing retrenchment. Areas of existing slack capacity include:
It is hoped that many of the 6,000 jobs that are presently superfluous can be saved by growing the business.
Our Australian undergraduate team arrived at the bold recommendation of placing Thai Airways into receivership, under the Amended Thai Bankruptcy Act.
Before howling down the idea, it is worth remembering that Japanese Airlines (JAL) went this route in January 2010 when it filed for bankruptcy with US$ 25 billion debt. JAL was in a very similar position to Thai Airways. Apart from the massive debt, staffing had swollen to excessive levels and the routenet was seriously overextended.
In August 2011, JAL announced it was cutting 16,000 employees, from 47,000 to 31,000, and cancelling 49 unprofitable routes. By November 2011, JAL had emerged from bankruptcy; it completed its IPO in September 2012, earning the Japanese government a Yen 300 billion profit in the process. Debt had been reduced from Yen 208 billion to Yen 100 billion, and equity increased from Yen 388 billion to Yen 776 billion. The end result was a turnaround in both profitability and returns to investors:
It will need a brave Thai government to undertake such a bold move but the timing is right. The Thai government currently lacks capital resources and cannot continue funding losses at Thai Airways.
Whilst the Thai Bankruptcy Act restricts companies entering into reorganization if still solvent (assets exceed liabilities), the courts would take into consideration other factors when assessing such applications. This would include having creditors & debtor all agreeing to the reorganization petition. There would also need to be a technical revaluation of the financial statements to show assets need to be further provisioned. Again, why is rehabilitation needed?
Using the JAL experience as a benchmark we can expect: