Chance of a THAI turnaround: Fat or slim?

On the day that Deputy Prime Minister Somkid Jatusripitak and Finance Minister Apisak Tantivorawong paid a visit to its headquarters, THAI stock gained 4.35 per cent. A day later, the price went up 20.24 per cent to Bt10.10, a level unseen in months. That day also saw over 700,000 THAI shares change hands – also unseen in months.
During his visit, Somkid expressed confidence that the national carrier would turn around, suggesting that the worst was over. But boosting investor confidence must be the notion of THAI executive vice president for commercial Teerapol Chotithanapibal, who said that next month the carrier would announce a step-by-step cut in its fuel surcharge as part of an aim to bring it to zero.
Fuel surcharges have so far barred airlines from lowering airfares, though oil prices have fallen sharply. In 2015, average jet-fuel prices were down by US$66 per barrel from the 2014 level. However, few premium airlines were able to cut airfares, du to high fuel-hedging ratios.
Between April and September 2015, Singapore Airlines hedged 57 per cent of its fuel requirements, at a weighted average of $106 per barrel. When jet-fuel prices during the period dropped by 41.1 per cent from the same period a year earlier, it should have locked in over 1 billion Singapore dollars (Bt 25 billion) in cost savings. In reality, hedging eroded those savings by nearly half.
The situation could be better this year. According to the International Air Transport Association (IATA), a grouping of over 200 airlines, the average price of jet fuel is expected to fall further to $41.20 per barrel in 2016, offering a chance for airlines to save $104.6 billion in fuel expenditure.
There is no information on the hedging ratio at THAI, but it is believed to be high. Hedging became a norm when oil prices hit new highs after the global financial crisis. But most airlines are under pressure to cut airfares and other costs anyway to stay competitive.
Indeed, if THAI can reduce fuel surcharges, it may be able to reclaim passengers lost to Middle East carriers. But will lower airfares alone help turn around THAI?
According to the IATA, in 2015 revenue passenger kilometres (RPKs) of global airlines rose 6.5 per cent compared to 2014 – the strongest result since the financial crisis and well above the 10-year average annual growth rate of 5.5 per cent. Unfortunately, that was boosted by lower airfares. After adjusting for distortions caused by the rise of the US dollar, airfares last year were on average 5 per cent lower than in 2014.
That figure helps explain why THAI posted huge net losses in 2013 and 2014 and will very likely do so again for 2015. It is no surprise that in the past three months, only two brokerage houses posted analytical views on THIA stock at www.settrade.com. One of them, Bualuang Securities, even advised investors to sell the stock, citing hurdles to achieving cost-cutting plans, and the extensive stakeholder base. In a research note dated November 23, it expected THAI to report Bt20 billion in net loss for 2015. The airline is also expected to remain in the red for the next two years, with projected net losses of Bt3.4 billion and Bt1.59 billion in 2016 and 2017. Losses are expected to narrow due to improved strategies, including a system to increase the airline’s flexibility in adjusting fares.
A return flight from Bangkok to Singapore booked via asiatravel.com currently costs Bt11,275 on Singapore Airlines. The same flight on THAI is Bt13,395.
A lack of flexibility in setting airfares is one thing, but the national carrier faces other organisational challenges too. For example, the loss-making airline employed 25,323 staff as of December 2014. Singapore Airlines employed some 2,000 fewer and showed a net profit in the year. One insider also said a hurdle lies with the age of the employees. An employment freeze at THAI means the average age of staff is above 40, he said.  
Given the dismal outlook, it’s no surprise that conferences on state enterprise competitiveness typically mention THAI as a bad example.
Externally, competition in the global airline industry is expected to remain as cut-throat as last year. That last week’s Singapore Airshow closed with orders worth only $12 billion – about half the 2015 level – speaks volumes. Tony Tyler, chief executive officer of IATA, said in Singapore that carriers in the region are now confronted with challenges such as overcapacity and intense competition, and they may need to push back delivery of new aircraft.
Charamporn Jotikasthira, president of THAI, is working his way through the 21 tasks designed to improve the airline. In a recent interview, he admitted he realised the magnitude of the challenge, but had taken the job because he saw the silver lining.
 THAI is definitely not the only carrier in the region to have hit turbulence. Malaysia Airlines is still reeling from two high-profile plane crashes. Still, it is expected to return to profitability by 2018.
Those hopes perhaps also help to explain the rally in THAI share prices last week.