Background and Motivation

Chapter 1 Introduction

1.1 Background and Motivation

Undoubtedly, transportation plays an important role in human daily lives. In particular, air transportation is already necessary in travelling whether for leisure or for business, in terms of convenience, timeliness, and safety.

Airline industry is considered as an important branch of air transportation. It is a typical service industry, being a part of aviation industry and focusing on moving people and cargo from one location to another. Airline industry is divided into three main sections: Full Service Airline (FSA), Low Cost Airline (LCA), and Charter Airline (CA) (Keyne, 2009).

In former times, airline industry has gone through a significant remodeling in its structure. The competition in the airline industry is very intense. Currently, this strong competition forces the whole industry to rethink their marketing strategy to meet the demand of customers. Therefore, all airlines need to try hard to increase profit.

The airline industry in Thailand has continuously grown. However, it is controlled by government’s regulations and policies. The beginning of airline industry in Thailand can be traced back to the year of 1933, since KLM airline, a foreign commercial airline from Netherland, first flew and transited to Don Mueang International Airport, the previous main airfield of Thailand. The current main airfield is SuvarnabhumiInternational Airport, because the limitation of space in Don Mueang area.

Later on, Thai government established Thai Airways Company (TAC) as the first domestic flag airline in 1947, registered capital of 20 million THB. Moreover, in 1960, Thai Airways International Public Company Limited (THAI), was established as a joint venture between TAC and Scandinavian Airlines System (SAS). Scandinavian carrier provided capital of two million THB and owned 30% share of THAI. However, in 1977, TAC purchased 30% share from SAS with Thai government consensus, therefore THAI has become a national flagship airline of Thailand since then.

Nowadays, there are 28 domestic airports and 6 international airports in Thailand.

Furthermore, there are more than 500 airlines serviced in Thailand. In 2014, Airports of

2

Thailand (AOT) served a total of 11 domestic airlines and 126 international airlines, and 126 passenger airlines and 11 cargo airlines. The main carriers serving in Thailand are THAI, Thai Air Asia, and Nok Air. THAI dominated as the lead player of airline industry in Thailand, by gaining 35% market share in 2015.

Department of Civil Aviation (DCA) of Thailand indicated that the total number of registered commercial aircrafts in Thailand was 288 trunks. Moreover, the data from AOT in 2014 reported that there were 624,169 aircrafts movement, increasing 7.17% compared with last year.

Thailand is known as one of the world’s top travel destinations. Thai government has thoroughly realized that airline industry has been an important infrastructure of travel industry sector, as it brings a tremendous amount of money into Thailand annually.

In 2014, the Minister of Tourism and Sports stated that even though Thailand had to face an anti-government conflict in the first half year, and the toppled government of Prime Minister Yingluck Shinawatra, the revenue from tourism was 1.13 trillion THB. Both the data from DOT and Thailand Transport Portal in the same year showed that the number of air passengers reached more than 90 million persons, including 52 million international passengers and 38 million domestic passengers, respectively. The average number of passenger movements was approximately 70 million, which increased every year, shown in Figure 1.1. Thailand is considered as one of the largest countries in the Asian and one of the fast growing markets globally (Qin, 2012).

3

Figure 1.1 Air Passenger Movements 2008-2015 Source: Airport of Thailand (AOT), 2015

In the same year, data from Board of Investment (BOI) in Thailand indicated that airline and aviation related industries contributed 1.5% of GDP. Data from State Enterprise Policy Office (SEPO) of Thailand also supported that the revenue from airline industry counted as 33% of transportation industry, and the main player was THAI.

Therefore, Thai government has been continuously promoting and supporting the domestic airline industry especially in the deregulation of airline industry and the opening sky policy in 1988, its purpose is to encourage the competition in airline industry since more local airlines and foreign airlines have been allowed to fly in Thailand than before. However, Thai government still supports national airlines by restricting the domestic airline business for local air carriers and subsidizing fund to Thai airline industry sector.

The data from Bureau of the Budget of Thailand in 2015 showed that Thai government invested a lot money in airline industry and related field for almost 2 billion THB, in which 0.3 billion THB for promoting the air transportation, 1.4 billion THB and 0.2 billion THB for developing airports and employees, respectively, and it aims to increase the number of new airline employees up to 1,196 persons. According to BOI, in 2014, the average employee of air services generated 1,321,883 THB in GVA (gross value added), which was 5.5 times more productive than the average employee of service industry in Thailand.

4

Because of that, airline industry in Thailand has grown in the good trend every year, in particularly, the emerging of new airline business model, Low Cost Airline (LCA).

Low Cost Airline (LCA) is an airline that differentiates itself in the market through reduced ticket price (Civil Aviation Authority, 2006), lower than competitors through a variety of strategies such as fuel efficiency, and careful management of revenue and yield.

The LCA business model is a new business model, which comes from the general business model of airlines (Sabre, 2010), Full Service Airline (FSA) business model. The difference between LCA and FSA includes fare structure, distribution channel, limited service levels, and difference types of flight aircrafts and passengers. However, the LCA has been proven to be a strong competitor against the FSA.

LCA was first introduced by Southwest Airline (SWA) in the United States in 1971.

The success of SWA led to the spread of the model to Europe and then to Asia. It competed by offering lower fares than those of full service airline (Qin, 2012).

Due to the deregulation of domestic airline industry in 2001, Thailand government allowed local LCAs to operate in the country. In December 2003, low-cost airlines started coming out in Thailand, e.g., One-Two-Go was the first LCA, rebranded as Orient Thai Airline in July 2010. Just one year later, three Thai LCAs emerged in the same year. Solar Air head office is in Bangkok. Its base was in Don Mueang International Airport. Thai Air Asia, a joint venture between Air Asia (Malaysia) and Shin Corp (Thailand), flew in February later on. Nok Air, the budget airline of Thai Airways, started the operation in July. Moreover, in May 2015, Nok Air, and Singapore based Scoot, affiliated the joint venture to launch NokScoot, a low-cost medium to long-haul airline started commercial flights out of Don Mueang International Airport in May 2015. Nowadays, there were about 30 LCAs serving in Thailand, in which regional LCAs were 10 players. Besides, in October 2012, AOT moved most of the LCA from Suvarnabhumi Airport to Don Mueang International Airport.

The data from IATA in 2012 showed that airline industry in Asia was striving and forecasted to face deficit of 3 billion dollars. However, some LCA could survive in this situation. The data from Transportation Research Information Services (TRIS) in 2014 showed that despite air traffic in Thailand was suffered from the worldwide economy and political confusion, which exploring since October, 2013, the economy was recovered by the

5

booming of low cost airlines. Besides, LCA in Thailand has become as a popular choice for domestic travelling, hence this pushed demand for domestic leisure travel to increase sharply.

Moreover, LCA in Thailand dramatically increased their competitiveness, gaining significant market share from FSA. According to the IATA 2014, Thai airlines have become competitive during 2009 to 2013, in line with global trends, with 9% revenue growth of all Thai airlines, which 31.5% of revenue growth came from LCA while 6.9% from FSA, 61.6%

from other airline services, and it proved that the LCAs has increased their market share of Thailand.

The growing rate in the number of passengers who flew with LCA was faster than the growth rate in the number of all passengers. In 2013, passengers on LCA grew by 29%

compared with a 16% growth in the total number of passengers transported by all airlines in Thailand (TRIS, 2014).

Furthermore, in the first 10 months of 2014, the total number of passengers of LCA in the six international airports in Thailand reached 28.3 million. Moreover, passenger of LCAs increased from 25.2% of all passengers in 2010 to 38.8% in 2014 shown in Table 1.1. From the fact above, FSA faced a significant challenge as they compete with the LCAs.

Table 1.1 Total Number of Passengers and LCA Passengers 2010-2014

Source: TRIS, 2014

For LCA sector, Thai Air Asia is the biggest airline, gained a half of market share of LCA market, followed by Nok Air with 33.98 % market share. Moreover, the player from Malaysia based airline, Air Asia Berhad, gained 3.07 % market share shown in Table 1.2.

Moreover, the top 3 LCA in the year of 2015 are the same as the data from Center for (Asia Pacific) Aviator (CAPA).

6

Table 1.2 LCA Market Shares by Passenger Volume (Fiscal Year 2013)

Source: TRIS 2014

Market segmentation of LCA is different from FSA, and among LCA in foreign country and Thailand. Each LCAs in Thailand focuses on different sub-market segmentation.

Air Asia targets at price-sensitive passengers. Nok Air focuses on higher segment. One-Two Go occupies the lowest segment (Komsan, 2006).

However, the main target group is the price sensitive passengers. The strategy of the lower fare allows lower income people to fly more frequently, especially, for the company employee group, and short length route traveler group, e.g., businessmen and leisure travelers.

Recently, ASEAN Open Sky policy comes into force and airlines are free to set up operations within the 10-member group countries in 2015. This policy is likely to create greater competition and even more financial challenges for local airlines and attracted more LCAs to come to Thailand (Qin, 2012). Therefore, the competition among airlines will become more intense, and it is important to find the key factors affecting customer’s choice of LCAs.