Low-Cost Challenger

Another Southeast Asian carrier, itself a spinoff of a recent startup, is ready to challenge the powers-that-be with discount services.

Known now as Air Asia Aviation, the discounter is to begin operations from here next February to six domestic points using two Boeing 737-300s. It expects to add two more -300s by the end of 2004. Some tourist destinations--Bangkok, the island resort of Phuket and the mountainous area of Chiang Mai--are well known to foreigners, while others--Hat Yai, Khon Kaen and Nakhon Ratchasima--are less visited.

The new airline carries a pedigree with political connections, but that won't stop it from facing stiff competition. It was founded by Air Asia, which began offering 64 domestic flights a day with regular-fare tickets in December 2001. Air Asia turned to the Thai telecommunications company Shin Corp. to take a 50% stake in the new venture. Air Asia will hold 49% with 1% being held by a Thai individual that airline officials declined to name. The carrier is to open with paid-up capital of 400 million baht ($10 million) and a five-year investment stake of 900 million baht.

Shin Corp. is owned by the family of Thailand's prime minister, Thaksin Shinawatra, although it's being portrayed as a nonmanagement investor. "Shin Corp. was chosen because of its financial strength, synergy in [information technology] and telecommunications, which would support the airline's Internet and [mobile-phone] bookings," said Air Asia CEO Tony Fernandes. He said Thaksin is not involved in the project.

Air Asia will run Air Asia Aviation, which is to have a name change to Air Asia Thailand by the start of its services.

Of his company's investment, Shin Corp. CEO Boonlee Plangsiri said, "Last year, only 10% of the 80 million domestic travelers traveled by air. Based on these numbers, we have concluded that our budget airline has huge market potential and we are confident that it would return a profit in the first year."

The carrier projects demand for 1 million tickets in its first year, Boonlee said, adding that the Thai market can support tickets 40-50% below today's scheduled carriers. Those include the government-backed Thai Airways International and the privately backed Phuket Air, PB Air and Orient Thai Airlines.

The Shin business case includes allowing subscribers of the Shin mobile phone flagship, Advanced Info Service, being able to reserve tickets through its short-messaging service.

A Thai Airways official was not perturbed at the thought of discount competition. "We have frequency and capacity to offer to our 13 domestic destinations." Air Asia Thailand's call for 50% discounts are unrealistic and will be heavily restricted, he said.

Another Thai upstart, no-frills carrier One-To-Go, could have a better market penetration by the time Air Asia Thailand gets off the ground. Started as a no-frills spinoff of Orient Thai Airlines, One-To-Go is to begin services Dec. 5 with a fleet of six Boeing 757-200s. Orient Thai CEO Udom Tantiprasongchai said it will match any fares that Air Asia Thailand wants to offer.

There's already been one casualty in these Thai air wars--Angel Air. Besides Phuket Air, PB Air, Bangkok Airways (the most successful of the private carriers) and One-To-Go, Air Asia's venture will face another competitor next year. Thai Airways is to start its own low-cost carrier using 737-400s.

The discounters face other challenges: finding open takeoff and landing slots at opportune times, and Thailand's regulation that sets minimum air-fare rates.

Transport Minister Suriya Jungrungreangkit said the current minimum air-fare regs will be scrapped to open up the market. But he couldn't name a date when this will be done. Still, he denied favoritism toward Thai Airways International's domestic operations.

"The minimum airfare ruling was implemented to prevent undercutting in the local market and to prevent airlines from going out of business," he said.