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Is Airline Business a Good Business? Print E-mail

Airline business is a dream for job seekers. Every country has to occupy a national airline. Famous national airlines represent image of their countries. Thai Airways International is a good example. The airline is a pride of Thailand and the Thai. It brings Thai culture as well as Thai hospitality to the world. Boys and girls graduated from universities in Thailand dream to join the company.

Austrian airline is also the pride of Austria. So is Lufthansa the pride of Deutschland (Germany). The latest news reported that Lufthansa bought Austrian airline. A huge amount of debt is a reason that Austrian airline can no longer carry on.  A question, thus, arose that whether airline business is a good business.

 

1. Costs of an airline

An airline faces a large portion of fixed cost. Salary of ground staffs and office staffs is the largest fixed expenditure that hardly avoided. Captains and cabin crews are paid only when they are on duty on board. However, they are also paid based salary as well. Maintenance cost for coping with capital depreciation, i.e. plane maintenance, is also a large expenditure which is mandatory for international safety standard. 

Fuel cost is another factor that airlines try to cope with by using so called fuel surcharge. The surcharge rises when fuel costs rises, and drops when fuel cost drops. It seems to be fine with this idea. However, the surcharge cannot change so often but fuel cost may be varied every week. Therefore, the surcharge may not cover the fuel cost in some periods.

Interest payments are another out-of-focused cost. An airplane was not purchased by company?s own cash, but by financial loan. Though the loan is a long-run loan, the interest payment does not stop even second. The problem will be more severe in low-season of tourism when cash is hard to be generated.

Labor unions of airlines are strong. They fight hard for keeping their jobs and salaries. Airlines cannot lay-off staffs. On the other hand, it has to raise staffs salaries or face their strikes.

2. Low cost airline: an alternative airline business model

Low cost airline is an alternative for businessmen who would like to set up and own airline business. Air Asia is professionally managed in a low cost airline model. Captains and cabin crews are paid just only they are on the flights. Contracts are almost in terms of variable costs. Fixed cost is reduced as much as possible. Maintenance cost is pushed down by new landing technique. An airplane usually lands down the airport by a strong touch the ground to avoid slippery landing. However, the technique shortens the usage time of airplane?s tires. Air Asia lands down smoother to make the usage time of the tires longer.  Its management of routes internationally throughout Asia is another core competency of the company.

Low cost airline are sparking to be a new successful business model in airline business. However, the model also faces unavoidable problems such as rising fuel cost. The drop of passengers due to the economic recession is another problem. Empty airplane cannot make money although the business model is so strong. Air hostages of some low cost airlines were laid-off more and more to reduce the cost during the declining economic situation.

3. Is it good to buy an airline?

The latest news of the taking over of Austrian airline by Lufthansa is surprised to me because I like to fly with Austrian airline between Bangkok and Vienna. When I think to the hardness the airline has to face, I understand the airline. It is a hard time to survive in these years without a strong financial support. Lufthansa is a good option for Austrian to join together to fight this economic recession. Now I think about the future of Lufthansa. The airline expects for the recovery of Austrian airline to meet its break-even point in 3 years. I hope this was realistic. I also hope that the economic recession will not last longer than 2 years.

Thai Airways International, although it is strong with a major holding by Ministry of Finance, experiences the decline of its stock price. The price went down from around 40 Baht from the beginning of 2008 to below 7 Baht at the end of the year. The situation may reflect the declining profitability of the company.  Moreover, the company just sued protesters who were thought a cause of the shut down of Suvarnabhumi and Don Muang airports, two major international airports in Bangkok Thailand, and claimed 20,000 Million Baht for its damage. The figure may be an additional lost in its financial statement this year. Therefore, its stock price dropped around 1 Baht per stock to reflect the news.

In my point of view, Thai Airways International cannot go bankruptcy. The holding by Ministry of Finance (around 51%) is a good guarantee. Moreover, the stock price is far under its book value. The book value is more than 5 times of the price. It is around 32 Baht. The book value means that when a company sells every assets and returns the whole debts, the remaining money would be divided to stock owners. The remaining value per stock is called book value. Now the ratio of price to book value is 0.21 on December 8th, 2008 with the closing price of 6.80 Baht.  We can calculate the fair price by dividing 1 by 0.21 and multiplying with 6.80, i.e. (1/0.21)*6.80. Then the fair price is 32.38 Baht.

The stock price of Thai Airways International is so attractive to investors. I am so interested to buy the stock when the price drops to 6 Baht. I bought it once at 7.8 Baht and sold fast at 8.10 Baht before the sharp drop due to the shut down of two major airports. However, some problems have to be clarified before I will come to buy it again. First, I don?t know how long the stock price will be up to 32.38 Baht. Second, the question of how good is the airline business. An answer of the first question may be shed light with the confidence of Lufthansa on the purchase of Austrian. Three years is probably the answer. The second question is obviously clear that Thai Airways International is one of the top airlines in the world with one of the best service offered to customers. The airline will remain the pride of Thailand and the Thai. I am eager to be one of owners of this airline when the stock price is more reasonable for my long-term savings. The last thing that I am afraid of is that the stocks may be bought cheaply and entirely by Singapore Airlines, another best airline in the world and the rival in the region, before I or other Thai people can get one.

4. Saving an airline

The taking over of Thai Airways International (TG) by Singapore Airlines, if it was occurred but hopefully not, will be the talk of the town and the aggressive spread of Singaporean wings in the world airline business. The first thing that will be happened after the taking over is usually that staffs in head quarters of the taken over company will be massively laid-off to reduce fixed cost and replaced by more efficient management following Singaporean style. The second is new painting of airplanes. The third is that the Thai will lose their beloved national airline, one of symbols of the nation, and the sense of coming back home once the Thai are on board of TG.

Therefore, I would like to encourage TG staffs, Thai stock traders and citizens of Thailand to buy stocks of Thai Airways International before Singapore Airlines will do it. It will be so valuable to spend your 6,000 Baht of savings to buy around 1,000 shares to make sure that TG will still be yours and belong to the Thai. There are around 833 million shares available for traders, 49% of 1,700 million shares. Thus, we need 833,000 persons to buy the stocks with one thousand shares each or less persons when each person buys more shares. When everyone is willing to support it at 6 Baht per share, the price will not go lower than that. Treat it as your long-term savings and support your Thai airline to fly high again.

I welcome your comments and your articles on logistics for tourism at http://www.tourismlogistics.com or you can email me at   suriyakomsan @yahoo.co.th

 

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