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									                              Alex Dichter
                Leader, Global Airline and Travel Practice
                        McKinsey & Co, Atlanta

               Thai Airways 50th Anniversary Conference:
                Challenges in global aviation management
                       Bangkok, 15 October, 2010

Moderator: Siva Govindasamy
Asia Managing Editor
Flight Global Group, Singapore

      The Airline industry faces many challenges and it is very tough
industry. In the early 2000, Mckinsey did some researches and the only
industry in the world that has consistently under-performing is the
airline industry.
      Thai Airways, however, not only survived the hard times but also
continue to profit in the future. The difference between success and
failure in the airline industry is the choice in time in the market. Most
regions eventually fall prey to industry dynamics. The International Air
Transport Association (IATA)’s Four Phases of Market Development
are as follow:

Phase 1:   Limited competition
Phase 2:   Emerging competition
Phase 3:   Traditional competition
Phase 4:   Intense traditional and non-traditional competition

      Over 50 years, the airline industry has been destroyed. But why
would people like to invest in this kind of industry. There are enormous
reasons for the government to support this business. These reasons are,
for example, cost efficiencies immediately are passed on to consumers.
Airline unit cost against airline unit price has been decreased. Most
airlines have done a good job in reducing cost. Airline has been
extraordinary generous in passing what they have saved in their cost to
consumer. So, ticket price has become lower every year because the
airline is effective in saving their cost. Moreover, there has been 99%
correlation since industry deregulation in late 70s, profits are passed
onto suppliers, etc.
      During the course of the airline industry, cyclical performance is
linked to mismatch between supply and demand. Accordingly, recent
downturn was predictable, even before the financial crisis. However, the
airlines are doing better now, especially, in Asia where airline industry is
particularly strong.
      In the U.S. Industry Example, there are three “Cs” of recovery from
this downturn as follows:
   - Capacity restraint - we have seen airline working to control
       capacity at a rate that in line with passenger demand growth or
       below. In US, we see it come down 4% per annual.
   - Cost control - improvement in cost structure
   - Charges - change in airline ticket price structure
      Asian carriers are doing better than peers, but still not earning cost
of capital. In a better performing industry, some clear winners are
emerging. Regarding the focused, traditional players, what we have to
be considered are low cost among peers, high asset utilization, high
labor productivity, and high percentage of unique markets.
      On the contrary, when it comes to the low cost players, what have
to be considered will be absolute lowest cost possible, high percentage
of unique markets, and high ancillary revenues.
      In Asia, the challenge will include the significant labor cost
advantages to European and North American competitors, strong service
reputation, limited runway capacity; bilateral agreements keep controls
on supply, robust demand growth likely to outpace supply growth for
next 3-5 years, labor cost advantage not reflected in overall CASK
advantage, focus on large aircraft increases exposure to commodity
markets; limits frequency.
      As markets open and new urban centers emerge, new hubs will
absorb excess demand and barriers to consolidation will limit
rationalization. In summary, Asian is much better than their peer with
very strong underline fundamental.

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