Thailand's infrastructure overhaul seeks to put logistics centre stage

Thailand’s quest to become a regional transport and logistics hub has been buoyed by a series of steps taken by the government. The country’s air regulators are focusing on regaining the country’s top-grade assessments and have been working to remove weaker discount carriers. Thai Airways is also restructuring, and airports are being upgraded, enlarged and improved. Most importantly, the country’s leaders are calling for significant investments into infrastructure, much of it fast-tracked so that real, tangible results may be achieved within a few years. Thailand is quickly transforming from a country with transport challenges to one that is becoming a transportation leader in the region and a possible logistics centre for ASEAN. “Thailand should consider the logistics sector to be a key source and driver of revenue for the country, capitalising on its central geographic position within ASEAN, and should invest in boosting capacity rather than simply maintaining competitiveness and costs,” Tipp Dalal, group CEO of Triple I Logistics Group, told OBG.

Despite recent progress, Thailand has been facing a number of transportation challenges in recent years. Its airports are running far above capacity, and the country has been downgraded by the International Civil Aviation Organisation (ICAO) and the US Federal Aviation Administration (FAA) (see analysis). The airlines, including flag carrier Thai Airways, are facing financial, and in some cases, operational difficulties. The country also has a number of lingering transportation issues. The rail network is underdeveloped and congestion remains a problem in Bangkok.

Up In The Air

Thai Airways, the country’s flag carrier with the Ministry of Finance holding a 51% ownership stake, has suffered from high operating costs and high debt, the consequence in part of over extending itself on the purchase of aircraft. Its debt-to-capitalisation ratio is above 80%, while it reported seven consecutive quarters of losses through March 2015. Beginning in early 2015, it initiated a major restructuring plan, announcing that it would reduce operating costs, sell assets and shed routes. The restructuring will take place over a two-year period, and in that time the company will rationalise its fleet, selling 22 planes and taking delivery of only two. Total routes were to be reduced by 10% in 2015, according to the plan, while operating capacity would be reduced by 20% over a two-year period, the company said.

As a part of the restructuring, the airline said in July 2015 that it would cut more than 1400 jobs through voluntary retirement. Services to Rome and Los Angeles were ended, while flights to Kolkata were reduced. Three routes (Hyderabad, Changsha, and Luang Prabang) will be transferred to Thai-Smile, a wholly owned subsidiary. The Rome and Los Angeles routes were both money losers, costing the company BT100m ($3m) a year. Flights to Moscow ended in March 2015, while Madrid services were cancelled in September 2015.

By the end of 2015, the situation had become worrying. The State Enterprise Policy Commission issued a report saying that the airline had missed its targets for cuts, reducing costs by only BT2bn ($60.2m) rather than the BT10bn ($301m) scheduled. The airline said it was having trouble meeting the proposed timetable for the cuts; despite the reduction in services, the company said it still had 50 loss-making or low-yielding routes.

Climbing

However, the government has stood decisively behind the airline, with Prime Minister Prayuth Chan-Ocha saying that the company would not go bankrupt and that the government will step in and support it if necessary. Despite the dire reports, the airline was starting to get the situation under control, with its performance starting to show improvement. As of October 2015, the company had managed to sell 17 aircraft (with a net reduction of eight), while the airline is only taking delivery of two aircraft in 2016.

The company also has a strategy for recovery that is being implemented with some success. It is focusing on building its Europe-to-Australia services as other South-east Asian carriers start to reduce theirs. The airline has also said it would increase frequencies to London and Frankfurt to twice daily, improve the connectivity of its routes, and start to focus on the development and improvement of its regional routes.

By the end of 2015, recovery seemed to be taking hold. The airline was finding that its capacity utilisation on the European routes had improved, so much so that it delayed the phasing out of eight 747-400s, according to the Centre for Aviation (CAPA). The company says that the 747-400s are quite attractive. They are flexible and can be used for a variety of services, while the airline has a significant number of employees trained on the aircraft. They also make sense to keep, given the drop in the price of oil. According to CAPA, the reductions leave Thai Airways with only 10 long-haul services, though the company had higher capacity to Europe at the end of 2015 than it did at the beginning.

Deep Discount

Thailand has also been facing some trouble with its discount carriers, not only causing disruption in the sector but also raising concerns about the regulation of the industry. City Airways has had problems for a number of years. The niche airline was set up in 2012 and based out of Bangkok’s Don Mueang International Airport. It was established to fly between Thailand’s major tourist destinations, Bangkok, Phuket and Chiang Mai, and Hong Kong, and has plans to start connecting to mainland Chinese cities.

However, the airline has been grounded a number of times, including three times in early 2016 alone. The Civil Aviation Authority of Thailand (CAAT) expressed concern about the company’s safety standards, with copilots working too many hours and the company using untrained flight crew on their aircraft. The regulator was also concerned about unpaid debts and looked into whether the airline was fit to continue operating.

Asian Air has faced similar trouble. The carrier was founded in 2011, and formed mainly to serve routes to South Korea and Japan. In January 2016, one of its aircraft, scheduled to fly to Macau and onward to Palau, was grounded for unpaid debts. The company is being sued by its cargo maintenance provider. By February, the airline had been grounded indefinitely. Intira Air, which was founded in 2008 as Business Air, was also grounded due to financial concerns in early 2016.

Nok Air, founded in 2004 and one of the larger of discount carriers in Thailand, also seems to be facing problems of its own. In February 2016, it abruptly started cancelling flights due to a lack of pilots. The local press reported that this may be due to pilots quitting. According to the Bangkok Post, the problems are the result of long-term disagreements between pilots and management over working conditions. The company insists the staff shortage is the result of rescheduling, as the airline works to get flying hours down to meet the limits set by the CAAT. By early 2016, it was not clear whether the situation could be fixed, and the Bangkok Post reported that the public was losing confidence in the airline.

Driving Force

Low-cost carriers are an important part of the market and have increasingly been seen as a driving forced behind growth. In 2015, their share was about 42% of the total market; in terms of domestic numbers, the share was about 50%. Industry executives have told the local press that a 75% market share was not impossible.

While some discount airlines face problems, some continue to grow. Thai Lion Air said in early 2016 that it would resume service to Indonesia and start to serve destinations in Myanmar and Vietnam. It is also considering Beijing as a destination, according to CAPA. The airline plans to double its fleet size by the end of 2016.

Thailand reported a new record for passenger traffic at its six main airports. In 2015, total numbers were up 21.3% to almost 110m. Total take offs and landings were up 16.6%. Suvarnabhumi Airport in Bangkok handled 52.9m passengers, up 15.9% on 2014. A total of 12.9m passengers went through Phuket Airport, up 12.8% from the previous year. The Airports of Thailand (AoT), a publicly-owned company that manages Thailand’s six international airports, is expecting 11% growth overall in 2016. To a great extent, the fast growth is the result of low-cost seats available on budget carriers. In part, the downgrades by the ICAO and the FAA were a consequence of overly liberal policies in the awarding of air operator’s certificates (AOC) to low-cost carriers. An estimated 60 licences have been granted to Thai budget airlines, and the process was not seen to meet international aviation standards.

Fast Growth

Airports are being expanded to handle the new traffic. Don Mueang Airport, also in Bangkok, which is used by low-cost carriers, opened a new terminal in early 2016, with this increasing the airport’s capacity from 18.5m to 30m passengers a year. However, traffic by the time the terminal opened, according to The the project is known, will take the airport’s total capacity to 60m from its current 45m. Construction is expected to begin in June 2016. The entire project will cost an estimated BT51bn ($1.5bn), with the first three of the seven stages costing BT18bn ($542m). The initial stages will involve the building of a public utility system and an apron capable of accommodating 28 jets and taxiways. A new satellite terminal will also be built. Phase 2 work is expected to be completed in 2019.

On Track

Rail expansion is a major priority of the new government, and will be a key part of its planned $100bn infrastructure spending programme, with the Ministry of Transport 2015-20 plan calling for a total estimated investment of BT1.796trn ($54bn), according to the Thailand-based Nation newspaper.

The major goals are to extend and improve connections north and south, ultimately linking Singapore with Kunming, China, and east and west, linking Myanmar, Cambodia and then onward to Vietnam. In part, the efforts will be undertaken to stimulate the economy, and also to help the country realise its vision of becoming an infrastructure hub of ASEAN. The dream of creating a Southeast Asian railway network goes back more than 20 years (see analysis). The government of former Prime Minister Yingluck Shinawatra had its own plans for a high-speed rail, but these were cancelled by the current administration.

To facilitate the building out of these projects, the Public-Private Partnership (PPP) Law of 2013 was amended in 2015 to make the process of completing a PPP faster. According to the amendment, investments under BT5bn ($151m) will not have to automatically be submitted to the PPP Policy Committee, chaired by the prime minister. The PPP process should now take nine months rather than the previous average of 24. Under the fast-track programme, projects are drafted in three and a half months, the State Enterprise Policy Office reviews the projects for a maximum of 15 days and then the projects are sent to the PPP Committee and the Cabinet, which spend about four and a half months considering the proposed PPP. A total of 66 projects with investment valued at BT1.4trn ($42.1bn) are planned through 2019. Of these, seven have been fast-tracked by the government.

Under the proposed PPP arrangement, the government will take care of land procurement, while the private sector partner will be responsible for building the rail system, maintaining and operating it. The state may provide some funding for the civil works in order to make the project more attractive. PPPs will run as 30-year concessions. The PPP programme has attracted considerable interest from overseas. South Korea’s Daewoo announced in early 2016 that it was interested in bidding on two rail lines as PPPs.

Mass Transit

Urban mass transit is also a focus of the government, and a large number of projects are either being undertaken, put out for bid or are being planned. The Purple Line of the Bangkok Metropolitan Rapid Transit, running from Bang Yai to Bang Sue, has been completed, and testing started on the line in December 2015. It is expected that it will be operational on a commercial basis from August 2016. The line follows the same route as the never finished project started by Hong Kong’s Hopewell Holdings in the 1990s.

The Green Line, also known as the Sukhumvit Line, is being extended in one direction from the current final stop at Bearing to Samutprakarn. In the other direction, it is being extended from Mo Chit to Khu Khot. These sections were approved in 2008, and it is likely that they will be finished in 2019 or 2020. In early 2016, the Bangkok Metropolitan Authority received permission to take over the operations of the Green Line extensions from the from the national authorities, as the sections connect directly to the existing Bangkok Mass Transit System. At the time, the Green Line extensions were about 77% complete.

In total, four projects remain under construction, including the two Green Line extensions; the Blue Line extensions from Hua Lamphong to Bang Khae and Bang Sue to Tha Phra, which was 72% complete as of March 2016, and set for opening in 2019 and the Red Line, running from Bang Sue to Rangsit. In addition, six other lines are scheduled for bidding in 2016 and in 2017 bidding is set to begin on a further four sections of the rail network. Despite the rapid build output, the actual implementation of the new lines is often difficult, according to Chartchai Thipsunawee, permanent secretary for transport, quoted in the Bangkok Post. The Red Line from Bang Sue to Taling Chan was complete in 2012, but it cannot be utilised until the Bang Sue to Rangsit section is completed, and that wont be done until 2018. He added that the Blue Line from Hua Lamphong to Bang Khae and Bang Sue to Tha Phra are still lacking a company willing to operate the lines.

A total of 10 additional lines will ultimately be built, with the Orange, Pink and Yellow Lines under consideration through PPPs. The PPP Committee has approved the development of the Pink and Yellow Lines, with an estimated value of BT110bn ($3.3bn). The Pink Line will run 34.5 km from Khae Rai to Min Buri, while the Yellow Line will run 30.4 km connecting Lat Phrao and Samron.

In addition to the Pink Line and the Yellow Line, a number of other projects are set to be fast-tracked. These include: a highway from Ayutthaya to Saraburi and Nakhon Ratchasima, with a total investment of BT84.6bn ($2.5bn); a highway from Nonthaburi to Kanchanaburi, with a total investment of BT55.6bn ($1.7bn); and two high-speed trains, one from Bangkok to Hua Hin and the other from Bangkok to Rayong, with total investment estimated at BT246bn ($7.4bn).

In March 2016, the State Railway of Thailand (SRT) said that it had submitted seven rail projects to the Cabinet for approval. New routes include: Map Kabao to Thanon Chira Junction, with a total investment of BT29.8bn ($897m); Nakhon Pathom to Hua Hin, at BT20bn ($602m); Prachuap Khiri Khan to Chumphon, at BT17bn ($512m); Lop Buri to Pak Nam Pho, at BT24.8bn ($746.5m); Hua Hin to Prachuap Khiri Khan, at BT9.43bn ($284m); Ban Phai to Nakhon Phanom, at BT60bn ($1.8bn); and Den Chai to Chiang Rai-Chiang Khong, at BT77bn ($2.3bn). Additionally, in early 2016, the Ministry of Transport sought approval to build a BT25bn ($753m) light rail system for Phuket Airport. The line will run for 60 km and the train will operate at speeds of up to 100 km per hour. A number of rail projects connecting Bangkok’s airports to the city and to each other are also under way or in the process of being approved (see analysis).

Ports

The Port Authority of Thailand plans to invest BT120bn ($3.6bn) to transform Thailand into a marine logistics centre. Investments will be made in infrastructure, information technology and training, and a number of ports will be targeted including Bangkok Port, Laem Chabang Port, Ranong Port, Chiang Khong Port and Chiang Saen Port. A significant development is already under way at Laem Chabang port. The two-yearlong project involves the construction of a new barge terminal with a depth of 10 metres, infrastructure and handling equipment, at a cost of $55m. The upgrades are connected to Thailand’s efforts to improve its transportation network and develop into a logistics hub. Laem Chabang will connect to the upgraded and dual-tracked train lines that will link to the borders of Myanmar and Laos. The government has also approved a $32.4m border crossing project at Nakhon Phanom that will operate as a logistics hub for the entire region.

Additionally, the government has developed a comprehensive plan for yacht and cruise ship ports. Currently, Thailand does not have a port designed for cruise ships and visiting ships usually stop at Laem Chabang. Thailand has 11 ports that are capable of handling yachts. In total, the country has 33 sites that could be developed into suitable harbours for yachts. Phuket has been targeted as a possible site for development as a deep sea port and as a centre for yacht activity.

The Marine Transport Department is working to upgrade ports in and around Bangkok. A total of 17 sites have been chosen. The work includes renovations, landscaping and the building out of passenger facilities. An estimated BT30m ($903,000) has been committed to the project.

The Roads Well Travelled

Road construction is also a priority for the government. In early 2015, it said that the country would be borrowing about BT40bn ($1.2bn) from overseas lenders to fund road construction. Traffic remains a serious problem in the capital city, especially after the first-time car-buyer programme was initiated under the previous government of Yingluck Shinawatra. Measured by start-stops, Bangkok is number eighth in the world in terms of congestion. The average driver spends 36% of their time while driving idling, while the average speed during rush hour is 18 km per hour. Congestion pricing has been discussed for years, but has never been implemented because resources and funding have been lacking. Therefore, Bangkok authorities have been left to implement stop-gap measures that do little to solve the problem – more boat services and encouraging people to use their bikes. The private sector has started to come up with some solutions. In early 2016, Uber, the car-hire service, began offering a motorcycle service in the city, UberMOTO. Initially it will be available only in the Sathorn, Siam and Silom areas.

Logistics Hub

In the World Economic Forum’s “Global Competitiveness Report” 2015-16, Thailand’s infrastructure was ranked a respectable 44th out of 140. However, scores within that overall ranking show some structural weaknesses. In terms of rail, it ranked 78th and in terms of roads, it was 51st. An estimated 90% of the country’s rail is only single tracked. Yet, the will and the potential are there for serious improvements to the country’s transport infrastructure.

Given its strong manufacturing base and growth of trade, it is possible for the country to become a trade and services centre for the Mekong region. According to Frost & Sullivan, the international consultancy firm, the country’s logistics sector had revenue of $71.7bn in 2014. That is expected to hit almost $100bn by 2019. Efforts are not only being made to build out the infrastructure but also to develop skills and capabilities. The Department of Business Development under the Ministry of Commerce has been conducting seminars to educate logistics operators about Customs procedures, import-export formalities and conforming to international standards.

Some questions remain over the economics, the long-term benefits and the long-term problems of Thailand’s ambitions to become a logistics hub. The cost is most often cited, and it is not clear whether the infrastructure being built will pay for itself. Rail historically requires subsidies, and the larger the network the larger the subsidy. There are also concerns about what will happen when the proposed rail network is built, and whether the proposed projects will begin to cause unanticipated problems due to the scale and geographic reach of the various lines and links. “The projects will create their own traffic in the classic way,” said Ruth Banomyong, head of the Department of International Business, Logistics and Transport at Thammasat University. “However, this traffic will not just be domestic but also international. The question is, how are we going to deal with that?”

Outlook

Thailand will face many transportation challenges in the next few years. Thai Airway’s restructuring must be completed so that the flag carrier is once again profitable and sustainable, and so that it can return to its position as regional and global leader, while the discount airline sub sector must be rationalised without overly regulating carriers that have been providing much of the traffic growth. This will require both the will to get the job done and a sense of balance.

At the same time, massive rail projects, which have long been discussed but never built, will have to be implemented. This will require careful use of limited finances, the proper structuring of the Thai Future Fund and expert negotiations with strategic partners, such as China and Japan. The Thai Future Fund is a government run initiative, which seeks to provide funding and investment for infrastructure projects in the country. The government is hoping to attract investment from private sector players, but has also encouraged the public to support the fund. If Thailand is able to stabilise its air sector and build out its rail network with modern technology, its ultimate goal of becoming a regional hub could become a reality.

It will most certainly be the transportation centre of the Mekong region and the gateway to the world for Myanmar, Laos and Cambodia. With this critical mass, it could also begin to rival some of the more traditional transportation hubs of the region, offering efficient connections inland and onward to China as well other related services.

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The Report: Thailand 2016

Transport chapter from The Report: Thailand 2016

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