Low-cost airlines enjoy high margins

Budget carriers are better off than fullservice carriers at profit margin generation as the latter get stuck with cumbersome operating systems, relatively lower productivity and higher costs.

The rates achieved by Thai AirAsia (TAA), Nok Air and Thai Airways International (THAI) — all listed on the Stock Exchange of Thailand — serve to underscore how the t wo industry groups perform in terms of profitability.

TAA, the country’s largest low-cost carrier (LCC), captured a net return of 12% in the first quarter, while rival Nok Air claimed a 14% margin and flag carrier THAI recorded a 9.8% return on equity.

THAI had a 2.3% return on assets for all of 2012.

TAA chief executive Tassapon Bijleveld told the Bangkok Post his airline plans to ramp up its profit margin to 15% in a few years, while Nok Air chief financial officer Vitai Ratanakorn said his airline is confident it can sustain double-digit growth this year.

THAI did not provide profit margin projections for this year.

Airline executives say no-frills carriers, especially in Thailand, have a profit edge for several reasons.

First, LCCs operate relatively new jetliners — brand-new A320s in the case of TAA and B737-800s for Nok — which offer better fuel efficiency and lower oil bills.

LCCs also lease rather than buy their aircraft, which avoids the heavy capital costs of aircraft ownership preferred by legacy airlines.

While discount airlines sell their tickets mostly through the internet, legacy airlines go about their sales through the costly Global Distribution System.

LCCs receive payment directly from passengers, while full-service airlines have to wait up to one week as the money passes through the Billing and Settlement Plan (BSP) operated by the International Air Transport Association.

Another issue is relatively higher manpower costs for legacy airlines than for LCCs, whose employees engage in multiple tasks in a flexible system.