Case Study Undergraduate 11,802 words

Study on Improvement of Low Cost Airline in Thailand

Last reviewed: June 17, 2011 ~60 min read

¶ … Low Cost Airline in Thailand

The Study on Improvement of Low Cost Airline in Thailand

Geography of Thailand

Nature of Airlines

Variables under Study

The Profitability of Low Cost Airlines in Thailand

Thai Economy

Operating Results, Selected Airlines, Financial Year 1999

The Economies of Scale Attained By Airline Industry

Human Resource Practices

The future of low cost Thailand Airlines

Contrasting Qualities of State Owned and Non-State Owned Airlines

The Study on Improvement of Low Cost Airline in Thailand

Thailand is a global source for customers seeking cheap labor or material inputs. The country is rich in natural resources -- tin, rubber, natural gas, tungsten, and timber being a few examples. The country is a major source for agricultural products1a.

Thailand also has an abundant supply of low-skilled labor with high participation rates in the workforce 86% for males and 67% for females in 1995. At the same time, the country is the most developed in Southeast Asia, making for a relatively reliable work environment. In consequence, foreign companies use Thailand as a production base in labor intensive and light industries such as textiles, consumer electronics, and auto parts to serve their regional networks1B.

Thailand's comparative advantage of labor cost is, however, slowly eroding. The threats have come from the opening of China's and Vietnam's markets with their even cheaper labor sources. The minimum wage rate of Thai labor in 1996 was 135 baht (U.S. $5.40) per day, compared to $1.25 per day for MNCs in Vietnam and about $3.50 per day in China. The eroding comparative advantage in labor cost is aggravated by increasing electricity, water, and office operating costs. The severe devaluation of the currency in 1997 should improve Thailand's cost position1C.

Strategically, Thailand has a comparative advantage in size and location with its four international airports and two major seaports[footnoteRef:1]. [1: Aharoni, Y. & Nachum, L. (Eds.). (2000). Globalization of Services: Some Implications for Theory and Practice. London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=102764448]

One hope for Thailand is to increase its technological capabilities. The country suffers from a shortage of skilled managers, scientists, and engineers, with only 0.2 scientists and technicians per 1,000 people during 1988-92, compared with Korea (2.3) and Japan (7.0). In parallel, foreign MNCs seldom transfer much technology to the country. When MNCs engage in a production strategy, they normally limit it to one using low levels of technological sophistication. Recognizing these problems, the government has embarked on various programs such as expanding research and development, improving education, luring expatriate scientists and engineers' home, and attracting foreign direct investment in technological projects. It has also designated human resource development as a key factor in national development.The prospective role of Thailand as a lead country will be contingent on the success of this plan. Local companies are beginning to play a part. For example, Siew Company, the local joint venture partner of Matsushita, has embarked on a joint investment, PKS Development, with the Crown Properties Bureau and the NEP to make Thailand a transfer base of technology from Japan[footnoteRef:2]. [2: Pendleton, R.L. (1962). Thailand; Aspects of Landscape and Life (1st ed.). New York: Duell Sloan & Pearce. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=6505049]

The automotive industry yields a chief example of the Thai government's efforts at trade liberalization. While Thailand market is still regarded as a well protected car market, the government maintains to cultivate and retain liberalization efforts that were originally initiated in 1988. In October of the same year Thailand joined the ASEAN BBC (Brand-to-Brand Complementation) agreement. Since 1991, Thailand has undertaken unilateral measures to liberalize the automotive industry in an attempt to make itself the regional center for automotive assembly and components. The government significantly reduced high import duties on fully assembled cars in 1991[footnoteRef:3]. It also announced, in 1994, a tariff rebate of more than 90% on imported CKD (completely knocked down) car kits that would be re exported as assembled vehicles. The Board of Investment has expanded its promotional incentives for assembly plants to be located in provincial regions. These incentives include a 7 years tax discharge on income earned from exports, reduced duties on imported machinery, and government subsidies for construction, transport, and power.Auto manufacturers can also expect further relaxation in the local content requirements as the Thai government implements the agreement of World Trade Organization[footnoteRef:4]. [3: Alagappa, M. (Ed.). (1998). Material and Ideational Influences. Stanford, CA: Stanford University. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=35541491] [4: Sundbo, J. & Fuglsang, L. (Eds.). (2002). Innovation as Strategic Reflexivity. London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=108254053]

Owing to the extraordinary importance of the country and its tourist locations the state has devised the means of transportation for all categories of people and tourist, so that they can relish the aesthetic beauty of Thailand and at the same time the state can earn the quantifiable sum of money[footnoteRef:5]. [5: Asia Top Companies by Sales. (2000, June). Business Asia, 8, 38. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=5001764374]

Geography of Thailand

Thailand is the one nation in Southeast Asia that was never colonized by European powers. This historical fact, proudly asserted by Thais, is often attributed to the Chakri administration's skills at compromise and negotiation. Thailand emerges as the space in-between British and French colonies. Lack of direct colonial experience does not mean that Thai modes of production were not shaped by external forces nor that there was no interference in the internal affairs of the Thai state. 'The French were reorganizing the country's legal system, the British its treasury and the Germans its army. In the nineteenth century, most commercial enterprises were in white hands and the rulers preserved independence by allowing colonial powers to exploit the nation and its resources (Copeland 1993:159). Thailand has the characteristics of a colonial state with an illegitimate military used as a resources of interior control rather than exterior fortification[footnoteRef:6]. [6: Thai Airways Sees Return to Profitability Starting Q3. (2009, August 18). Manila Bulletin, p. NA. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=5031797291]

The internal reforms following the turn of the century were not sufficient to transform an absolute monarchy to a constitutional one, and in 1932 a small group of the allied coalition takeover and forced Rama VII to become Thailand's first constitutional monarch. Political changes and World War II strengthened efforts to develop a Thai national identity, and selectively borrow Western paths to modernity and progress. The military has had a great influence on Thailand through its involvement in the many coups and political crises since 1932. Through the 1950s and 1960s, Thailand was transformed from a subsistence based agricultural economy to a market-oriented rice economy and by the eighties, to an industrializing economy. While the Thai military with American support provided the stability to make this economic transformation possible, military ambitions had other consequences[footnoteRef:7]. [7: Thierauf, R.J. (1987). A Problem-Finding Approach to Effective Corporate Planning. New York: Quorum Books. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=29035447]

Thailand experienced an exceptionally high rate of economic growth between 1985 and 1996 due to the dynamic growth of urban manufacturing, tourism and the service industry. The booming economy was growing by 8% a year in the late 1980s, and even 6.4% in 1996. Thailand is now facing a financial crisis of major proportions, and did not even reach its revised projection of 0.6% growth in 1997. Land prices soared in the boom years, and developers overextended themselves, building condominiums and housing estates for the new urban middle class. Banks and finance companies were stuck with huge foreign loans to these developers, at the same time that the central bank was no longer willing to prop up the local currency (baht). Investors, local businesses, and consumers all suffered after the currency was allowed to float in July 1997. By October, the baht had fallen 40% in value. Higher prices and unemployment worsened the situation. The October 1997 collapse of the Thai financial markets prompted Prime Minister Chavalit Yongchayudh to remind investors that they should not leave a country. Other approaches to encourage investors to continue to support Thailand include promotional messages in the Thai Airways magazine, Sawasdee (November 1997:41): 'Those who look behind the headlines, however, are finding that Thailand's growing pains can mean substantial gains for investors. Out of the country's crisis, opportunity has arisen.' The government's mismanagement of the crisis increased political instability, resulting in the resignation of Prime Minister Chavalit Yongchayudh on 30 October 1997. The $17 billion (U.S.) bailout from the International Monetary Fund offered the country financial support, contingent on following a recovery plan that included checking inflation and reducing public spending such as halting the construction of Bangkok's $4.5 (U.S.) billion expressway[footnoteRef:8]. [8: Beirman, D. (2003). Restoring Tourism Destinations in Crisis: A Strategic Marketing Approach / . Crows Nest, N.S.W.: Allen & Unwin. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=102031189]

The new 'people's constitution' passed by parliament in September of 1997 began the process of political reform designed to deliver transparency and good governance and end corruption. One now needs a BA to be Member of Parliament, setting up a whole new arena for potential corruption. Ironically, it was the military that forced political reform to proceed, easing public tensions and siding with a popular cause against an 'unusually corrupt' and incompetent government. For example, 123 members of the Thai parliament received envelopes containing fifty 1000 baht notes from the Minister of Education during a 6 February 1997 meeting about reform of the education system[footnoteRef:9]. [9: Van Esterik, P. (2000). Materializing Thailand / . Oxford, England: Berg. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=102366428]

Nature of Airlines

Before the advent of international airlines, Thailand was much neglected by tourists, as Bangkok was far from the main sea lanes. The health hazards existing in Thailand are said to have been greatly exaggerated in Penang and Singapore; and in any case, relatively few travelers took the time and trouble to leave world sea routes at Singapore or Penang to visit Thailand, and few passenger ships came to Bangkok[footnoteRef:10]. [10: Binggeli, U., & Pompeo, L. (2002). Hyped Hopes for Europe's Low-Cost Airlines: Europe's Most Successful No-Frills Carriers Are Making a Lot of Money. But as They Mature, They Will Have Problems Expanding. 87+. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=5000843886]

In the early 1930's, Royal Dutch Airlines (KLM) established an air service between the Netherlands and Java, calling at Bangkok. By 1935 the company had one flight a week each way, with an overnight stop at Bangkok. (At that time most airports was not lighted for night flying, so that overnight stops were generally made between Europe and the Far East.) A trip to London took six days on planes seating 14 passengers.

Gradually larger planes and more airlines began stopping in Thailand, so that by 1950 the city had become one of the world's important aerial cross roads. Today Bangkok is, after Singapore, the most important air center in Southeast Asia. Airlines stopping there include Royal Dutch, Pan American, Air France, British Overseas, Scandinavian, Philippine, Malayan, Swissair, Air India, Air Viet-Nam, Air Laos, Union of Burma, Cathay Pacific, South American, and Far East[footnoteRef:11]. [11: Vikitset, T. (1998). 14 Liberalisation and Privatisation of the Thai Power Sector. In Business, Markets and Government in the Asia Pacific: Competition Policy, Convergence and Pluralism, Wu, R. & Chu, Y. (Eds.) (pp. 300-321). London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=105513503]

The only international airport in Thailand, and the country's principal airfield, is at Don Mu'ang, 20 miles north of Bangkok. Adjacent to the Thai Air Force headquarters, it has a modern commercial passenger terminal built and operated by the Government. The field is connected to Bangkok by modern bus service over an excellent highway. Don Mu'ang is connected by international air flights directly to Penang, Singapore, Medan (Sumatra), Djakarta, Phnom Penh, Saigon, Manila, Hong Kong, Vientiane, Rangoon, Calcutta, and Colombo, and by connecting flights to all the world's principal cities[footnoteRef:12]. [12: Brown, D. (1996). The State and Ethnic Politics in Southeast Asia. New York: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=105562990]

Thai Airways Company, Ltd., a Government-sponsored airline, maintains regular domestic flights from Bangkok to important towns in North, Northeast, and peninsular Thailand. In 1956, Thai Airways entered the international field with a weekly flight from Bangkok to Singapore. The International Cooperation Authority provided $78,000,000 in 1956 for extension of airports at Nakhonsawan and Nakhonratchasima (Khorat) and has granted funds for a United States airline to assist Thai Airways in improving and extending their services. It has recommended that the Thai Government concentrate upon domestic service, withdraw from unprofitable international service, and expand the Don Mu'ang field to accommodate jet flights of the major airlines. In 1960 Thai Airways merged with SAS into Thai International Airways, serving Southeast Asia, from Calcutta to Singapore and Saigon[footnoteRef:13]. [13: Brown, D. (1996). The State and Ethnic Politics in Southeast Asia.]

Irrespective of the origin and crucial need of an adequate transportation system, precisely the need and demands of the Thai population has resulted into a bifurcation of the Thai air busses into high cost and low cost market segmentation. The Thai airways as mentioned is the most authentic rather the most subtle and internationally recognized air rout. But on the other hand the models of airlines of Nok Air, Bangkok Airway and Thai Air Asia are relevant to the presented research, and the relative strategic measures for the improvement of the low cost airline in Thailand[footnoteRef:14]. [14: Canto, V.A. & Laffer, A.B. (Eds.). (1990). Monetary Policy, Taxation, and International Investment Strategy. New York: Quorum Books. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=28796999]

Significance of Study

The study signifies the importance of established and good quality, effective airlines in the countries like Thailand that relies much on the revenue it generates from the tourism. The rich and dense culture of the county makes it the attraction of the tourist from across the globe.

The airline industry presents an inconsistency over time, technology and consumers preferences.

Nature of Research

The research is inductive and exploratory in nature.

The research ids regarded inductive in its nature because the outcomes of the research and generated from the available fact. By reconciling and reevaluating the known variables the research becomes inductive. The outcomes of the research are generalized to the entire industries of Thailand.

The exploratory nature of the research refers that the research is proceeded using the available data and the entire purpose of the research is focused to the strategic improvements in the low cost airlines of Thailand

Data Sources

The data is collected using the secondary sources and government statistics of Thailand.

Research Problem

The paradox of high growth yet poor profitability is amply illustrated by the experience of Thailand's major scheduled international airlines which are the low cost airlines designed mainly for masses rather than elites[footnoteRef:17]. [17: Culpan, R. (2002). Global Business Alliances: Theory and Practice]

There is no simple justification of the obvious disagreement between the airline industry's rapid growth and its marginal and recurring profitability. But, for the individual airline, overcoming this contradiction means matching supply and demand for its services in a way which is both efficient and profitable. This is the essence of airline management and planning[footnoteRef:18]. [18: Deitz, S.R. & Thoms, W.E. (Eds.). (1991). Pilots, Personality, and Performance: Human Behavior and Stress in the Skies. New York: Quorum Books. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=24381859]

To be successful in this an airline can be a low-cost operator or a high-cost operator. An airline, within any regulatory constraints, can itself determine the supply of services it offers in the various markets it serves. In turn, the way it organizes those services and manages the inputs required to supply those impacts directly on its costs.[footnoteRef:19]. [19: Deitz, S.R. & Thoms, W.E. (Eds.). (1991).]

Research Questions

The basic research questions that will be catered in the entire research are:

1. The need of improvement in the low cost airlines

2. What is the present quality level of the low cost airlines of Thailand?

3. How do the low cost airlines position themselves in the mind of the Thai consumers?

4. The actual need of low cost airline in Thailand?

5. The impact of technological advancements on the low cost airline of Thailand?

6. The human resource needs to fulfill the agenda of the low cost airline?

7. The level required by the low cost Thai air industry to reach the economies of scale?

8. Can the Southwest Airlines model suit the Thai culture and preference of low cost airlines?

Variables under Study

The research will study the relationship of chief variables including the profitability of low cost airlines in Thailand, the consumer preferences, the standing of the Thai low cost airlines against the worldwide low cost airlines, the human resource requirements and the impact of technological advancements on the low cost airlines of Thailand.

The Profitability of Low Cost Airlines in Thailand

The relationship of the profitability of the low cost airlines with the availability and quality of the low cost airline is direct in nature. Because profitability as a matter of fact is the mainstream that runs through the entire structure of any organization or industry, that is either state owned or privately owned.

For example Nok Air is regarded as one of the low cost airlines of Thailand, the strategic management of the airline is strong enough to maintain the dynamics of the airline company's profitability. If we glance at the historical trends of the airline industry in Thailand many of the low cost as well as high cost and elite airlines of Thailand faced troubles in expanding their operation internationally, owing to this challenging international expansion the Nok Air invested its resources and sills in the domestic market of Thailand. This strategy of Nok Air proved successful in a way that the company was able generate 618 million Thai Baht in net profit on revenues of 3.97 billion Thai Baht in the year 2010[footnoteRef:20]. But the greatest drawback analyzed from this situation was the decline in the quality of services. [20: Dempsey, P.S., & Goetz, A.R. (1992). Airline Deregulation and Laissez-Faire Mythology. Westport, CT: Quorum Books. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=27417268]

Nok Air felt that catering the locals of the vicinity does not calls for the state of art facilities but compromising on the facilities and the services quality will not yield negative consequences.

Similarly the Thai AirAsia and the Bangkok Airways are also operating domestically, the visible amount of profitability is observed in either of the two airlines but yet the quality of service of the domestic airlines have been observed to declines over time. Two basic factors were the contributors for the dynamic growth in the airline industry namely the rapid technological change which is trait of air transport, and the liberalization of economic and market entrance policy during the 1980s and 1990s. Technology has been a key driver of the airline industry's economic fortunes and merits closer attention.

Background of the Problems

Thailand has been a free market economy since the establishment of the Kingdom of Suko Thai in the 13th century. A stone inscription in the Thai language attributed to King Ramkhamhaeng the Great reads, in relation to the economic system of that period, that: 'Those who want to trade elephants can do so while others who want to trade horses can do so as well. 'This statement is taken to mean that it was the King's policy to promote a system of free enterprise within the kingdom[footnoteRef:21]. [21: Dempsey, P.S., & Goetz, A.R. (1992). Airline Deregulation and Laissez-Faire Mythology.]

Free enterprise has remained at the heart of the Thai economy to the present day, despite the fact that national economic development policies over the last four decades have resulted in various restrictions and created state monopolies in some sectors. These exceptions have been based on the theory that state monopolies will produce dynamic growth effects and favorable externalities.

The change in emphasis in industrialization policy in the 1980s from import substitution to an export orientation exposed Thai producers to competition in world markets and prepared them to appreciate and be ready for competition in the home market. Export industries began to recognize the disadvantages of a restricted home market with respect to product development and the costs of protected upstream inputs[footnoteRef:22]. Moreover, the obligations accepted under the Uruguay Round agreements to open up the home market and to meet the challenges of even greater competition in the world market triggered awareness of the need to revitalize competition in the home market and, as part of that process, to revise the nation's inadequate and outdated competition rules and regulations. [22: Dempsey, P.S., & Thoms, W.E. (1986). Law and Economic Regulation in Transportation. Westport, CT: Quorum Books. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=15418656]

Even in the era of the piston engine dramatic improvements were made so that the hourly productivity of the Super Constellation was seven times greater than that of the Douglas DC-3 the early turbo-prop aircraft also significantly improved productivity. Though the Viscount's productivity was less than that of the Super Constellation, as a DC-3 replacement the Viscount's productivity was four times as great. Likewise, the Britannia was a significant improvement on the Super Constellations they were meant to replace[footnoteRef:23]. [23: Dixon, C. (1999). The Thai Economy: Uneven Development and Internationalisation]

The new 'people's constitution' passed by parliament in September of 1997 began the process of political reform designed to deliver transparency and good governance and end corruption. One now needs a BA to be Member of Parliament, setting up a whole new arena for potential corruption. Ironically, it was the military that forced political reform to proceed, easing public tensions and siding with a popular cause against an 'unusually corrupt' and incompetent government. For example, 123 members of the Thai parliament received envelopes containing fifty 1000 baht notes from the Minister of Education during a 6 February 1997 meeting about reform of the education system[footnoteRef:24]. [24: Dobson, A. (2002). Deregulation and Liberalisation of the Airline Industry: Asis, Europe, North America and Oceania. The Journal of Transport History, 23(2), 203+. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=5035352053]

Literature Review

The airline industry shows the trends of inconsistency. For the last fifty years it has been characterized by continued and rapid growth in demand for its services. Yet it has lingered only marginally profitable. The growth was much faster in the 1950s and 1960s when aviation was a new industry than it is today when it is reaching maturity[footnoteRef:25]. But growth rates are still impressive. In the 1950s and 1960s the world's air traffic, measured in terms of ton kilometers carried, grew on average at around 14-15 per cent each year. In the decade 1970-79 the annual growth was close to 10 per cent[footnoteRef:26]. In the following ten years to 1989 growth declined to around 6 per cent annually and in the decade up to 1999 growth was down slightly at 5.2 per cent. In absolute terms, because of the much higher base, a 5 per cent jump in recent years represents a much greater surge in demand than a 10 per cent annual growth thirty years ago[footnoteRef:27]. Most long-term forecasts for the first decade of the new millennium are also just above or below the 5 per cent mark[footnoteRef:28]. [25: Doganis, R. (2001). The Airline Business in the Twenty-First Century. London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=108443407] [26: Doganis, R. (2001). The Airline Business in the Twenty-First Century. London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=108443407] [27: Doganis, R. (2001). The Airline Business in the Twenty-First Century. London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=108443407 ] [28: Doganis, R. (2001). The Airline Business in the Twenty-First Century. London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=108443407]

The repeated nature of the airline industry is clearly evident. Four to five years of poor or bad performance are generally followed by an upturn and five or six years of improving results. However, even in the good years profit margins are low, the net profits after interest and tax rarely achieve even 2 per cent of revenues[footnoteRef:29]. These are of course global figures and mask the fact that some airlines such as Singapore Airlines, Cathay Pacific or British Airways have frequently produced much better profit margins. Nevertheless, such low average profit margins are poor for a new and high-growth industry[footnoteRef:30]. [29: Doganis, R. (2001). The Airline Business in the Twenty-First Century] [30: Doganis, R. (2001). The Airline Business in the Twenty-First Century]

More surprisingly, airlines are the worst performing of any of the individual sectors in the air transport chain. It is also clear from the diagram that the 6 per cent return on capital earned by the world's airlines in the years 1992-96 was below the cost of capital. For most airlines this would have been at least 8 per cent. The period 1992-96 included some very bad years at the bottom of the cycle and some relatively good years such as 1995 and 1996. The other suppliers of aviation goods and services would also have been affected by the cyclical downturn too. Yet they still outperformed the airlines by a big margin[footnoteRef:31]. [31: Doganis, R. (2002). Flying off Course: The Economics of International Airlines. London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=108443496]

To be successful in this an airline can be a low-cost operator or a high-cost operator. The factors that determine the well being and profitability of an airline is the airline's ability to generate unit revenues which are higher than its unit costs. An airline, within any regulatory constraints, can itself determine the supply of services it offers in the various markets it serves. In turn, the way it organizes those services and manages the inputs required to supply those impacts directly on its costs. But cost efficiency and low unit costs are no guarantee of profit if an airline is unable to generate even the low unit revenues necessary to cover such costs[footnoteRef:32]. [32: Dorraj, M. (Ed.). (1995). The Changing Political Economy of the Third World. Boulder, CO: Lynne Rienner. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=98132527]

Thai Economy

Thailand has been a free market economy since the establishment of the Kingdom of Sukothai in the 13th century. A stone inscription in the Thai language attributed to King Ramkhamhaeng the Great reads, in relation to the economic system of that period, that: 'Those who want to trade elephants can do so while others who want to trade horses can do so as well. 'This statement is taken to mean that it was the King's policy to promote a system of free enterprise within the kingdom. Free enterprise has remained at the heart of the Thai economy to the present day, despite the fact that national economic development policies over the last four decades have resulted in various restrictions and created state monopolies in some sectors. These exceptions have been based on the theory that state monopolies will produce dynamic growth effects and favorable externalities[footnoteRef:33]. [33: Ingram, J.C. (1971). Economic Change in Thailand, 1850-1970. Stanford, CA: Stanford University Press. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=104796477]

The change in emphasis in industrialization policy in the 1980s from import substitution to an export orientation exposed Thai producers to competition in world markets and prepared them to appreciate and be ready for competition in the home market. Export industries began to recognize the disadvantages of a restricted home market with respect to product development and the costs of protected upstream inputs. Moreover, the obligations accepted under the Uruguay Round agreements to open up the home market and to meet the challenges of even greater competition in the world market triggered awareness of the need to revitalize competition in the home market and, as part of that process, to revise the nation's inadequate and outdated competition rules and regulations[footnoteRef:34]. [34: Ingram, J.C. (1971). Economic Change in Thailand, 1850-1970]

Thailand is currently engaged in revising existing laws and enacting new legislation relating to competition applicable to both domestic and external entities in order to promote and ensure fair and open competition internally as well as externally. Although this process has been ongoing for some time, no prior study has yet been undertaken of this subject. It is therefore timely to review the nature and status of existing competition regulations and their role in the Thai economy and economic policy[footnoteRef:35]. [35: Ingram, J.C. (1971). Economic Change in Thailand, 1850-1970]

The first law relating to competition in the modern Thai economy, known as the Excess Profit Prevention Act, was enacted in 1947 and amended in 1964 by the Excess Profit Prevention Act II. That Act empowered government authorities to act against profiteering and specified the scope of regulatory actions that could be taken. Specifically, the authorities were empowered to designate merchandise subject to regulation and then to control production, distribution and movement of the merchandise; determine prices; ration or set conditions for purchase or sale; restrict the possession or use of the merchandise; and, if necessary, take over production or sale of the merchandise. To enforce the Act, the authorities could seize merchandise in the hands of an offender or punish him with fines and jail terms. The Excess Profit Prevention Act II was, in turn, found to be inadequate, and was replaced by a completely new act, the Price Control and Anti-Monopoly Act of 1979, which remains in force at the present time[footnoteRef:36]. [36: Ingram, J.C. (1971). Economic Change in Thailand, 1850-1970]

The 1979 Act was intended to eliminate certain loopholes found in the previous acts in order to provide better consumer protection against rapid price increases. The act also seeks to prevent monopolization and restrictive business practices, and it puts new controls on mergers and price-fixing cartels. Moreover, in contrast to the previous legislation, which applied only to merchandise, the 1979 Act covers both merchandise and services[footnoteRef:37]. [37: Ingram, J.C. (1971). Economic Change in Thailand, 1850-1970]

The 1979 Act established a Central Committee on Price Control and Anti-Monopoly, with jurisdiction over the national economy and Bangkok, along with provincial committees on price control and anti-monopoly with jurisdiction for each of the provinces. The Central Committee is comprised of the Minister of Commerce as chairman; the Permanent Secretary of Commerce as vice-chairman; the Director-General of the Internal Trade Department as Secretary; and four to eight distinguished members appointed by the Cabinet of Ministers, as least half of whom must be from the private sector. An office within the Internal Trade Department serves as the administrative arm of the Central Committee and coordinates between the Central Committee and the various provincial committees. The Director-General of the Internal Trade Department serves as ex-officio Secretary-General of the office of the Central Committee[footnoteRef:38]. [38: Ingram, J.C. (1971). Economic Change in Thailand, 1850-1970]

The provincial committees, which act under the guidance or instructions of the Central Committee, consist of the provincial governor as chairman, the provincial commerce officer as secretary and five to nine distinguished members appointed by the provincial governor. Each provincial committee has an administrative office headed by the respective provincial commerce officer[footnoteRef:39]. [39: Ingram, J.C. (1955). Economic Change in Thailand since 1850. Stanford, CA: Stanford University Press. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=61765885]

Operating Results, Selected Airlines, Financial Year 1999[footnoteRef:40] [40: Ingram, J.C. (1955). Economic Change in Thailand since 1850. Stanford, CA: Stanford University Press. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=61765885]

Airline

Operating cost per ATK (cents) 1

Operating revenue per ATK (cents) 2

Total profit/loss before interest/tax ($ millions) 3

Korean

22.2

23.1

+153

Cubana (1998)

25.1

24.9

SIA

25.8

28.6

+467

Malaysian

25.8

23.9

Cathay Pacific

29.3

31.3

+219

Thai Airways

31.2

37.1

+434

Northwest

39.4

42.8

+769

TAROM

40.1

34.4

United

41.9

45.4

+1,358

THY

41.7

34.8

American

42.2

45.0

+1,003

KLM

42.2

42.3

+17

Delta

44.5

48.6

+1,261

Avianca (Colombia)

45.5

43.0

Lufthansa (1998)

46.5

51.7

+1,031

British Airways

49.6

50.3

+156

SilkAir

51.3

48.7

Iberia

53.1

53.6

+35

JAL

53.2

54.7

+260

Middle East Airlines

61.9

50.0

SAS

+31

British Midland

+15

Source: ICAO Digest of Statistics, Series F, Financial Data[footnoteRef:41]. [41: Ingram, J.C. (1955). Economic Change in Thailand since 1850. Stanford, CA: Stanford University Press. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=61765885]

The included table indicates the standing of Thailand among the international airlines. The fact that needs to be highlighted at this point of time is to understand the distinction between the domestic and international quality of the airlines operated from Thailand and as a matter of fact there is a huge difference between the two extremes of airline operated domestically and internationally. From a review of a sample of various airlines' costs and revenues in 1999, which was a good year, it is immediately apparent that unit costs vary enormously. The high-cost airlines at the bottom of the table, SAS and British Midland, had unit costs that were three or four times as high as the low-cost carriers in the top half. The high costs were and still are a function of the nature of their operations and the externally determined costs of their inputs rather to be successful in this an airline can be a low-cost operator or a high-cost operator. What determines profitability is the airline's ability to generate unit revenues which are higher than its unit costs. An airline, within any regulatory constraints, can itself determine the supply of services it offers in the various markets it serves. In turn, the way it organizes those services and manages the inputs required to supply those impacts directly on its costs. But cost efficiency and low unit costs are no guarantee of profit if an airline is unable to generate even the low unit revenues necessary to cover such costs[footnoteRef:42]. [42: Elliott, J. (1997). Tourism: Politics and Public Sector Management. London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=103042436]

From a review of a sample of various airlines' costs and revenues in 1999, which was a good year, it is immediately apparent that unit costs vary enormously

The high-cost airlines at the bottom of the table, SAS and British Midland, had unit costs that were three or four times as high as the low-cost carriers in the top half. As will become apparent in the course of this research, their high costs were and still are a function of the nature of their operations and the externally determined costs of their inputs rather than a result of poor management. Such factors also explain in part the very low costs of Nok Air, Bangkok Airways and Thai AirAsia[footnoteRef:43]. [43: Elliott, J. (1997). Tourism: Politics and Public Sector Management. London]

In its financial year 1998-99 Malaysia Airlines was one of the lowest-cost airlines in the world, helped in part by the devaluation of the Malaysian currency in 1998 as a result of the East Asian financial crisis. Despite its low costs the airline was losing $3 million each week during that year. This was largely due to an over-ambitious fleet and route expansion plan. Fares were cut to capture market share and to fill all the extra capacity. Unit revenues or yields fell to levels which were below unit cost. The airline was in crisis. In fact, control was bought back from private hands by the Malaysian government early in 2001. Airlines with relatively low costs such as TAROM, the Romanian airline, Northwest and Kuwait Airways; also failed to generate revenue levels sufficient to cover their costs and made losses. Surprisingly the two airlines with very high costs, SAS and British Midland, were able, through their product and marketing strategy, to generate very high yields and produce profits. They were successful in the matching process[footnoteRef:44]. [44: Findlay, C., & Goldstein, A. (2004). Liberalization and Foreign Direct Investment in Asian Transport Systems: the Case of Aviation. Asian Development Review, 21(1), 37+. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=5045076440]

Even in the era of the piston engine dramatic improvements were made so that the hourly productivity of the Super Constellation was seven times greater than that of the Douglas DC-3. The early turbo-prop aircraft also significantly improved productivity. Though the Viscount's productivity was less than that of the Super Constellation as DC-3 replacement the Viscount's productivity was four times greater. Likewise, the Britannia's were a significant improvement on the Super Constellations they were meant to replace[footnoteRef:45]. [45: Findlay, C. & Warren, T. (Eds.). (2000). Impediments to Trade in Services: Measurement and Policy Implications]

The arrival of the turbo-jet engine had a twofold impact. In the 1960s the turbo-jets led to a dramatic increase in speeds, while the size of the aircraft did not increase appreciably[footnoteRef:46].In the later 1960s and early 1970s there was no appreciable increase in speeds, because existing speeds were approaching the sound barrier, but there was a significant increase in the size of aircraft, particularly with the introduction of wide-body fuselages. The earlier increases in speeds combined with these significant jumps in aircraft size together produced major improvements in aircraft productivity so that while the Boeing 720B in 1960 was producing 11,600 ton-km per flying hour, only ten years later the hourly productivity of the Boeing 747, the first so-called 'jumbo', was three times as great. The Airbus A300 introduced in 1974 was the first short-haul wide-body aircraft[footnoteRef:47]. Its productivity was about twice as high as that of the narrow-body short-haul aircraft then in service. The next major technological breakthrough was the production of civil aircraft flying faster than the speed of sound. But in economic terms it was a failure. The Anglo-French Concorde, which entered service in 1976, flies more than twice as fast as its predecessors yet is able to do so only through a very Impact of technological advance on aircraft productivity[footnoteRef:48]. [46: Findlay, C. & Warren, T. (Eds.). (2000). Impediments to Trade in Services: Measurement and Policy Implications. London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=105639464] [47: Findlay, C. & Warren, T. (Eds.). (2000). Impediments to Trade in Services: Measurement and Policy Implications. London: Routledge. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=105639464] [48: Flood, T. (1975). The Thai Left Wing in Historical Context. Bulletin of Concerned Asian Scholars, 7(2), 55-67. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=97733091]

The Economies of Scale Attained By Airline Industry

Aircraft type

Year of entry into service

Mean cruise speed (kmph)

Maximum payload (ts)a

Passenger payload

Hourly productivity (000 t-kmph) b

Piston

1936

2.7

0.5

Lockheed 1049 Super Constellation

1952

1.0

47-94

3.8

Turbo-prop

Viscount 700

1953

5.9

40-53

2.2

Britannia 310

1956

15.6

52-133

6.2

Turbo-jet - short haul

Caravelle VI R

1959

8.3

52-94

4.7

Airbus A300

1974

31.8

19.8

Airbus A320

1988

20.4

11.9

Turbo-jet - long haul

Boeing 720B

1960

18.7

115-49

11.6

Douglas DC-8-63

1968

30.6

20.0

Boeing 747-100

1969

49.5

31.5

Boeing 747-300

1983

68.6

43.6

Boeing 777-200

1995

55.1

33.5

Airbus A380

2005

85.0

52.5

Concorde

1976

2,236

12.7

19.3

Source[footnoteRef:49]. [49: Flouris, T., & Walker, T.J. (2005). The Financial Performance of Low-cost and Full-service Airlines in Times of Crisis. Canadian Journal of Administrative Sciences, 22(1), 3+. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=5037572638]

Notes

A Later versions or developments of these aircraft may have had different maximum or passenger payloads.

B Calculated on the basis of an average block speed assumed to be about 70 per cent of the cruise speed. This is likely to be an underestimate for aircraft on medium- or long-haul sectors.

From the mid-1970s onwards the rate of technological innovation slackened. Attention switched from the long-haul end of the aircraft market to the development of more efficient wide-bodied medium-haul aircraft such as the Boeing 767 and the Airbus A310. Developments here were based essentially on existing engine and airframe technology, though there were major developments in avionics, in the use of lighter composite materials in airframe construction and in other areas. At the same time, the trend towards larger aircraft flying at the same speed continued. An example is the Airbus A320 introduced in 1988 which, with up to 180 seats, was significantly larger than the 100-130-seater aircraft it was intended to replace. Thus important gains in hourly productivity have continued to be made as airlines switch to larger, newer aircraft types[footnoteRef:50]. [50: Goel, R.K. (1999). Economic Models of Technological Change: Theory and Application. Westport, CT: Quorum Books. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=23335245]

During the 1990s there were two important developments. First was the introduction of extended-range versions of the newer twin-engine jets such as the Boeing 767-200 EQ offering 200 to 250 seats per flight. These allowed more direct non-stop flights on 'thinner' long-haul routes that could not support the large traditional long-haul aircraft such as the Boeing 747 with 400 seats or more. This trend towards medium-size aircraft for long-haul services led to the introduction of the Airbus A340 in 1993 and the Boeing 777 in 1995. The second important development, one which technologically was perhaps more significant, was the development of small, efficient and light jet engines that could be used to power smaller passenger aircraft. Such aircraft had hitherto been dependent on turbo-propeller engines. But they were noisy and aircraft speeds were low. The Canadair fifty-Seater Regional Jet which first entered service in November 1992 and the Embraer ERJ 145, also with fifty seats, which launched services in 1997, revolutionized regional air services. They offered faster and more comfortable jet travel on thinner short-haul routes previously the preserve of turbo-prop aircraft[footnoteRef:51]. [51: Haites, E. (2009). Linking Emissions Trading Schemes for International Aviation and Shipping Emissions. Climate Policy, 9(4), 415+. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=5045042116]

The technological developments in aviation, while they were beneficial in their impact on operating costs and in improving safety, also created problems. The increasing size and capacity of aircraft and the speed with which new, larger aircraft were introduced, often in reaction to competition from other airlines, created a strong downward pressure on load factors. Average load factors of ICAO scheduled airlines dropped from a level of around 60 per cent in the early 1950s to levels below 48 per cent by 1969. There was a significant fall in weight load factors between 1960 and 1963 with the widespread introduction of the first-generation jet aircraft and then again between 1968 and 1971 with the introduction of the early wide-bodied jets. Both these periods of over-capacity were marked by sharply falling profit margins. It was not till the late 1980s that average load factors began to approach the 60 per cent level again. They then steadied at close to 60 per cent. During the last ten years or so they have generally tended to be around 63-5 per cent on international services, though higher in the mid-1990s for some airlines, and lower on purely domestic routes. This means that more than a third of airline capacity each year still remains unsold[footnoteRef:52]. [52: High Flyers. (1998, November 2). Business Asia, 6, 4. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=5001413563]

The reasons for the relatively rapid overall growth rate which is so characteristic of air transport are not difficult to find. The falling level of operating costs, previously described, enabled airlines to offer tariffs that were lower in real terms. The impact of lower costs on fares was reinforced by the growing liberalization of international air transport during the 1980s and 1990s. Liberalization had a double impact. Increased and open competition created further pressures to reduce costs while liberalization also led to the gradual removal of tariff controls, thereby facilitating price competition[footnoteRef:53]. [53: Kay, J.A. (1995). Foundations of Corporate Success: How Business Strategies Add Value. Oxford: Oxford University Press. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=29059159]

Human Resource Practices

The airline industry is a popular playground for HRM policies and practices and so provides a cornucopia of insight, both in terms of the location of OHS in HRM agendas and in terms of the complex array of factors that influence OHS policy, practice and outcomes. These include an intensely competitive market environment, a relatively loose regulatory framework and a self-regulatory approach. In an industry that claims 'people are its most important asset', one might expect 'good practice' in terms of OHS. Equally, we might expect modern aircraft to offer a salubrious working environment, while the safety-sensitive nature of the industry might lead us to believe that the highest quality OHS standards are continuously met[footnoteRef:54]. [54: Keeler, D. (2001, October). Thailand: Thai Airways Flies into More Turbulence. Global Finance, 15, 8. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=5036303709]

While corporate statements certainly appear to support and reinforce such expectations, a growing body of international research provides persuasive contradictory evidence suggesting that quite the opposite is true. This creates a series of conflicts and contradictions in relation to the principles of HRM and our expectations of health and safety management. First, there is some evidence to suggest that airlines are fully aware of a range of health and safety risks in the aircraft cabin, yet do little to minimize or remove these because of the costs involved in taking remedial action. If this were the case, it would not only ridicule their pious mission statements, but would also suggest that in one of the world's most safety-sensitive industries, worker health and safety is routinely exploited in the pursuit of higher profits. Second, in an industry that depends so heavily on cabin crews' commitment to cultural values such as service quality, the diminution of employee health would run counter to service and safety goals, as well as potentially undermining employee commitment. Such conflicts and contradictions fit well with the 'rhetoric and reality' debate in HRM. This theme is dominant in our exploration of airline cabin crews' working conditions. This chapter identifies a range of conflicts and contradictions in the international airline industry's HRM policies and practices in relation to their espoused goals, values and objectives, for example, the pursuit of superior service quality and safety standards[footnoteRef:55]. [55: Lerda, V.G. (Ed.). (2002). Which "Global Village"? Societies, Cultures, and Political-Economic Systems in a Euro-Atlantic Perspective. Westport, CT: Praeger. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=101307846]

The exploration begins with a review of the competitive climate in the international airline industry, which is followed by a discussion of aviation regulatory frameworks and agencies, where some of the implications and consequences of relatively unrestrained competitive practice in the international airline industry are outlined. The chapter then goes on to discuss specific OHS issues and outcomes in relation to the aircraft working environment and cabin crew working practices. In doing so, we examine a wide range of primary and secondary research material in which the reality of cabin crew work is shown to clash quite spectacularly with airlines' professed approach to people management. In the UK, JARs provide quite different requirements on, for example, air crew working hours and physical working conditions, to those laid out in the Working Time Regulations (1998) and the Management of Health and Safety at Work Regulations (1992)[footnoteRef:56]. [56: Macavoy, P.W. & Snow, J.W. (Eds.). (1977). Regulation of Passenger Fares and Competition among the Airlines. Washington, DC: American Enterprise Institute. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=99978741]

Across the international airline industry, there is what can only be described as a complete void of regulations relating to basic employee health and safety issues such as rest breaks, hygiene, air quality, ergonomics and rest facilities for employees. While the ICAO requires member states to set limits on flight and duty times, it does not regulate the airlines' operating practices or specify recommended limits, so conditions vary from country to country. In addition, JARs provide only 'recommended' levels for air quality pollutants such as carbon dioxide and ozone. And, unlike most other workplaces, the aircraft cabin is not routinely subject to external inspections, meaning that it is primarily left in the hands of individual airlines to ensure these 'recommended' standards are maintained on flights. The gaps in health and safety regulations have been recently highlighted by the Flight Attendants and Related Services (NZ) Association (FARSA), which represents some 1,500 flight attendants in New Zealand. Their recent submission to the New Zealand Select Committee, in relation to the Health and Safety in Employment Amendment Bill, challenges its exclusion of air crew, whom they argue are exposed to a range of health and safety risks - many of which we cover later in this chapter. In addition, the trade unions argue that the NZ Civil Aviation Authority is not the appropriate body to manage air crew health and safety issues because its interests lie more in the safety of aircraft and passengers. As is the case in the U.S.A. And UK, the NZ CAA regulations currently contain no measures intended to protect the health and comfort of flight attendants -an astonishing omission considering the safety-sensitive role of these individuals[footnoteRef:57]. [57: Montreevat, S. (Ed.). (2006). Corporate Governance in Thailand. Singapore: Institute of Southeast Asian studies. Retrieved June 11, 2011, from Questia database: http://www.questia.com/PM.qst?a=o&d=115974574]

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