Thai Airways International Pcl said on Friday it will not extend its budget airline contract with Singapore's Tiger Airways Holdings Ltd, effectively terminating their alliance.

The Thai flag carrier's planned new regional airline, Thai Smile, would help replace the alliance with Tiger Airways, Chairman Ampon Kittiampon told reporters after a board meeting.

"We will not extend our contract with the MOU which will expire next month because we now have Thai Smile," Ampon said.

In 2010, Thai Airways signed a memorandum of understanding (MOU) to form the alliance with Tiger Airways to operate a new budget carrier, Thai Tiger, but the plan has been delayed pending approval from the transport ministry.

Under the MOU to expire in October, Thai Tiger would be 51 percent owned by Thai Air and 49 percent by Tiger.

The flag carrier plans to launch its wholly-owned Thai Smile from July next year to tap strong demand for air traffic in Asia and win back market share in the wake of fierce competition in the region.

The new airline would fly to domestic cities in the first year of operations before expanding destinations into Southeast Asian countries as well as China and India in 2013, when it expects to make profit, Ampon said in August.

Thai Air, with a market value of US$1.8 billion, is 51 percent owned by the Finance Ministry and competes with bigger rivals like Singapore Airlines and Cathay Pacific Airways .

The airline has the ambition to become one of the top three airlines in Asia and among the top five in the world both in terms of quality and service efficiency.

Thai Airways planned to boost its cabin factor, the percentage of passenger seats sold, to more than 75 percent in the last four months of 2011 to help boost revenue, Ampon said.

He also expected Thai Airways net profit in 2011 to be lower than 2010 due to losses from foreign exchange, high fuel costs and fierce competition.

It is expected to make an average net profit of 5.2 billion baht (US$172 million), according to Thomson Reuters I/B/E/S.

Hit by rising fuel costs, Thai Airways made a first-half net loss of 7.3 billion baht versus a net profit of 11.9 billion a year earlier.

Shares in Thai Airways were down 0.4 percent at 09:00 a.m. GMT, in line with the broader market.