TRIS Rating Co., Ltd. has assigned the rating of “A+” to the proposed issue of up to Bt7,000 million in senior debentures of Thai Airways International PLC (THAI). At the same time, TRIS Rating has affirmed the company rating of THAI and the ratings of its existing senior debentures at “A+”. The outlook remains “stable”. The proceeds from the proposed debentures will be used in part to refinance THAI’s maturing debentures and part will be reserved for working capital and future investment needs. The ratings reflect THAI’s position as the leading carrier flying international air routes in and out of Thailand, and the benefits it derives as a member of Star Alliance, the largest airline alliance in the world. However, these strengths are partially offset by THAI’s relatively high leverage and its exposure to fuel price volatility, foreign exchange risk, and event risk, e.g., epidemics, natural disasters, and political unrest. In addition, intense competition, from both premium carriers and low-cost carriers (LCCs), will continue to constrain the passenger yield (revenue per passenger-kilometer) in the short to medium term.
The “stable” outlook is based on the expectation that THAI will maintain its dominant position in international routes. The ratings take into consideration the intrinsic benefit of having the government as a major shareholder. Hence, a privatization could lower THAI's credit ratings by a certain level. In addition, THAI’s ability to improve profits by reducing operating costs and fuel costs is crucial to maintain its credit quality, especially as the company is making huge investments.
TRIS Rating reported that the ratings are enhanced from THAI’s stand-alone credit profile. The enhancement reflects the implicit support from the government due to THAI’s status as a state enterprise and the flag carrier of Thailand. Thus, the ratings will be lowered if the government shareholding falls below 50%. Currently, the Ministry of Finance (MOF) remains the major shareholder with a 51% shareholding while the Government Savings Bank (GSB) holds 2.1% of THAI’s shares. The 15.5% of THAI’s shares held by the Vayupak Fund 1 is considered as a private investment, although the Vayupak Fund 1 was established by the MOF.
TRIS Rating said, THAI is one of the largest airlines in Asia. As of October 2012, its international network comprised 63 international destinations with 614 flights per week. In the first half of 2012, THAI’s capacity, measured as available seat kilometers (ASK), was unchanged from the previous year. THAI has a strong market position in international routes. In 2011, THAI had a market share of around 38.9% of international passenger traffic through the Thai international airports.
For the domestic market, overall air traffic has increased substantially since LCCs were introduced in 2003. The total market grew from 7.2 million passengers in 2003 to 14.3 million passengers in 2011. However, despite the rise in the size of the market, the domestic market share of THAI has declined steadily, falling from 85% in 2003 to around 37% in 2011. The domestic market contributes around 11% of THAI’s revenues. Due to its relatively high operating costs compared with the LCCs, THAI had a clear strategy to improve profitability by reducing flights on some uneconomical domestic routes and letting its subsidiary, “Nok Air”, service these routes. In addition, the company established a new business unit, “Thai Smile”, which operates a new light premium airline, targeting mid-range customers. Thai Smile was created to gain market share in the LCC segment in both the domestic and regional markets. In the first half of 2012, THAI’s cabin factor was 76.7% compared with 71.3% in the first half of 2011. However, the freight load factor declined by 2.3% to 55.0% in the first half of 2012.
In the first half of 2012, the fierce competition limited the ticket price and fuel surcharge adjustment. Despite the competition, THAI’s operating performance improved because cabin factor rose. THAI ran several promotional campaigns during the low season, which boosted the cabin factor. As a result, adjusted operating income as a percentage of sales increased from 9.7% in 2011 to 13.2% in the first half of 2012. The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio picked up from 3.6 times in 2011 to 4.5 times in the first half of 2012. The adjusted funds from operations (FFOs) to total debt ratio was 10.9% in 2011 and 8.3% in the first half of 2012 (non-annualized). The adjusted debt to capitalization ratio slightly declined from 69.5% as of December 2011 to 69.1% as of June 2012. Financial leverage is expected to increase and remain high in the medium term, considering the sizable capital expenditures required to acquire new aircraft. However, the new aircraft will benefit the company because the new aircraft will be more efficient, consume less fuel, and require less maintenance. The rating could be under pressure should the operating performance deteriorate or if leverage is maintained at high level for a longer period, said TRIS Rating. — End.
Company Rating: Affirmed at A+ Issue Ratings: THAI12NA: Bt4,500 million senior debentures due 2012 Affirmed at A+ THAI13OA: Bt2,556.79 million senior debentures due 2013 Affirmed at A+ THAI14OA: Bt3,000 million senior debentures due 2014 Affirmed at A+ THAI155A: Bt3,000 million senior debentures due 2015 Affirmed at A+ THAI165A: Bt2,000 million senior debentures due 2016 Affirmed at A+ THAI185A: Bt1,555 million senior debentures due 2018 Affirmed at A+ THAI185B: Bt1,445 million senior debentures due 2018 Affirmed at A+ THAI215A: Bt833 million senior debentures due 2021 Affirmed at A+ THAI215B: Bt2,167 million senior debentures due 2021 Affirmed at A+ THAI16DA: Bt2,000 million senior debentures due 2016 Affirmed at A+ THAI192A: Bt1,000 million senior debentures due 2019 Affirmed at A+ THAI222A: Bt2,000 million senior debentures due 2022 Affirmed at A+ THAI243A: Bt1,500 million senior debentures due 2024 Affirmed at A+ Up to Bt7,000 million senior debentures due within 2022 A+ Rating Outlook: Stable
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