TRIS Rating has assigned the rating of “A+” to the proposed issue of up to Bt5,000 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 debenture issue will be reserved for working capital and future investment needs. The ratings reflect THAI’s leading position in international air routes of Thailand, plus the benefits THAI receives 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 exposure to fuel price volatility, foreign exchange risk, and event risks, e.g., epidemics, natural disasters, and political unrest. In addition, intense competition from both premium- and low-cost carriers will continue to constrain THAI’s passenger yield (revenue per passenger-kilometer or RPK) in the short to medium term. The “stable” outlook is based on the expectation that THAI will maintain its dominant position in international flights of Thailand. The rating is also based on the expectation that government support will continue, particularly during adverse situations, since the government is the major shareholder. Presently, the secured debt portion is higher than the current rating threshold. Thus, the issue ratings could be downgraded unless the company has a concrete plan to reduce the amount of secured debt or improve the recovery of unsecure indebtedness.
The ratings are enhanced from THAI’s stand-alone credit profile, reflecting the 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. Vayupak Fund holds 15.5% but this stake is considered as a private investment despite the fact that Vayupak Fund was established by the MOF.
Foreign tourist arrival increased by 20.0% year-on-year (y-o-y) to 12.74 million persons in the first half of 2013. However, THAI’s cabin factor declined by 1.5% y-o-y to 75.2% in the first half of 2013. The drop was due to a substantial increase in its capacity as available seat kilometers (ASK), increased by 8.3% y-o-y to 41,957 million ASK. However, in term of sales volume, THAI’s passenger traffic increased by 6.2% y-o-y to 31,534 million revenue passenger kilometers (RPK). The freight load factor declined from 54.9% in the first half of 2012 to 51.3% in the first half of 2013. The decline was mainly affected by the global economic slowdown.
During the first half of 2013, jet fuel prices slightly fell and tourist arrivals rose. Even with these two positive factors, THAI’s operating performance deteriorated. Non-fuel costs, such as personnel expenses and selling and marketing expenses, rose during the first half of 2013, offsetting the gains from lower fuel costs and greater tourist arrivals. In addition, intense competition constrained THAI’s ability to raise fares and adjust the passenger surcharge. The adjusted operating income as a percentage of sales decreased from 13.5% in 2012 to 12.3% in the first half of 2013. The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio also declined from 4.3 times in 2012 to 3.3 times in the first half of 2013. The adjusted funds from operations (FFO) to total debt ratio stood at 6.1% (non-annualized) in the first half of 2013. The adjusted debt to capitalization ratio jumped from 70.5% at year end 2012 to 74.7% at the end of June 2013 as THAI borrowed more to finance its new aircraft. In 2013, the company will receive 13 aircraft. Eight of the aircraft will be acquired under operating leases, three aircraft are supplied via financial leases and two aircraft will be purchased outright. The purchases of the two aircraft will be funded by loans from the MOF. Financial leverage is expected to increase further in the medium term, given THAI’s 5-year plan to acquire new aircraft. In the long term, the new aircraft will yield several benefits, such as greater efficiency, lower fuel consumption, and reduction in maintenance expense.
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