TRIS Rating has affirmed the company and senior debenture ratings of Thai Airways International PLC (THAI) at “A+”. At the same time, TRIS Rating has revised down the rating outlook of THAI to “negative” from “stable”. The outlook revision reflects the deterioration of the company’s profitability due to the higher non-fuel costs and intense competition. The ratings are also pressured by THAI’s relatively high leverage, exposure to volatile fuel prices, foreign exchange risk, and event risks. However, THAI’s credit quality reflects its 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. 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. The Ministry of Finance (MOF) is the company’s major shareholder with a 51% shareholding as of September 2013. THAI’s status as a state enterprise also takes into account the 2.1% shareholding held by the Government Savings Bank (GSB). Vayupak Fund holds 15.4% in THAI but this stake is considered as a private investment despite the fact that Vayupak Fund was established by the MOF. The “negative” outlook reflects the deterioration in profitability due to rising non-fuel costs. The ratings could be downgraded if the operating profit margin of the company remains low and the debt service coverage ratio (DSCR) drops below 1 time. The outlook could be revised to “stable” if the company can improve its operating profit margin above the mid-teen percent. The ratings are also based on the expectations that THAI will maintain its dominant position in international flights of Thailand and the government support will continue, particularly during adverse situations.
THAI, as one of the largest airlines in Asia, provides premium air services. THAI is striving to gain market share in the low-cost carriers (LCC) segment in the domestic market and the regional markets. To this end, THAI launched a new light premium airline, “THAISmile”, in mid-2012. THAISmile has middle-market customers as its target group. At the end of September 2013, THAI’s network spanned 68 international destinations serviced by 655 flights per week. In addition, the company holds a 39.2% stake in NOK Airlines PLC, a major LCC operating in Thailand.
In the first nine months of 2013, foreign tourist arrivals increased by 22.0% year-on-year (y-o-y) to 19.49 million persons. However, THAI’s cabin factor declined by 1.5% y-o-y to 75.2% over the same nine-month period. The drop was due to a substantial increase in its capacity, measured as available seat kilometers (ASK), which increased by 8.5% y-o-y to 63,415 million ASK in the first nine months of 2013. However, in terms of sales volume, THAI’s passenger traffic increased by 6.4% y-o-y to 47,683 million revenue passenger kilometers (RPK). The freight load factor declined to 50.3% in the first nine months of 2013, compared with 54.1% in the same period of the previous year. The decline was mainly caused by an economic slowdown in Thailand.
The Thai tourism industry has shown strong growth. Foreign tourist arrivals have grown at double digit growth rates each year since 2010. Despite steady growth in the number of foreign tourist arrivals, THAI's profitability has varied considerably during the last three years. In 2011, the operating margin dropped to 9.7%, compared with 17.2% in 2010. The drop in margin reflected the severe flood and high fuel costs. In 2012, the operating margin improved to 13.5% even though jet fuel prices remained high. For the first nine months of 2013, THAI reported an operating margin of 10.4% despite a slight decline in fuel prices. The drop was due in large part to rising non-fuel costs such as personnel expenses and selling and marketing costs.
THAI’s liquidity has weakened but remains at an acceptable level. The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio declined from 4.3 times in 2012 to 2.9 times in the first nine months of 2013. The adjusted funds from operations (FFO) to total debt ratio weakened from 15.5% in 2012 to 11.4% (annualized from the trailing 12 months) at the end of September 2013.
During the past few years, THAI has entered an investment cycle. The investments are needed in order to improve the efficiency of the aircraft fleet. Thus, the adjusted debt to capitalization ratio jumped from 70.5% at the end of 2012 to 76.6% at the end of September 2013. Over the next five years, the company will receive 36 aircraft, of which 21 will be supplied under operating lease and 15 will be acquired via financial lease. THAI’s operating performance will improve after it receives the new aircraft. The new aircraft will yield several benefits, such as lower fuel consumption and reduction in maintenance expense. Debt is anticipated to peak in 2014. TRIS Rating expects that the company will have a plan to reduce its leverage in the medium term.
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