TRIS Rating has assigned the rating of “A+” to the proposed issue of up to Bt3,200 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 “negative”. The proceeds from the proposed debenture will be used in part to refinance THAI’s maturing debt while the remainder will be reserved to fund its working capital 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 its exposure to volatile fuel prices, foreign exchange risk, event risk, and intense competition. 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 owns 15.4% of THAI. However, this sizable 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 remains low and/or the debt service coverage ratio (DSCR) drops below one (1x). 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 medium segment in the domestic market and in 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 people. However, THAI’s cabin factor declined from 76.7% in the first nine months of 2012 to 75.2% in the first nine months of 2013. The drop was due to a substantial increase in 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). Despite the anti-government rallies which started in November 2013, foreign tourist arrivals still grew by 11.6% y-o-y in the fourth quarter of 2013. However, THAI’s cabin factor declined by 5.2% y-o-y to 71.0% in the same period. 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 the global economic slowdown.
The Thai tourism industry has shown strong growth. Foreign tourist arrivals have grown at double digit growth rates each year since 2010. Despite the steady growth in the number of foreign tourist arrivals, THAI's profitability has varied considerably during the last three years. The operating profit margin dropped significantly in 2011 and in the first nine months of 2013. In 2011, the weaker profit margin was due to high fuel costs and the severe flood in the last quarter of the year. The rising non-fuel costs were key factors that deteriorated the profit margin, especially personnel expenses and selling and marketing costs, in the first nine months of 2013. The price of jet fuel remains high, even after a slight drop in 2013. In addition, political strife intensified in the last quarter of 2013. The resultant travel warnings issued by several countries, if prolonged, are expected to hurt THAI’s operating performance in 2014. In addition, TRIS Rating is also highly concerned about any continued rise in THAI’s non-fuel costs. The issuer rating could be negatively impacted if THAI's operating profit margin in 2013 dampens to low single digit. TRIS Rating expects that THAI will put its best effort to control its expenses and improve its operating performance in order to support its credit quality. Moreover, from past record, the Thai tourism industry posts a quick recovery after each event is resolved. If the current political tensions ease within the first half of 2014, the effect on THAI’s operating performance should be limited.
THAI’s liquidity has weakened. 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.
For the past few years, THAI has been in an investment cycle. The investments are needed in order to improve the efficiency of the aircraft fleet. Because of the substantial investment, THAI’s 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 leases and 15 will be acquired via financial leases. The new aircraft will yield several benefits, such as lower fuel consumption and reductions in maintenance expenses. 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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