TRIS Rating has affirmed the company rating of Thai Airways International PLC (THAI) and the ratings of its existing senior unsecured debentures at “A+”. At the same time, TRIS Rating has assigned the rating of “A+” to THAI’s proposed issue of up to Bt4,000 million in senior unsecured debentures. The outlook remains “negative”. The proceeds from the issuance of the proposed debentures will be used to refinance THAI’s maturing debts and investments. The ratings are enhanced from THAI’s stand-alone credit profile, reflecting its status as a state enterprise and the flag carrier of Thailand. TRIS Rating believes that the government will provide strong support to THAI on a timely basis, especially during the financial difficulty. The ratings, however, are constrained by THAI’s high leverage, weakened competitive position, high operating cost, and its vulnerability to event risks and fuel price fluctuations. The “negative” outlook reflects the severe competition in the industry and the deterioration in THAI’s profitability. The ratings could be downgraded if THAI’s weak financial status persists or the government reduces the support. The outlook could be revised to “stable” if the company can revive its operating margin and improve the debt service ability.
THAI is one of the largest airlines in Asia, operating a full service airline, and providing light premium airline service under “THAISmile” brand through its wholly-owned subsidiary. In addition, the company holds a 39.2% stake in NOK Airlines PLC, a major low-cost carrier (LCC) in Thailand. At the end of September 2014, THAI’s network spanned 68 international destinations served by 647 flights per week, and 10 domestic destinations with 357 flights per week.
THAI is a state enterprise, considering that the Ministry of Finance (MOF) owns 51% of the outstanding shares and the Government Savings Bank (GSB) owns another 2.1%. Vayupak Fund holds 15.1% of THAI but this stake is considered as a private investment, despite the fact that Vayupak Fund was established by the MOF.
In the first nine months of 2014, foreign tourist arrivals to Thailand declined by 10.3% year-on-year (y-o-y) to 17.56 million persons due to the political instability. THAI’s cabin factor was negatively impacted and decreased to 68.3%, compared with 75.2% in the same period of 2013. The drop reflected a substantial plunge in THAI’s passenger traffic, which declined by 13.3% y-o-y, and more aggressive competition from LCCs. The Thai tourism industry is expected to recover in the last quarter of 2014 as the political violence has ceased. Although martial law remains in force, foreign tourist arrivals in October 2014 started to recover, rising by 6.1% y-o-y to 2.18 million persons.
During the last five years, THAI’s operating performance has declined steadily. THAI’s operating margin dropped from 19% in 2009 to 9.6% in 2013, and to 4.5% in the first nine months of 2014. The deteriorating profitability was partly affected by domestic event risks, such as flood disaster and series of political conflict. In addition, fuel prices remain high and competitions are more intense from both full-service airlines and LCCs which pressure the ticket price adjustment. THAI has relatively high operating costs and shows inflexibility to cut. Consequently, THAI's ability to generate operating cash flow weakens, and so does its liquidity.
The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio declined from 2.9 times in 2013 to 0.9 times in the first nine months of 2014. The adjusted funds from operations (FFO) to total debt ratio weakened from 10.7% in 2013 to 3.5% (annualized, from the trailing 12 months) at the end of September 2014. As of 30 September 2014, the company had Bt18,625 million in cash on hand and a Bt7,000 million credit facility from a bank. During the next 12 months, THAI has scheduled principal repayment of Bt28,733 million. TRIS Rating expects the company will prudently manage to reserve some cushion to close the liquidity gap.
THAI's leverage has been high and increasing since 2011 and is expected to remain high in the medium term. The adjusted debt to capitalization continued to increase from 66% in 2010 to over 70% in 2011-2013, and rose to 82.3% at the end of September 2014. The increase was due to the huge capital expenditure plan, mainly to acquire the new aircraft fleet. During 2011 through 2013, the company spent over Bt100 billion in capital expenditures, and planned for Bt20 billion in 2014. THAI has received 41 aircraft during the last four years, which were funded by financial lease for 18 aircraft, the rest was under operating lease. The company has schedule to receive another 22 aircraft during 2015-2018 of which 10 aircraft will be under financial lease. The planned capital expenditures during the next four years will be around Bt80 billion. The investments are needed in order to improve the efficiency of the aircraft fleet. The new aircraft will yield several benefits, such as lower fuel consumption and reduction in maintenance expense. However, the leverage level is higher than the current rating category. TRIS Rating expects that THAI should have a deleverage plan during the next two years.
A new government was appointed after the coup d’?tat in May 2014. The government has prioritized to restructure seven loss-making state enterprises, including THAI. The State Enterprise Policy Commission was appointed and delegated to state enterprise’s board of directors in order to help formulate the restructuring plan. THAI will conclude the plan within January 2015 to be executed immediately. The plan is expected to reshape THAI’s organization and operational structure. The objective is to improve its competitive position, operational efficiency, and profitability. TRIS Rating will follow up on the restructuring plan. THAI’s credit ratings are heavily relied on the government’s support in all aspects including extraordinary financial assistance. The ratings could be downgraded if the expected improvement is not materialized or takes time to implement.
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