TRIS Rating has upgraded the company rating of Aeronautical Radio of Thailand Ltd. (AEROTHAI) to “AAA” from “AA+” with “stable” outlook. The factors supporting the upgrade include robust growth in air transportation, a strengthening liquidity profile, and the company’s ability to adjust unit charges. The rating enhancement reflects the support from the government, ensuring AEROTHAI’s strategic importance as the air navigation service provider of Thailand. The rating also reflects the company’s good safety record and experienced management team. However, these strengths are partially offset by sensitivity of air transportation to event risks, a substantial debt burden, and a high level of investment required during the next few years.
The “stable” outlook reflects AEROTHAI's monopoly status and the strong government support. AEROTHAI’s rating downgrade may occur if the company’s liquidity position declined substantially or if the government diluted its shareholding in AEROTHAI or reduced its support for the company.
AEROTHAI is a state enterprise with 91% of the shares owned by the Thai government and the remaining 9% held by a number of member airlines. The Thai government, as a contracting state of the International Civil Aviation Organization (ICAO), is responsible for providing safe and efficient air transportation over the Bangkok Flight Information Region (BKK FIR), which covers Thailand, the Gulf of Thailand, and some parts of the Andaman Sea. AEROTHAI has been appointed by the government to be the sole provider of air traffic control services in Thailand. AEROTHAI ensures that operations comply with the ICAO’s standards and recommended practices. AEROTHAI’s operations are supervised by the government through the Department of Civil Aviation (DCA), Ministry of Transport. The government designates nine of AEROTHAI’s 11 board members, while two members are appointed by the member airlines. The government representatives are from the Ministry of Transport and the Ministry of Finance. AEROTHAI’s corporate plan and capital expenditure budget are subject to approval by the Ministry of Transport and the Cabinet. As a non-profit organization, AEROTHAI structures its air navigation charging mechanism based on the cost-recovery scheme and adjusts the pricing mechanism when appropriate. Any changes in AEROTHAI’s air navigation charges must be approved by the Civil Aviation Board.
Air traffic control services typically comprise more than 90% of AEROTHAI’s total revenues. Air traffic is projected to grow in line with tourism and economic growth, especially in the Asia Pacific region. The Thai tourism industry, although sensitive to event risks, has been boosted significantly by an increase in the number of foreign and local travelers. Air traffic volume, through the six airports operated by Airports of Thailand PLC (AOT), grew at an average 12% per annum during fiscal years (FY) 2010-2014. The growth was supported by the rise in the number of foreign tourist arrivals, thanks to the popularity of the Thai destinations, and the rapid growth of low cost carriers (LCC). During the mentioned period, the number of international and domestic flights grew at annual rates ranging from 8%-18%, except for a 2.6% rise in international flights in FY2014. The low growth in FY2014 was due to the aftermath of chronic political conflicts in Thailand.
In addition to the growth in air traffic volume, AEROTHAI has adjusted its charging mechanism a few times during the last four years. As a result, revenue grew by 13%-16% per year in FY2011-FY2013, and 18.5% in FY2014. The jump in FY2014 was also due to a 4% increase in air navigation charge. For the first six months of FY2015, revenue continued to increase by 9.3% year-on-year (y-o-y) to Bt5,259 million, in tandem with an increase in flights. After posting under-recovery in FY2009 and FY2010 because of the global financial crisis and domestic political turmoil, AEROTHAI reported over collection of Bt377 million in FY2011, increased to Bt1,756 million in FY2014, and Bt982 million for the first six months of FY2015.
AEROTHAI’s total debt declined, falling from Bt4,683 million in FY2013 to Bt3,717 million at the end of March 2015. The total debt to capitalization ratio improved to 81% in the first six months of FY2015, from 85% in FY2013. However, leverage is expected to rise because AEROTHAI plans to invest Bt8,400 million over the next three years. The major investment is the Air Navigation Services Infrastructure Development Project, worth approximately Bt4,500 million. This project is a new air traffic control system, utilizing satellite technology, which will increase AEROTHAI’s ability to handle the substantial increase in air traffic volume in the future. The project started in FY2014 and 20% of the budget has been spent since. The company has secured a Bt3,480 million long-term credit facility to finance the project. TRIS Rating estimates that AEROTHAI’s debt to capitalization ratio will bounce in the range of 85%-88% during the next three years.
AEROTHAI reported funds from operations (FFO) of over Bt2,000 million in FY2013 which rose to Bt2,815 million in FY2014, and stood at Bt1,768 million in the first six months of 2015. The FFO to total debt ratio improved from 43.7% in FY2013 to 69.7% in FY2014 and 78.8% (annualized, from the trailing 12 months) in the first six months of 2015. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio also improved, rising from 11.6 times in FY2013 to 19.9 times in FY2014 and 29 times in the first six months of FY2015. At the end of March 2015, AEROTHAI’s financial liquidity was further strengthened by a cash balance of Bt3,395 million and uncommitted credit facilities of Bt880 million from banks. The company has debt repayment obligations of around Bt600 million per annum during the next three years. In the future, TRIS Rating expects AEROTHAI’s debt service coverage ratio will not fall below 1.5 times.
In 2015, the ICAO announced that Thailand has Significant Safety Concerns (SSC). The concerns included the approval criteria of DCA on air operator certification and hazardous goods transportation certification. As a result, some countries halted charter flights from Thailand-based airlines. The process for securing approvals for new routes has become stricter. As ICAO showed the intention to assist and guide DCA on the procedure amendment to meet the ICAO’s standard, TRIS Rating expects that the situation will be rectified soon. The impacts from the ICAO concerns might lower the projected growth in the certain segment. AEROTHAI’s strong liquidity could partly absorb some under-recovery, if any, in the medium term.
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