TRIS Rating has assigned the rating of “A+” to the proposed issue of up to Bt8,000 million in senior unsecured 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 unsecured debentures at “A+”. The outlook remains “negative”. The proceeds from the new debentures will be used partly to refinance THAI’s maturing debts and the remainder will be reserved for its working capital needs. 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 the government has closely monitored THAI’s restructuring plan and is willing to provide support to THAI, especially if it encounters any financial difficulties. The ratings, however, are constrained by THAI’s high leverage, weaker competitive position, high operating costs, and its vulnerability to event risks and fuel price fluctuations.
The “negative” outlook reflects the intensified competition in the aviation industry and the deterioration in THAI’s profitability. Achievement of the transformation plan or increase in government support could be positive to the rating and vice versa.
THAI is one of the largest full-service airlines in Asia. THAI also provides “light premium” airline services under the “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. In September 2015, THAI’s network spanned 60 international destinations served by 591 flights per week, and 11 domestic destinations with 399 flights per week.
THAI is a state enterprise, considering the shareholding by the Ministry of Finance (MOF) 51% and Government Savings Bank (GSB) 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 2014, foreign tourist arrivals to Thailand declined by 7% to 24.78 million due to political instability. THAI’s cabin factor was negatively impacted and decreased to 69% in 2014, compared with 74.1% in 2013. The drop reflected in a 17.4% plunge in THAI’s passenger traffic and more aggressive competition from LCCs. However, as an attractive destination, the Thai tourism industry has made a fast recovery after each unfavorable event. In the first half of 2015, foreign tourist arrivals grew by 28.6% year-on-year (y-o-y) to 14.76 million. The growth was mainly supported by a strong growing number of travelers from Asia. As a result, in the first half of 2015, THAI’s cabin factor increased to 72.8% compared with 66.9% in the same period of the previous year. The recent bomb blast at the Ratchaprasong intersection may restrain the expected growth of the tourism industry. However, the situation could be controlled to limit the aftermath in a short period of time.
In January 2015, upon the approval of the State Enterprise Policy Commission (SEPO), THAI has implemented the transformation plan. The company terminated loss-making routes, phased out 7 aircraft, and offered mutual separation program to employees. The company is also reshaping its organization and improving operational structure. However, THAI’s effort to reduce non-fuel costs still lagged behind expectation. The transformation plan is expected to improve its competitive position, operational efficiency, and profitability.
In the first half of 2015, the operating profit margin recovered to 12.1% from 3.3% in 2014. The improvement was mainly due to a substantial drop in the jet fuel price. However, the low fuel price intensifies the competition, especially from LCCs. Hence, THAI’s profitability remains under pressure. Over the next two years, TRIS Rating expects that THAI’s transformation plan would achieve to boost its operating margin to around 20%.
THAI's leverage is high. The adjusted debt to capitalization ratio rose steadily in the past several years, peaking at 87.4% in the first half of 2015. The increases were due to THAI’s huge capital expenditures, mainly to acquire new aircraft, and its huge operating losses in the last two years. Leverage is expected to remain high in the medium term. The company is scheduled to receive another 14 aircraft during 2016-2018. Capital expenditures during the next three years will be around Bt55 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 reductions in maintenance expenditures. TRIS Rating expects that THAI will have a deleverage plan during the next two years.
THAI's liquidity is slightly improved. The adjusted funds from operations (FFO) to total debt ratio improved from 2.2% in 2014 to 4.5% (annualized, from the trailing 12 months) in the first half of 2015. The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio increased from 0.7 times to 2.1 times during the same period. During 2016-2017, TRIS Rating estimates that THAI’s FFO to total debt ratio would stay over 10% while the EBITDA interest coverage ratio will be greater than 2.5 times. At the end of June 2015, the company had Bt22,525 million in cash on hand and Bt7,600 million credit facilities. During the next 12 months, THAI has scheduled principal repayments of Bt24,149 million and outstanding short-term obligations of Bt18,396 million. TRIS Rating expects the company to secure a sufficient financial cushion to serve its debt services and protect against unexpected events. In addition, the governmental support is expected to be in effect and support the financing gap, if needed.
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