TRIS Rating has downgraded the company rating of Thai Airways International PLC (THAI) and the ratings of its existing senior unsecured debentures to “A” from “A+”. The outlook is revised from “negative” to “stable”. The downgrade reflects THAI’s deteriorating financial profile caused by ongoing operating losses and rising leverage. The expected improvement from implementing transformation plan may take more time to materialize. In addition, the ratings are constrained by the continuing intense competition in the aviation industry, plus THAI’s vulnerability to event risk and fuel price fluctuations. However, the factors supporting THAI's credit rating are its leading position in the Thai aviation industry with the largest market share and the premium quality of THAI’s service. THAI's credit rating is enhanced by the government support reflecting its strategic importance as a state enterprise responsible for the nation’s flag carrier. THAI is 53% owned by the government, through the Ministry of Finance (MOF) (51%) and the Government Savings Bank (2%). 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. Any change in the government’s shareholding or support could impact THAI's rating accordingly. TRIS Rating believes that the government has closely monitored THAI’s performance and is willing to provide support to THAI, especially if it encounters any financial difficulties.
The “stable” outlook reflects the expectation that THAI’s operating performance will recover and return to profitability in the coming year. The ratings could be downgraded if THAI’s operating profit margin deteriorates further or if TRIS Rating believes that the level of the government support has been reduced. The ratings could be upgraded if THAI’s operating performance recovers substantially and the debt to EBITDA ratio stays below 5 times on a sustainable basis.
THAI is one of the largest full-service airlines in Asia. THAI also provides “light premium” airline services, under the “THAISmile” brand, through a wholly-owned subsidiary. THAISmile is responsible for the short haul routes, supporting THAI's overall network at a competitive cost. In September 2015, THAI’s network spanned 63 international destinations served by 667 flights per week, and 11 domestic destinations with 441 flights per week. In addition, the company holds a 39.2% stake in NOK Airlines PLC, the second-largest low-cost carrier (LCC) in Thailand.
Thai started a fleet rejuvenation program in 2011 which has incurred a high capital expenditure and then financing needs. The program will finish in 2018 and the remaining 14 aircraft will be delivered during 2016-2018. Unfortunately THAI's operations were hurt by the series of event risks which THAI had little flexibility to adjust to the events due to its high non-fuel cost structure. The low fuel price, though lowering the operating cost, has triggered severe price competition, especially from the LCCs. THAI’s weak operating performance leads to the higher-than-expected leverage which has deteriorated the company's financial strength. As a result, in the fourth quarter of 2014, THAI was named as one of the seven loss-making state enterprises to be restructured with the assistance from the State Enterprise Policy Commission (SEPO). Once the SEPO approved the transformation plan, THAI immediately implemented the plan in January 2015. The plan calls for THAI to terminate loss-making routes, phase out inefficient aircraft, offer mutual separation packages to employees, sell non-core assets including grounded aircraft, and reorganize the operational structure. The objective of the transformation plan is to improve THAI’s competitive position, operational efficiency, and profitability. However, THAI's effort still lags behind the plan, especially the reduction of non-fuel costs.
In 2014, THAI’s total revenue declined by 8.7% to Bt188,368 million as the political unrest adversely affected its cabin factor, which dropped to 69.0% in 2014, compared with 74.1% in 2013. As a result, the company posted a huge net operating loss in 2014. The operating profit margin deteriorated to 3.3% in 2014 from 9.6% in 2013. In the first nine months of 2015, the strong growth of the tourism industry pushed THAI’s cabin factor to 73.4%. However, THAI’s total revenue still declined by 1.2% year-on-year (y-o-y) to Bt136,412 million due to a lower yield. The operating profit margin recovered to 10.7% in the first nine months of 2015, due mainly to a substantial drop in the price of jet fuel. However, the company still posted a net operating loss of Bt7,298 million as THAI was unable to reduce its non-fuel costs as planned. THAI’s profitability remains under pressure as severe competition limits its ability to boost the yield and THAI does not seem to be able to reduce its non-fuel costs as fast as necessary.
THAI's leverage is high. Due to the huge capital expenditures over the past several years, total debt peaked at Bt201,287 million at the end of September of 2015, compared with Bt191,852 million in 2014. Coupled with the operating loss, the adjusted debt to capitalization ratio continued to increase from 84.4% in 2014 to 92.1% in the first nine months of 2015.
THAI's liquidity, though improving slightly, remains soft. Funds from operations (FFO) dropped substantially from Bt19,960 million in 2013 to Bt2,948 million in 2014, then recovered to Bt7,993 million in the first nine months of 2015. The adjusted FFO to total debt ratio declined from 10.7% in 2013 to 2.2% in 2014 and 4.4% (annualized, from the trailing 12 months) in the first nine months of 2015. The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio, though falling down to 0.7 times in 2014, is expected to stay around 2.0 times in 2015. At the end of September 2015, the company had Bt28,251 million in cash on hand and Bt17,600 million credit facilities. During the next 12 months, THAI has scheduled the principal repayments of Bt20,551 million and outstanding short-term obligations of Bt18,480 million. TRIS Rating expects the company to maintain a sufficient financial cushion to service its debt service commitments and to protect against unexpected events. In addition, the government is expected to provide financial support in the event of any financial shortfall.
During 2016-2018, TRIS Rating estimates that THAI’s total revenue will grow at a moderate rate. The achievement of the goals in the transformation plan would mean the operating margin will rebound to 20%, pushing FFO to around Bt24,000 million per annum. Without any concrete deleveraging plan, leverage will remain high. Cash flow protection is expected to improve slightly with the FFO to total debt ratio staying over 10% and the EBITDA interest coverage ratio staying above 2.5 times.
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