TRIS Rating has affirmed the company rating of Aeronautical Radio of Thailand Ltd. (AEROTHAI) at “AAA” with “stable” outlook. The rating reflects the strategic importance of air navigation services to the country, as well as AEROTHAI’s good safety record, ample liquidity, and experienced management team. The company’s credit profile is further enhanced by the support from the government, ensuring AEROTHAI’s importance as the sole air navigation service provider of Thailand. However, these strengths are partially offset by sensitivity of air transportation to event risks.
The “stable” outlook reflects AEROTHAI's monopoly status and efficient operations. In addition, the company is expected to sustain strong liquidity position. AEROTHAI’s rating downgrade may occur if its relationship with the government is weakened from the current level which may dilute the support from the government.
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 Civil Aviation Authority of Thailand (CAAT) of the Ministry of Transport. The government designates nine of AEROTHAI’s 11 board members, while the other 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 from 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. Although being sensitive to event risks, the Thai tourism industry has been boosted significantly by an increase in the number of foreign and local travelers. Air traffic volume, at the six airports operated by Airports of Thailand PLC (AOT), grew by 16% in the fiscal year 2015 (FY2015) and 11% year-on-year (y-o-y) in the first six months of FY2016. The growth was due to the rise in the number of foreign tourist arrivals and the increasing popularity of low-cost carriers (LCC).
In tandem with the growth of air traffic volume, AEROTHAI posted the revenue growth of 11% during FY2015 through the first six months of FY2016. Hence, AEROTHAI reported over collection of Bt1,909 million in FY2015 and Bt1,589 million for the first six months of FY2016. During FY2016-FY2018, TRIS Rating forecasts AEROTHAI’s revenue to grow by approximately 8% per annum, supported by strong demand from both domestic and international air travel. Hence, the company’s over collection is expected over the next three years.
AEROTHAI’s total debt declined, falling from Bt4,040 million in FY2014 to Bt3,115 million at the end of March 2016. The total debt to capitalization ratio improved to 77.5% in the first six months of FY2016, compared with 82.5% in FY2014. However, leverage is expected to rise because AEROTHAI plans to invest Bt7,042 million over the next three years. TRIS Rating estimates that AEROTHAI’s debt to capitalization ratio will be around 80% during the next three years.
AEROTHAI’s funds from operations (FFO) rose from Bt2,815 million in FY2014 to Bt3,267 million in FY2015, and stood at Bt2,100 million in the first six months of FY2016. The FFO to total debt ratio improved from 69.7% in FY2014 to 96.2% in FY2015 and 115.5% (annualized, from the trailing 12 months) in the first six months of FY2016. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio also improved, rising from 19.9 times in FY2014 to 30.9 times in FY2015 and 55.9 times in the first six months of FY2016. During the next three years, TRIS Rating estimates that AEROTHAI’s FFO to total debt ratio will remain high over 40% and the EBITDA interest coverage ratio will be above 20 times.
At the end of March 2016, AEROTHAI’s financial liquidity was further strengthened by cash on hand and short-term investment of Bt3,848 million and short-term revolving credit facilities of Bt880 million from banks. The company has debt repayment obligations of around Bt542 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 raised concerns over aviation safety standard in Thailand. As a result, the Thai government has been addressing concerns recently raised by the ICAO. The government is in the process of implementing new safety procedures that comply with the ICAO standards. Because of the concerns raised by the ICAO, some countries do not allow charter flights from Thailand-based airlines. The process for securing approvals for new routes has become stricter. These factors may reduce the growth in air traffic volume over the short term. However, these events have not yet had a significant negative effect on AEROTHAI. As AEROTHAI has a strong liquidity profile, there are no liquidity concerns in the short to medium term. TRIS Rating expects that the government will resolve the issue with the ICAO within 2017.
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