TRIS Rating has affirmed the company rating of Thai Airways International PLC (THAI) and the ratings of THAI’s 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 Bt7,000 million in senior unsecured debentures. The outlook remains “stable”. The proceeds from the proposed debentures will be used to refinance THAI’s maturing debts and investments.
The ratings reflect THAI’s leading position in international air routes of Thailand, plus the benefits from being a member of Star Alliance, the largest airline alliance in the world. 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 expects that the government will provide strong support to THAI on a timely basis, especially during financial difficulties. The ratings, however, are constrained by THAI’s high leverage, weakened competitive position, high operating costs, and its vulnerability to event risks and fuel price fluctuations.
The “stable” outlook reflects the expectation that THAI’s operating performance will improve in tandem with its plans. The ratings could be downgraded if THAI’s operating profit margin significantly deteriorates or if TRIS Rating believes that the level of the government support is reduced. The ratings could be upgraded if THAI’s operating performance improves substantially and the debt to EBITDA ratio stays below 5 times on a sustainable basis.
THAI is a state enterprise, 51% owned by the Ministry of Finance (MOF). 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 December 2016, THAI’s network spanned 66 international destinations with 670 flights per week, and 11 domestic destinations with 515 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’s competitiveness is weakening. Although the number of tourists visiting Thailand is growing every year, the company could not reap benefits from that. Its market shares in both domestic and international routes have declined continuously in the past five years. Its market share in the international routes measured by numbers of passengers has declined from 32.9% in 2011 to 25% in 2015, while its share in the domestic routes also declined from 35.9% to 19.4%. In the first nine months of 2016, foreign tourist arrivals in Thailand increased by 12.2% year-on-year (y-o-y) to 24.82 million persons. THAI’s cabin factor improved marginally to 73.6% compared with 73.4% in the same period last year.
Thanks to the sharp drop in jet fuel price, THAI’s operating margins improved significantly from 3.3% in 2014 to 11.7% in 2015 and to 19.4% in the first nine months of 2016. Its cost per available seat kilometer (ASK) dropped from Bt2.33 per ASK in 2015 to Bt2.10 per ASK in the first nine months of 2016 while its yield, measured by passenger revenue per ASK, has declined from Bt1.87 per ASK to Bt1.77 per ASK in the same period. In the first nine months of 2016, the company was able to reduce personal expenses to Bt22,162 million from Bt25,982 million in the same period last year. However, its non-fuel costs are still higher than targets. Under its business restructuring plan proposed to the State Enterprise Policy Commission (SEPO), the company has to reduce its non-fuel costs by around Bt10,000 million in 2016. In TRIS Rating’s view, THAI’s profitability remains vulnerable as severe competition from both low-cost carriers and middle-east airlines limits its ability to raise ticket prices, and a rise in fuel price will definitely hurt its profit margins.
THAI’s capital structure is relatively weak. Its large capital expenditures coupled with the significant drop in its capital due to the severe losses in the past couple of years caused its debt-to-capitalization ratio to stay at around 87%. Based on its plan to renew its fleets, the company’s capital structure is expected to maintain at this level.
However, due to its improving profitability, its liquidity profile started to recover. Funds from operations (FFO) increased from Bt2,948 million in 2014 to Bt15,631 million in 2015 and Bt16,677 million in the first nine months of 2016. The adjusted FFO to total debt ratio revived from 2.1% in 2014 to 8% in 2015 and 12.4% (annualized, from the trailing 12 months) in the first nine months of 2016. The adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio also rebounded from 0.7 times in 2014 to 3 times in the first nine months of 2016. At the end of September 2016, the company’s source of fund comprised Bt13,695 million in cash on hand and Bt24,380 million in credit facilities. FFO is expected to be around Bt21,000 million per annum. This should be sufficient for its uses of fund. During the next 12 months, THAI has scheduled the principal repayments of Bt21,338 million and outstanding short-term obligations of Bt12,031 million, plus the capital expenditure of around Bt16,000 million. TRIS Rating expects the company to maintain a sufficient financial cushion to service its debt service commitments and to provide protection against unexpected events.
During 2017-2019, TRIS Rating estimates that THAI’s total revenue will grow at a modest rate. The average jet fuel price is forecast to be approximately US$70 per barrel. The ongoing implementation of a transformation plan is expected to increase its operating margin to 20%. 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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