TRIS Rating affirms the company rating on Thai Airways International PLC (THAI) and the ratings on THAI’s outstanding senior unsecured debentures at “A”. The company rating is enhanced from THAI’s stand-alone credit profile based on our expectation of the high likelihood of government support due to its status as a state enterprise. The stand-alone credit profile reflects its position as a leading international passenger airline in Thailand. The ratings, however, are constrained by rising financial leverage in line with its aircraft acquisition plan and persistently high operating cost. The ratings are also constrained by fuel price fluctuations and event risks that could adversely impact air travel demand.
KEY RATING CONSIDERATIONS
State enterprise status underpins ratings
THAI’s key rating driver is its status as a state enterprise, 51% owned by the Ministry of Finance (MOF). TRIS Rating believes that there is a high likelihood that the government will continue to provide financial support to the company when needed and on a timely basis. The company is the national carrier of Thailand, operating domestic and international flights from its home base in Bangkok. The company’s budget and investment plan are subject to the approval of the Cabinet.
Expect profitability to improve
TRIS Rating expects THAI’s financial performance to gradually improve over the next few years, mainly due to lower fuel cost. We assume jet fuel price of US$85 per barrel, compared with US$90 in 2018. Based on this assumption, we project THAI’s operating profit margin will recover to a range of 18%-19% during 2019-2021.
In 2018, a rise in jet fuel cost and other non-fuel costs were the main factors that pressured profitability. The operating profit margin declined to 14.9% in the first nine months of 2018 (9M2018), from 18.4% in 9M2017. Jet fuel cost increased 18% year-on-year (y-o-y), from an average of US$76 per barrel in 9M2017 to US$90 per barrel in 9M2018. In addition, the company was unable to cut non-fuel costs as planned. In 9M2018, non-fuel costs per available seat kilometer (ASK) was Bt1.38, compared with Bt1.37 per ASK in 9M2017.
Intense competition limits passenger yield improvement
We expect the intense competition in the airline industry will persist, which is likely to hinder THAI’s ability to improve passenger yield (passenger revenue per revenue passenger kilometer or RPK) from the current level. The competition among airlines, both legacy airlines and low-cost carriers (LCCs), is likely to continue to limit THAI’s ability to increase ticket prices, despite its capacity to levy fuel surcharges on some routes when fuel prices rise. THAI’s passenger yield was maintained at Bt2.20 per RPK in 2017 through 9M2018.
Growth in tourist arrivals to support cabin factor
We expect the cabin factor to be in a range of 75-80% over the next three years. This is based on our belief that the number of foreign tourist arrivals to Thailand will continue to grow and support THAI’s cabin factor. In 9M2018, total foreign tourist arrivals to Thailand increased by 9.2% y-o-y to 28.54 million persons. With cabin factor in the 75%-80% range and relatively stable passenger yield, we expect revenue will be in the range of Bt204 billion to 210 billion in 2019-2021.
Debt to grow from investment plan
We project THAI’s leverage will gradually increase in the next three years. According to THAI’s investment plan to acquire at least 25 new aircrafts during 2019-2024, we expect adjusted debt to increase to Bt223 billion by the end of 2021 from Bt219 billion in 2019. Despite the rising debt level, we project earnings before interest, taxes, depreciation, and amortization (EBITDA) will increase more rapidly to approximately Bt40 billion in 2021, compared with Bt36.1 billion in 2017. As a result, the total debt to EBITDA ratio will gradually decline from 6.5 times in 2017 to around 5.6 times in 2021. On the other hand, debt to capitalization ratio will edge up from 88% in 2017 to about 90% in 2021 and the EBITDA interest coverage ratio will stay at around 3.5 times.
Sufficient liquidity
TRIS Rating expects that the company will maintain a sufficient cushion to service debt maturities and deal with any unexpected events. Its source of funds comprised cash on hand of Bt13,027 million and undrawn credit facilities of Bt23,580 million at the end of September 2018. Its funds from operations over the next 12 months is expected to be around Bt22,000 million. This level should be sufficient to match the planned uses of funds. During the next 12 months, THAI must make principal repayments of Bt20,775 million. In addition, capital expenditures are budgeted at around Bt7,825 million in 2019.
BASE-CASE ASSUMPTIONS
The following are our base-case assumptions and forecasts for 2019-2021:
• Annual revenue growth of about 2%
• 75-80% cabin factor
• Passenger yield of about Bt2.20 per RPK
• Operating profit margin in a range of 18%-19%.
• Jet fuel price assumption of approximately US$85 per barrel.
RATING OUTLOOK
The “stable” outlook reflects the expectation that THAI’s operating performance will be in line with our expectation and its status as a state enterprise is maintained.
RATING SENSITIVITIES
The ratings could be lowered if the operating profit margin deteriorates significantly without material reduction in leverage or if TRIS Rating believes that the level of government support will be reduced. The ratings and/or outlook are unlikely to be upgraded in the near term. However, the ratings and/or outlook could be revised upward if THAI’s operating performance improves significantly or its debt to EBITDA ratio stays below 5 times on a sustained basis.
COMPANY OVERVIEW
THAI was founded in 1960 under a joint investment agreement between a Thai government agency operating the domestic airline, Thai Airways Co., Ltd. (TAC), and Scandinavian Airlines Systems (SAS) to engage in international air transportation. SAS provided the know-how to support THAI’s efforts to operate and manage an airline efficiently. SAS sold its 30% stake in THAI to the Thai government in 1977. Before a public offering in November 2003, the government owned 93% of THAI via the MOF and the Government Saving Bang (GSB). Currently, the MOF directly owns 51.0% of THAI while the GSB holds 2.1%. A Cabinet resolution on 16 September 2003 ensured the government will maintain its ownership over 50%, continuing THAI’s status as a state enterprise. The Vayupak Fund investment, holding 15.1% of THAI’s shares, is considered as a private equity investment.
THAI is the national carrier of Thailand, operating domestic and international flights from its home base in Bangkok. In 2004, THAI and its partners set up Nok Air to compete in the domestic LCC market. Presently, the company holds a 21.8% stake in Nok Air. In mid-2012, THAI established a wholly-owned light premium airline, “THAISmile”, to serve short-haul routes, supporting THAI’s overall network. In December 2018, THAI’s network, including destinations served by THAISmile, spanned 70 international destinations with 749 flights per week and 10 domestic destinations with 374 flights per week.
During the last five years, THAI’s largest revenue stream has been passengers and passenger-related services, which accounted for over 80% of total revenue. Cargo and mail services contributed around 10% of total revenue. Other activities include catering and maintenance services.
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