Bangkok--18 Jul--TRIS Rating
TRIS Rating Co., Ltd. has affirmed the company rating of Thai Airways International PLC (THAI) and the ratings of its senior debentures (THAI085A, THAI08OA, THAI09OA, THAI10OA, THAI115A, THAI11OA, THAI14OA, THAI155A) at “AA-” with “stable” outlook. The ratings continue to reflect THAI’s leading position in international air routes in and out of Bangkok and the benefits it derives from being a member of Star Alliance, the world’s largest airline alliance. The ratings are enhanced by THAI’s status as the national flag carrier and the major ownership stake held by the Thai government. These strengths are partially offset by intense competition, increased risk from rising fuel prices, and the company’s high debt burden.
The “stable” outlook is based on the expectation that THAI will maintain its dominant position for international traffic in Thailand. The outlook is also based on the expectation that government support, as its major shareholder, will continue, particularly during adverse situations. Though traffic demand in the long term is favorable, it can be affected by uncontrollable events. The outlook also takes into consideration the capital expenditures required over the next few years. THAI will also face a more difficult environment in light of intense competition and higher fuel costs. Therefore, THAI’s performance will depend largely on its ability to increase revenue, successfully cut costs, and improve efficiency. Weakening of THAI’s financial profile may cause a revision of its ratings or outlook.
TRIS Rating reported that, currently, the Thai government directly holds 54% of THAI’s shares, down from 79% in 2003 following a public offering of 285 million shares in 2003. The Vayupak Fund, which is an investment fund originated by the Ministry of Finance to invest in listed state enterprises, also has a considerable stake in THAI (18%). Although the government has reduced its stake in THAI during the last three years, it has clearly stated its intention to retain a minimum of 51% of the carrier’s shares. As a state enterprise and the national flag carrier, THAI has received strong financial and operating support from the government. The Thai government has provided THAI with bridge loans and has helped the company obtain funding.
TRIS Rating said, THAI has enjoyed a strong market position on international routes for a long period, with a market share of more than 40% of international passenger traffic through Bangkok International Airport. Although its market share declined from 45% in 2003 to 40% in 2005, THAI’s market share is still far higher than the runner-up. It is expected that THAI will likely maintain its leading position on international routes in its home Bangkok International Airport because its existing traffic rights and take-off and landing slots are still well protected, however, high competition from both low cost carriers and legacy carriers, both of which are expanding routes and fleets, will challenge THAI’s market position. For domestic traffic, which traditionally contributes only 10% of THAI’s revenue, THAI’s market share plunged to 43% in 2005 from 84% in 2003 due to THAI’s strategy to strengthen its profitability by reducing the number of loss making domestic sectors and letting Nok Air fly instead. Low cost carriers have a different target market although a relatively small target group overlaps with THAI. The current proportion of domestic revenue to total revenue is down to 7%.
Competition has sprung up after the government implemented an “open skies” policy in 1998 and fully liberalized the airline industry in 2001 by allowing all Thai airlines to freely operate every route, subject to availability of traffic rights. To enhance competitiveness, THAI plans to expand its fleet from 84 aircraft in 2005 to 93 aircraft in 2010 and will renovate in-flight facilities on existing aircraft. However, the fleet expansion needs large capital expenditures, which will be funded largely by additional borrowing. Therefore, THAI’s financial leverage will deteriorate further.
THAI has consistently delivered favorable performance, even during the last economic crisis, despite global worries over terrorist attacks and the twin outbreaks of Severe Acute Respiratory Syndrome (SARS) and bird flu. However, THAI’s performance has recently been pressured by high competition and surging operating costs, particularly from fuel cost and staff costs. The company’s operating margin, which declined slightly from 28% in 2002 to 25% in 2004, dropped significantly to 18% in 2005. In terms of cash flow protection, the earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage and funds from operations (FFO) to total debt ratios also declined in fiscal year 2005. However, THAI’s operating margin recovered to 23% during the first half of fiscal year 2006, said TRIS Rating.