TRIS Rating Affirms Company Rating of “AEROTHAI” at “AA” With “Stable” Outlook

TRIS Rating Co., Ltd. has affirmed the company rating of Aeronautical Radio of Thailand Ltd. (AEROTHAI) at “AA” with “stable” outlook. The rating reflects the strategic importance of air navigation services to the country, the company’s status as the sole air navigation service provider in Thailand, its good safety record, and its capable and experienced management team. In addition, implicit support from the government is a major factor that enhances the company’s credit profile. These strengths are partially offset by a substantial debt burden and the exposure of the air transportation industry to several uncontrollable external factors.

The “stable” outlook reflects AEROTHAI’s status as the nation’s sole air traffic control service provider, implicit support from the Thai government, and strong operating performance. However, AEROTHAI’s outlook and rating could be revised should the company fail to balance revenues and expenses and maintain an adequate liquidity position over the next few years.

TRIS Rating reported that AEROTHAI is a state enterprise with 91% shareholding owned by the Thai government and the remaining 9% held by various airlines. The Thai government, as a contracting state of the International Civil Aviation Organization (ICAO), is responsible for providing air transportation safety over Thailand. AEROTHAI has been appointed by the government as the sole provider of air traffic control service in Thailand. The service includes the systems and technologies for air navigation services, which are critical elements of air transportation safety. The company’s area of responsibility is the Bangkok Flight Information Region (BKK FIR). Its operations comply with ICAO standards and recommended practices.

TRIS Rating said, AEROTHAI’s operations are heavily influenced by government policies. All investments must be approved by both the Ministry of Transport and the Cabinet. All budgets are approved by the board of directors, most of whom are representatives of the Ministry of Finance and the Ministry of Transport. The government appoints nine of the 11 board members, while two members are the representatives of the shareholders from member airlines. The company’s air navigation service charge structure must be approved by the Civil Aviation Board.

The revenue from air traffic control service typically contributes more than 90% of AEROTHAI’s total revenues. As a non-profit organization, its tariff-setting mechanism is based on a cost-recovery basis. Under-recovery from airlines in some years are expected to be recovered by over-collections in the following years. During the past few years, the company posted huge under-recovery from member airlines as the global economic slowdown and domestic political turmoil caused air traffic movements to fall short of projections. However, in FY2010, the amount of under-recovery from member airlines was Bt181 million compared with Bt531 million in the previous year. The decline in the amount of under-recovery was due to a rise in total revenues. Revenue increased by 7% to Bt5,219 million in FY2010 as air traffic movements increased by 9.1% in tandem with the economic recovery. However, AEROTHAI still recorded an under-recovery because the company’s fixed cost remained high and AEROTHAI was unable to increase the tariff to cover all its costs. Funds from operations (FFO) increased from Bt181 million in FY2009 to Bt518 million in FY2010. Thus, the FFO to total debt ratio improved from 3.3% in FY2009 to 9.7% in FY2010. AEROTHAI is expected to have over-collections from member airlines in FY2011 as air traffic volume has risen significantly in the first half of FY2011 due to the global economic recovery and the absence of political turmoil in the second half of FY2011, unlike the previous year. Based on the anticipated recovery of the global economy and the expected tariff adjustments, the company plans to fully recover its accumulated under-recovery within the next five years.

AEROTHAI’s total debt to capitalization ratio stayed at approximately 88% during the past two years. However, leverage is expected to rise in the next few years as AEROTHAI plans to invest in the Air Navigation Services Infrastructure Development Project, worth Bt4,460.31 million. The investment will be funded with new borrowings. The project consists of the setting up a new air traffic management centre (ATMC), the enhancement of the communication navigation surveillance (CNS) system and air traffic management network integration, and the acquisition of two new flight inspection aircraft. The investments are required to enhance AEROTHAI’s ability to qualify as a regional air navigation service provider. Although AEROTHAI’s financial status has weakened, the company’s business profile remains strong due to its monopoly status and strong support from the government, said TRIS Rating. -- End

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