Thai AirAsia gets A- from Tris Rating

Tris Rating rates Thai AirAsia Co (TAA) and its outstanding senior unsecured debentures worth up to 5 billion baht an A-.

The ratings firm also assigned an A- to TAA’s proposed issue of up to 5 billion baht in senior unsecured debentures. The proceeds from the new debentures will be used to refinance existing debts and reserves for investments.

The ratings reflect TAA’s position as the leading low-cost carrier (LCC) in Thailand, its cost efficiency, synergy with AirAsia Berhad (AAB) and its affiliate, AirAsia Group, and ongoing growth of the Thai tourism industry.

However, these strengths are partially offset by intense competition in the industry, plus TAA’s relatively high leverage, exposure to volatile fuel prices, currency risk and event risk.

In the first quarter of 2018, TAA’s revenue increased by 23% year-on-year to 11.25 billion baht due to strong passenger growth. TAA’s operating margin also improved to 29.6%, compared with 25.7% in the same period of the previous year.

TAA’s leverage declined but remained at a high level. The adjusted debt-to-capitalisation ratio declined from 78% in 2017 to 75% in the first quarter of 2018, thanks to earnings retention, which increased TAA’s equity base.

During 2018-20, the company is scheduled to receive 17 new aircraft, which will be financed by both financial lease and operating lease. Hence, the debt level will increase significantly. However, the capacity expansion will boost operating results and enhance TAA’s equity base.

The stable outlook is based on the expectation that TAA will maintain its dominant position in the LCC segment in Thailand. TAA’s cost management efficiency and versatile operations are expected to withstand seasonal and external factors affecting the airline industry as a whole.

Under the best-case scenario, Tris assumes that TAA’s revenue will grow by 15% a year. Its operating profit margins will be above 20%.

Despite an aggressive expansion plan, debt-to-capitalisation ratio will gradually decline to 71% in 2020. Meanwhile, the earnings before interest, tax, depreciation and amortisation interest coverage ratio should stay above 3.5.

A ratings upgrade is unlikely in the near term based on TAA’s current financial profile.

The downside risk scenario is if TAA’s financial performance deteriorates substantially or if its financial leverage rises significantly above the current level.