THAI to stick landing:
Its finances in free fall, the national carrier is readying amake-or-break rehabilitation plan to wino vera sceptical government, write Wic hit Chantanusornsiri, Dusida Worrachaddejchai and Darana Chudasri
The clock is ticking for loss-ridden Thai Airways International Plc( THAI) as it seeks a much-needed life line from the government or risks becoming another chapter in the history of national flag carriers to go bust, with the lives of about 21,000 employees hanging in the balance.
The outcome for Thailand’s financially beleaguered flag carrier is set to be unveiled by the end of this month, as Transport Minister Saksayam Chidchob said THAI must submit a rehabilitation plan within May if it wants the government to consider a rescue package.
THAI plans to seek short-term loans worth 54 billion baht to finance operating expenses as it undertakes a rehabilitation plan.
In exchange for the loans, the carrier is obliged to follow through on a rehabilitation plan to be approved by the cabinet. The obligations include cost management such as an early retirement scheme.
But the amount is not the full bailout sum, as a further 80-billion-baht capital increase is needed afterward for the rescue plan.
The government is ready to back a rescue package for THAI, but it will entail a full restructuring and there will be no second chance, Prime Minister Prayut Chan-o-cha has said.
The State Enterprise Policy Committee has already submitted the restructuring proposal, which would be forwarded to the Transport Ministry for consideration. It will have to be scrunitised further before being forwarded to the cabinet for approval.
There have been heated discussions in the online and offline worlds along with insights offered by politicians, bankers and academics on possible solutions for THAI and, more importantly, the fact that taxpayer money worth more than 100 billion of baht could be used to fund a state-owned enterprise saddled with a long history of corruption and nepotism.
FALL FROM GRACE
THAI’s fall from grace may be accelerated by the Covid-19 pandemic as the aviation and tourism industries across the globe suspend their flights and activities as a result of lockdown measures. But the carrier’s financial situation was assuredly in dire straits long before the outbreak.
THAI posted a net loss of 2.11 billion baht in 2017, widening to 11.6 billion baht in 2018 and 12 billion baht last year, according to data from the Stock Exchange of Thailand. THAI’s debtto-equity ratio rose to 21 times in 2019 from 12 in 2018 and 7.8 in 2017.
The company also has debentures worth 6.5 billion baht that will mature this year, with a total outstanding amount of 70.1 billion baht that will gradually mature over the next 15 years, according to the Thai Bond Market Association.
Suwat Wattanapornprom, an analyst at Asia Plus Securities, said the company’s equity base, registered at 11.7 billion baht as of year-end 2019, is not enough to cover operating losses t hi s yea r.
Borrowing loans from banks and using sales and leaseback for financing are quite difficult in the current situation, so the available choices could be a capital increase or a bond financing guarantee by a government entity, Mr Suwat said.
“The equity base would nearly disappear, as the company is expected to log a net loss of about 11 billion baht this year,” he said.
A former THAI executive, speaking on condition of anonymity, said the current financial crisis of the company needs a speedy and decisive decision from the prime minister on whether to extend a lifeline to the flag carrier as a state-owned enterprise or opt for a bankruptcy filing.
If Gen Prayut agrees with the second option, the cabinet should not endorse the rescue package, the former executive said.
In the event of a bankruptcy filing, the government can still provide financial assistance later. This solution would let the carrier continue to exist in the future, as the business could run in accordance with a rehabilitation plan under the Bankruptcy Act, the person said.
But if the country still needs a national carrier, every related agency has to provide effective and concrete solutions to preserve the airline, particularly negotiating a budget of financial support to continue business operations.
“But the prime minister also has to realise that whateverchoice he makes, it will certainly encounter side effects,” theformer executive said. “He has tocarefully choose thepath with the most acceptable consequences.”
VIABLE OPTIONS
Only a handful of options appear available to rescue the ailing airline. Besides using taxpayer money to fund the bailout package, a bankruptcy filing and undergoing a process of nationalisation or privatisation are viable solutions for the airline famous for its “Smooth as Silk” slogan.
THAI’s labour union has made it clear it would oppose any plan that seeks to privatise the airline’s businesses, insisting that the company must remain a state enterprise and a single organisation. But the union later retracted its demand calling for a single entity, characterising it as a viable option for survival.
The union has also called for no forced layoffs and demanded that its representatives have a say in the rehabilitation plan, instead of leaving it to board members and executives to make the crucial decisions.
The Finance Ministry owns 51% of THAI, which legally makes it a state-owned enterprise. B utt he state- o wned status h asu n de rmin edt he airline’s competitiveness and efficiency, due to legal restrictions in business development, and created greater opportunity for corruption and political intervention.
There are two ways to solve THAI’s financial problems: privatisation or nationalisation, former finance minister Thirachai Phuvanatnaranubala told local media in a televised interview.
“Taking the middle path will not help the company to survive,” Mr Thirachai said. “If the government provides a debt guarantee, it will be difficult to explain to the public why the state has to use taxpayers’ money to bail out an airline where private shareholders make up 49%, and some of them are foreign shareholders.”
Using taxpayer money to bail out the airline could violate the law, as it might be viewed as exercising state power for the benefit of the 49% private shareholders, he said, adding that a vague rehabilitation plan does not justify the bailout move.
If nationalisation is chosen, the government will have to compensate shareholders fairly based on asset appraisal value and the airline will have to undergo a “major dissection” and “significant downsizing”, Mr Thirachai said.
Revamping future management to be self-reliant is a must, while a small operational scale will lend support to less political interference in the company, he said.
Nationalising or using taxpayer money to assist THAI are not viable solutions, said Thanathorn Juangroongruangkit, leader of the dissolved Future Forward Party, presenting his views via Facebook Live.
This is because history has proved that the airline has failed to revamp its business and beef up competitiveness after receiving a series of liquidity injections from the government, Mr Thanathorn said.
He advocates either letting the airline go bankrupt or a short-term bridge loan provided by the government. Both of these options will have to be followed by diluting the government’s shares in Thai Airways to 0-25% and putting the airline’s shares up for sale to new shareholders.
Against the backdrop of THAI’s current financial status, a bankruptcy filing, referred to as entering into a business rehabilitation plan under the Bankruptcy Act, is the most viable option for THAI, Banyong Pongpanich, chief executive of Phatra Securities Plc and a former THAI board member, told local media in an online interview.
It is a process for various stakeholders, such as shareholders, creditors and employees, to come into an agreement on how to proceed with the next step, with two main objectives at stake: maintaining the economic value of the business at a maximum and sharing the value with different stakeholders fairly, Mr Banyong said.
Several world-renowned airlines have undertaken business rehabilitation through bankruptcy filings, such as Pan American World Airways, United Airlines, Swissair, Japan Airlines and Malaysia Airlines, he said.
The most recent airline bankruptcy filing was Colombia’s Avianca, the world’s second-oldest extant airline after KLM Royal Dutch Airlines, due to the Covid-19 crisis.
In the case of THAI, the saga resembles Italy’s Alitalia: the airline filed for bankruptcy in 2017 after employees rejected a job-cuts proposal aimed at reducing costs. Moreover, both Italy and Thailand have made considerable revenue from tourism, with the industry contributing to more than 10% of GDP.
Veteran independent academic Somjai Phagaphasvivat thinks the government should provide assistance based on a
“strategic holding” approach by requiring the airline to come up with a rehabilitation plan on business and debt management, downsizing operations and reforming the entrenched patronage system.
Private shareholders should also inject capital or opt for converting the company’s liabilities into common stock, Mr Somjai told the Bangkok Post.
“There needs to be a strategic and clear business rehabilitation plan from Thai Airways, otherwise any amount of liquidity injection will not help,” he said. “Transforming a state-owned enterprise does not fully guarantee success. Private shareholders could monopolise the business.”
‘THOSE IN POWER’
In hindsight, the near-collapse of THAI, whose origins date back to 1960 as a joint venture with Scandinavian Airlines before becoming a state-owned enterprise in 1977, comes as no surprise to many. The national carrier has had issues related to procurement corruption, deep-rooted patronage and political interference, as well as failure to compete against low-cost airlines amid stiff competition in global aviation.
Former THAI president Sumeth Damrongchaitham resigned in March, saying he decided to step down after “those in power” told him he was done with his mission.
Political interference is a deep-rooted problem for the airline. Most of the board members are hand-picked by politicians who supervise the Transport and Finance ministries. The chairmen mostly come from the Royal Thai Air Force in what is seen as a package to please the military, an influential camp in Thai politics.
The culture of a patronage-driven and elitist system is prevalent at the company, as the airline is seen as a treasure trove to be exploited for personal gain by those in the management rank and the upper class.
One of the most scandalous cases in the company’s history relates to engine procurement with Rolls-Royce.
According to the statement of facts prepared in a British court, the period of the scandal dates to 1991-2005 and involves a US$36.38-million payment to “regional intermediaries”. Some of the money was for individuals who were “agents of the state of Thailand and employees of Thai Airways”.
Another scandal dates back to 2015, when the National Anti-Corruption Commission found four THAI officials guilty of selling tickets outside the system at lower prices.
A long history of having some ticket sales go through agents also means that the airline is losing a portion of revenue. Stopping the practice should allow for an increase in online sales directly to passengers.
Over-the-top perks for employees are another case in point. For instance, it was reported in 2013 that THAI had an unconditional policy of paying personal income tax for employees who started their career at the airline before 2005.
The same news report said the airline shouldered the price difference of personal income tax payment by expediting a sum of 40-50 million baht for the 2013 tax filing for 4,000 employees who started their jobs on Jan 1, 2005.
Total non-fuel expenses totalled 137.6 billion baht in 2019. When combined with fuel expense and net finance cost, total operating expenses stood at a staggering 196.5 billion baht, compared with total operating revenue of 184 billion baht.
The Bangkok Post contacted a THAI employee for comment, but the person said no staff are allowed to discuss the company’s situation or post Facebook comments about the airline.
HOME COOKING
Despite cementing its prestigious status as Thailand’s flag carrier for 60 years, debates continue over whether a national carrier is even needed in modern times.
Having a national carrier does not necessarily yield a negative or positive impact, said Mario Hardy, chief executive of the Pacific Asia Travel Association (Pata). This is because at the end of the day, it doesn’t matter to an everyday traveller who owns the carrier, as effective management of the organisation, safety, reliability and consumer confidence are more important, he said.
“As opposed to national carriers, I would rather talk about the advantages of homebased carriers regardless if they are government or privately owned,” Mr Hardy said. “The benefit of a home-based carrier for a consumer is the direct service, meaning there is no need to transfer in between to get to your final destination.”
To have a national carrier or not is ultimately a national and political decision, said Jeffrey Goh, chief executive of Star Alliance, the largest global aviation alliance of which THAI was a founding member.
Historically, national airlines were regarded as a nation’s flag carrier, particularly over international seas, Mr Goh said. But aviation liberalisation has led to growth of airlines across the world.
Today some airlines are truly state-owned and represent the nation (THAI), while others are not state-owned but regarded as the national airline (Aegean Airlines of Greece). There are also other airlines that are not state-owned and not regarded as the national airline (Wizz Air of Hungary).
Albert Tjoeng, assistant director for corporate communications in Asia-Pacific at the International Air Transport Association, said IATA is urging the government to consider providing direct financial support, including staff cost subsidies or support, loans or loan guarantees, and support for the corporate bond market and tax relief to airlines suffering from coronavirus impact.
“The key thing is to have a viable airline industry to support the economic recovery when the pandemic is contained, connect manufacturing hubs and support tourism,” Mr Tjoeng said.
Thailand still needs a national carrier to support the government’s policy, strengthen its bargaining power and come as a boon for the country’s development, a source at the Finance Ministry said.
With a national carrier, more inbound flights from China, for instance, could be offered to support the government’s policy to increase the number of Chinese tourist arrivals, the source said.
“Certainly pumping money into Thai Airways is not financially worthwhile in the short-term, but it is a worthwhile investment in terms of government policy support,” the source said.
The national carrier will no longer be classified as a first-tier state enterprise if the Finance Ministry’s shareholding is diluted to less than 50%, enabling it not to comply with several laws and increasing its flexibility.
State enterprise status, therefore, remains crucial for the flag carrier’s survival, as it could be hard for THAI to borrow money without the Finance Ministry’s guarantee, the source said.
To help the national carrier survive in a sustainable way, downsizing the organisation is inevitable because the business’s profit margin is thin, the source said, adding that THAI should strike a partnership with profit-making businesses related to aviation.
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Taking the middle path will not help the company to survive. THIRACHAI PHUVANATNARANUBALA Former finance minister