Thai Airways International PCL : 15 Aug 2016 Management Discussion and Analysis Quarter 2 Ending 30-Jun-2016

1. Executive summary

   The world economy in the second quarter of 2016 was gradually recovered by the US economy while European economy was slowly recovering. Japanese economy started to improve due to the stimulus package in late April and the delay of increasing in the value- added tax. Asia's overall economy remained sluggish, as the value of exports also shrank. The price of oil has increased from the first quarter of 2016.

   Thai's economy in the second quarter of 2016 improved from the first quarter. Particularly, domestic spending has been driven by government economic measures and accelerating government investment which was grown at a high level. Although the export sector shrank, the supply side had better adjustment from the positive growth of many sectors. The growth was mainly from the support of the tourism sector resulting from the expansion of Chinese, Hong Kong, South Korea, India, Russia, the CLMV, and the American tourists. Thai baht depreciated steadily in line with most currencies in Asia. However, the results of the referendum to the UK from the EU or Brexit (British Exist) on June 23, 2016 is expected to affect the economy of the United Kingdom and Europe and the currencies of GBP and EUR trended to be fluctuated.

   World's airline industry continued to grow steadily based on the data from International Air Transport Association (IATA) indicated the volume of passengers' traffic and production during the first six months of 2016 increased from previous year 6.0% and 6.2%, respectively. The averaged cabin factor was 79.2%. Not only more challenges of uncertainty, both economic and political, terrorism, and natural disasters but the steady drop of crude oil prices which fell and the deteriorating competition also affecting the price of the ticket dropped were beneficial to the increase of travel demand. However, the slowdown of the Chinese economy made the high impact in the economics of partner countries to slow down, particularly the export sector resulting in dropping freight load factor which was down by 44.6% from last year to 42.5% this year.

   Overview of Thailand's aviation industry was likely to grow in a better direction by these some example indicators such as opening of new routes, fleet expansion, and so on resulting from Thailand's political stability, the tourism stimulating program and building confidence in tourism. These expansions were in line with the growth of both South East Asia and the world aviation industries made the industry to expand which corresponds to the number of passengers traveling in-out Thailand at Suvarnabhumi Airport during the second quarter of 2016 proved by 9.74 million, an increase of 4.0% from the previous year.

   In 2016, THAI entered into the second phase of transformation plan "Strength building" by embarking on 4 main strategies: 1) generating uplifting revenue through which focuses on all possible channels 2) managing reducing cost by cost management program, cash and balance sheet management 3) improving capabilities such as Network Management and Optimization, Fleet plan concentrates on simplifying THAI's fleet and enhancing revenue management; 4) building the service excellence in continuing from last year initiatives such as business class service upgrade. In this quarter, THAI took further steps by establishing the 10 years plan and implementing the ROP "MyWallet" which was the latest Digital Pass service and Digital Mobile Marketing Platform designed to integrate ROP's online services and information for better convenience of ROP members, process redesign to enhance efficiency among Business Units such as Catering, Ground Customer service, and so on, and 2016's Mutual Separation Plan(MSP) that there were 280 staff joining the package which effective on June 1 and July 1, 2016, respectively.

   According to the State Enterprise Policy Committee (SEPO) meeting No. 3/2559 held on July 11, 2016 stated that THAI's transformation Plan has well progressed which was consistent with the latest rating by Skytrax (Skytrax Awards) in 2016 that THAI was awarded the first World's Most Improved Airline. The award reflects an airline's quality and performance improvements in many categories: product quality, ground services, and in-flight services. Moreover, THAI was voted the World's Best Airline Lounge Spa.

   Normally, the second quarter is the low season period combining with the fierce competition, especially in Asia-Pacific area caused by the enlargement of low cost airlines and Middle East carriers and the terrorism in Europe where is the leading market of THAI. These caused the 0.6% decrease of passenger traffic (RPK) while production traffic (ASK) reduced by 0.2%. Average cabin factor was 69.0% which was slightly dropped from last year. In June 2016, THAI decommissioned 1 operating lease aircraft: Boeing B777-200 which made the total 94 active aircrafts as of June 30, 2016, which was 1 less aircraft from the previous quarter. Aircraft utilization increased from 10.9 hours last year to 11.0 hours this year with 5.11 million passengers carried representing a 0.8% increase from last year.

   THAI and its subsidiaries' financial performance for the second quarter of 2016 showed an operating loss of THB 1,782 million - a decrease of THB 2,931 million (62.2%) since the fuel expenses decreased by THB 3,182 million (21.3%) resulting from the falling jet fuel prices by 27.9%. Non-fuel operating expense decreased by THB 184 million (0.6%) from last year. Surprisingly, the decreasing fuel surcharge caused reduction of passenger and excess baggage revenue only by THB 536 million(1.6%) due to the better revenue management which made the better coverage of revenue over fuel cost.

   THAI and its subsidiaries had THB 427 million of Mutual Separation plan THB 1,873 million, loss of impairment on assets and aircraft expenses but had THB 595 million gain of foreign currency exchange. Consequently, THAI and its subsidiaries reported the net loss of THB 2,915 million, a decrease of THB 9,839 million loss from last year. Loss attributable to owners of the parent amounted to THB 2,921 million. Loss per share was THB 1.34 compared to last year of 5.85.

   EBITDA was THB 3,662 million while last year's result reported THB -2,304 million. EBITDA margin was 8.9%, as compared to last year's reported -5.5%.

2. Summary of Operating Results for Thai Airways International PCL. and its subsidiaries Financial Performance

The consolidated financial statements for the second quarter of 2016 consists of THAI's financial statement and 5 subsidiary companies which are 1) THAI-Amadeus Southeast Asia Co.,Ltd., 2)Wingspan Services Co., Ltd., 3) THAI Flight Training Co., Ltd, 4) Tour Eurng Luang Co., Ltd., and 5) THAI Smile Airways Co., Ltd.

Note : 1) EBITDA = Total Revenue (Exclude gain/loss on foreign currency) - Total Expenses(exclude finance cost, tax, depreciation and amortization, and impairment loss of assets and aircraft)

For the second quarter of 2016, total revenues decreased by THB 564 million (1.3%) from the same period last year with details as follows:

• Passenger and excess baggage revenue

  Passenger and excess baggage revenue decreased by THB 536 million (1.6%) as:

  • Average passenger yield (including fuel and insurance surcharge) was 2.38 THB/RPK equivalent to the previous year. Also, the weakening Thai Baht against the major revenue currencies partially benefited more revenue. When excluding such effect, the average passenger yield was 2.30 THB/RPK which decreased by 0.08 THB/RPK (3.4%) or THB 1,100 million due to the fierce completion and reduction of fuel surcharge in line with the falling fuel prices.

  • Passenger traffic (Revenue Passenger-Kilometers - RPK) decreased by 0.6%, or approximately THB 210 million since the traffic in Asian region decreased but the domestic routes by ThaiSmile and intercontinental routes, especially Europe and Australia, increased. Production traffic (Available Seat-Kilometers:ASK) reduced by 0.2% due to the discontinued routes which were Bangkok-Madrid , and Bangkok - Los Angeles since last year resulting average cabin factor was 69.0% closed to last year's 69.2%.

• Freight and mail revenue

  Freight and mail revenue decreased THB 77 million (1.7%) because average freight yield (including fuel and insurance surcharge) was 8.32 THB/RFTK, a decrease of 0.44 THB/RFTK(5.0%) or around THB 220 million over last year. Freight traffic (Revenue Freight Ton-Kilometers: RFTK) increased by 3.1 % or around THB 130 million.

• Other income

Other income increased by THB 57 million (12.8%) from last year mainly due to the compensation from lawsuits amounting to THB 45 million.

Total expenses for second quarter of 2016 was THB 3,495 million (7.5%) lower than last year. A summary of operating expenses is as follows:

• Fuel and oil expense decreased by THB 3,182 million (21.3%) due to decrease in average jet fuel price by 27.9% and lower fuel hedging, THB 976 million, compared to the same period last year; however, the depreciating THB against USD cause the higher expense in Baht term.

• Non-Fuel operating expense was THB 184 million (0.6%) lower than last year.

Details as follows: