Thai Airways PCL : 16 May 2016 Management Discussion and Analysis Quarter 1 Ending 31-Mar-2016

Microsoft Word - MD&A_ENG_2016V2.0 Management's Discussion and Analysis for three months ended March 31, 2016 for Thai Airways International Public Company Limited and Its Subsidiaries

1. Executive summary

   Overview of the global economy in the first quarter of 2016 is likely to expand at a low level. It has been affected by the economic slowdown in China and the volatility of capital flows flowing into emerging markets resulting the negative impact on the growth of developing countries significantly while the economic growth of Europe and Japan are still at low levels. However, the US economic is recovered relatively strong is expected to drive global economy through the next stage. Crude oil prices still remained low, with the average price in the first quarter of 2016 was

   30.4 USD per barrel.

   The economy of Thailand in the first quarter of 2016 gradually recovered, partly as a result of the government's economic measures has taken continuously. With the support of the tourism sector, the number of tourists grew at nearly every region, especially from East Asia. As Thailand's main tourist market, Chinese tourists has grown steadily over the years and most of them travel during the festival throughout the year, especially in the first quarter, with the Chinese New Year. In addition, European and Russian tourist market continued to expand continuously. However, the export sector of Thailand was still at risks from the uncertainty of the global economy. As a result, the confidence of economic declined and affected private consumption to slow down.

   In the first quarter of 2016, the world's aviation industry is still facing the challenges of uncertainty, both economic and political. With incidents of terrorism in Europe, they affected travel demand of tourists, especially in major markets including the European market. Not only more rivalry from the expansion of low cost and the Middle East airlines and fluctuations in exchange rates but the steady drop of crude oil prices which fell by 41.7% compared to last year and the deteriorating competition affecting the price of the ticket dropped were beneficial to the increase of travel demand. According to data from the International Air Transport Association-IATA show a continued growth in both of passengers traffic and production which increased by 7.0% and 7.0%, respectively, resulting 78.7% of averaged cabin factor. 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 the dropping freight load factor.

   The aviation industry in Thailand is likely to expand which corresponds to the number of passengers traveling in-out Thailand at Suvarnabhumi Airport during the first quarter of 2016 proved by 11.03 million, an increase of 6.6% from the previous year. However, there is still a risk factor from intensifying competition, oversupply situation, jet fuel price, and fluctuations in foreign currency exchange.

   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; revenue from passenger, freight, Business units, and technical services 2) managing reducing cost by cost management program, cash and balance sheet management;, and aircraft selling 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 had total 95 active aircrafts, 9 less aircraft than the same period last year. With adjustment in flight frequencies and aircraft types to suit market demand caused more efficient aircraft utilization to increase from 10.7 hours last year to 11.5 hours this year. Production traffic (ASK) reduced only by 1.8% while passenger traffic (RPK) increased by 0.9%. Average cabin factor was 77.5% comparing to 75.4% last year with 5.92 million passengers carried representing a 5.3% increase from last year.

   2

   THAI and its subsidiaries' total revenue, the amount of THB 50,183 million, decreased by THB 1,384 million(2.7%) when comparing to the same period last year due to the reduction of passenger and excess baggage revenue on the back of decreasing fuel surcharge as well as higher competition. However, the number of passenger carried was 5.3% higher than last year, total expenses, the amount of THB 43,003 million, decreased by THB 4,149 million (8.8%) since the fuel expenses decreased by THB 3,637 million (25.1%) resulting from the falling jet fuel prices by 37.6%. Non-fuel expense decreased by THB 524 million (1.7%) from last year mainly from production decrease in-conjunction with ongoing cost management.

   THAI and its subsidiaries' financial performance showed an operating profit of THB 7,180 million, or a THB 2,765 million (62.6%) increased from last year. Special items include THB 1,153 million maintenance provision expense for lease aircraft, THB 174 million impairment loss of assets and aircraft, and THB 681 million loss on foreign currency exchange. Net profit for the period was THB 6,011 million. Profit attributable to owners of the parent amounted to THB 5,999 million with profit per share of THB 2.75, increased by THB 0.67(32.2%) from last year.

   EBITDA was THB 12,049 million, which increased THB 1,133 million or 10.4% over last year. EBITDA margin was 24.0%, as compared to last year's reported 21.2%.

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

The consolidated financial statements for the first 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.

Financial Performance : THAI and its subsidiaries Unit : Million Baht Jan - Mar Variance 2016 2015 MTHB %

Total operating revenues		50,183	51,567	-1,384	-2.7
- Passenger and excess baggage revenue		42,045	43,523	-1,478	-3.4
- Freight and mail revenue		4,412	4,905	-493	-10.1
- Revenue from other activities		3,283	2,788	+495	+17.8
- Other income		443	351	+92	+26.2
Total operating expenses		43,003	47,152	-4,149	-8.8
- Fuel and oil		10,843	14,480	-3,637	-25.1
- Non-fuel operating expenses		30,821	31,345	-524	-1.7
- Net finance cost		1,339	1,327	+12	+0.9
Operating Profit		7,180	4,415	+2,765	+62.6
Less Maintenance provision for operating lease aircraft		1,153	-	+1,153	-
Less Impairment loss of assets and aircraft		174	11,804	-11,630	-98.5
Add Gain (Loss) on foreign currency exchange		(681)	9,654	-10,335	-107.1
Profit before tax		5,172	2,265	+2,907	+128.3
Net Profit		6,011	4,549	+1,462	+32.1
Profit attribute to owners of the parent		5,999	4,541	+1,458	+32.1
Net Profit per share (THB)		2.75	2.08	+0.67	+32.2
Significant operating data
EBITDA (MTHB)		12,049	10,916	+1,133	+10.4
Number of passengers (Million)		5.92	5.62	+0.30	+5.3
Available Seat-Kilometers (Million)		21,476	21,869	-393	-1.8
Revenue Passenger-Kilometers (Million)		16,637	16,489	+148	+0.9
Cabin factor (%)		77.5	75.4	+2.1
Passenger yield (THB/RPK)		2.50	2.60	-0.10	-3.8
Available Dead Load Ton-Kilometers (Million)		890	988	-98	-9.9
Revenue Freight Ton-Kilometers (Million)		508	596	-88	-14.8
Freight load factor (%)		57.1	60.3	-3.2
Freight carried (Ton)		140,626	151,768	-11,142	-7.3
Freight yield (THB/RFTK)		8.18	7.81	+0.37	+4.8
Number of active aircraft (Aircraft)		95	104	-9	-8.6
Flight hours (Hours)		97,855	98,563	-708	-0.7
Aircraft utilization (Hours/Aircraft/Day) Average foreign currency exchange rate		11.5	10.7	+0.8	+7.5
1 USD : THB	35.6470	32.6462	+3.0008	+9.2
1 EUR : THB	39.3163	36.7544	+2.5619	+7.0
100 JPY : THB	30.9407	27.4246	+3.5161	+12.8
Average jet fuel price	(USD/BBL)	48.11	77.06	-28.95	-37.6

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)

4

Revenues of Thai Airways International PCL. and its subsidiaries

Total revenues for the first quarter of 2016 decreased THB 1,384 million(2.7%). Details are as follows:

• Passenger and excess baggage revenue

  Passenger and excess baggage revenue decrease THB 1,478 million (3.4%) over last year as:

  • Average passenger yield (including fuel and insurance surcharge) decreased by 0.10 THB/RPK(3.8%) or approximately THB 1,665 million. However, there was a positive factor which was the weakening Thai Baht when compared to major revenue's currencies which are EURO, USD, and Japanese Yen which caused the higher passenger yield If excluded this effect from foreign currency exchange which average passenger yield increased by 0.05 THB/RPK approximately around THB 830 million, average passenger yield decreased by 5.8% or THB 2,495 million due to the fierce completion and reduction of fuel surcharge in line with the falling fuel prices,

  • Passenger traffic (Revenue Passenger-Kilometers:RPK) increased by 0.9%, approximately THB 385 million due to the increase of domestic routes by ThaiSmile, intercontinental routes: Europe and Australia, and some regional routes: Western and Indochina. However, some regional routes: Northern, Southern, and Middle East, decreased. Production traffic (Available Seat-Kilometers:ASK) reduced by 1.8% due to the discontinued routes which were Bangkok - Johannesburg, Bangkok-Moscow, Bangkok-Madrid , and Bangkok - Los Angeles since last year. Average cabin factor increased from 75.4% last year to 77.5% this year.

• Freight and mail revenue

Freight and mail revenue decreased by THB 493 million1(10.1%). Average freight load factor was 57.1% compare to last year's 60.3% due to the decrease of freight production(Available Dead-load Ton-Kilometers:ADTK) by 9.9% resulting from decommission of 2 Boeing B747F freighter aircraft in March 2015. (Revenue Freight Ton-Kilometers: RFTK) decreased by 14.8 % or around THB 687 million while average freight yield (including fuel and insurance surcharge) was

Other income increased by THB 92 million(26.2%) from last year due to revenue from other services of Technical department.