Time to bid farewell to Thai Airways?
published : 18 Feb 2021 at 04:00
newspaper section: Oped
On March 2, Thai Airways will submit its business rehabilitation plan to the Central Bankruptcy Court. After that, in around May, the court will assemble Thai Airways' creditors to vote on the plan. If a majority of creditors vote yes, the court will appoint rehabilitation plan administrators and Thai Airways will conduct its business according to the plan. If a majority of creditors vote no, Thai Airways will be declared bankrupt and will head towards liquidation.
Originally, Thai Airways intended to submit the plan on Jan 2 but that did not happen. The submission date was then rescheduled to Feb 3. That did not happen either. The submission date is now pushed to March 2 -- one day before the deadline set by law. If Thai Airways fails to submit the rehabilitation plan by that date, it's over.
Thai Airways was a large public organisation and currently employs about 20,000 people. More importantly, the national flag carrier is a vital part of the tourism industry. Before going under, Thai Airways carried over 24 million passengers a year. If half were tourists, it means that Thai Airways alone brought in 1.2 trillion baht (equivalent to 7.3% of GDP) of tourism income to economy. This definitely is not an organisation to be ignored.
Thai Airways never publicly explained the plan and its problems led to submission postponements. But with information from various sources and my own experience in mega-debt restructuring, I can pretty much guess what has been going on. According to my understanding, the first draft of the restructuring plans failed because of three burning issues. The first issue was the abandonment of Thai Smile -- a 100% subsidiary of Thai Airways. Thai Smile has been running at an operating loss for seven consecutive years, about 1.5 billion baht per year, and sees no sign of turning profitable any time soon. Most foreign creditors saw no reason to keep the cash-drained Thai Smile. But certain Thai creditors disagreed as the closure of that subsidiary could result in political repercussions.
The second burning issue was the downsizing of the fleet. The draft called for halving of its fleet of 80 aircraft to fit the new business plan. Well, half a fleet means half an income. Half-sized income means half-sized debt. Creditors, on average, would need to take a 50% hair-cut on their loans.
But in reality, creditors with collateral, like airplane lessors, would get much less haircut depending on the value of the collateral while non-secured creditors, like debenture holders, would bear most of the haircut burden. Super-deep and uneven haircuts caused disagreement among creditors. However, in subsequent drafts, Thai Airways still insisted on the necessity of downsizing its fleet as it could find no profitable routes for those planes.
The last burning issue was most critical and Thai Airways did not have a good answer for it. The issue was about new debt that occurred after it filed for bankruptcy protection in May last year, and the necessary working capital needed when Thai Airways resumes its normal business. Without a regular income, Thai Airways has been losing money -- at least one billion baht a month since the grounding of its fleet. So, it has been secretly borrowing money to pay for necessities such as staff salaries. I estimate that the accumulated new debt and needed working capital for business resumption would amount to at least 30 billion baht. Without this money, the rehabilitation plan will never work.
In response to that, Thai Airways appointed an advisory firm to find the money both from new investors and new borrowing. The appointment of an additional adviser is a controversial one as the fee is a whopping 600 million baht. The fee is high because the adviser will only get the full amount if it can find new investors and funds. I don't think the money-finding scheme worked, resulting in the postponement of the February submission date.
Be real. Who would be brave enough to invest in an airline business now? If one wants to do so, one has 25 bankrupted airlines around the world to choose from. And a few more months, there is likely to be more airlines filing for bankruptcy. Finding money for Thai Airways would be most difficult.
Plan A failed to get investor's blessing because there is no identification of cash injection sources. Plan B failed to get the consent again because Thai Airways cannot find cash. Now we are in Plan C which has to be submitted before the March 3 deadline.
Without the necessary cash injections, Thai Airways is as good as dead.
Under Plan C, it seems like Thai Airways is preparing itself to walk down the bankruptcy route. But before facing the cruel fact, it wishes to save its four siblings -- Thai Catering, Thai Cargo, Thai Ground Services, and Thai Technical. Three siblings -- Thai Crew Centre, Thai Flight Training Centre, and Thai Smile -- will not be saved. But without the mother who carried 24.5 million passengers a year and flew 80 aircraft around the world, these four siblings will find difficult to survive on their own. I do not want to see Thai Airways die. The country should not risk leaving more than 10 million cash-paying foreign tourists in the hands of foreign carriers.
Here is my suggestion. The government should be the one which provides the "seed" necessary for finding a cash injection. The government does not need to pay anything upfront, but just simply agree to purchase services from Thai Airways for five consecutive years at the amount of 10 billion baht a year. With the 5-year purchase contract totalling 50 billion baht from the government, Thai Airways can use that contract as collateral for a new 30 billion baht loan or even lure new investors.
In exchange for the contract, Thai Airways has to commit to bringing in a minimum of three million foreign tourist a year. Why?
First, the country will have secured 150 billion baht of foreign tourist income. Second, the government will get 26 billion baht in tax revenue from those tourists, calculated based on 17.5% effective tax rate. Third, the government would get 10 billion baht a year in travel vouchers from Thai Airways. Fourth, at least 10 thousand people can keep their jobs at Thai Airways and all its siblings will survive.
A win-win solution?
Chartchai Parasuk, PhD, is a freelance economist.