Is Thai Airways Going to Bankruptcy - Research Paper Example

Is Thai Airways Going to Bankruptcy? due: Is Thai Airways Going to Bankruptcy? The foundation of Thai Airways can be traced back to 1960, when the Thai government realized the lucrativeness of air travel. The government undertook a conjoined investment alongside Thai Air Company (TAC), a Thailand domestic air carrier, and the Scandinavian Airlines System (SAS) to form Thai Airways International. The investment was introduced in the capital market with SAS owning 30%, while TAC owned the rest. The venture was fully owned by TAC on March 30, 1977, when SAS transferred its shares to the venture’s partner. The ministry of finance would take up shares with the business, beginning April 1, 1988, to be the major shareholder with an estimated 51.03% of the company’s shareholdings, while the remaining 48.97% is owned by investors in the domestic and foreign markets, also including the company’s employees (THAI, 2013). Through the years, the company has experienced various challenges, benefits, and implemented different strategies to remain competitive and profitable in a highly competitive international market (Shoffner, Shelly, & Cooke, 2011). There is speculation that Thai Airways may be going bankrupt, following several challenges in generation of revenue. Different scholars and publications have closely followed the progress of the company, often making speculations, and detailing the actions taken by various entities in an effort to prevent the company from going bankrupt. The impeding bankruptcy of the airline follows a number of decisions made by the company, with respect to the market forces. The extent to which the investors are willing to get involved in the recovery efforts will determine the probability and possibility of the company failing. In this study, the aim is to conduct a comprehensive analysis of the company finances and situation to establish the basis of bankruptcy claims and probabilities. Nature of Business Thai Airways is an entity in the transportation industry, such that the ministry of transport manages the domestic, regional and international routes. The nature of the venture means that the products and services offered include air passenger, cargo and mail transport, warehouse, ground passage, ground equipment, and catering and maintenance services. Although the company is renowned for the air passenger services, the other services serve to support this core service. Under the service, the company has witnessed growth in the customers as well as fleet of airplanes, but challenges have resulted in premonitions on the company’s bankruptcy. Improvements to the services offered and competing in the market are part of the company’s 2013-2022 projected plans (THAI, 2013), but there is a high chance that economic and financial challenges currently facing the company were not forecasted. The company’s vision statement emphasize on the need for perspective and vision, as the essential ingredients to ensure competitiveness of the company in the international front. The objective to the approach is ensuring that the airline maintains its position among the prestigious airlines. The vision also incorporates the need for a universal approach towards management of the business with respect to the short and long-term goals of the venture. The struggle for the company is being a first choice for international as well as domestic passengers, as such incorporating a bit of Thai culture, a silky-smooth travel experience, excellence and consistency in all interactions with the customer, thereby achieving overall customer satisfaction. The efforts made by Thai Airways has seen the company generate growth over the years, as well as obtain several accolades for the nature of services offered, though there has been challenges in the industry which range from natural catastrophes to insecurity associated with terrorism, and illnesses. The analysis by the company in 2013 fostered numerous initiatives to ensure continued improvements to the product range and services that were offered to consumers. The approach meant that the company was striving to keep up with international standards of quality in the airline industry. Changes to the Boeing 747-400 and 777-200 fleets, with the seat and entertainment retrofitting program, indicated the lengths to which the company is willing to venture into for continued dominance in the international and regional markets, while ensuring there is consistency in the products offered. Increasing the operations efficiency is another approach that the company incorporates in its annual plans, thereby meeting the needs of the customers effectively and economically. Management is tasked with the responsibility of ensuring continued growth of the venture, and annual analysis and forecasts are part of the approach, but the projections of bankruptcy indicate a challenge to the administration. The success of the company may be viewed as a factor contributing to the decisions made in terms of expansion and reinvestment into different capital entities. Challenges in the company were expected with every year, but there must have been a trigger in the course of the year 2014, which resulted in the bankruptcy claims. The 2013-2022 strategy contained some initiatives that were developed to ensure the success of the company, which begs the question what went wrong. The initiatives that were to ensure the success of the company included internal reorganization, route network expansion, enhancement of products and services, and financial strength maintenance. Internal Reorganization The dynamic conditions of the industry attract the need for reorganization in the airline. Different measures have been instituted in the protocol and procedural activities of management and flexibility in opportunity identification and business expansion. The taking up of Thai Smile Airways is a strategic move to target a unique range of consumers by focusing on the flexibility, efficiency, management, and product offering to complete the advent of international standards. Reorganization allows for several opportunities in the development of business, and associated opportunities and improvements to existing facilities. The initiative intended on keeping the ideas in the airline inventive, creative, and afresh. Reorganization of any business is important for a number of reasons, some financial, others performance oriented. The reorganization targeted different divisions, such as the commercial division, in an attempt to employ new developments such as internet checking for the customers. Reorganization did not mean an increment in the employees, though other initiatives translated to this expense. Expansion of Route Network Part of the initiatives taken by the Airline was expansion of the routes covered, with the intended aim of increasing the customer base. One of the proposals that Thai made was placing emphasis in the generation of direct traffic to Bangkok, attached to the strategic geographic placement, cultural, and natural attractions of Thailand. There were several launches done by the airline such as direct flights between Bangkok and Mandalay, Bangkok and Chongqing, Bangkok and Changxa, and Bangkok and Luang Prabang. The approach, which also incorporated services by Thai Smile, meant acquisition and replenishing the existing fleet. Some finances were spent in the acquisition of 17 new planes (3 A380-800, 6 B777-300ER, 2 A330-300 and 6 A320) in 2013, and consequently in 2014. These crafts were aimed at providing service to the green markets, and thereby being used by Thai Smile as a means of promoting quality service. Product and Service Enhancement Thai service improvement is a continuous program where the needs of different customer needs are pursued. The improvements concentrated on improvement of quality and maintenance of quality. Consistency of the services provided by the airlines is an aspect that is cemented by the company management, with creative ideas such as providing premium class passengers making trips of about 3 to 4 hours with iPads where personalized screens are not available. Improvements in the meals offered in the flight via presentations, introduction of new menu items and the frequency of special meals is part of the approach taken up by the company as a method by which to attract different customer and market niches. The airline has gone to extremes of introducing famous chefs to the airline as a means of enhancing the flight experience. The overall passenger comfort and experience is the main target of the improvements in the airlines, with retrofitting of aircrafts being done to meet market standards. These improvements under aircrafts and services demand new labor force, part of whom were new, thereby increasing the salary and wages budget for the company. Increasing the company expenses should have been met with an equivalent increase in revenue; else an error in the balancing of accounts was eminent. Maintenance of Financial Strength Expansion of the company needs stable financial support, and ensuring the strength of company finances. Financial stability is needed for the company’s growth and obligations indebt must be met by the company, and optimization of the capital restructuring is promoted by the company as a means of coping with the volatile and cut-throat airline industry. Several leases were signed by Thai in the acquisition of aircrafts, which setback the company in the margins, from investors and large institutions supporting the company’s investment plan. The approach was necessary to minimize the risk posed by operations while ensuring ongoing services and maintenance of liquidity. This approach was inevitable, since the company was engaged in a radical expansion of its fleet, aiming at increasing the revenue gathered from the venture. This and the previously mentioned initiatives were taken up irrespective of the challenges posed by economic uncertainty, fluctuation of the global fuel prices, political instability, among other challenges. Financial Health The financial profile of Thai Airways is discussed within. The health stature is determined by the profitability of the engagements by the venture. The profile, considering finances, tells the researcher how well the company is fairing in the free market. It involves an analysis of the income statements, to the risks involved in the industrys operations. The financial profile of Thai Airways is discussed herein. The health stature is determined by the profitability of the engagements by the venture. The profile, considering finances, tells the researcher how well the company is fairing in the free market. It involves an analysis of the income statements, to the risks involved in the industrys operations. Below is a financial profile of Thai Airways: STATEMENT OF INCOME         Total Revenue (Million Baht) 211,605 213,530 194,342 Total Expense (Million Baht) 224,534 206,426 202,259 Profit (Loss) before Income Tax Expense (Million Baht) (12,929) 7,104 (7,917) Profit (Loss) attributable to owners of the parent (Million Baht) (12,047) 6,229 (10,197) Net Profit (Loss) (Million Baht) (12,000) 6,510 (10,162) BALANCE SHEETS         Total Assets (Million Baht) 307,085 304,096 273,956 Total Liabilities (Million Baht) 250,166 234,278 211,009 Shareholders’ Equity (Million Baht) 56,919 69,818 62,947 SHARES         Issued and Paid-up Share Capital (Million Shares) 2,182.77 2,182.77 2,182.77 Par Value (Baht) 10.00 10.00 10.00 Earnings (Loss) Per Share (Baht) (5.52) 2.85 (4.67) Dividend Per Share (Baht) - 0.50 - FINANCIAL RATIOS         Net Profit (Loss) to Total Revenues (%) (5.7) 3.0 (5.2) Return on Total Assets (1) (%) (2.3) 4.5 (0.8) Return of Equity (2) (%) (19.0) 9.8 (14.6) Interest bearing debt to Equity (3) (Times) 3.1 2.3 2.3 1) Return on Total Asset = Net Profit before Interest and Tax / Average Total Assets (2) Return on Equity = Net Profit / Average Shareholder’s Equity (3) Interest bearing debt to Equity = (short-term loan + long-term loan including current portion of long-term loan within 1 year) / Shareholder’s Equity Source: Helena Independent Record. (2015, January 26). PM: Thai Airways wont go bankrupt but faces rehabilitation. Retrieved from http://helenair.com/news/world/asia/pm-thai-airways-won-t-go-bankrupt-but-faces-rehabilitation/article_25220e4a-2b9f-5324-b8b3-43fb5801958c.html Risk Factors influencing Profits 1. Jet Fuel As plane fuel constituted roughly 40% of the Companys working expense, to better ensure the Companys working and money related execution against fuel value vacillation, the Company has put basically a more dynamic and extensive fuel administration approach utilizing both supporting and fuel additional charge to relieve the effect of climbing plane fuel cost. Fuel supporting embraced is for the profit of ensuring the Company against unforeseen spikes in fuel cost and not as intended to theorize against change in fuel value development. In 2013, the Company had the capacity authorize a fuel supporting program that has empowered the expense of plane fuel to stay on the set plan for the year (THAI, 2013). The gathering of fuel additional charge has possessed the capacity to make up for a part of the Companys fuel fetched yet was liable to air travel request, rivalry with different aerial shuttles, level of fuel value variance, market response and the change in real fuel utilization. Dynamic fuel stock administration and dynamic fuel administration were additionally embraced to moderate the effect of the change in fuel cost. 2. Foreign Currency Exchange Fluctuation With the Company acquiring more than fifty separate coinage constituting 70 percent of the Companys aggregate income, hazard administration in this admiration has been the attention on utilizing regular supporting to minimize effect on the Companys money position. Exertion was put towards expanding costs in monetary forms where the Company was net long in income. The staying net overabundance income was then assembled into four noteworthy monetary standards utilizing connection in respect to the fundamental currency (USD, Euro, Yen, and Baht). Post gathering, the net money stream is then figured out how to better match its real liabilities, fuel installment, and airplane working lease installment and worker compensation. Borrowings are then made in the monetary forms with high networking money stream (THAI, 2013). On the other hand, to assure that the Company does not bring about a lot of remote coin obligation, THAI additionally tackled Thai baht obligation to alleviate the outside cash pick up/misfortune effect on the Companys benefit and misfortune articulation. Thai additionally utilizes the Value at Risk (VaR) project to survey the Companys presentation to remote cash vacillation and utilized as an apparatus to enhance financing and danger administration procedures. In 2013, the Company raised Euro subsidizing against its net overabundance Euro money stream to gain 1 A380-800 airship and 2 A330-300 airplane. A subsidizing of THB 9,000 million equal Euro engineered bonds was raised. Spot and forward instruments were utilized to change over different coinage to USD for its fuel installment. From 31 December 2013, the Companys remarkable outside coin borrowings post CCS were EUR: JPY: THB = 55: 8: 37 percent (excluding airplane working lease liabilities) (THAI, 2013) (THAI, 2013). Rivalry in the business air transport industry has gotten to be more extreme as ease transporters and/alternatively, newcomers have joined the conflict of rivalry alongside new participation and unions structured outside of customary partnerships are all changing the working and aggressive scene of the business (THAI, 2013). Thai is keeping a vigilant eye on rivalry particularly on the courses for which Thai presently serves to guarantee that the supply of limit is in accordance with the current request in order to boost its income potential. Changes were made concerning airship sort, size, flight recurrence and flight times to enhance general course execution. Deals and showcasing methodologies were additionally utilized reflecting examination attempted surveying the level of rivalry and deciding key markets that have the potential for further air travel development. To better contend with territorial transporters, Thai dispatched Thai Smile Airways, a light premium item local bearer with a lower working expense structure. To rival newcomers to the business sector, Thai has taken conveyance and updated existing advantages for guarantee that the item and administration offered to its passengers is of global standard and at standard to newcomers to the business (THAI, 2013). An alternate methodology taken is framing extra collusion and participation with different aerial shuttles to augment collaboration and utilize innovative deals and promoting to meet the difficulties presently confronted by Thai. Conclusion Thailands national air transport will be spared from liquidation under a restoration arrangement being worked out between the carrier and government, head Prayuth Chan-ocha (Helena Independent Record, 2015). Misfortunes at state-claimed Thai Airways increased in the previous two years as expanded rivalry and years of fair administration took their toll (Helena Independent Record, 2015). The organization reported a loss of 12 billion baht ($368 million) in 2013 and 9.2 billion baht ($282 million) in the initial nine months of 2014 (Helena Independent Record, 2015). The administration was examining steps to spare Thai Airways from liquidation and has given an introductory green light to a restoration arrangement proposed by the transporter, Prayuth said after a gathering with the legislatures board on state endeavor approach (Helena Independent Record, 2015). Prayuth, who expelled Thailands chosen government in an overthrow a year ago, said the national aerial shuttle will need to cut costs, expand income, drop unbeneficial courses and offer planes that are at present surplus to prerequisites (Helena Independent Record, 2015). His remarks came after hypothesis that the national carrier would bow out of all financial obligations in the not so distant future. Thai Airways said its first need was to cut misfortunes by disposing of unbeneficial courses and by expanding income from its effective courses. References Shoffner, H. George, Shelly, Susan & Cooke, Robert. (2011). Finance for Nonfinancial Managers (3rd Ed.). New York, NY: McGraw-Hill. THAI. (2013). Annual Report. Thai Airways. Helena Independent Record. (2015, January 26). PM: Thai Airways wont go bankrupt but faces rehabilitation. Retrieved from http://helenair.com/news/world/asia/pm-thai-airways-won-t-go-bankrupt-but-faces-rehabilitation/article_25220e4a-2b9f-5324-b8b3-43fb5801958c.html Read More