Thai Airways International PCL : 08 Nov 2018 Management Discussion and Analysis Quarter 3 Ending 30 Sep 2018

Management's Discussion and Analysis for the third quarter ended September 30, 2018 for Thai Airways International Public Company Limited and Its Subsidiaries

1. Executive summary

The overall world economy had expanded well due to the continued recovery of private consumption and expansionary monetary policy. The economy expansion of USA was still rise; meanwhile, the economy growth of EURO zone, Japan and China began to slow down. Crude oil prices in the world market remained high. In the third quarter of 2018, average crude oil price was USD 74.2 per barrel, 46.9% higher than last year.

Thai economy in the third quarter was likely to continue to grow resulting from expansion of consumption and investment which mainly came from both the public and private sectors. The expansion was also supported by the growth of export sector from the major trading partners and world trade but in September the figures showed the first contraction in the 19th consecutive month resulting from the economy weakness of Chinese and Australia market. In addition, the tourism sector expanded dramatically due to the growth of foreign tourists. The number of international tourists arriving in Thailand in the third quarter of 2018 was 9.1 million, an increase of 3.4% over the previous year. This was despite a slight decrease in the number of arrivals from the first half of the 2018 due to the boat tragedy in Phuket, the number of Chinese tourists, which accounted for 29.3% of total foreign tourists diminished in September 2018 by -14.9% comparing to the previous year. The continuous reduction of Chinese tourists had indicated the obvious figures since July and August by -0.9% and -11.8%, respectively. However, the Ministry of Tourism and Sports predicted that this would be temporary and would rebound in the next quarter.

In the third quarter of 2018, the global aviation industry continued to expand as well as passenger demand continued to increase. However, the trend of expansion had decreased compared to last year. According to the International Air Transport Association (IATA), passenger traffic growth in the 9 months of this year was 6.7%, down from 7.7% in the same period last year. Ticket prices had escalated from last year due to higher costs due to increasing jet fuel prices resulting the drop of travelling demand. Asia-Pacific airlines have the highest passenger volume growth while India's domestic passenger traffic growth rate was double-digit for the 49th. consecutive month. The passenger production increased 6.0% from the previous year, and the average cabin factor was 82.3% higher than 81.7% of last year, while overall freight growth continued to be driven by increased global trade but slow down trend since mid-2017. The growth of freight traffic during the 9 months of 2018 increased by 3.7%, less than last year's growth of 10.1% while the freight load factor for the 9 months of 2018 was 44.1%, slightly less than the previous year at 44.4%.

Thai aviation industry in the third quarter of 2018 continued to expand supported by various factors include: growth of Thai economy, the continued increase in tourist arrivals despite some of the Chinese tourists decreased, the release of ICAO's red flag which was successfully completed in October 2017. The return to FAA's Category 1 which was in preparation for the Pre Audit process in January 2019, and the development of airport capacity in Thailand which entered the 2nd. Phase of Suvarnabhumi Airport Development, the 3rd. phase of Don Muang Airport Development, and U-Tapao Development Project. However, fuel prices have risen this year, resulting in higher operating costs for the airline.

In the third quarter of 2018, THAI followed the guideline of 2018 transformation plan which consisted of 5 core strategies including 1) creating profits from increasing revenues, controlling cost structure by adopting low-cost business models, 2) transforming business units to profit centers by seeking new business opportunities and increasing efficiency in asset management, 3) improving and integrating service ring to better customer engagement, 4) implementing digital applications to increase performance and to create a competitive, and 5) developing human resources focused on organization structure and from last year organizational culture, leadership, and human resource development.

In this quarter, significant actions were:

•  The development of revenue efficiency aimed to increase all types of revenues throughout THAI such as passenger revenue via the Revenue Management System (RMS), ancillary revenue via online/digitalization channel, and etc..

•  The development of operation with ThaiSmile to be more efficient and profitable. The

Performance Monitoring Board of Thai Smile Airways Co., Ltd. has established guidelines for operation improvement, such as improving flight planning to increase the utilization, reducing frequency of unprofitable flights, increasing profitable flights, and etc..

•  THAI, Royal Thai Navy, and Eastern Economic Corridor Office Sign Memorandum of Understanding (MOU) on August 10, 2018 that granted THAI, a pioneer project of The TG MRO Campus, the rights to operate at U-Tapao International Airport in the Eastern Special Development Zone. This MOU was the outcome of the feasibility study and analysis report which would be used as part of approval in principle from the Eastern Economic Corridor Policy Committee. The result of successful cooperative efforts between THAI and the government sector which led to establishment of TG MRO Campus, a pioneer project in the EEC area of vital importance to Thailand.

•  THAI and Rolls-Royce held an opening ceremony to launch the THAI and Rolls-

Royce Trent XWB Engine Research and Development Testing Program, the first collaboration of this kind in the world on September 6, 2018. The project would take place over a two year period at THAI's Engine Test Cell and was initiated with the main objective to conduct research and further develop Trent XWB-97 engines, which powers the Airbus A350-1000 aircraft. Rolls-Royce has chosen to conduct tests on its engines at THAI's Engine Test Cell, located at THAI's Technical Department, Don Mueang Airport, where is the first aircraft maintenance center that has received trust, confidence, and cooperation from Rolls-Royce for engine research and development testing that is conducted outside of the United Kingdom. This program is part of the strategic plan for 2018-2019 and is a revenue generating in the future, collaborative project for the Company, whereby technology and skills gained will further strengthen Thailand's aviation industry.

•  THAI had a 2019-2024 fleet development plan, which acquired for replacing older aircraft aging over 20 years. Currently, the plan is being revised and updated to match the market situation and actual usage resulting from the recommendations of the Office of the National Economic and Social Development Board (NESDB) to present to the Board of Directors for approval before the Ministry of Transport.

•  THAI announced that it would form the alliance with 3 state enterprises comprised with Tourism Authority of Thailand (TAT), Airports of Thailand Public Company Limited (AOT), and Krungthai Bank Public Company Limited, to boost Thailand's economy for Thailand's sustainable growth. The three state enterprises will cooperate with THAI as follows:

  - Tourism creates the greatest revenue for the country, especially the strategy support tourism Thailand's secondary destinations that will boost aviation business, create jobs and revenue in all sectors throughout Thailand. THAI will bring tourists to all secondary destinations, whereby the Tourism Authority of Thailand will provide support through advertising and public relations.

  - With regard to THAI's part in the Thai aviation industry, as the national carrier of

Thailand, THAI operates the most roundtrip flights to and from Suvarnabhumi Airport and joining forces with the Airports of Thailand Public Company Limited will boost Thailand as the regional aviation hub.

- In support of the Thailand 4.0 strategy and in the digital media, the leading state enterprises must support each other in the area of "Big Data." THAI, TAT, AOT, and Krungthai Bank will develop tourist segment information and make "Payment Gateway" development making it easy and convenient to make purchases with THAI.

•  THAI decommissioned 2 Boeing 737-400 aircraft and successfully sold 1 aircraft held for sale which was Airbus A330-300 aircraft.

•  THAI Issued the 2nd. series of new debentures amount of THB 7,000 million on

August 16, 2018 their maturity between 1-15 years. The main purposes were to repay the maturing debentures, repay the debentures with higher financial costs and invest in assets, and use as working capital.

Moreover, the board of director appointed Mr. Sumeth Damrongchaitham as a new President being effective since September 1, 2018.

Resulting from the accomplishment of services development, THAI was honored the TTG Travel Hall of Fame for the 3 consecutive times after winning the Best South East Asian Airline Award at the TTG Travel Award for 10 consecutive years.

In this quarter, THAI and its subsidiaries had total 103 active aircrafts as of September 30, 2018, 4 more aircraft than the same period last year. THAI decommissioned 2 Boeing B737-400 aircraft. The aircraft utilization was 12.1 hours, equal to last year's. Production traffic (ASK) increased by 2.0% while passenger traffic (RPK) increased by 1.0%. Average cabin factor was 77.5% lower than 78.2% of last year with 6.0 million passengers carried closed to last year's as well.

The third quarter of 2018 was normally a low-season period; however, competition in the aviation industry was still intense with the rising world oil prices causing the reduction of traveling demand while operating cost increased. Unfortunately, THAI confronted various natural disasters during September 2018 which included Typhoon Jebi stroke Japan forced Kansai International Airport to shut down the operation since its runways were damaged and flooded, Hokkaido earthquake, Typhoon Mangkhut stroke Hong Kong, and the decrease of Chinese tourists mainly from the boat tragedy in Phuket significantly impacted the tourism sector mentioned early.

THAI and its subsidiaries's performance for the third quarter of 2018 had operating loss of THB 3,934 million compared to THB 300 million profit of last year since the increased operating expenses were increased more than the increase revenues. Total expenses from last year enlarged by THB 5,259 million (11.3%) due to an increase in fuel expenses of THB 3,499 million (29.4%) from the rising fuel price which increased significantly by 41.0% compared to the same period last year. Non-fuel operating expense enlarged by THB 1,862 million (5.5%) from last year mainly from the upsurge in maintenance and overhaul expense as well as the increase in lease of aircraft and spare parts. Total revenue increased by THB 1,025 million or 2.2% due to an increase of passenger and excess baggage revenue: THB 304 million(0.8%) from the increase in passenger traffic. Freight and mail revenues increased by THB 561 million (10.9%). Other revenues also increased by THB 360 million (12.3%).

This quarter THAI had one-time expenses consisted of impairment loss of assets and aircraft, amount of THB 371 million, gains on foreign currency exchange was THB 299 million mainly from balance sheet revaluation.

Consequently, THAI and its subsidiaries reported the net loss of THB 3,686 million which was more loss by THB 1,872 million (103.2%) of last year. Loss attributable to owners of the parent amounted to THB 3,701 million. Loss per share was THB 1.70 per share, THB 0.86 or 102.4% more loss than last year.

EBITDA was THB 1,198 million, which decreased THB 4,638 million (79.5%) over last year. EBITDA margin was 2.5%, as compared to last year's reported 12.4%.

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

The consolidated financial statements for the third quarter of 2018 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) THAISmile Airways Co., Ltd.

Financial Performance : THAI and its subsidiaries

Jul - SepUnit : Million Baht

2018	2017
47,953	46,928
38,494	38,190
5,698	5,137
3,296	2,936
465	665
51,887	46,628
15,391	11,892
35,421	33,559
1,075	1,177
(3,934)	300
-	92	-92
-	5	-5
371	1,503	-1,132
299	(829)	+1,128
(4,006)	(2,129)	-1,877
(3,686)	(1,814)	-1,872
(3,701)	(1,825)	-1,876
(THB)	(1.70)	(0.84)	-0.86
EBITDA	(MTHB)	1,198	5,836	-4,638
Number of passengers	(Million)	6.01	5.99	+0.02
Available Seat-Kilometers	(Million)	23,391	22,931	+460
Revenue Passenger-Kilometers	(Million)	18,121	17,936	+185
Cabin factor	(%)	77.5	78.2
Passenger yield	(THB/RPK)	2.09	2.10	-0.01
Available Dead Load Ton-Kilometers	(Million)	1,035	959	+76
Revenue Freight Ton-Kilometers	(Million)	612	609	+3
Freight load factor	(%)	59.2	63.5
Freight carried	(Ton)	173,528	168,547	+4,981
Freight Yield	(THB/RFTK)	8.76	7.90	+0.86
Number of aircraft(As of September 30)	(Aircraft)	103	99	+4
Flight hours	(Hours)	106,119	102,329	+3,790
Aircraft utilization	(Hours/Aircraft/Day)	12.1	12.1	-
Average foreign currency exchange rate
1 USD : THB	32.9732	33.3875	-0.4143
1 EUR : THB	38.3502	39.1969	-0.8467
100 JPY : THB	29.5740	30.0863	-0.5123
Average jet fuel price	(USD/BBL)	94.33	66.89	+27.44

Variance MTHB

- Other income

Total operating expenses

- Fuel expense

- Non-fuel operating expenses

- Net finance cost

Operating profit (loss)

Less Maintenance provision for operating lease aircraft

Less Loss from change in ownership interest

Less Impairment loss of assets and aircraft

Add Gain (Loss) on foreign currency exchange

Loss before tax

Net Loss

Loss attribute to owners of the parent

Net Loss per share

Significant operating data

Total operating revenues

+1,025 +2.2

• - Passenger and excess baggage revenue

  +304 +0.8

• - Freight and mail revenue

• - Revenue from other activities

+561 +10.9 +360 +12.3 -200 -30.1

+5,259 +11.3

+3,499 +29.4 +1,862 +5.5

-102 -8.7

-4,234 -

-100.0

-100.0

-75.3

+136.1

-88.2

-103.2

-102.8

-102.4

-79.5

+0.3

+2.0

+1.0

-0.7

-0.5

+7.9

+0.5

-4.3

+3.0

+10.9

+4.0

+3.7

-

-1.2

-2.2

-1.7

+41.0

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

amortization, loss on change in ownership interest and impairment loss of assets and aircraft)

Revenues of Thai Airways International PCL. and its subsidiaries

Total revenues for the third quarter of 2018 totaled THB 47,953 million, an increase of THB 1,025 million (2.2%). Details are as follows:

- Passenger and excess baggage revenue

Passenger and excess baggage revenue totaled THB 38,494 million, an increase of THB 304 million (0.8%) over last year as:

- Average passenger yield (including fuel surcharge) decreased by 0.01 THB/RPK(0.5%) or approximately THB 99 million. Thai Baht appreciated against major currencies including Japanese Yen, US Dollar, EURO dollar, and Australian Dollar resulting passenger yield decreased by 0.06 THB/RPK or THB 1,045 million. When exclude foreign exchange, the average passenger yield increased approximately by 2.4% or THB 906 due to the updating rates of fuel surcharge in line with the rising fuel prices.

- Passenger traffic (Revenue Passenger-Kilometers:RPK) increased by 1.0% or approximately THB 390 million, in intercontinental routes including Europe, Australia and New Zealand, and Regional routes where increased in Western, Southern routes and routes operated by ThaiSmile but slightly decreased in Northern routes due to the natural disaster in Japan and paling number of Chinese tourists. Production traffic (Available Seat-Kilometers:ASK) increased by 2.0%. Average cabin factor was 77.5% lower than 78.2% of last year.

- Freight and mail revenue

Freight and mail revenue amounted of THB 5,698 million, an increase of THB 561 million (10.9%) because average freight yield (including fuel surcharge) was in very good price level, 8.76 THB/RFTK, an increase of 0.86 THB/RFTK(10.9%) or around THB 526 million. Freight traffic (Revenue Freight Ton-Kilometers: RFTK) increased by 0.5% or around THB 24 million over last year due to the recovery in export sector but started to slow down. Average freight load factor was 59.2% lower than 63.5% of last year but higher than 44.1% of industry average.

- Revenue from other activities

Revenues from other activities consisted of revenues from business units which were Ground services, Catering, Cargo handling services, and other activities revenue totalled THB 3,296 million, an increase of THB 360 million (12.3%) over last year mainly due to the higher incomes. Revenue from Ground and Catering services increased from the greater number of customer airlines' flight while revenue of Cargo handling services also increased due to the increase freight traffic. Also, the revenue of maintenance services was higher than last year's.

- Other income

Other income was THB 465 million, decreased by THB 200 million (30.1%) mainly due to compensation from delay delivery of aircraft, was lower than last year's by THB 92 million and lower income from spare parts lending to other airlines by THB 38 million.

Expenses for Thai Airways International PCL. and its subsidiaries

Total expenses of the third quarter of 2018 amounted to THB 51,887 million, an increase of THB 5,259 million (11.3%). A summary of the operating expenses was as follows: