Thai Airways International : Management Discussion and Analysis Quarter 3 Ending 30 Sep 2020

Management's Discussion and Analysis for the third quarter 2020 ended September 30, 2020 for Thai Airways International Public Company Limited and Its Subsidiaries

1. Executive summary

Global economy in the third quarter of 2020 showed recovery signs from its bottom in the second quarter. However, many cities returned their shutdown measures more stringently after the increasing number of coronavirus cases (COVID-19). In some countries, business closures and high unemployment rates in many countries are increasing resulting in different countries all over the world experienced the worst economic recession on record and affect the world economy that tends to slow down in the longer period.

Thai economy improved from the previous quarter. This was partly due to the easing prevention and inhibition of the COVID-19 virus epidemic as well as the better export sector as almost all of major trading partners' markets improved. Moreover, export volume to the US market expanded at a high level for the fourth consecutive month as did China, Australia, Vietnam, Malaysia and South Korea which returned to expand again. However, the tourism sector is still affected by the COVID- 19 pandemic due to the international travel restrictions, both of Thailand and other countries resulting in a strong contraction in tourism business compared to the same period of the previous year since there were no foreign tourists traveling to Thailand for the sixth consecutive month.

World's aviation industry in the third quarter of 2020 indicated slight signs of recovery from domestic travel; however, the figures presented the much lower number than normal levels. According to the International Air Transport Association (IATA), traffic demand in July, August and September 2020 were 79.8%, 75.3% and 72.8% lower than the same period last year, respectively. For the first nine months of 2020, traffic demand and traffic production decreased by 64.7% and 56.2%, respectively. The average cabin factor of 66.7% was lower than the same period last year, which averaged 82.9%. Cargo transport gradually recovered since the ability to cargo transport was inadequate to meet market demand. Freight production in the first nine months of 2020 was 24.7% lower than the previous year. However freight traffic fell 13.2% at a lower rate than production. As a result, the average freight load factor was 53.3%, higher than the same period last year, which averaged 46.3%.

In the third quarter of 2020, THAI provides cargo transportation services in certain routes. Including organizing special flights to bring Thais home by continuing to cancel regular flights, both international and domestic routes temporarily while ThaiSmile, a subsidiary, has resumed the service of passengers on domestic routes from June 1, 2020 onwards. Moreover on September 14, 2020, the Central Bankruptcy Court granted THAI's business reorganization petition and appointed the planner as nominated by THAI, which are : Air Chief Marshal Chaiyapruk Didyasarin, Mr.Chakkrit Parapuntakul, Mr. Pirapan Salirathavibhaga, Mr. Boontuck Wungcharoen, Mr.Piyasvasti Amranand. and Mr.Chansin Treenuchagron together with EY Corporate Advisory Services Co., Ltd., at this time, the planning team is in the process of preparing the business reorganization plan.

In the third quarter of 2020, THAI continued to strengthen the measures to reduce costs and mitigate the impact of the COVID 19 situation from the previous quarter, especially by reducing personnel expenses while still reducing salaries of senior management compensation and ask for cooperation for employees to join the project on leave without salary and compensation (Together We Can Project). The two packages are the Mutual Separation Plan (MSP A) and the Leave without pay program, both of them will take effect in the fourth quarter 2020 to reserve as much cash on hand as possible while no cash inflow from the aviation business and other sources of fund. THAI halted investment and delayed procurement as well as reducing costs not related to operations, safety and rules prescribed by law. THAI attempted to earn additional revenues from unrelated passenger transportation by penetrating the market to more ground customers. Which are :

• Royal Orchid Dining Experience by THAI Catering. Customers can taste the food like serving on a plane by providing services at Thai Airways Head Office and Silom Office. It will serve international food served on only Business Class and First Class aircraft. In addition, THAI Catering

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has also launched patong-go, or deep-fried dough served with a cup of dipping sauce made from purple sweet potato and egg custard which has become very popular product.

• Thai Flying Experience & Beyond project which offer interested people to visit and experiment flight simulators to create a real flight experience.

In the third quarter of 2020, THAI and its subsidiaries's passenger production (ASK) decreased by 95.0% while passenger traffic (RPK) decreased by 97.8%. Average cabin factor was 34.9% lower than last year which averaged 80.0%. Passengers carried were 0.49 million people, a decrease of 91.9% from the previous year. For cargo transportation, freight production (ADTK) was 96.2% lower than the previous year, while freight traffic (RFTK) was 93.6% lower than the previous year. Average Freight load Factor was 91.2% higher than the previous year at 52.2%.

Total revenues of THAI and its subsidiaries were THB 3,727 million, lower than the same quarter of last year by THB 41,289 million or 91.7%. The main reason was because both revenue from passenger and cargo transportation decreased by THB 37,654 million (95.1%). Revenue from other activities decreased by THB 1,718 million (56.2%) due to the measure to restrict international travel, both of Thailand and other countries that still exist. Total expenses were of THB 19,375 million, THB 28,483 million or 59.5% lower than last year, mainly due to operating expenses that varied with traffic production, traffic demand and number of passengers decreased in line with production and traffic demand. Moreover, fixed expense was still high while reducing revenue decreased greater than reducing expenses which was inadequate to compensate resulting in operating loss of THB 15,648 million, higher loss of THB 12,806 million (450.6%) from the same quarter last year.

In the third quarter of 2020, THAI and its subsidiaries had a one-time cost consisting of

• Impairment loss on fixed assets in the amount of THB 444 million.
• Impairment loss in accordance with TFRS 9 in the amount of THB 35 million.
• Loss on foreign exchange was THB 5,306 million, which mainly caused by the revaluation of foreign currency liabilities including aircraft operating lease liabilities in accordance with TFRS16.
• Gain for hedge of group of items with offsetting risk positions in the amount of THB 32 million.

In the third quarter of 2020, THAI and its subsidiaries had net loss of THB 21,531 million, more loss of THB 16,851 million (360.1%) from the previous year. Loss attributable to owners of the parent company was THB 21,536 million, representing a loss of THB 9.87 per share while last year had a loss of 2.14 baht per share.

EBITDA was negative of THB 4,770 million, while the previous year was positive THB 2,597 million. EBITDA margin equal to -127.3% compared to previous year at 5.8%

2. Management's Discussion and Analysis of Operating Results for the Third Quarter of 2020

The consolidated financial statements for the third quarter of 2020 consists of THAI's financial statement and 5 subsidiaries including 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.

As announced by the Federation of Accounting Professions Thai Financial Reporting Standard (TFRS) No.9: Financial Instruments and No.16 : Lease Agreement which was effective for accounting periods beginning on or after January 1, 2020 onwards affecting the financial statements as detailed in Note 2.7 to the financial statements.

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Financial Performance: THAI and its subsidiaries

									Jul - Sep
						2020			2019			Variance
										MTHB			%
Total operating revenues		3,727		45,016		-41,289		-91.7
-	Passenger and excess baggage revenue		1,216		35,339		-34,123		-96.6
-	Freight and mail revenue		717		4,248		-3,531		-83.1
-	Revenue from other activities		1,338		3,056		-1,718		-56.2
- Other income			456		2,373		-1,917		-80.8
Total operating expenses		19,375		47,858		-28,483		-59.5
-	Aircraft fuel expenses		292		13,284		-12,992		-97.8
-	Non-fuel operating expenses		14,994		33,507		-18,513		-55.3
-	Net finance cost			4,089		1,067		+3,022		+283.2
Operating Loss			(15,648)		(2,842)		-12,806		-450.6
Less	Estimate service compensation (400 days)	-		2,689		-2,689		-100.0
Less	Impairment loss on fixed assets		444		181		+263		+145.3
Less	Impairment loss in accordance with TFRS 9	35		-		+35	-	-
AddGain (Loss) on foreign currency exchange	(5,306)		919		-6,225		-677.4
AddGain for hedge of group of items with offsetting risk positions	32		-		+32		-
Loss before tax			(21,401)		(4,793)		-16,608		-346.5
Net Loss			(21,531)		(4,680)		-16,851		-360.1
Net Loss attribute to owners of the parent	(21,536)		(4,682)		-16,854		-360.0
Net Loss per share		(THB)	(9.87)		(2.14)		-7.73		-361.2
Significant operating data
EBITDA		(MTHB)	(4,770)		2,597		-7,367		-283.7
Number of passengers	(Million)	0.49		6.06		-5.57		-91.9
Available Seat-Kilometers	(Million)	1,126		22,529		-21,403		-95.0
Revenue Passenger-Kilometers	(Million)	393		18,018		-17,625		-97.8
Cabin factor		(%)	34.9		80.0						-45.1
Passenger yield		(THB/RPK)	3.05		1.93		+1.12		+58.0
Available Dead Load Ton-Kilometers	(Million)	37		985		-948		-96.2
Revenue Freight Ton-Kilometers	(Million)	33		514		-481		-93.6
Freight load factor		(%)	91.2		52.2						+39.0
Freight carried		(Ton)	12,333		144,246		-131,913		-91.5
Freight Yield		(THB/RFTK)	20.68		7.75		+12.93		+166.8
Number of aircraft (As of Sep 30)	(Aircraft)	103		103		-			-
Flight hours		(Hours)	7,959		103,771		-95,812		-92.3
Aircraft utilization		(Hours/Aircraft/Day)	2.6		11.6		-9.0			-77.6
Average foreign currency exchange rate
		1 USD	: THB		31.3268		30.7123		+0.6145		+2.0
		1 EUR	: THB		36.5981		34.1389		+2.4592		+7.2
		100 JPY : THB		29.5301		28.6163		+0.9138		+3.2
Average jet fuel price	(USD/BBL)	47.61		82.72		-35.11		-42.4

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Note : 1) EBITDA = Total Revenue (exclude gain on foreign exchange) - Expenses (exclude finance cost, tax, depreciation and amortization,

impairment loss on fixed assets, estimate service compensation, impairment loss in accordance with TFRS 9, Hedging gains for hedge of group of items with offsetting risk positions and loss on foreign currency exchange)

Summary of the operating results of THAI and its subsidiaries

Revenues

Total revenues of THAI and its subsidiaries for the third quarter of 2020 was THB 3,727 million, decreased by THB 41,289 million (91.7%). Details are as follows:

• Passenger and excess baggage revenue

Passenger and excess baggage revenue were THB 1,216 million, decreased by THB 34,123 million (96.6%) from decreasing in passenger traffic (Revenue Passenger-Kilometers:RPK) by 97.8% from last year which was main revenue from repatriation flights of Thai citizens and domestic revenue form ThaiSmile.

• Freight and mail revenue

Freight and mail revenue were THB 717 million, decreased by THB 3,531 million (83.1%) from last year due to the decrease of freight traffic (Revenue Freight Ton-Kilometers: RFTK) which decreased by 93.6 %. During this period, main revenue was from charter flight operated to the required destinations by customers.

• Revenue from other activities

Revenues from other activities consists of revenues from business units which are Ground services, Catering, Cargo handling services, and other activities revenue, were THB 1,338 million, decreased by THB 1,718 million (56.2%) from last year because of the drop in number of customers airline's flights in line with the Notification of the Civil Aviation Authority of Thailand on Conditions for Aircraft Permission to Enter Thailand to control the Outbreak of the Communicable Disease Coronavirus 2019 (COVID-19) causing decreased in revenue from all other activities.

• Other revenues

Other revenues totaled THB 456 million, decreased from last year by THB 1,917 million

(80.8%) mainly since last year there was the adjustment item: passenger airport tax liability which is a part of ticket fare collected from passenger before 2016 was adjusted to be other revenue amounted of THB 1,976 million since they have not been charged for more than 3 years since the day had recorded this liability.

Expenses

Total expense of THAI and its subsidiaries for the third quarter of 2020 was THB 19,375 million, decreased by THB 28,483 million (59.5%) from last year. A summary of operating expenses is as follows:

• Fuel and oil expense was THB 292 million representing 1.5% of total expenses, decreased by THB 12,992 million (97.8%) resulting from temporary flight cancellation which caused decreasing fuel consumption while average fuel prices decreased when compared to the same period last year by 42.4%.
• Non-fueloperating expense was THB 14,994 million, decreased by THB 18,513 million
  (55.3%) from last year. Details as follows: