THAI opts for natural hedging strategy

To offset some of the rapid baht appreciation over the past few months, THAI shifted its strategy to selling more baht-based revenue tickets along with better matching of its net long revenue positions with corresponding currency borrowings designed to mitigate the cash impact on THAI’s operations.

"THAI is committed to addressing corporate risks, through offensive hedging in fuel and foreign exchange. We will ensure that expenses are in the same currencies as our revenue," said Sorajak Kasemsuvan, president of the airline.

In the first quarter, THAI reaped Bt6.13 billion in foreign exchange gains, up from Bt527 million in the same period a year earlier. This pushed its quarterly net profit to Bt8.295 billion, up by Bt3.05 billion or 58.3 per cent on year.

A natural hedge is the reduction in financial risk that can arise from the normal operating procedures. In this case, THAI will try to boost baht-denominated revenue.

The natural hedging will cover the company’s borrowings, as the airline seeks more loans in the same currencies in their cash flow.

weak growth

Without foreign exchange gains, the net profit would be low, due mainly to weak growth in passenger and a drop in cargo business revenue.

A source from the airline admitted that the quarterly revenue of Bt54 billion missed the target, which was set at Bt57.49 billion.

Revenue from freight and mail decreased Bt649 million or 10 per cent.

THAI’s own operating expenses increased Bt3.9 billion or 8.2 per cent, which is higher than the rate of increase in revenue resulting from higher traffic production, payment of staff performance incentive, and accrued annual staff welfare. However, depreciation expense decreased due to a change in accounting estimate extending aircraft useful life from 15 to 20 years.

The board of directors last week was informed by the management that ticket revenue structure would be adjusted, to raise revenue in strong currencies like the baht. As the Japanese yen is weakening, sale in Japan will be downsized. Meanwhile, domestic airfares will be raised, but according to the competition environment.

At present, THAI earns 30 per cent of ticket revenue in baht and 70 per cent in over 50 currencies. The foreign income is managed according to the foreign exchange rates of the baht against the major currencies like the US dollar and Japanese yen.

THAI chairman Ampon Kittiampon reportedly assigned Teerasak Suwannayos, a director who chairs the cash flow management committee, to complete a study on foreign exchange impacts. Teerasak has also been assigned to find out how to maximise the natural hedging and to maintain yield.

A company that has a significant portion of its sales in one country will have a natural hedge for at least part of its currency risk if it also has operations in that country generating expenses in the currency. Firms may act to increase natural hedges by changing sourcing, funding, or operational decisions, but natural hedges are less flexible, and more difficult to reverse, than financial hedges.

In the first quarter, THAI enjoyed 69.2 per cent load factor against 69.6 per cent in the same period last year. With cabin factor of 79.8 per cent against 78.2 per cent, it carried 5.69 million passengers in the quarter, up 10.3 per cent from the same period last year. Freight load factor dropped 3.5 per cent from 54.4 per cent to 50.9 per cent.