International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CASE STUDY 10.1

How Thai Airways FOILs Jet Fuel Price Risk

Shuvam Dutta

This case study accompanies Chapter 10 of International Corporate Finance.

Songkran Piyavasti, the CFO of Thai Airways, was planning a round of capital raising to meet the airline's fleet expansion plans and needed to raise up to US$800 million in debt by June 2010. Traditionally, the company had financed its aircraft acquisitions through the issuance of baht-denominated debentures and bank loans from Thai banks. However, in the aftermath of the Asian financial crisis, the airline had sought to diversify its funding sources; it had raised debt from international capital markets through dollar- and euro-denominated loans from international banks, and it had increasingly used structured lease instruments to finance its capital expenditures.

AIRCRAFT FINANCING THROUGH STRUCTURED LEASES

By the end of 2009, 56 percent of Thai Airways' fleet was financed by operating and financial leases. Net gearing (debt/equity ratio) of a number of Asian carriers, including this airline, was at a record high. With limited unpledged assets, unsecured loans were difficult to obtain without guarantees or government support. A stretched balance sheet, high capital expenditures commitments, and a net tightening of credit conditions pushed the carrier to seek off-balance-sheet financing in the form of leases.

Airlines were also entering into sale and leaseback transactions¹ through which they could effectively fund 100 percent of ...