One of the key figures in Thai Airways International's business restructuring plan, chief financial officer Narongchai Wongthanavimok, has a clear vision of both where the company has been and what's on the horizon after taking on what he's called "the most challenging task" of his life.
Brought in by the carrier's former president, Charamporn Jotikasthira, Mr Narongchai has, from the start, recognised foreign exchange management as the most complicated issue facing the airline business. He has led his team through a tough 18 months to clear up the airline's financial mess.
What has THAI done regarding financial and accounting restructuring?
I believe we have done everything we can in terms of forex management, which is the major issue that needs to be tackled in terms of finance and accounting.
The airline generates revenue from 50 currencies, and its debt and expenses are also paid in different currencies.
In order to improve cost efficiency and risk management in line with the rapid changes of other currencies against the baht, we have to find the best strategy to manage our risk exposure in a volatile foreign exchange environment.
The first option is to match expenses and revenue in the same currency, but the airline business has to pay up to 49% of its expenses in US dollars, including fuel costs and aircraft rental expenses. By contrast, US dollars only account for 6% of total revenue.
Since we can't do the simple currency income-expense matching option, we have to find other options to get the best possible deal. We found that we also had debts in US dollars, which means apart from high but inevitable US dollar expenses, we also had to pay in dollars for unnecessary items.
So I decided to go for the cross-currency interest rate swap (CCIRS) option by looking at the interest rates of different currencies to see which offered better rates than the greenback. We then swapped all of our debts in dollar terms to those currencies with the best interest rates and locked in those rates throughout the contract period.
We found that Swiss francs offered the lowest rates followed by the yen and the euro, so as of last September, all of our debt in dollar terms, 12.2 billion baht, were switched over to Swiss francs at a -0.5% rate for 12 years, starting in December 2016. Also under the contract we are able to use our revenue in Swiss francs to directly pay some expenses in dollar terms.
Apart from Swiss francs, we have negotiated with suppliers, banks and our partners to be able to tap the benefits of the cheap rates for the euro and the yen as well. We have adopted the cross currency mechanism for these two currencies across 12 items.
That seems like a very complicated option. Did it help you cut all of the US dollar exposure on your balance sheet to equal revenue? If so, what have been the implications?
No, we can't cut them all. The best we've been able to do is to cut US dollars on the expense side by one-third of total expenses in dollar terms.
The implications of applying CCIRS is we can cut more than 3 billion baht in funding costs over the next four or five years.
Actually, we have looked at some expenses to see if it is possible to pay in other currencies, especially for two items; fuel costs and aircraft renting. But so far we cannot change those systems as they are used worldwide.
Also, under the restructuring plan implemented under Mr Charamporn, we have managed to gradually cut our total loan balance from December 2015, which stood at 190 billion baht, to 182 billion at the end of 2016. The average interest payment was gradually cut from 5.9% to 5.3% from 2015 to 2016.
Our loan burden was very high at that time due to the borrowing the company incurred in order to compensate for the huge losses generated during 2011-14.
How about the implications for business operations?
Well, we can maximise the benefits from our currency swap mechanism by looking for ways to get more revenue from those currencies from which we can find an advantage. For example, as we prefer to pay in yen and Swiss francs, we should find more revenue in those currencies by, for example, adding more flights to Japan or to Zurich. We could also maintain the number of flights on those routes at current levels but boost sales on them through online channels.
THAI has also changed its policy to open up for the code-share option. We are now partnered with EVA and Asiana and we can add more partners in our preferred currencies, such as ANA and SAS. By doing so, we will have more clients that will pay us in yen and Swiss francs.
What comes next after forex management?
No one knows the future, anything can happen, so my next focus will be on transferring knowledge to my team to ensure that people here can carry on with these methods for Thai Airways in the future.
You know, this is not easy at all, even for me, who's been in the banking and financial sector my whole life. This is the most challenging task I've ever done.
I have to admit that right now only a small portion of my team of almost 500 people in the financial and accounting department can understand this mechanism.
Now that our mission has been accomplished, we still have to monitor each deal, each currency, and be ready to adjust, to renegotiate or to make new swap deals when needed.
So I have to make sure that we prepare people to be ready to do this job.
The department has a huge number of staff because we have to process each ticket by them. In the future, we might have to look at the automated system to work that out instead of outsourcing, even though that will result in redundancies.
Since the beginning of my term, the department's staff has been reduced from around 600 to 480 now, mostly through natural retirement. There is only a small number who have left the company through the early retirement option that we launched at the beginning of the restructuring programme.
I am not a fan of cutting employees to cut costs. We can use many methods to work out costs.
The major point is it must have some way to increase efficiency, which is the ultimate goal and much better than just cutting down on staff without achieving any other results. I mean, so what if you have fewer employees but don't create added-value!