Thai low-cost carrier Nok Air has missed lease rental payments to at least one of its lessors due to financial difficulties, according to sources.

Airfinance Journal understands that South African company Investec is considering early termination of two 2007-vintage ATR72-500 leases. The company also has two 2014-vintage Bombardier Q400s placed with the carrier. Airfinance Journal’s Fleet Tracker shows the leases on the ATRs are due to expire in December 2020 and April 2021, having begun in in January 2013 and April 2013. The Q400 leases are due to run until November 2026.

"Investec do not comment on clients due to client confidentiality," says a spokesperson for Investec. 

A Nok Air spokespersonsays Nok's chief financial officer (CFO) Pawinee Chayavuttikul "did contact lessors and inform regarding period of payment", without commenting further. 

According to Fleet Tracker, other lessors with exposure to the airline include: ALAFCO with three Boeing 737-800s; Apollo with one 737-800; Avolon with two 737-800s; BOC Aviation with three 737-800s; DAE Capital with one 737-800; Fly Leasing with one 737-800; GA Telesis with one 737-800; GECAS with six Q400s and two 737-800s; Merx with one 737-800; NBB Leasing with one 737-800; and Tokyo Century with one 737-800.

“They [Nok] don’t seem to realise that every day that goes by without the rent being paid, we are incurring cost because we have to pay the secondary and tertiary layers of debt on the aircraft,” says one of the affected parties, who declined to be named.

On 27 August, Nok Air’s chief executive officer, Pia Yodmani, resigned from the carrier, having taken the helm in September 2017 when former CEO and current Nok shareholder Patee Sarasin resigned.

“Certainly, there is concern amongst the lessors for Nok Air,” says a source at another affected lessor.

Asked how lessors will deal with the situation, the person says there is “not a one-size-fits-all answer to that”.

“We have to look into what the root of the problem is and work out a solution, and we need to work out who is running things going forward and find out what the situation is before we consider action,” he says.  

Another lessor source says he is waiting to see whether Yodmani’s replacement “has the experience to drive the airline forward”. Director Pravej Ongartsittigul was appointed acting CEO, effective 27 August, but the airline plans to appoint a new CEO at an unspecified time, according to a filing to the Stock Exchange of Thailand (SET).

Even before the resignation of Yodmani, sources were voicing their concerns to Airfinance Journal about the financial health of Nok Air.

On 17 August, a lessor risk manager who had recently evaluated an aircraft portfolio for potential purchase told Airfinance Journal that the presence of one Nok Air aircraft in that portfolio was “definitely a risk factor”.

“A lot of the lessors have far less tolerance for Thai operators than they did a year ago,” says Alan Polivnick, a partner at Watson Farley & Williams’ Bangkok office, citing incidents in the Thai airline market that shook lessor confidence.

In February 2018, Airfinance Journal reported that Los Angeles-based lessor Air Lease (ALC) was considering the repossession of an aircraft and a spare engine from Orient Thai Airlines.

In June 2018, Asia Atlantic Airlines, an operator of two 767-300ERs, informed staff of mass redundancies and told Airfinance Journal it was initiating a major restructuring including introducing new aircraft, a new management team and board of directors.

In September 2017, at least a dozen Thai airlines temporarily lost their permission to fly international routes ahead of a then-upcoming ICAO safety assessment of the country. 

In 2016, Israeli lessor Global Knafaim Leasing (GKL) repossessed an aircraft it had on lease to Thai airline Business Air Centre after a long legal battle to get the aircraft out of Thailand.

“I think the first step is to decide whether you want to do a deal with the airline to get the aircraft out or whether you wish to pursue the lease payment,” says Polivnick. “Some lessors will take the view that Nok can tread its way out of this – and take that on the chin.”

However, Polivnick says many of the aircraft leased into Nok Air – particularly the 737-800s – are in high demand, so lessors may take this opportunity to get the aircraft out and offer Nok Air a waiver for outstanding lease payments. The downside for the airline is that if it accepts, it may end up paying higher lease rentals in future when it is forced to take aircraft from a lessor with a higher risk appetite and higher lease rates.

Recovery plan

On 21 August, Nok Air “cautiously” set out a recovery plan. The carrier cited “extreme” competition in the aviation industry, increases in the price of jet fuel and the fluctuation of the US dollar as external factors causing the airline’s shareholder equity to drop to below 50% of paid-up capital for the second quarter of 2018, ended 30 June. “Internal” factors cited were that passengers had lost confidence in Nok Air due to flight delays. The airline also mentioned “cost efficiency” as being a factor.

The recovery plan focuses on revenue improvement by offering more product choice for passengers, co-branding, increasing ancillary revenue, and communicating on-time performance to customers.

Cost-reduction measures include re-modeling of ground handling; reducing maintenance costs; improving fuel use management by improving take-off and landing plans; and increasing aircraft utilisation by adding nighttime and longer flight operations in international flights, which will increase utilisation from 9.3 flight hours per aircraft per day to 11.2 hours by the end of 2018. On-time performance should also be improved above Nok’s 87.89% on-time performance as of June 2018 to regain passenger confidence, the airline says.

“Other than the current business partners such as Thai Group, Nok Air will be looking for further business partners including considering investing in subsidiaries such as Nokscoot Airlines to expand the network.”  

Five days before, Nok’s board approved the airline to borrow THB 500 million ($15.3 million) at an annual interest rate of 6% from a “close relative” of the company’s major shareholders.

Hatairatn Jurangkool, who (as of 30 June 2018) owns 9.22% of Nok Air, has agreed to extend the loan to the airline, which will be separately drawn down by issuing one or more promissory notes, with each note having a term no longer than 180 days.

At the same time as approving this loan, Nok Air’s board also approved additional investment of THB 490 million in Nokscoot Airlines, the company’s joint venture with SIA group airline Scoot. The loan will be used to purchase newly issued shares in Nokscoot.

Nok Air says the additional investment will create an opportunity for Nokscoot to expand its budget airline business by increasing flights and routes, thereby increasing its market share.

“The big challenge for Nokscoot is Scoot could invest more in the company – and has the resources and willingness to do so – but can’t because of foreign ownership [restrictions]. There’s very little Scoot can do,” says WFW’s Polivnick.

“It’s an issue, and whoever is going to take over Nok Air will need to look at Nokscoot.”

Nok’s financials: the TAA view 

Airfinance Journal reported on 7 December 2017 that Nok Air’s financial rating decreased over the past fiscal year by one grade from “CCC-“ to “CC” – TAA’s lowest rating.

Commenting just over eight months after that was reported, Mike Duff, TAA’s managing director, says that in the 12 months to 30 June 2018, Nok Air’s Ebitdar margin of 10.7% had improved, but not to historical levels of around 24%.

Furthermore, its liquidity fell to $52 million at 30 June 2018 from $98 million at 31 December 2017.

The airline’s fixed cover charge was 0.5x for the 12 months ended 30 June 2018. This was “actually an improvement over the previous three years”, Duff says.

“A fixed cover charge of below ‘one’ for an extended period is unsustainable. It eats up liquidity in the absence of asset sales or capital raises.”

The airline was 15.5x leveraged on 30 June 2018.

“Nok’s leverage is at unsustainable levels unless they can rapidly improve Ebitdar margin,” Duff says.

The situation will be a challenge for the airline’s CFO Chayavuttikul, as well as whoever comes in as the new CEO.  

One of the issues that departing CEO Yodmani has had to deal with, and the new CEO will have to deal with, is exactly where Nok Air positions itself in the market, says WFW’s Polivnick.

“They are creating a family of airlines – Thai Airways, Thai Smile and Nok Air – looking to emulate regional competitors who have those three tiers of airlines,” he says.

“The low-cost carrier domestic market in Thailand is very, very competitive and I guess we will need to see where Nok Air will place themselves in that. I’m sure some of the competitors would love Nok Air’s slots at Don Mueang airport.”

Lessors’ next steps

One leasing source warns that the larger lessors accustomed to dealing with non-payment scenarios are likely to pull out the big guns should Nok Air persist in non-payment.

“I’m nice; you flick GECAS’ tail and see what happens,” the person says.

A different leasing source says that although GECAS has the highest exposure of all lessors to Nok Air by number of aircraft, it is “not a big exposure” compared to the lessor’s fleet of over 1,000 aircraft. The company had 1,271 aircraft in its fleet, when surveyed last year for Airfinance Journal’s Leasing Top 50 2017. Airfinance Journal understands that Nok Air has been a client of GECAS since 2004.

When contacted GECAS says Nok Air continues to be a valued customer. “We are in regular contact with Nok and look forward to our relationship continuing,” the lessor adds.