Türk Hava Yollari Anonim Ortakligi (THYAO) Earnings Call Transcript & Summary

We will have a Question-and-answer session following the presentation by our speakers. [Operator Instructions] With that, I will now hand you over to our host for today's webcast. They are Associate Professor Murat Seker, member of the Board and Executive Committee as well as the Chief Financial Officer; and Mr. Mehmet Fatih Korkmaz, Head of Investor Relations. Speakers, it's over to you.

Thank you very much, Rob. Good afternoon, everyone, and thank you for joining us today. Since the beginning of this year, economic uncertainty stemming from the U.S. policy change has added a new layer of complexity to the challenges that our industry is facing. Persistent pressures from geopolitical tensions, aircraft production bottlenecks and engine reliability issues are amplified by the unpredictable nature of tariffs and their effects on consumer behavior. In this rapidly evolving and volatile operating environment we are leveraging our capabilities to their full extent while actively countering market overreactions on our share price with our ongoing buyback program. As you may recall, Turkish Airlines operating performance has been repeatedly tested in recent years by numerous shocks. In each of these instances, our diverse revenue streams flexible operating structure and adaptability enabled us to demonstrate resilience. Against the current backdrop, we remain confident that our experience and sound balance sheet will give us strength to withstand obstacles along the road, allowing us to sustain our growth trajectory. Believing in our prospects, our investments continue at full speed. In addition to the fleet expansion program, we are working on cargo terminal capacity expansion and will soon begin construction a new catering facility, which will provide considerable efficiency and cost benefits. Now I would like to draw your attention to the highlights of the first quarter. After a long pause, we resumed our operations to Benghazi and Damascus, two historically lucrative destinations in our network. We also expanded our footprint by integrating direct flights to offer it in North Macedonia, marking our 300 international destination. With upcoming route launches to Phnom Penh in Cambodia and Port Sudan, later this year, we aim to further strengthen our worldwide presence. Initially, exclusive to passengers traveling from T rkiye, Turkish Airlines Holidays went live globally during this quarter. Travelers from all around the world is now able to plan their entire vacation in one seamless experience. We are excited about the growth opportunities this platform presents, particularly in terms of ancillary revenue generation as a part of our broader diversification efforts. More recently, in collaboration with Istanbul Airport, we successfully conducted Europe's first simultaneous triple runway operations. This milestone not only marks a new chapter in European Aviation, but also strengthens our hub strategic position by increasing its air traffic movement capacity by 25%, a critical step in supporting our long-term growth plans. With the opening of fourth runway, by the end of this year, we aim to launch simultaneous quadruple independent runway operations, setting a new benchmark for global aviation industry. Turning to our results. Seasonal factors materially affected our first quarter performance. The timing of Easter and Ramadan combined with the negative impact of the snow storm in February in Istanbul were the main drivers of the relatively soft outcome. In the quarter, passenger capacity rose by 4.3%, surpassing the pre-pandemic level by more than 40%. At the same time, we carried around 19 million passengers with a Load Factor of 80.6%. Focusing on operational excellence, our on-time performance reached 91%, the highest level in the last two decades. Despite a negative impact of $50 million from the February snow storm, we recorded our highest first quarter revenue of $4.9 billion. Passenger revenue increased modestly by 2.7%, reflecting a high base. As the freight market continues to search for balance, amid an uncertain outlook, our cargo revenues were resilient at $762 million. Meanwhile, Turkish Technic's external revenue amounted to $141 million, more than doubling its 2019 level. New partnership with IndiGo and Air India Express, along with others, provide momentum to the technical segment's performance in the upcoming period. Apart from slower revenue growth, our profitability was adversely affected by the inflation level above Turkish lira depreciation. Although lower fuel prices partially offset this adjustment, profit from main operations stood at negative $76 million. In January to March period, EBITDAR was around $660 million with a margin of 13.6% and net income realized at negative $44 million. These results were in line with our guidance. We expect to see sequential improvement with positive momentum provided by Ramadan holiday and Easter in April. Accordingly, we anticipate broadly similar performance in the first half of '25 compared to the same period last year. On the other hand, the impact of weakening consumer confidence under ongoing tariff uncertainty remains difficult to assess. While we acknowledge that there are downward risks to demand, we are not currently seeing any meaningful slowdown reflecting -- reflected in our forward bookings. On the positive side, stronger euro against dollar and lower Brent prices are supportive to our operational profitability. Furthermore, if tariffs affect aircraft delivery schedules, industries growth capacity could be further constrained, which may help support yields to a certain extent. Given these factors, we are maintaining our guidance of 6% to 8% passenger capacity growth with flat yields in 2025. We will update our projections should we observe any material change in the outlook. I will now pass the call over to Fatih Bey to elaborate on our results and provide additional insights.

Thank you, Murat Bey, and good afternoon, everyone. We now delve into the details of our operational and financial performance. As Murat Bey briefly outlined in the first part of the call, seasonal factors resulted in slower capacity growth year-over-year. At the same time, we continue to selectively expand our capacity, taking aircraft delivery delays, GTF groundings and regional conflicts into account. As a proportion of the pre-pandemic levels, our international passenger capacity remains substantially above European and Global averages. In today's operating environment, our diversified regional capacity allocation, supported by dynamic capacity management provides a significant hedge against demand volatility. Balance composition of direct and transfer passengers is also providing us flexibility. Far East was the top performer region during the first quarter. Compared to the same period in the previous year, 9% higher capacity accompanied by 11% demand increase led to 1.2 percentage points by the Load Factors. Strong demand in Indonesia and Japan helped offset the aggressive capacity increases by competitors across the region. Meantime, our route to Australia contribute our Load Factors, especially for key volcano destinations such as Greece and Macedonia, though higher flight distances dilute yields. One of our most promising regions, Africa performed relatively well in the first quarter. Touristic destinations such as Zanzibar and Seychelles continue to provide momentum. We also observed increasing preference for our classic networks towards Egypt, especially Sharm El-Sheikh. Although we didn't experience the negative impacts of the U.S. policy changes, it affected the sentiment in the first quarter. Our checks within the country suggest that consumers are preparing themselves through a difficult period. For now, vague macro outlook hasn't been translated into any weakness in bookings. However, it represents a major risk factor. We have alternative plans in place for various demand scenarios and will adjust our capacity swiftly depending on the circumstances. Our passenger traffic in Europe was supported by the demand from the Far East, rising competition in the Eastern side balanced with the strength in Northern side. Overall, capacity demand and Load Factors in the region were stable in the quarter. Domestic demand was a bright spot with 23% higher yields on the back of relative strength of Turkish lira. We are not observing any slowdown in the local air travel appetite in T rkiye for the following quarters. During January-March period, passenger revenues rose by 2.7% due to 1.6% lower yields and 4.3% higher capacity. Cargo performance remained resilient despite heightened uncertainty. The post-pandemic fragility of supply chains, significantly threaten by the increasing trade barriers and tariff unknowns. Even though indicators point to softening cargo demand, we haven't seen any materialization on our front yet. Apart from macro factors, supply growth driven by new vessel deliveries and prospects of the [ Red Sea ] opening are expected to wait on pricing for the remainder of the year. In the near term, we are capitalizing on the front-loaded inventory building ahead of the upcoming tariff implementations. Additionally, we see potential opportunities over sea freight as timeliness and urgency gain importance. Consequently, we preserve our guidance of a broadly neutral cargo performance in 2025. In the first quarter, AJet passenger capacity rose by around 6% year-over-year. Marking the first anniversary of its operations, we are pleased with the progress made towards establishing an efficient low-cost carrier. By the end of March, 40% of the airline's fleet consists of new generation aircraft aligning with our strategy. This ratio will increase to more than 90%, enabling us to benefit from lower unit costs through increased fuel efficiency and seat count per aircraft. In response to unanticipated maintenance events and GTF engine groundings, our efforts towards improving scheduled consistency paid off. In the 3 months of March, on-time performance of the airline increased by 2 percentage points to 84%, although 16 aircraft are still grounded due to the engine problems. As previously stated, a strong base, seasonality and muted cargo performance resulted in a slight annual increase in revenues. On the cost side, the decline in fuel prices was not sufficient to offset the adverse impact of inflation compensation. Accordingly, profit from main operations was in red with $76 million. Correspondingly, EBITDAR dropped by 15% year-over-year to around $664 million with a margin of 13.6%. Below the line, weaker equity pickup and tax contributions translating to around $100 million of headwind. Heading into unit expenses. We recorded around 3 percentage points increase in total cost per ASK during the first quarter. Looking at unit expense breakdown, main contributors to the rise were personnel, ground handling and passenger service expenses, all of which are directly linked to inflation compensation in T rkiye. Additionally, the impact of GTF engine issues contributed around 2 percentage points to ex-fuel unit costs. On the positive side, structural improvements in the reservation systems, along with the other cost control initiatives led to an 8% reduction in sales and marketing unit expenses. During the quarter, our free cash flow generation reached $400 million, bringing the 4-year cumulative total to around $14 billion. Correspondingly, our on-hand liquidity increased to $7.3 billion. Although net debt rose by around $260 million, primarily due to the appreciation of euro against the dollar, our leverage continues to hover around its lowest level at 1.2x. Currently, global travel appetite remains healthy. However, global uncertainties pose downside risks to demand and pricing dynamics. Within this outlook, it is crucial to prepare cost base for a potential downturn in demand. As you remember, last year, we outlined a number of initiatives to improve efficiency as we progress towards our centenary goals. Categorized under four pillars, our initiatives will lead to around 2 percentage points ex-fuel cost savings annually. As the negative impact of salary inflation compensation on our cost base abates, structural productivity gains will become more apparent. We are also keeping our contingency plans ready for more severe downturn scenarios as we did in 2016 and during the pandemic. At the moment, our daily passenger sales are flowing smoothly as deferred income reached to $3.7 billion or 16% of the last 12-month passenger sales. As a result, we are preserving our guidance of 22% to 24% EBITDAR margin for this year. We will continue to closely monitor our booking trends, macroeconomic environment and adjust our projections when necessary. With this, we conclude our presentation and can now continue with the Q&A session.

[Operator Instructions] Welcome back Murat Bey, we got a number of questions from our analysts and investors, namely [indiscernible], Hanzade from JPMorgan, [indiscernible] from [indiscernible], Vladimir from Trigon, [indiscernible] from Aviation and others. So I will start with the first question. What were the main reasons of this quarter's loss after 14 consecutive profitable quarter.

Yes. Thank you very much. Well, so there are two different two sides to the story. On the positive side, declining fuel prices came with the uncertainties in the global macro environment due to these tariff wars, so to speak, let fuel prices to decline by about 6% and related to the crack spread by 11%, which decreased our ex-fuel CASK -- sorry, decrease our fuel CASK by about 14% (sic) [ 16% ]. And air cargo despite our fears continue to have a resilient in volumes despite of its high base and the volume was flat and the unit revenue was up by about roughly 1% levels. And another positive factor was sales and marketing CASK declined by almost 8% as a result of our strong efforts to increase the sales through our direct sales channels. On the negative side, the biggest contribution came from the obvious personnel expenses, which did not affect our personnel expenses, but a significant portion of our operating cost items like handling, like maintenance, like catering are also related to increased because of the high inflation in T rkiye. 38% annual inflation year-over-year observed by the end of March and about 20% decline in Turkish lira against dollar led to a roughly 20% increase in personnel expenses in dollar terms. And so you could also see that in our personnel CASK, which Fatih just presented. This was partially mitigated with the Turkish lira depreciation, but in dollar terms, this paid the biggest contribution. Another factor was roughly speaking, $50 million loss we observed due to the snowstorm that we lived in February. And Ramadan just falling into a full month of March and Easter becoming this year taking place in April, we're supporting factors for relatively low demand we observed in the first quarter. Our subsidiaries AJet and SunExpress to airlines also had the similar issues, which overall on consolidated basis led us to have this loss. However, I can say that this loss was within our budget, within our expectations, we actually even outperformed our budget as the result of first quarter, and we expect to improve these results. We already actually saw much improved results in the month of April, where we had the Ramadan holiday as well as the Easter and with the strong supporting demand from Europe and Middle East, the four month results were look much more promising.

Can you give us the details about the current situation in GTF groundings.

Unfortunately, there is not much news to share on this front. Currently, roughly 40 aircraft are grounded, and we expect this number to go down to 30 by the end of this year. Next year, we'll keep getting new NEOs. We'll keep grounding some of our old NEOs. So we don't expect this number to improve significantly, but not to deteriorate by large numbers as well. So this will be probably the number of grounded aircraft throughout '25 and '26 as well.

Continuing with the current trends, could you provide insights into current passenger bookings both network-wide and by region.

So as I was just saying, sharing some light in the month of April. That month travel statistics look quite supportive. And this year, we are expecting about 4% to 5% increase in the number of tourists coming to T rkiye from $62 million to roughly $65.5 million. And especially with the summer months, we will see a more strong effect of this. Network wide, our forward sales are above last year by high single digits. And if I might share the view for the next two quarters, including the second and third quarter, overall, in regional-wise, we are expecting a low double-digit growth in capacity in Europe with roughly 1% growth in yields and flat Load Factors. In Far East, we are expecting a high single-digit capacity growth, again, flattish Load Factor and yields. In Middle East, we are expecting about 6% capacity growth in average of the next two quarters. And in Americas, we're expecting another like a 6%, 7% ASK growth in the next two quarters with, again, flattish yields and Load Factors. And so overall, our expectation for the next two quarters is to have about 7% to 8% ASK growth, roughly 0.5 percentage points increase in yields and flattish load factors. The summer bookings also look good. The uncertainty is a little higher, starting from October and onwards, but that's too far in the future at the moment. We hope to be much more clear in those months bookings in our second quarter -- second quarter announcement.

Can you share your comments on the cargo performance and its outlook. And how do the tariffs and political challenges impact the cargo business.

So well, despite of the huge uncertainty in the first quarter, we had -- the volumes were up, the yields were down, but the decrease in the yields was successfully with the great efforts of our cargo team compensated with higher Load Factors so that the overall amount of revenue did not deteriorate significantly. We expect the remaining part of this year, despite of the uncertainties to sustain in this manner, we are holding on our guidance of having flat revenues and mid-to single-digit increase in volumes and mid-to single-digit decrease in yields.

Speaking about the tariffs, what are your views on the FX on the industry in general and on your operations?

One positive effect of the noise around the tariffs was declining fuel prices, which had the most direct and positive effect in our bottom line. We at the beginning of the year, we budgeted a fuel of [ $70 ] a Brent price of $78 per barrel. And our current year-end expectation is $71 and each $1 move roughly affects $30 million in profitability, including the hedge. The indirect effect of lower fuel price is a little difficult to guess. Historically, it took around three to six months for ticket prices to adjust on fuel price changes. However, currently, as we are in a period where there is more capacity constraint, we might have more slower decline in the yields going forward. Also, increasing the euro-dollar parity materially contributed to our operating profit as more than -- we had a 15% loan position in euros. Another point of uncertainty is the aircraft deliveries. If they get delays due to the tariff uncertainty, especially in widebody segment, this may support the yields by the lower capacity availability in the market. So far, I might say we have not seen a significant weakness in our bookings. As I said, April performance was strong. So we are keep holding on to our guidance. And on the cargo front, our Asia to America Express cargo capacity was already very limited. We had a higher contribution from the express cargo segment of Asia to Europe or vice versa. So we might have a limited negative impact from the tariff's war eventually.

Proceeding to expectations. What are your anticipation for fuel CASK and what is your assumptions. Can you also share your hedging ratios?

So our -- as I just said, our -- so our Brent price guidance is around 71%. We expect about 12% lower fuel CASK year-on-year in '25. Our hedge ratio for '25 is around 45%. And in '26, it's around -- between 5% to 10% levels. We saw as a result of this expectation, we expect a quite limited hedge loss in 2025.

Could you also discuss your ex-fuel CASK expectations for 2025? And is there any specific plan to manage cost given the downside risk to revenues.

So for '25, we are expecting ex fuel CASK to increase by mid-single digits, somewhere between 5% to 7%. And we are expecting to see a better cost performance in the second quarter, and inflation is expected to moderate going forward not in the speed we anticipated, but it is declining. We post hiring staff, except for the capacity growth in aircraft and this is expected to enhance our operational leverage and generate greater efficiency. And we are not going to have any wage negotiation with the union this year. So there is less of an uncertainty there. Expansion of TKConnect, which is the name of our direct sales channel, lower distribution and incentive expenses fees to the agencies are going to be a big improvement to better utilize our crew, we partially implemented part-time work scheme and that has also -- is going to help us in the coming quarters to limit the increase in personnel expenses.

Is it possible to talk about revenue and margin forecast.

Sure. For the second quarter, we are expecting to grow in revenues with high single digits with 23% to 25% EBITDAR margin. We are holding our year-end guidance of around 6% to 8% year-on-year revenue growth and year-end EBITDAR margin expectation is also going to be around between 22% to 24% levels.

Continuing with the fleet time CapEx question, what is the anticipated fleet size this year?

This year, we are having about net [ 30 ] aircraft added to the fleet, which will bring our fleet size to 522. It is a combined fleet of TK and AJet. And of this growth, we will have about 18 widebodies, 29 narrowbodies entering to the fleet so overall 47 entries, and there will be about 17 aircraft entering from the fleet.

What are the estimated CapEx and pre-delivery payment figures for this year? And accordingly, what is your year-end net debt levels?

Our gross CapEx is going to be around $4 billion to $4.5 billion in '25, as we have guided in our year-end call. Of this gross CapEx, we expect to finance around 70%, which is formed of the aircraft financing. And we will have about $100 million net inflow of PDP. And this will bring our year-end net debt expectation $6.5 billion to $7 billion and a multiple net debt-to-EBITDA multiple of 1.1 to 1.3x.

How is the appreciation of the euro against U.S. dollar affecting your financials?

On the income statement side, we have -- as I said earlier, we had a net loan position in euros. So euros appreciation has a positive effect. On the balance sheet side, we are short in euros as euro constitutes about 45% of our aircraft finances, and appreciation against dollar -- of euro against dollar has a negative impact on the balance sheet.

Is there a new development about your Boeing order. Will there be any opportunity in the current macro setting, for example, a lot of airlines there has the intention to purchase rejected deliveries by China?

So our big negotiation with Boeing is still continuing. We are in close communication with them. But however, still we have not finalized an order book together with the engine producers for both widebody and narrow body order book. We are continuing our discussion. Regarding to those recent developments, we have been in touch with them. They know that we have a open appetite to get earlier aircrafts and we will be aware if they have a tender on this, if any aircraft becomes available in earlier slots.

Can you also discuss the positive impact of -- impact you expect from the triple parallel runway operations at Istanbul Airport. Can we expect a higher on-time performance? And what are the other advantages?

In the first quarter, we achieved 91% of on-time departure performance, which was definitely greatly benefited from the two parallel runway operation that we have been having in Istanbul Airport for quite some time. With the triple parallel run way operation, especially during the peak hours of morning, noon and evening, it will facilitate our operational efficiency, not going to have a very soon contribution, but considering the speed, Istanbul Airport is growing, which they had last year around 85 million passengers served. We are expecting to have this benefit in the coming years. We believe that this launch as Europe's first triple independent runway system at Istanbul Airport is going to mark a milestone in boosting our efficiency as well as the airport's efficiency as being Europe's largest cargo terminal and second largest MRO capacity, Istanbul Airports this latest development is going to set a positive contribution to our operational efficiency.

Continue with another good news with Antalya Airport expansion. Do you plan to maintain your market share? What are your plans for the airport?

Antalya was ranked as the fifth most visited global city in 2024 with 40 -- more than 40% increase in number of visitors compared to 2019 level. And following this expansion, Antalya's Airport annual passenger capacity is going to increase from 30 million, 35 million to above 80 million. In '25, the expectation is to reach around 40 million passengers. And this expansion is going to increase the passenger experience while it's going to bring significant capacity in '24 international passenger market share of the airport was more than 25% -- 27% covered by Turkish Airlines, AJet and SunExpress by our TK brand and our subsidiaries. So we definitely see these developments as an opportunity to strengthen our market share in Antalya.

We have one additional question online. Do you think the peace between Russia and Ukraine could bring additional pressure over years in the remaining year causing the capabilities of European rivals.

I mean this is a 2-way stream for T rkiye. Before the war, we used to receive a significant -- for Ukrainians, T rkiye was a very hot tourist destination. But through the war, as we had to stop the operation, even in that case, we got some Ukrainian tourists through neighboring countries. So together, those two countries used to bring close to 5 million, including among Belarus bring about 5 million tourists to T rkiye. One of these countries were completely shut down because of the war. So if a peace agreement is reached, even though the traffic from European carriers would increase, we don't think it will be a harmful development for T rkiye and for Turkish Airlines, we will be able to benefit of serving the passengers customers from both countries.

Thank you, Murat Bey. With this question, we conclude our first quarter earnings call. Thank you all for your participation and hope to be with you next quarter.

Thank you very much, gentlemen. Thank you much, speakers. Ladies and gentlemen, that concludes today's conference call. We thank you for your participation.