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Turkish Airlines & Pegasus: the slumping lira isn't all bad news

The value of the Turkish lira (TRY) lost a quarter of its value against USD between 8-Aug-2018 and 13-Aug-2018, before starting to rally.

For both Turkish Airlines (THY) and its low cost rival Pegasus Airlines, it's not all bad news. Their currency exposure is complex; both have significant costs and revenues in USD and EUR in addition to those in the local currency, TRY. The different mix of revenues and costs in these currencies for each airline is such that a weaker TRY may be better for Turkish Airlines than for Pegasus.

Both airlines reported 1H2018 financial results as the currency crisis was unfolding, but Pegasus maintained its EBITDAR margin guidance for the year and THY actually increased its guidance. For both, this may have been too soon for any impact on underlying demand to be visible.

Traffic figures for Aug-2018 may be the first indicator, but ticket pricing (and aircraft financing) in hard currencies by both airlines should help to mitigate the impact.

Summary

  • Turkish Airlines has a balance of USD revenue and costs, but its P&L is short TRY and long EUR.
  • Pegasus' P&L is short USD, a little long EUR and more significantly long TRY.
  • For both Turkish Airlines and Pegasus Airlines, debt is all in hard currencies.
  • In the short term at least, inbound tourism should be boosted, delivering more hard currency.

Turkish Airlines has a balance of USD revenue and costs, but its P&L is short TRY and long EUR

According to THY's 1H2018 results presentation, around 57% of its revenue is in USD or USD-correlated currencies and 27% is in EUR or EUR-correlated currencies. Only 14% is in TRY.

Turkish Airlines: revenue split by currency, 1H2018

 

On the cost side, 56% is in USD and 12.5% is in EUR, while 26% is in TRY.

The importance of USD to Turkish Airlines is such that it reports its financial results in the US currency.

Turkish Airlines: expenses split by currency, 1H2018

 

The balance between THY's USD exposure in revenues and costs would seem to provide a natural hedge, while its P&L is short TRY and long EUR. It has hedged 25% to 30% of its EUR/USD and EUR/TRY exposures, but a weaker TRY versus EUR is positive for its P&L.

Turkish Airlines' debt is all in hard currencies

THY's debt is all in hard currencies: EUR (41%), JPY (34%), USD (22%) and CHF (3%). Its hard currency revenues should enable it to service this debt, both principal and interest.

In this respect, THY is better off than many other Turkish companies with USD or EUR-denominated debt but with revenues in the local currency, who now need more TRY to service their debt.

Moreover, 76% of THY's debt is at fixed rates of interest, which limits its exposure to interest rate fluctuations.

Turkish Airlines actually raised its FY2018 guidance on 9-Aug-2018

In its 1H2018 results announcement on 9-Aug-2018, THY raised its guidance for 2018 EBITDAR margin from 23% to 25% (vs 27.5% in 2017 and a five-year average of 21%), which suggests it viewed its financial performance as satisfactory at that point.

This statement was prepared just at the beginning of the lira's rapid slide: TRY fell by approximately 5% versus USD on 9-Aug-2018, but tumbled by a further 14% on 10-Aug-2018 and then 7% on 13-Aug-2018.

Passenger numbers were up 17.8% in 1H (with load factor up by 4.3ppts) and 15.2% in Jul-2018, so traffic figures for Aug-2018 to be published in Sep-2018 will be the first opportunity to assess the impact, if any, of the recent currency crisis, which was only just starting to unfold at the time of THY's 1H2018 results announcement.

Turkish Airlines has 219 confirmed aircraft orders

According to the CAPA Fleet Database, THY has 219 confirmed aircraft orders at 13-Aug-2018: 91 A321neos, 25 A350-900s, 65 737MAX-8s, 10 737MAX-9s, 25 787-9s and three 777Fs. These are due for delivery until 2024.

Since THY prepares its accounts in USD and finances aircraft in hard currencies, any weakening of TRY has no impact on the prices it pays for aircraft.

Pegasus' P&L is short USD, a little long EUR and more significantly long TRY

For Pegasus, its 1H2018 results presentation shows that 30% of revenue is in USD, 29% is in EUR and 38% is in TRY (3% is in other currencies).

Pegasus Airlines: revenue split by currency, 1H2018

 

More than half of its costs, 56%, are in USD, with 22% of costs in EUR and 20% in TRY (1% in other currencies).

Pegasus Airlines: expenses split by currency, 1H2018

 

So Pegasus' P&L is significantly short USD, a little long EUR and more significantly long TRY. Pegasus' P&L is adversely affected by a weaker TRY versus USD, but benefits (to a lesser extent) from a weakening of TRY versus EUR.

Pegasus' debt is all in hard currencies

All of Pegasus' debt is in either EUR (57%) or USD (43%) and its hard currency revenue is available to service this.

In addition, its international revenue collected in TRY and up to 25% of its domestic revenue are converted to USD, but these conversions are subject to currency risk, with the weaker TRY meaning fewer dollars.

Pegasus maintained its FY2018 guidance on 13-Aug-2018

In its 1H2018 results announcement on 13-Aug-2018, after the TRY tumble was already in motion, Pegasus maintained unchanged guidance for a 2018 EBITDAR margin of 22.5%-23.5% (vs 24.4% in 2017). As with THY, this suggests it viewed its financial performance as satisfactory at that point.

Pegasus' 1H2018 passenger numbers grew by 13.9% and load factor gained 2.9ppts, to 82.5%.

Pegasus has 78 confirmed aircraft orders

According to the CAPA Fleet Database, Pegasus has 78 confirmed aircraft orders at 13-Aug-2018: 35 A320neos, 18 A321neos and 25 A321neo ACFs, due for delivery until 2025.

Pegasus finances aircraft in hard currencies, so any weakening of TRY has no impact on the prices it pays for aircraft (although its balance sheet, reported in TRY, reflects changes in asset values resulting from currency movements versus USD).

Currency movements can affect demand

In addition to the mechanical impact of currency movements on the costs and revenues in a company's P&L, underlying demand can also be affected.

Typically, a weakening currency makes imported goods more expensive in the local currency but boosts exports (including the sale of airline tickets by local airlines), since products sold in the local currency are cheaper to buyers in other countries.

However, for both THY and Pegasus, the majority of revenue is in USD and EUR, reflecting their policies of pricing tickets in hard currencies, and so demand for their tickets from outside Turkey may not be affected by TRY weakening.

The weaker TRY means that products and services sold in Turkey in the local currency, including tourist services, are cheaper to inbound travellers; this could possibly – and should – increase demand for travel to the country.

On the negative side, foreign travel becomes more expensive for Turks paying in TRY and this could decrease demand for outbound travel.

Moreover, for tourists, political stability and security are important and inbound demand could perhaps be adversely affected by any unease towards Turkey at some point and by any general weakening of the economy resulting from the current situation.

But overall, in the short term at least, the steep weakening of the TRY is attracting media attention in all of Turkey's tourist origin markets, so there could be good news for both of Turkey's airlines as tourists from the harder currency markets are attracted.

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