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Financial Report of Turkish Airlines
Hochschule für Technik und Wirtschaft Berlin
Bachelor of International Business (BIB)
Name (Enrollment No.): Halil İbrahim Petek (0551321)
Subject: B15 Corporate Finance
Prof. Dr. Ralf Hafner
18.07.2015

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TABLE OF CONTENTS
General information on Turkish Airline....................................................................................................... 3
Chapter 1 ................................................................................................................................................................... 4
Corporate governance …........................................................................................................................... 4
Potential conflicts of interest …….......................................................................................................... 4
Interaction with financial markets ...................................................................................................... 4
Breakdown of stockholders – insiders, individuals and institutions ................................... 6
Turkish Airlines’ social obligations and image .............................................................................. 7
Chapter 2 ................................................................................................................................................................... 8
Risk profile ..................................................................................................................................................... 8
Performance profile ................................................................................................................................... 9
Expected investment return ………………………………………………………………………………… 12
Cost of equity ............................................................................................................................................... 13
Cost of debt ................................................................................................................................................... 14
Cost of capital .............................................................................................................................................. 14
Chapter 3 .................................................................................................................................................................. 15
Projects of Turkish Airlines ................................................................................................................... 15
Chapter 4 .................................................................................................................................................................. 17
Financing ....................................................................................................................................................... 17
Sources ....................................................................................................................................................................... 21

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Turkish Airlines (Türk Hava Yolları AO) was incorporated in Turkey on May 20, 1933. It is
Turkey’s flag-carrier airline company. The Company operates in two segments; air
transportation and aircraft technical maintenance operations. The Company’s air transportation
in the domestic and international passenger and cargo air transportation. The Company’s
Technical Maintenance Services provides repair and maintenance service on civil aviation sector
and technical and infrastructure support related to airline industry. It provides services including
passenger services, cargo services, technical services, training services as well as online services.
The Company flies approximately 48 domestic and 226 international airports the total number
to 274 destinations. It offers flight network to approximately 108 countries.

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CHAPTER 1
CORPORATE GOVERNANCE
Turkish Airlines is a publicly traded company and there is a clear separation between
management and ownership. Temel Kotil is an aeronautical engineer and serves as the General
Manager and CEO of the Turkish Airlines since April 2005. As Temel Kotil finished his 10th year
in Turkish Airlines as CEO, he is the second long lasting CEO in airline business after the
Emirates’ CEO Tim Clark.
Temel Kotil studied his Bachelor in İstanbul Technical University as aeronautical engineer
and went to University of Michigan-Ann Arbor (USA) where he had M.Sc degree in Aerospace
Engineering in 1986 and another M.Sc in Mechanical Engineering in 1987 from the same
university. Kotil continued his studies there and received his Ph.D in Mechanical Engineering in
1991 with Turkish Government’s scholarship as a part of prime minister’s producing national
aircraft vision. After he came back to Turkey, he worked at some different positions as
academician until he employed by Turkish Airlines in 2003. Temel Kotil is regarded as one of the
most successful CEOs in Turkey.
The Board of Directors is comprised of nine members elected by the general essembly. At
least eight out of nine Board Members should be elected from among Class A shareholders with
the highest vote, and one member should be chosen from among the Class C share
shareholders. At least six Board Members, including the Board Member representing the Class C
share, must be Turkish citizens. The term of office for Board members is 2 (two) years, according
to Article 10 of our Articles of Association. The General Assembly may terminate the
membership of a Board Member before the end of his/ her term. Board Members whose term
has expired may be reelected.
Three members of the Board of Directors are appointed to the Executive Committee, and
the other six are non-executive members. Among the non-executive Board of Directors three
are independent members of the Board, as defined in the CMB legislation. Since the aviation
industry has a dynamic nature, were the Chairman of the Board of Directors and the Executive
Committee the same person, it would create uniformity. Therefore, in Turkish Airlines the
Chairman of the Board of Directors and Executive Committee is the same person, and the CEO is

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not the Chairman of the Board of Directors. No one, alone, has unlimited power to make
decisions in Turkish Airlines.
In Turkish Airlines, Government’s shares are in minority but because of the ‘Golden Share’
system which allows Government to control the management, Government has the greatest
power among the management.
POTENTIAL CONFLIFTS OF INTERESTS
Even though Turkish Airlines is not a state-owned company anymore, Turkish Government
still has a great control over the management and the company thanks to ‘Golden Share’
system, because Turkish Airlines is Turkey’s flag carrier and has great strategic and economic
importance.
As the Government has a great control over the management, managers might have
difficult times while making the decisions in favor of the Government and their future career, or
in favor of the stockholders or in favor of the company and its employees.
INTERACTION WITH FINANCIAL MARKETS
Turkish Airlines shares are listed in Borsa İstanbul (Istanbul Stock Exchange) in THYAO code
since 1990. Turkish Airlines shares are one of the most preferred equities in market. In 2014 it
was the 5. most preferred shares and %5.1 of the total trades in Borsa Istanbul. In Turkish
Airlines management, there is an ‘Investor Relations Department’ which is responsible for
providing all the information about the Company to the investors, shareholders, stakeholders,
etc. Markets can easily get information about the Company through;
 Turkish Airlines Investor Relations (http://investor.turkishairlines.com/en)
 Public Disclosure Platform (http://kap.gov.tr/en/companies/traded-companies/all-
companies/detail.aspx?sId=1107)
BREAKDOWN OF STOCKHOLDERS, INSIDERS, INDIVIDUALS AND INSTITUTIONAL

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Originally, Turkish Airlines is founded and owned by Turkish Government. But in 1990,
2004 and 2006, Government applied some ‘privatization’ programs. The Republic of Turkey's
Prime Ministry Privatization Administration owns a 49.12% interest in THY, while 50.88% of
shares are publicly traded.
Breakdown of Ownership [by Halil İbrahim Petek]
Breakdown of Ownership [Public Disclosure Platform]
49,12
50,88
Breakdown of Shareholders
Republic of Turkey's Prime Ministry Privatization Administration Publicly Traded

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[Bloomberg Terminal]
TURKISH AIRLINES’ SOCIAL OBLIGATIONS AND IMAGE
Since Turkish Airlines is biggest airline company and national flag carrier of Turkey,
Company feels responsible for promoting the best image for Turkey, among the service quality
and social responsibility, both domestically and internationally. Company’s Board of Directors
has prepared ‘Code of Ethics’ to promote best service and behaviours by Company and
employees to the customers, business partners, shareholders, stakeholders, society, etc.
Turkish Airlines pays very high attention to the climate, environment and social issues and take
serious actions among these issues, also.
The Company is the main sponsor of the ‘Euroleague Basketball Championship’ which is
the biggest basketball organization of Europe and supports many social projects for the disabled
with the support of basketball teams, as part of ‘One Team’ project.
Within the ‘Widen Your Heart’ program, Turkish Airlines supported different social
projects that provide schools, stationaries, winter clothes for the children in need in 19 cities of
Turkey. The Company also showed its sensitivity by establishing ‘Turkish Airlines Memorial
Forest’ which contains 1 million trees.

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CHAPTER 2
RISK PROFILE
1. What is the risk profile of your company? How much overall risk is there in this firm?
Moody's and S&P, two of the most respectful international credit rating agencies, assigned
Turkish Airlines' first time public corporate rating to be Ba1 and BB+, respectively. In these
evaluations, Moody’s and S&P have mentioned the importance of Turkish Airlines for Turkey
and its very close economical bonds with the government and its natural adventages arising
from using İstanbul as a main hub. Even though airline industry is volatile and holds various
significant risks, the importance of Turkish Airlines for Turkish economy provides a significant
support for the Company by the Government. And Company’s healthy financial profile, well-
diversified passenger revenue are few of the reasons of having ‘fair’ risk profile.
With these ratings, Turkish Airlines achieved the second highest rating among the global
network carriers in the industry that have been rated by both Moody's and S&P.
2. Where is this risk coming from (market, firm, industry or currency)?
Within the framework of its financial risk management policies, the company has defined
the following elements of risk as being fundamental to the healthiness of its future cash flows
and liquidity:
 Cash flow risk: The possibility of the company’s being prevented from achieving its
business objectives by changes taking place in its short-, medium-, and long-term cash
position and in its portfolio investments.
 Commodity price risk: The financial impact of changes in aviation fuel and in carbon
emission certificate prices.
 Interest rate risk: The financial impact of changes in the market value of aircraft
financing, of FC-denominated debt, and of cash owing to movements in interest rates.
 Exchange rate risk: The possibility that earnings and expenditures may be mismatched
owing to differences in the exchange rate of one currency against another.

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 Counterparty risk: The potential for losses if a domestic or foreign financial institution or
its counterparties default on deposit, derivative, or other transactions.
Apart from these financial based-related risks, there are some other risk factors related to
airline industry also:
 wars
 terror attacks
 epidemics
 oil price shocks.
3. How is this risk profile changing?
In next years, Turkish Airlines is expected to continue its sustainable growth, while world
economy has uncertanties, with the successful finance and risk management departments
within the company, it seems that company will maintain its current situation.
PERFORMANCE PROFILE
Turkish Airlines shares have been listed as THYAO on the Borsa İstanbul A.Ş. (İstanbul
Stock Exchange - BIST). When we look at the last 5 years’ market performans (please see the
table below) of Turkish Airlines, we see that shares are 70% more valuable that its price 5 years
ago. Until the 2013, Turkish Airlines looks like underperformed the BIST 100, as a consequence
of global crisis and airline indusries’ riskiness. But as a generally, from both financial and non-
financial results, we can easily say that Turkish Airlines show a great performance for last 10
years, as it became one of the top 10 airlines in the world and still continues its growth.

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[Bloomberg Terminal]

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[Annual Report]
Turkish Airlines’ shares have been among the most preferred equities in the stock market
and Despite turbulence in the global economy and politics, and thanks to successful
management, the shares rose 23% above the BIST-100 index average in 2014.
[Annual Report]
As we see in the table above, thanks to efficient cost management in addition to sharp
decrease in fuel prices, Turkish Airlines increased its net profit by 137% over the previous year.
While the global profit margin was 3% in 2014, Turkish Airlines nearly tripled this figure with an
attained profit margin of 8%.

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EXPECTED INVESTMENT RETURN
Cost of equity = Risk free rate + Beta * risk premium
Beta: 1.14
Risk-free rate: 6.43%
Market risk premium: 9.05%
Expected return = risk-free rate + Beta*market risk premium
=6.43% + 1.14 * 9.05%
=16,75%
Turkish Airlines has to deliver a return of at least 16,75%, to secure a „break-even” of its
investors. The 16,75% return is the „hurdle rate“ for Turkish Airlines’ stockholders – it is the
compensation they require for taking the risk associated with the stock. Therefore Turkish
Airlines’ cost of equity amount to 11.02%
And when we look at the Turkish Airlines’ ROE(Return on Equity) for 2014, it is 19,9%. It is
obvious that Turkish Airlines performed well in 2014, made profit and added 3,15% of value.
Would you have under or out performed the market?
Regarding stock market and especially airline business, it is obvious that Turkish Airlines’
out performed the market, even though there have been some fluctuations some times, as a
result of fluctuations and other risks in the industry.
How much of the performance can be attributed to management?
It can be difficult to measure the management’s share on Turkish Airlines’ success because
there are lots of different factors which affect the Company’s performance. But as a general
overview, based on my readings about Turkish Airlines during last few years and interviews of
managers, I really find the management successfull and significant part of the Company’s
success comes from the management.

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Before 2003, Turkish Airlines looked like a typical government-owned company which
does not have a high performance. But in 2002, Turkey had a new Government which has
various visions and strategies, and this changed the Turkish Airlines’ status also. Government
wanted to make the Turkish Airlines Turkey’s international brand and benefit this situation as
much as possible. In 2003, Goverment made new regulations and opened legal ways for Turkish
Airlines to become more active in global market. Because Turkish Airlines used to operate
mostly in Turkey for the upper-class customers. With new changes among regulations and
strategies, Turkish Airlines became a global power of Turkey and region with its 15%-16%
growth in last years. We need to admit that significant part of this success belongs to
management and Government because its very difficult to compete in the global market and
arrange all the legal base, planning whole business steps, taking the financial desicions while
trying to avoid the fluctuations in foreign currencies and surviving after 2008 global crisis.
My another perspective for management’s success is looking at for how much the CEO
maintains his position. By 2015, Temel Kotil (CEO and General Manager) has been in his position
for 10 years and he is the second longest CEO in Airline Industry after the Emirates’ CEO Tim
Clark.
As the Government, especially current President (ex Prime Minister) Recep Tayyip
Erdoğan has a great control over the Turkish Airlines, the fact that majority of the management
maintains its position for a long time, we can say Government is happy with the Company’s
performance and management. I think this is an important measure in Turkey’s conditions. Even
though the Chairman of the Company resigned in April 2015, as I said majority of the
management maintains its positions, this does not affect the management’s share in the
Company’s success.
COST OF EQUITY
As we calculated before, the Company’s cost of equity is 16,75%, which is the hurdle rate
for shareholders.

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COST OF DEBT
Times Interest Earned Ratio equals 4,98. According to it THY has Rating A2/A with:
Spread of 1.0%
Risk free rate 6.43%
Pretax cost of debt would then be 6.43% (risk-free rate) plus 1.0% = 7.43%
After-tax cost of debt = (1-0.2) x 7.43% = % 5.94
At a marginal tax rate of 20%
COST OF CAPITAL
Determining Weighted Average Cost of Capital (WACC)
WACC=[ ke x (E /(D+E)) ] + [kd x (D/(D+E))]
Ke: cost of equity = 16,75%
Kd: cost of debt= 5.94% (after tax)
Tax rate : 20%
Market Value of Equity (in thousands TL): 13.289.400
Market Value of Debt (in thousands TL): 14.589.679
WACC= [16,75% x (13.289.400.000 / (13.289.400.000+14.589.679.050))]+[5.94% x
(14.589.679.050/(14.589.679+13.289.400.000)=
WACC = 11,09%

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CHAPTER 3
PROJECTS OF TURKISH AIRLINES
One of the typical projects of Turkish Airlines is setting a new destination or new route.
There is no any other airline in the world which flies as much as Turkish Airlines and Turkish
Airlines is first in this segment by far from its competitors and it does not look possible to lose
its position in near future.
Here are some of Turkish Airlines’ new destination plans in 2014, 2015 and 2016;
 Turkish Airlines plans to add six new destinations in Africa in 2015. Egypt (2), Nigeria,
Mali, Guinea, South Sudan.
Turkish Airlines currently serves 39 destinations in Africa across 27 countries.
 Turkish Airlines started non-stop flights to Taipei in Taiwan in March 2015 and tries to
add new destinations in Far East, especially in China.
 Turkish Airlines plans aggressive expansion in Latin America with four new destinations
(Bogota, Caracas, Havana, Mexico City).
 Turkish Airlines wants to adds new hubs in North America also and one of its planned
hubs is Atlanta for 2016.
One of the most important strategis for Turkish Airlines and Turkey is the new airport in
İstanbul which its construction started and planned to finish at the end of 2017. Turkish Airlines
revises its plans based on this new airport, which will be the biggest airport in the world.
Turkish Airlines’ projects are long-term projects mostly, which starts with negotiations
with external partners, license acquisations, starting and maintaining the projects. And projects
requires heavy investments by license acquisitions, buying or leasing aircrafts,maintenance
operating costs.

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Below the chart shows Turkish Arlines current destinations in 2015 and its new destination
plans:
[en.wikipedia.org]
Are the projects in the future likely to look like the projects in the past? Why or why not?
Turkish Airlines’ projects are likely to look like the previous projects because projects are not
vary so much and it is obvious that Turkish Airlines will keep its growth just like before, because
in America and Far East, there are plenty of new hubs to connect, even though Turkish Airlines
has the highest destination network in the World. It seems Turkish Airlines have learned how to
benefit from globalization. One of the problem with the expansion is countries have different
Civil Aviation problems, especially China and other Asian countries. But I believe these countries
will embrace with the world more and Turkish Airlines will widen its network just like before.

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CHAPTER 4
FINANCING
Cost of capital approach is a very useful when it comes to decide optimal debt ratio for a firm.

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Based on the cost of capital approach, optimal debt ratio for Turkish Airlines is 60%, as it could
be seen in the chart above.
Currently Turkish Airlines’ long-term debt ratio is 60,83% and WACC is 11,09%.

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TYPES OF FINANCING
The current debt portfolio of the company consists of ECA and US Exim Guaranteed Loans,
Tax Leases such as JOLCO or French Tax Lease, Short term Operational Leases, and commercial
loan financial leases, all of which offers very competitive financing solutions to Turkish Airlines
in the international markets. Additionally, in March 2015, Turkish Airlines stepped into Capital
Markets Financing by issuing Enhanced Equipment Trust Certificates (EETC) with an aggregate
face amount of U.S. $328.3 million. In the future, Turkish Airlines plans to continue to diversify
its financing sources by adding more innovative structures.
Turkish Airlines’ 88% of the financing based on the financial lease and 12% is based on
operating lease. Turkish Airlines mostly focus on financing with ‘debt’, particularly ‘long-term
debt’.
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
60,00%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Leverage
Cost of Equity Cost of Debt (after tax) Cost of Capital

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[Bloomberg Terminal]
Turkish Airlines’ financing should be long-term because company’s projects are long-term,
so by that way company can have an effective cash management. And 51% of the Turkish
Airlines’ debt on US Dollar, while almost 41% of the debt on Euro. And this is very logical and
strategic decision since its based on company’s revenue profile among the currencies.

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SOURCES
https://en.wikipedia.org/wiki/Turkish_Airlines
http://investor.turkishairlines.com/en
http://www.kap.gov.tr/en/companies/traded-companies/all-companies/detail.aspx?sId=1107
https://www.google.com/finance?cid=253010728799051
http://www.reuters.com/finance/stocks/overview?symbol=THYAO.IS
https://en.wikipedia.org/wiki/File:Turkish-Airlines-destinations-2015.PNG
http://centreforaviation.com/analysis/turkish-airlines-will-add-six-new-destinations-for-2015-
in-africa-for-a-total-of-48-cities-202922
Bloomberg Terminal