U.S. Markets closed

Edited Transcript of THYAO.IS earnings conference call or presentation 9-Aug-19 1:00pm GMT

Q2 2019 Turk Hava Yollari AO Earnings Call

Istanbul Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Turk Hava Yollari AO earnings conference call or presentation Friday, August 9, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* M. Ilker Ayci

Türk Hava Yollari Anonim Ortakligi - Chairman of the Board

* Murat Seker

Türk Hava Yollari Anonim Ortakligi - CFO

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to Turkish Airlines' First Half 2019 Results Conference Call and Webcast. Today's speakers will be Mr. Ilker Ayci, Chairman of the Board and the Executive Committee; and Mr. Murat Seker, Chief Financial Officer.

I'll now hand over to your host, Mr. Ilker Ayci. Sir, please go ahead.

--------------------------------------------------------------------------------

M. Ilker Ayci, Türk Hava Yollari Anonim Ortakligi - Chairman of the Board [2]

--------------------------------------------------------------------------------

Thank you very much. Good afternoon, everyone. I'd like to thank you for joining on half year financial results presentation. It's our pleasure to be on the line with you. We completed a challenging half year. The first half turned out to be a period of slowing demand in aviation industry, which is highly sensitive to the world economy.

In April, we accomplished a great move to our new hub at Istanbul Airport. The move was very fast and smooth. We managed to start out operations without any major inconvenience. However, we had to cut about 5,000 frequencies during the month of the move, and this had some negative impact on our passenger numbers and available capacity. After the move, Istanbul Airport passed 2 busy episodes successfully. The first one was the Easter holiday. The second one was the Ramadan holiday, 8 holiday.

In our new hub, we had significant improvements in terms of passenger capacity and service quality. Since the slots in Atatürk airport were fully utilized, we were not able to get additional slots in many profitable destinations. With the move to the new airport, we have eliminated the slot constraints. In addition, the overall service quality is improved by the higher number of boarding bridges, passport control decks and check-in counters. For transit passengers, there is the higher accommodation capacity and more free-time opportunities, like duty-free shops and bigger lounge spaces.

Another important issue occurred in the first half year is the grounding of the Boeing 737 MAX aircraft. The MAX issue is an important crisis for the aviation industry. We grounded 12 MAX aircraft in March. Also, we postponed the delivery of 12 aircraft that were planned to be delivered by the end of June. This issue will have a notable impact on our 2019 results on the revenue, profit and traffic. Furthermore, our ex-fuel unit costs are also negatively affected by the fixed costs incurred due to the grounded aircraft. We had detailed discussions with Boeing on the compensation.

On the demand side, we observed a more price-sensitive environment than expected mainly driven by trade wars and slowing down of the world trade growth. Especially Europe seems to be highly affected, which has a significant share in our revenues. At the same time, we see a decrease in cargo demand in Europe to Asia routes, which was among the reason why we planned for a slow cargo capacity growth in 2019.

Before we introduce our financial results, let me review the financial and operational summary of the Turkish Airlines in the first half year. In second quarter, most of our peers achieved flat top line figures in U.S. dollar, although their capacities were increasing. We managed to maintain our total revenues in terms of U.S. dollar at a flat rate with the declining capacity in this quarter. While the global cargo growth slowed down and the cargo profitability is shrinking, we managed to hold to our cargo revenues in good range. Especially in the second quarter, we employed additional personnel in order to operate the incoming aircraft.

We suffered a major increase in operating expenses, which will be elaborated in the following slides. In spite of all the challenges we have faced in the first half of 2019, we achieved a positive operating profit and net income in the second quarter.

The negative development of our revenue per ASK has been impacted by the dilution of the cargo unit revenues. By the reason of the grounded MAX aircraft, the delayed Airbus 321neo aircraft, the flight cancellations during the move to the new airport, our carried passenger number decreased by around 2%. The number of tourists coming to Turkey reached 18.1 million in the first half of 2019, increasing 13% from 16 million in the same period of 2018.

Aside from that, demand on the international transit side increased 2%, reaching 11.3 million passengers. The increasing demand from tourism were enough to compensate the decrease in domestic demand caused by depreciation of the Turkish lira.

In a country breakdown, we can see significant increases in direct passengers from India, Indonesia and Spain. The demand supported with an increase in direct passenger figures helped to mitigate the impact of the decrease in domestic demand.

Total number of tourists is expected to reach 45 million in 2019. 16 million of tourists are expected to travel to Antalya, and more than 90% of Antalya passengers are international direct passengers. We are planning to capture more of this premium demand, and we already assigned new direct flights from Antalya to some cities in Europe and Middle East.

With these remarks, I will now leave the floor to Mr. Murat Seker to continue with the presentation. Thank you so much.

--------------------------------------------------------------------------------

Murat Seker, Türk Hava Yollari Anonim Ortakligi - CFO [3]

--------------------------------------------------------------------------------

Thank you, Mr. Chairman, for your introduction. I will continue with Slide 6, with the passenger traffic.

In the first half of '19, our passenger numbers decreased by about 1.7% because of the capacity cuts caused by the move to Istanbul Airport in April and the unplanned capacity cuts due to the grounding of MAXes and delays in the arrival of neos.

We planned to receive 9 neos in the first half of the year, but unfortunately, due to some manufacturer-related problems, there was about 2.5 months delay per aircraft. We could add only 5 neos to the fleet in this half.

Another factor was the slowing domestic demand. The joint impact of slowing domestic demand and capacity cuts were the leading factors for the decline of about 1 million domestic passengers.

The number of international passengers increased by 1.6% in this first half compared to the first half of '18. These 2 effects balanced each other, and we had an overall flat load factor, which is still in our guided range.

Looking at the passenger breakdown, we can see that international-to-international transfer passenger number increased 2.1%, while it represents 56% of the total international passengers. Regarding the international breakdown by geography, we have no changes in the percentage share of demand compared to last year.

The breakdown of passengers by transfer type indicates a shift from the domestic category, other international passenger categories, which again shows the current decline in domestic demand. The increase in the most rewarding international direct categories prevented the decline in total revenues in this quarter.

As we expand our fleet to utilize the higher capacity in Istanbul Airport, we opted to invest only in new generation and environmental-friendly aircraft. Our fleet will be expanding in this regard, with more than 200 new-generation aircraft until 2023.

We received 10 new-generation narrow-body aircraft and 1 wide-body aircraft in the first half of this year. These aircraft consist of 5 neos and 5 737 MAXes, which are 15% to 30% fuel-efficient compared to conventional aircraft types in our fleet; and our first 787-9, which is about 20% more fuel-efficient and has a 60% lower noise footprint.

Unfortunately, we had to ground all MAX fleet since about mid of March. For the time being, we don't have a clear time line regarding the reintroduction date of the MAX aircraft.

On the other hand, delivery of 6 A321neos, which was planned to be delivered in 2019, are currently postponed to 2020. 50 new-generation wide-body aircraft that are scheduled to be delivered between this year and 2023 will be utilized as additional frequencies to the existing primary long-range destinations and grow our network in Asia and Americas. They will also contribute to replace flights performed by A330s and 777s for secondary long-range destinations.

Growth in terms of demand and capacity in the cargo operations continued during the first half. We have observed double-digit growth in the past 2 years. This year, we were more conservative and guided a slower cargo growth for 2019. There were several factors for this.

First, our cargo terminal construction is ongoing in Istanbul Airport, which we expect to be fully operational towards the end of 2020. Thus, flight operations are currently being executed from Atatürk Airport, yet the daily cargo operation is being performed from Istanbul Airport. These operations with 2 hubs at the moment led to a little decline in the growth of our Cargo business.

Second, the global slowdown in trade also affected the Cargo business. In the first half, total tonnage of cargo carried increased by 8.8%. Our cargo revenue increased by 1.9%, reaching almost $800 million, which corresponds to about 13% of our total revenues. And this figure is coming up from about 10% about 2 years ago.

Although our pace of growth declined, total freight tonne kilometer increased by 11.6%, whereas, as you know, the global freight tonne kilometer data decreased by 3.6% in the first half.

When we look at the financial data, we can see flat total revenues in the first half. One of the main reasons behind this flat revenue development is decreasing domestic demand. In addition, the move to the new airport and grounded MAX aircraft limited our revenue growth.

Aside from this, high base effects from last year also caused the revenue improvement to slow down. As you would remember, the first quarter of '18 was an extraordinary positive quarter for Turkish Airlines as well as for the sector, which pushed up the base.

2019, the way we see it, is a transition year in many aspects. The move to our new hub, Istanbul Airport, caused numerous cancellations in the first weeks of Q2. Also the state airport authority, airport operators and Turkish Airlines operations team had to be in full cooperation and coordination in order to run an optimal operation in our new hub. And in order to attain this goal, capacity was put back slowly, incrementally. Overall, we cut about 5,000 frequencies in just in the month of April, which you know is a wise -- travel wise, a busy month.

We generated $561 million EBITDAR and 17.6% EBITDAR margin in the second quarter. This is 6 percentage points lower than in the same period of 2018. The depression of EBITDAR margin was mainly caused by higher fuel and personnel expenses, consequently offsetting the slight increase in top line, which resulted in a decrease in profit from main operations.

In the end, we achieved $26 million net income in the second quarter of this year. The impact of IFRS 16, which we started to implement since the beginning of 2019, caused an increase in total operating lease liabilities of about $1.5 billion on the balance sheet.

The EBITDAR margin graph shows us the picture for the last 5 years. We can see that there is contraction in the margin compared to last year figures in the first half. As explained, the lack of revenue growth, together with the increase in costs, pulled down the margin. For the full year guidance, though, we expect to be able to fulfill our guidance of 22% to 24% EBITDAR margin.

The revenue breakdown shows the positive environment in tourism and depreciation of Turkish lira has been stimulating both passenger and cargo demand.

Looking at the geographic breakdown, we can see a well-diversified revenue generation with the capability to stand the ground against possible regional volatilities. 90% of revenues in the first half were generated outside of Turkey, with the largest contribution coming from Europe, followed by Far East. We managed to increase the share of Americas and Far East, whereas the share of Europe and domestic market decreased due to the weakening of the European market and the decreasing demand in the domestic market.

As we follow positive news from European tour operators regarding the reservations to Turkey in the third quarter, we expect the share of Europe to increase again.

Europe, with its more than 115 destinations we fly to, continued to be an important region for us. On the Asian market, we believe the codeshare agreement with Indigo, which was made at the end of 2018, will stimulate our revenues in the Indian market and, thus, Far East.

The evolution of revenue yield was strong in the second quarter of '19, but still slightly decreasing overall in the first half. The slight increase in passenger RASK and the revenue yield in the second quarter is in line with our expectations.

When we look at the ex-currency development, an increase of almost 7% was realized due to the depreciation of Turkish lira and euro against dollar.

Because of the yield performance in the first quarter, we see a decline in the first half of this year. Our total RASK decreased by about 3% in the second quarter as a result of the contraction in cargo unit revenues.

Here it is seen that we have been increasing our capacity in a market where demand is growing. So we have been able to partly improve unit revenues at the same time. We realized RASK growth in America and Middle East. Compared to the first quarter, we also realized some improvement in unit revenues in Europe.

Domestic RASK was highly affected negatively by the currency depreciation. However, when we look at the constant currency domestic passenger yields, it shows considerable growth as well. Its impact to total yield is not substantial, thanks to the low share of domestic revenue in total passenger revenue compared to the other regions.

Just like the domestic constant currency passenger yield development, high constant currency passenger yield increases are also seen in every region.

Developments in the first half year is similar to the second quarter development. RASK growth has been realized in America and Middle East, whereas constant currency passenger yields show considerable growth in every region.

In the second quarter, there is a slight increase in total revenue. On the graph, you can see the drivers of the revenue development in the second quarter.

The main driver was ex-currency passenger increase of about 6.9%. However, the negative currency effect offset this positive figure. Others have very limited effect on revenue development.

When we look at the revenue development of the first half, we lost $359 million of revenue due to the appreciation of dollars against lira and euros. However, thanks to the good result of ex-currency RASK growth, we managed to achieve a flat revenue increase. We also had an increase of 2% in cargo revenues.

Looking at the cost breakdown on per ASK basis. Our costs continued to be among the lowest in the industry. Ex-fuel CASK increased by about 11% in the second quarter mainly as a result of higher personnel costs due to pilot salary increases that was introduced -- that were introduced in June and October of last year, which we have communicated to you earlier.

Another significant factor behind the higher personnel costs is linked to the aircraft deliveries between 2019 and 2020. In order to meet the capacity growth in the coming periods, additional personnel needed to be employed and trade in advance. The delayed deliveries of Airbus neo aircraft and the grounding of MAXes caused excess personnel that caused the increase in personnel CASK. We are currently taking measures to alleviate this increase.

The aircraft ownership costs increased due to 33% increase in wetlease expenses and the amortization of new aircraft, including the grounding of 777 MAXes. The increase in wetlease expenses is partly related to an accounting reclassification about the maintenance charges of these aircraft. Maintenance tests completed by us were being settled with the lessor company and subject to deduction in the wetlease expenses. This quarter, it has been changed to be deducted from maintenance expenses instead. Overall, these 2 effects balanced each other. So the net impact to our total cost was negligible.

Another reason is the payment received after maintenance settlements for some return deliveries of wetlease aircraft in last year's second quarter, which pulled down the base for this cost item last year too. Airport and air navigation costs increased in accordance with our expectations because of the higher unit costs in Istanbul Airport and the increase in capacity.

Also linked to the move to the new airport, ground handling costs increased due to additional personnel employed in ground services and overall increased size of the operating area in the new airport.

Another cost increase occurred in passenger services and catering. Until the kitchen facilities at the new airport are completed, the food service will be transported from the facilities in Atatürk Airport to Istanbul Airport, where we have built a satellite unit, but this will still -- it still will lead to a slight increase in costs. In addition, there is also an increase in the cost of the lounge area at the new airport due to, again, the increased size.

While total CASK increased by 9.7% in the second quarter of this year, ex-fuel CASK increased by 10.8%. In CASK calculations, we do not include cargo capacity under ASK, but we include cargo costs in the total cost side. With the increase in cargo capacity and growth in cargo business, related costs also increased. When they adjust cargo capacity, ASK -- cargo ASK, to the calculation of CASK, ex-fuel costs increase, including cargo ASK, dropped from 10.7% -- 10.8% to 7%. This is too high and slightly above our second quarter expectation, and this increase is largely affected by the delayed deliveries of neo aircraft and grounding of 737 MAXes.

In the fuel cost breakdown, we can see the impact of hedging, volume and price to the overall fuel expenses. In the second quarter and the first half of this year, an increase of around 6.5% in fuel expenses were realized. Even though the unit costs are not affected, the main reason for the fuel expense increase is the lower hedging profit. This is a common consequence we observe among peers who implement similar hedge policies.

Our profit from main operations in the second quarter significantly suffered compared to the same period of last year. The main reason lies in the increase of ex-fuel unit costs, as I described earlier. However, we were able to offset the negative currency effect on revenues, since the Turkish lira portion of our expenses is higher than the Turkish lira portion of our revenues.

By the end of second quarter, the cumulative performance is still in the negative area. In the first half, the same effect as in the second quarter can be seen. The high positive currency effect, together with the ex-currency RASK effect, wasn't enough to offset the ex-fuel unit cost increases.

As visualized in the graph, we are long in euros and short in Turkish lira. Share of Turkish lira declined to 10% levels, parallel to the depreciation against USD. We use monthly based decreasing layered hedging policy with a maximum 24-month contract period. In this policy, we modify hedging parameters regarding the current circumstances and developments.

Fuel cost share within our total cost base is around 30%. Even though we use the layered hedging strategy, we decrease the number of involved hedging contracts when the forward fuel price curve is higher than our estimation. 54% of the fuel consumption in '19 and 21% of the consumption in 2020 are already hedged. Our breakeven point for Brent is $65.

Our financial lease liabilities is around $8.1 billion. We expect that we'll receive that by the end of first half of 2019. In 2018, we mandated financing for 44 aircraft that are planned to be delivered to the end of 2019.

On the operational lease side, our total obligations decreased from USD 1.6 billion by the end of March to USD 1.5 billion by the end of first half of this year. Weighted average interest rate continues to be competitive at around 2.5%, with 70% fixed and 30% floating interest ratio.

This concludes our presentation. Now we will be -- continue with question-and-answer session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

--------------------------------------------------------------------------------

Murat Seker, Türk Hava Yollari Anonim Ortakligi - CFO [2]

--------------------------------------------------------------------------------

The first question we received is from TEB Yatirim, Erdem Kayli; BCG Partners (sic) [BGC Partners], Ezgi Yilmaz and Ünlü Menkul Degerler, Erol Danis: Based on current macro conditions, do you have an upside/downside risk on your expectation for your international and combined yield performance for this year?

The base impact from last year was high, as I mentioned earlier. Thus, we might see flat revenue yields in the third quarter, although in the last quarter, though there might be an increase in revenue yields for both domestic and international operations.

The next question from Renaissance, Artem Yamschikov and (inaudible): It appears that costs are rising ahead of your expectations comparing to your guidance. What expenses are rising above your expectations and what are the reasons?

Well, I tried to elaborate on this in the presentation, and different factors are increasing ex-fuel costs in the second quarter. Within this 10.8% increase, the new operating costs in Istanbul Airport had about 3% share. The hiring of corporate personnel for future fleet development, which implies the cost impact is realized before the capacity generation, as I mentioned also, has about 2.5 percentage points. MAX groundings had about 1.5 percentage points. And the pilot wage increases had roughly about 1% increase.

And the costs related with the increase in third-party MRO sales, which on the revenue side is also definitely creating an increase through the consolidation, but it is also creating a 1.2% increase on the cost side. And the remaining 1.5% to 2% increase are the regular contractual markups that we were expecting.

A question from OYAK Yatirim, Melis Pocar: What is the current state of negotiations with Boeing? Can you enlighten us about the role impact on your financials, taking into account longer taxiways at the new airport, fuel expenses and fuel-efficient status of MAX, which cannot be operated at the moment?

There's quite a few questions here. Okay. So the current state with Boeing, we are definitely in very close coordination with Boeing on MAXes. We are one of the big purchase -- big order -- we have put one of the big orders to Boeing, with about 58 aircraft that were supposed to come in the next 5 years. So -- and then they have been updating us regularly on the developments.

And of course, about the compensation, once we have a clear time line on when the MAX operations will resume, we will be able to elaborate on the details of a possible compensation.

About the taxi times and fuel consumption during taxi, our -- yes, they are increasing in the new airport and they are roughly consuming 20% more costs as compared to the Atatürk Airport. However, total flight times and fuel consumption is not increasing, though, since the landing and takeoff times are shortened with the availability of 2 parallel runways.

According to the latest sample data that we have, we expect about 1% to 2% fuel savings in Istanbul Airport operations, but this is something we will be able to see with a full year of operation.

Once the third runway is completed, which we expect that to take place by the middle of next year, we expect further improvements on the taxi times. The issue with the taxi times is, as both runways are on one side of the airport, the taxi times for mainly domestic flights are relatively longer than the international ones.

But the third runway is going to be -- is currently being constructed on the other side of the terminal, which is going to decrease the taxi time significantly.

The next question is from Erdem Kayli, TEB Yatirim: What is the impact of MAX ban on your financials? Do we see increasing unit costs for the coming quarters? What is your capacity plan if you're unable to add MAX planes in the longer term?

Well, given the second quarter isn't our peak season and the increase in the utilization of our current fleet, operational effect of grounded MAXes were present, but not significant. For the following quarters, especially the third quarter, we expect increases in the costs because of higher personnel expenses and new airport charges as in the second quarter. Additionally, ASK decline as a result of the MAX issue and the delays we observed in neos, we expect high single-digit unit cost increases.

That's a tough question. Of course, what would we do if MAXes do not come. If it is not solved in the longer term, then we will be looking into operating leases or wetlease agreements, which we are already inquiring about, and such agreements could be made to reach desired ASK levels. But at the moment, I might also add, given the fleet development of 2020, which we expect to have about 15 to 12 neos and about 14 wide-bodies, as I mentioned in the presentation, this still is going to be able to provide us a reasonable amount of capacity growth going forward. Plus, we were planning to retire some of our older-generation owned aircraft. We might just end up -- we have about 25 to 30 AOGs in the fleet. We might just hold on to those aircraft for a little longer until the MAX issue -- we have a little bit more clarity on the MAX issue.

Next question is from VTB Capital: Airport mitigation -- airport and navigation, passenger services costs grew by 11% and 16% in second quarter. Is that related to higher new Istanbul Airport costs? Could you please provide us which cost items would be affected by airport, higher rents and approximately how much?

Airport expenses increased in the Istanbul Airport due to: number one, fare change by about -- varying between 15% to 30% on different items in euro terms compared to Atatürk Airport. Rents and other fees were also increased and which lead to -- leading to a rise in ground services, handling and catering expenses. Besides the higher rents, transportation of catering from Atatürk Airport base to Istanbul Airport caused a slight increase in catering costs. As we may have mentioned earlier, the utilization of bridges is much higher in Istanbul Airport at the moment. And the number of bridges are many more, the number of counters are much higher. The lounge space is much higher. So this also, in addition to the increase in unit costs, we are operating in a bigger space that is also affecting the costs.

What is the reason for a reduction from 15 to 13 deliveries of neos in '19?

We planned to receive 9 neos in the first half of the year, but unfortunately, due to the -- some manufacturer-related problems, there were roughly 2.5- to 3-month delay per aircraft. We could have added only 5 neos in the fleet in the first half, but we are also in very close coordination with Airbus. We will be able to increase or at least receive some of those delayed aircraft in the early months of 2020.

Next question from OYAK Yatirim, Melis Pocar: Are there any one-offs, which had impact on your operating profitability in the second quarter and also nonoperational front?

In the second quarter, we had about $10 million worth of one-off moving costs to the new airport. Additionally, we sold 2 A340 aircraft, and we realized a one-off loss on this sale. And we sold 5 spare engines in this quarter, and also, this led to the one-off losses in the second quarter.

From Esra Suner, Is Yatirim: What is the reason for 7.3% increase in ex-fuel costs in second quarter, given the flattish fuel consumption and 3.3% increase in fuel prices? Is it possible to share average hedge fuel costs for '19?

Well, I have explained this in the presentation. The second quarter and the first half of '19, an increase of about 6.5% increase in fuel expenses were realized. Even though the unit costs are not much affected, the main reason for the fuel expense increase were the lower hedging profit compared to last year.

A question from -- okay. There are several parties asking similar questions. From Yapi Kredi Yatirim, Mustafa Görkem Göker and (inaudible): Are you planning any type of partnership to augment your Far East exposure? If yes, could you please provide some color on what type of partnership we could expect?

We are having talks for strategic partnerships in Asia and the Far East. We have been stating this for some time. Indigo might be a good partnership example for us in India. ZTO in China is another new partnership that we recently established, and it has started operations. In China, we are planning to establish alliances for passenger operations as well. This might be exclusive codeshare agreement or a JV. We are currently working hard on these with this motivation. As soon as we have more, solid improvements, we will be happily sharing with our investors.

Esra Suner from Is Yatirim: It seems that mostly Istanbul Airport did not offer any benefit to Turkish Airlines, considering the significant cost increase, especially increasing catering, fuel and airport navigation? When should we expect to see improvements in Turkish Airlines operating performance?

In terms of positive impact on P&L, the next year is going to be critical. There will be a third runway, as I mentioned earlier, located, which is going to be reducing taxi times and it will be increasing aircraft utilization and to facilitate the passenger capacity currently from 90 million to 120 million. So this will facilitate and it will improve the aircraft utilization, the timing, improving the connection times as well, and furthermore, the new-generation aircraft, including 14 wide-body that will be utilized for new capacity enabled by the increasing flows in Istanbul Airport. Subway will be ready there, which will be increasing domestic demand. We also discussed with the airport operator for -- to be able to receive discounts because of the volume that we bring, which might be realized in the coming periods.

Also, we have to take into consideration that the move to the new airport took just about 2 months ago. And in the month of April, we had to cut about 5,000 frequencies. So that brings down the profitability metric significantly for the first half. And there is, of course, a learning period. There is an adjustment period that we are going through. But it's safe to say that with such a major transfer of the hubs, we successfully achieved that without any major incidents.

A question from Yapi Kredi Yatirim, Mustafa Görkem Göker: What is your growth plan at Sabiha Gökçen and how much aircraft are you planning to deploy in 2020? Are there any progress on your plans to spin-off AnadoluJet as a separate entity?

Well, this is a tough question. As the situation with MAXes are not clear, it is really very challenging to make any expectation about the growth in the fleet that would be led by MAXes. But the rest, I can say clearly, as I also -- we mentioned in the presentation, the wide-bodies are going to be arriving in the next year, about 14, and neos are going to be arriving. We have solved with the manufacturer most of the delay issues. But the only uncertainty is with the MAXes. And excluding MAXes, I think this remaining capacity could give us about 7%, roughly speaking, capacity growth going forward already.

About AnadoluJet, yes, we are working on that project and organizationally analyzing its cost structure. We are planning to come up with a strategy probably towards the end of this year about AnadoluJet.

A question from Renaissance, Mr. Artem Yamschikov: High season has begun, but still you demonstrated a modest ASK growth in June. What are the reasons? Do you plan to revise your capacity after [4] '19?

This year, we were planning to add about 17 MAX aircraft to our fleet by the end of June. However, we could only add 5 and we could not operate them either. Delivery schedule of the remaining 12 aircraft are currently postponed until further clarification from the Boeing side. Additional change in the new delivery schedule also affected ASK growth in June. And as a result of this -- and there were some unplanned AOG maintenance requests on the aircraft that we had to come up with, we had to resolve. So these factors are the reason for our lower-than-expected capacity growth in the first half.

A question from Melis Pocar, OYAK Yatirim; and JPMorgan, Hanzade Kilickiran: How are your forward bookings? What is the reason behind April operators weak, a new airport's weak PAX performance in July? Are you concerned about the seasonally important third quarter?

We see the forward bookings flattish for the third quarter and slightly positive for the last quarter. In July, PAX figures are flat for international passengers, and there's 4% increase in capacity, which led load factor to turn negative. High base impact from last year was also important. Last year, load factor was about 85%. We aren't concerned too much about the third quarter, as August started better-than-expected results.

From Yapi Kredi Yatirim, Mustafa Görkem Göker: Could you -- could we assume the current capacity mix suggesting reduction on domestic capacity and increase in international to be broadly identical next year? That is, is there a room for further reduction in your domestic capacity?

Due to the MAX issue and the neos, we had to cancel quite a few flights. And as you know, the depreciation of Turkish lira led domestic demand to decrease. Therefore, we try to compensate the demand decrease -- this demand decrease with the increase in international capacity. Depending on the macro issues, capacity mix may differ in the following years.

Do you think -- it's a question by Citi, Kerem Tezcan: Do you think yield improvement growth is sustainable in the second half, considering you are increasing the capacity? Any change in the competitive environment?

The base impact from last year was high, as I mentioned, thus, we might see flat revenue yields in the third quarter. In the last quarter, though, there might be an increase in yields for both domestic and international operations. There are some new carriers starting operations to Istanbul Airport from different regions like China and India. We expect to be benefiting from this increase, as the holiday -- as Turkey, Istanbul is seen more as a holiday destination, especially from countries with strong growth potential. These airlines -- new arriving airlines are adding services, obviously, after observing a positive trend in the demand.

And once they carry the passengers to Turkey and Istanbul with their airlines, we think we will be well positioned to host them on their next channel because of our advantages compared to the peers, like our well-diversified network, good connection times, affordable price, young fleet and good service quality.

What is -- a question by Hanzade Kilickiran: What is your net debt guidance, including leasing?

We expect to add about 25 new aircraft to the fleet in 2019, assuming MAXes will not be delivered before the beginning of 2020. Additionally, our infrastructure development in Istanbul Airport is continuing. With applying IFRS 16 beginning from '19, our net debt amount increased further. As a result, we expect a net debt of about $11 billion by the end of this year.

A question from [Deniz] Investment, Selim Kunter: We know from some press articles that the taxi times are increasing compared to Atatürk. What is the impact on planning and fuel costs?

I tried to respond to this during the presentation. At the very beginning, there were some increases in the taxi times. But coordinating with the airport operator, we have improved that and we have actually, in the month of July, brought the taxi time to a very close level with Atatürk Airport.

And yes, on the fuel costs, I already answered to this as well.

Okay. So the rest of the questions seem quite similar. There is one question. A question by -- asked actually by almost everybody, I could say: Are you planning to update your guidance? Yes, we will be updating our guidance. Actually we were planning to do it with this call, but we decided to wait the month of August. The ASK growth in the first half was just about 1.7% above last year, which is definitely below our expectations. Move to the new hub took place in April, which was slightly different than what we had initially planned while we were preparing the guidance. The problem with the MAXes, the delays in the neos, they all played important roles in our falling short performing within our guidances. So the total revenue and ex-fuel guidance were shared -- that we shared with you towards the beginning of the year were all impacted.

So after seeing the August performance, which at the moment is going better than our expectations and not too far in the future, probably by either end of August, end of this month or very early September, we will be sharing a revised guidance in the items that we expect there might be some changes. But most prominently, as we shared the July traffic, the ASK growth is going to be below our guidance figures. The -- and related to that, the PAX number are going -- is going to be below the guidance figures. In terms of profitability, as I also mentioned in the presentation, we expect to attain a similar EBITDA margin as we have guided earlier. So this completes our answer session.

We would like to thank you for your participation, and our Investor Relations team will be available to get your further questions and inquiries. Thank you very much for attending.

--------------------------------------------------------------------------------

Operator [3]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's webcast. Thank you all for your participation. You may now disconnect.