Turk Hava Yollari AO

IST:THYAO.E

Earnings Call Analysis

Resilience Amidst Challenges

Turkish Airlines has continued to demonstrate resilience amidst a challenging global environment. Despite various headwinds, including the Russia-Ukraine conflict and escalating tensions in the Middle East, the airline maintained its strong profitability and enhanced its global footprint. The first quarter of 2024 saw Turkish Airlines navigating through supply chain difficulties that affected aircraft deliveries and maintenance schedules. Remarkably, the airline achieved higher returns on invested capital than the industry average through strategic capital allocation and operational efficiency.

AJet: A Strategic Initiative

A significant highlight of the quarter was the official launch of AJet on March 31. The new airline subsidiary aims to renew its fleet and implement digital transformation initiatives to boost ancillary revenue and online ticket sales. Over the next four to five years, these initiatives are expected to increase unit revenues by 20% and reduce unit expenses by the same margin.

International Expansion

In March, Turkish Airlines expanded its international reach by launching flights to Melbourne, its first destination in Australia, making it the only European carrier flying to the city. This expansion means the airline now serves 130 countries, covering over 90% of the global population and GDP. Passenger capacity increased by 13% year-over-year, driven by international operations, and the number of passengers rose by 8% to 18.5 million, with 65% being international travelers .

Financial Performance

For the first quarter of 2024, Turkish Airlines reported total revenues of nearly $4.8 billion, marking an increase of 10% from the previous year's $4.4 billion. Despite rising operational costs due to a new collective bargaining agreement, lower jet fuel prices offset some of the impact. The airline recorded an EBITDA of $780 million with a margin of 16.3%. The net income was $226 million, marking the 11th consecutive profitable quarter for Turkish Airlines .

Revenue and Margin Guidance

Looking ahead, Turkish Airlines expects to increase total revenues by 8% to 10% by the end of the year. EBITDAR margins are projected to normalize to between 22% to 25%, down from the extraordinarily high margins of 28% to 29% seen in recent years. This level of margin is considered sufficient to cover investments, CapEx needs, and maintain liquidity with good leverage .

Cargo Segment Performance

The cargo segment showed robust performance, with a 35% increase in volume, making Turkish Cargo the third-largest cargo airline globally by freight tonne kilometers. Cargo revenues surged by 27%, driven by strong demand for e-commerce and disruptions in sea freight, which increased demand for air cargo. This segment is expected to generate around $3 billion in revenue for the year .

Operational Efficiency and Cost Management

The first quarter saw substantial increases in personnel expenses, projected to rise by 15% to 20% annually due to inflation and salary adjustments. Fuel costs are expected to increase slightly with 47% of the fuel needs hedged at an $81 breakeven price. The company is focused on managing costs efficiently, including innovative aircraft leasing structures, which have lowered aircraft funding costs to about 2.7%. Ex-fuel unit costs are anticipated to rise slightly in the low single digits for 2024 .

Fleet and Capital Expenditures

Turkish Airlines plans to grow its fleet by a net of 40 aircraft in 2024, with 60 new deliveries offset by the retirement of 20 planes. Capital expenditures for the year are expected to be between $4.3 billion and $4.7 billion. Aircraft and slot transfers from AnadoluJet to AJet are ongoing and expected to increase efficiency and profitability .

Liquidity and Debt Position

Turkish Airlines holds a strong liquidity position with $6.2 billion in on-hand liquidity by the end of the first quarter. Operational cash inflows reduced net debt by around $750 million to $6.6 billion, resulting in a leverage ratio of 1.2x. The year-end net debt is projected to be between $9 billion and $9.5 billion, with a net debt-to-EBITDA ratio of 1.6x to 2.1x .

Market Outlook and Strategy

Despite global challenges, the airline's diversified network and dynamic capacity management are expected to adapt well to changing market conditions. Turkish Airlines is optimistic about demand for the rest of the year, with strong forward bookings and robust traffic results in April. The company expects 10% higher passenger capacity for 2024, accompanied by a low single-digit decline in yields. This strategy positions the airline to continue its growth trajectory while managing competitive pressures and cost challenges .

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the Turkish Airlines First Quarter 2024 Earnings Call. [Operator Instructions]I'll now hand you over to your hosts, first of all, 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, both at Turkish Airlines. Gentlemen, the floor is yours.

[Murat Seker, executive]

Thank you very much. Good afternoon, everyone, and thank you for joining us today. The results we announced yesterday reaffirmed our position in one of the leading global airlines with sustained profitability despite regional volatilities. By leveraging our structural advantages and agile execution, our growth trajectory remains robust with our 10-year strategy progressing effectively.As we present our first quarter results for 2024, it's important to recognize the challenges that shaped our operating landscape. Throughout this period, Turkish Airlines navigated a series of significant market disruptions, including the ongoing Russia-Ukraine conflict and escalated tensions in the Middle East. These headwinds were compounded by persistent supply chain difficulties that impacted aircraft deliveries and maintenance schedules.Before going into details of our results, I want to underscore the outperformance of our return on invested capital relative to the industry. Turkish Airlines continues to achieve materially higher returns through strategic capital allocation and operational efficiency. Our strategic initiatives and prudent financial management were pivotal in steering through uncertainties and consistently delivering value to our stakeholders.In addition to operations, our finance team greatly contributed to our performance, as evidenced by notable returns from the investment portfolio and innovative leasing structures that reduced our aircraft funding costs to about 2.7% levels. Turkish Airlines' expertise in aircraft financing was globally acknowledged over the years and most recently, at the Airline Economics Aviation Awards in Dublin. At this event, we were honored with the Global Lease Deal of the Year, JOLCO Deal of the Year and Supported Finance Deal of the Year awards.Another key development last quarter was the successful launch of AJet, which officially began its operation on March 31. AJet is actively implementing a number of initiatives. One of these initiatives is fleet renewal to decrease unit costs with more efficient and high-density new generation aircraft. An important second one is digital transformation aimed at generating ancillary revenue and online ticket sales. Through these projects, we aim to increase our unit revenues by 20% and reduce our unit expenses by 20% within the next 4 to 5 years.In March, we expanded our international footprint by launching flights to Melbourne, our first destination in Australia. Starting with 3 weekly flights, this route not only extends our operations to 6 continents, but also established Turkish Airlines as the sole European carrier currently flying to the city. With this addition, Turkish Airlines now flies to 130 countries around the world, covering more than 90% of the global population and GDP.Let's now delve into our first quarter results. Our passenger capacity experienced a substantial increase of 13% annually on this quarter, driven by international operations. On the cargo front, a 35% higher volume placed Turkish Cargo in the third place globally in terms of freight tonne kilometers according to IATA. In the same period, number of passengers increased by 8% to $18.5 million, 65% of which was formed of international passengers. Total revenues for the quarter reached almost $4.8 billion, up 10% from the previous year's $4.4 billion. This increase is primarily attributed to the strength in our passenger segment, supported by surging cargo performance.Profit from main operations was impacted by rising operational costs, particularly due to the recently signed collective bargaining agreement and declined by around 60% year-over-year. These factors were partially offset by lower jet fuel prices. In the January to March period, we recorded an EBITDA of $780 million with a margin of 16.3%. Net income was realized at $226 million, marking our 11th consecutive profitable quarter.As you may recall, in the last 2 years, shortcomings related to airport operations and air navigation services significantly impacted on-time performance of many airlines. While our operations at Istanbul Airport outperformed our peers, we weren't immune to these issues and experienced delayed inbound flights from Europe. For the upcoming busy summer season, we are preparing for these challenges by increasing the number of backup aircraft, introducing additional buffer times to our schedule and oversee the readiness of our third-party service providers. We hope these measures will enable us to improve our on-time performance while minimizing passenger discomfort and system inefficiency.Looking ahead, issues on aircraft and engine availability will continue to constrain industry growth, particularly in the long haul segment. Additionally, we anticipate global competition to intensify as the industry has now fully recovered to the prepandemic capacity level. Despite these obstacles, our April traffic results and the current forward bookings indicate healthy demand for the rest of the year. We believe our diversified network attractiveness of Turkiye, combined with dynamic capacity management will serve us well to adapt to rapidly changing market conditions.I will now pass the call over to Fatih Bey to elaborate on our results and provide additional insights.

[Mehmet Korkmaz, executive]

Thank you, Murat Bey, and good afternoon, everyone.We now delve into the details of our operational and financial performance for the first quarter. We continue to increase our passenger capacity in response to strong demand environment. However, the impact of heightened competition resulted in a percentage point decrease in our load factor. As a proportion of the prepandemic levels, our international passenger capacity was 42% higher, representing a sharp contrast to the rest of the industry.Our transfer traffic at Istanbul Airport continued to gain momentum. From January to March, the number of international transfer passengers increased by 10% compared to last year, reaching 40% above pre-COVID levels. Similarly, our total international passenger numbers rose by almost 7% year-over-year. Including domestic operations, we served over 18.5 million passengers in the first quarter, achieving our highest passenger volume on record.The joint growth narrative between Turkish Airlines and the Turkish tourism industry became increasingly evident in the post-pandemic era. As Turkiye climbs the rankings of the world's most visited countries, our passenger numbers also continued to grow. During the first 3 months of the year, the number of visitors traveling to Turkiye increased by 10% to 9 million, mirroring our 8% higher passenger numbers.In the first 3 months of 2024, the Far East and Americas remained our top performing regions. As we expanded our capacity in the Far East by over 27%, in line with the competitors, our load factor and yield decreased by around a percentage point. Additionally, following the launch of our Osaka route last December, we introduced our inaugural flight to Melbourne, further diversifying our network. In North America, sustained demand strength encouraged us to increase our capacity in the region by around 16%. Despite the suspension of Tel Aviv route, we successfully generated more traffic from India and Southern Europe. As a result, the region's load factor was almost on par with last year.In South America, we quickly addressed the load factor weakness by stimulating more demand from Southern Europe and Asia as evidenced by our April traffic results. While we anticipate some continued challenges in the region, they are expected to lessen in the coming months. Looking ahead, we plan to expand our presence in the Americas by initiating flights to Denver in the U.S. this June and to Santiago in Chile during the winter season.In Europe, there was a mixed picture. Seasonal uplift during Easter helped us to balance competitive pressures in the first quarter. Although Eastern Europe showed some weakness driven by decreased local traffic, Southern Europe contributed positively our results. Our new Melbourne route supported our load factors, especially in Italy, Greece and Macedonia. At the same time, passenger flow from the Americas to Italy and Greece rose materially by around 60%. In the Middle East, we responded to the negative impact of ongoing conflicts on demand by reducing capacity by 2% year-over-year.On a brighter note, the introduction of new tourist visa regulations in Saudi Arabia positively impacted Umrah travel, especially from European destinations and Turkiye. Consequently, we improved our load factors by 2 percentage points quarter-on-quarter basis. The previously implemented visa on arrival policy for Turkish students traveling to Egypt continue to support our traffic in Africa. As of the first quarter, demand stabilized in Morocco, following the tragic earthquake. In North Africa, significant capacity increases by Saudi Airlines and aggressive pricing had a negative impact on traffic.Our passenger revenues in the January-March period rose by 5%, even though last year's unusual high base resulted in a 6% decrease in passenger yields. Cargo revenues surged by 27%, driven by a 35% increase in volumes. This was mainly due to elevated e-commerce demand, relatively strong global trade and last year's low base due to the earthquakes in Turkiye.Recent signals showed continued strength in air cargo demand, especially for deliveries originating from Asia. While disruptions in the Red Sea initially boosted air cargo, the impact has stabilized as the use of alternative routes became more significant. Increased sea freight costs due to these changes makes air cargo more competitive. Additionally, signs of inventory restocking suggest a potential contribution to cargo traffic. Although uncertainties remain due to the elevated interest rates, we are optimistic for the remainder of the year and revising our projections upwards.As of the end of the first quarter, our on-hand liquidity stands at $6.2 billion. Operational cash inflow reduced our net debt by around $750 million to $6.6 billion. Consequently, our leverage decreased to 1.2x by the end of this quarter. Our strong liquidity position and lower average funding costs will continue to positively affect our bottom line. As macroeconomic indicators suggest that interest rates will remain elevated for some time, we anticipate our full year net income to be at a comparable level with last year.Increasing Cargo and Technic contribution led to more than 9% higher revenues in the first quarter compared to the same period last year. Operational performance translated into around $780 million of EBITDAR, up slightly versus last year. Even though profit from main operations were impacted negatively by the cost pressures, net income was almost on par with last year as a result of strong financial income.Since the beginning of 2023, we have been gradually increasing our fuel hedging positions, considering the price levels, volatility, macro picture and the developments in the airline industry. Currently, our hedge level stands at 47%, up from a previous level of 37%. We recorded around 0.5 percentage point increase in total cost per available seat kilometers during the first quarter.Looking at unit expense breakdown, around 8% increase in fuel unit cost was driven by lower annual prices and largely offset the 5% increase in ex-fuel CASK. The main contributor to the unit cost growth was the personnel expenses with a 25% increase year-over-year, following the inflation adjustment and the new collective bargaining agreement. On the positive side, cost control in marketing and maintenance items decreased unit expenses by around 9% and 6%, respectively.In the first quarter, AJet and AnadoluJet's combined passenger capacity rose were around 12% year-over-year and its number of aircraft reached to 98. By the end of this year, 40% of Ajet's fleet will consist of new generation aircraft, aligning with our strategy. This will allow us to benefit from having lower unit cost through increased efficiency and seat count per aircraft. Looking ahead, AJet plans to expand its network in Europe, Middle East and Central Asia.Thanks to our flexible operating structure, we adjusted the passenger capacity dynamically and profitably throughout last year and the first quarter. Currently, global travel appetite remains constructive, even though geopolitical issues continue to pose a downside risk to the demand environment and competition to the yields. Our April traffic results and forward bookings reveal confidence about the demand strength for the upcoming summer season. As a result, our 2024 guidance of 10% higher passenger capacity accompanied by a low single-digit decline in yields remains unchanged.For the remaining quarters, we expect our ex-fuel unit cost increase to normalize from the levels seen in the first quarter. Accordingly, we anticipate that this year's ex-fuel CASK to be up by low single percentage point compared to last year. For 2024, we expect our gross CapEx to be around $4.3 billion to $4.7 billion with 41 net aircraft additions, which was revised downwards according to the recent developments in delivery schedules.With this, we conclude our presentation and can now continue with the Q&A session.

[Operator]

[Operator Instructions] Speakers, over to you for those written question answers.

[Mehmet Korkmaz, executive]

Welcome back, Murat Bey. Following to our results yesterday, our analysts focused on the material increase in personnel expenses, obviously. We got a number of questions on that front, but I believe it would be better to provide a broader overview at the beginning of the Q&A session. So we are starting with the first quarter performance. What were the main drivers?

[Murat Seker, executive]

Sure. Well, there were definitely positive and negative developments in the quarter. On the positive side, the passenger demand regarding -- in terms of the volumes, especially in the Far East and Americas was strong in the first quarter, and this helped the overall yield to be still significantly higher than 2019 level in like around 20% levels. But compared to last year's first quarter 2023's first quarter, which was an extraordinary year, the yields came down. Nevertheless, it's fair to say that the demand continued to be strong in the first quarter.And not only on the passenger side, also on the cargo side due to the continuing strong demand on e-commerce and the disruptions we observed in sea freight, cargo revenues, which we also showed in the presentation, increased by 27% and the volume was up by about 25%, and yields in cargo front, despite coming back significantly last year, were still about 40% higher than their 2019 levels. And another positive front was, of course, the jet fuel, which was 10% lower than the level of last year. Both the Brent and the crack spread mutually acted downward, and this helped us gain that advantage on the fuel cost.On the negative side, again, as we kind of shed some light in the presentation, the personnel expenses, which was a result of the high inflation in Turkiye and globally being reflected a little bit lately, though being reflected in the personnel expenses. We had in the first half of the year, according to our union agreement, 64% increase in salaries at the beginning of the year. And in the second half of this year, the 1st of July, we will have another inflation adjustment that will compensate the inflation effect in the first half of 2024. So we are projecting somewhere around 27% to 30% increase in salaries in Turkish lira terms in July 1. And that's hopefully will be the overall impact on the salaries.And a final less slightly -- a final important point is the continuing tension in Middle East and continuation of the war conflict in Russia-Ukrainian region also affected the bottom line.

[Mehmet Korkmaz, executive]

Murat Bey, how many aircraft were grounded due to the Pratt & Whitney GTF engine issues?

[Murat Seker, executive]

So these numbers definitely changing depending on the news we get from the producer with our -- with the most updated information and our current projection is, currently, we have around 20, 25 aircraft grounded. This will go up to 40s towards the end of this year, and it will be around those levels for the remainder of 2024 and part of the 2025, it will be around 40, 45 aircraft. However, we try to mitigate this capacity loss with leasing additional aircraft. Last year and this year, we added about 15 to 20, still some of them -- for some of these aircraft contracts are being negotiated. 15 to 20 narrowbody aircraft are being added to the fleet with lease contracts to compensate this capacity loss.

[Mehmet Korkmaz, executive]

Continuing with the outlook. What are your expectations for this year's passenger demand? And accordingly, what are your capacity and yield guidance?

[Murat Seker, executive]

Well, currently, we see a strong demand environment for summer. I mean the tourism numbers projected for this year also supportive of this statement. Although there will be some pressure on the yields because there is more competition and more capacity is being presented in the market. Asia will continue to be a major driver for global air travel. Long haul in general seems quite robust, especially due to limited number of wide-body aircraft deliveries to the airlines. On the other hand, higher interest rates and geopolitical conflicts are posing somewhat risks on the travel appetite. However, our diversified network can easily mitigate these potential risks as we have done successfully many times in the past.So we believe changing the market dynamics present new opportunities, considering the diverging performance across regions as it was presented during the slides. Despite of the fact that we are facing some Middle Eastern crisis, we're also seeing positive developments like the Saudis providing visa services much more easily, Egypt introducing new visit policies to attract more Turkish tourists. These are the positive developments. So overall, we expect our capacity to grow by about 10% and the passenger yields will be declining in low single-digit margins. And as a result, with 10% ASK growth, we are expecting about 7% to 8% passenger growth. And part of this capacity growth, of course, is going to come through the increase in the [indiscernible].

[Mehmet Korkmaz, executive]

Murat Bey, we got questions from Erdem Kayli from TEB and Hanzade Kilickiran from JPMorgan about our forward bookings, particularly what is your view about current forward bookings for different regions?

[Murat Seker, executive]

Forward bookings for the summer, even though on the big picture, broadly speaking, look promising, there are definitely regional disparities. In Middle East, as I said just earlier, we started to -- because of the conflict affecting not just Israel, but also the neighboring countries, we cut some capacity, but from last quarter -- the last quarter of 2023. But looking into the second and third quarter of this year, we see some recovery, especially in Jordan and Lebanon. So some of the capacity could be recovered in these 2 countries.In Europe, considering the aggressive capacity increase of the peers, we expect further pressure on the yields, but our large network in the region will help us again to mitigate these risks. So like in this region, for example, in the second and third quarter, the capacity will be around roughly 7%, 8% increasing. In the Far East, our capacity increase will be much higher than the other regions. Part of it is due to its low base of production, and we are quite optimistic on the load factors, too. I mean as I said earlier, unit revenues, yields will be on slight pressure due to higher competition, but we'll be able to mitigate that.To put those in some numbers, in the Middle East, we can have around 25% increase in the next 2 quarters on increasing capacity, Americas, again, around like 8% to 9% levels, Africa, around 10% levels and Middle East will still see some decline compared to last year, but it won't be as drastic as we were initially anticipating.

[Mehmet Korkmaz, executive]

Murat Bey, we got questions from [ Yunus Yenikalayci ], Hanzade Kilickiran about tourism season in Turkey for the upcoming tourism season. What are your views on that?

[Murat Seker, executive]

So last year, as you would remember, as we also mentioned in our year-end results, we had a record number of tourists to Turkiye, 57 million, almost 57 million tourists came to Turkiye, and it was already significantly above 2019 levels. And this year, the Ministry of Tourism's projections, which we feel again they can be comfortably achieved is to increase this number to 60 million, which corresponds to something around a 6% increase in the number of incoming tourists to Turkiye. And in the first quarter, of this year, we saw already a 10% increase. So 1 million is already there. Additional tourists came to Turkiye in the first quarter of this year. And this definitely will help our direct operation from international to Turkiye. And -- but not only that, actually, the transit demand, the tickets sold on the transit network are also looking strong for the summer travel season for this year.

[Mehmet Korkmaz, executive]

Is it possible to elaborate on the impact of recent increase in domestic price caps?

[Murat Seker, executive]

Well, it's too recent though, the price cap increase took place in April, and the cap was increased by about 20%. And towards the end of summer, we will be seeing an additional 25% increase on the cap. Well, the contribution of domestic network to our overall revenue is limited. It's around 7%, 8% levels. So even though this price increase, this cap increase is going to have a positive impact, it will be limited. We are anticipating that it will have an 0.5 percentage point increase contribution to our passenger revenue for the full year.

[Mehmet Korkmaz, executive]

Continuing with cargo, could you please comment on cargo unit revenues in the last quarter and your forward expectations?

[Murat Seker, executive]

Well, the last quarter of 2023, annual cargo revenue increased swiftly on the back of the significantly higher volumes and low base. And we recorded a double-digit volume growth in almost all regions, most notably in Asia, which was around 60% in the first quarter. Of course, the earthquake effect had an impact on having a relatively lower base and thus putting us a huge increase in the first quarter. But looking -- going forward, we expect this positive trend on air cargo to continue into second and third quarter. The disruptions in sea freight is still ongoing, though in a lesser extent compared to the previous quarter. But according to our yield evolution, we are projecting that the cargo yields, cargo revenue over cargo carried, is going to be above 5% levels and -- year-on-year, and the total amount of cargo carried to go up by more than 10% this year. So this hopefully will be able to help us generate a cargo revenue around $3 billion.

[Mehmet Korkmaz, executive]

We are heading to cost questions. Could you discuss the cost expectation for 2024? What are the main challenges? And what is the projected ex-fuel CASK?

[Murat Seker, executive]

Well, the biggest cost challenge was personnel expenses, which we already alluded. And the other cost items, especially on the aircraft maintenance related with the GTF issue, the handling and catering because of the inflationary pressure, not just in Turkiye but globally, are going to be important items for us to monitor. But given that we are increasing the capacity significantly by about, as I said, 10% levels, it's helping us a little bit to mitigate these costs or to separate them around our operations. Considering these, ex-fuel CASK is expected to be up and around low single digits for 2024.

[Mehmet Korkmaz, executive]

Murat Bey, you highlighted the reasons for the increase in personnel expenses. But can you quantify its impact for the full year?

[Murat Seker, executive]

So the personnel cost is expected to rise by about 15% to 20% annually. Of course, I mean, we know how much salary increase will take place, but we are projecting how much Turkish lira is going to depreciate towards the end of the year. So based on our estimates, 15% to 20% in personnel CASK in unit cost terms is what we are -- what we think is going to be achieved by the end of this year. Of course, by trying to increase the personnel utilization, labor productivity, we are trying to level this increase up a little bit.

[Mehmet Korkmaz, executive]

What are your expectations for fuel CASK on what assumptions? And can you also share the details of your hedging ratios?

[Murat Seker, executive]

On fuel CASK in '24, we expect low single-digit increase in fuel CASK compared to last year. Assuming our assumption is the brand is going to be going around $85 to $90. And our hedging ratio has been increasing since the beginning of the year and currently it's around 47% level, and the breakeven price is around $81. We keep adding new positions significantly. And we expect by the end of this year, our hedge ratio will be around 55% levels. And yes, we are expecting because of our breakeven price is still below the current price, we might end up writing some hedge gains by the end of this year.

[Mehmet Korkmaz, executive]

Is it possible to talk about revenue and margin forecast? Also, we got questions from Erdem, TEB Yatirim. Is there any EBITDA margin threshold to have triggered to initiate cost-cutting measures? And how do you envisage the normalization?

[Murat Seker, executive]

Well, given our current projections on the capacity and passenger evolution and the yield environment, we expect to increase our total revenues by about 8% to 10% levels by the end of this year. Last 2 -- last year -- in the last 2 years, EBITDAR margin was extraordinarily high, which we had somewhere around 28%, 29% EBITDAR margin. We knew that it was quite high, and we were expecting some normalization. And when we were working on our 10-year strategy for our long-term projections and EBITDAR margin of somewhere between 22% to 25% is comfortable for our long-term projections to cover our investments, CapEx needs and to support our projections with leaving us sufficient amount of liquidity and with good leverage. So our target is to be around 22% to 25% EBITDAR margin levels. And this is with our current projections of this year, we are quite comfortably able to achieve this target.So I don't think it's -- we're in a position to start aggressively cost-cutting strategies, but it is always in our minds. We know that this year is going to be different than the last 2 years where the yield environment was extra comfortable. We know that the competition is back, and we have to be prepared for it. So we will start working on some cost-cutting initiatives to increase our efficiencies to increase -- or to increase the contribution of our digital transformation and to see how much efficiency is going to bring to us using the robotics, using the new NDC channels to increase our sales -- to decrease our sales costs, to increase our efficiencies in operations. So we will be working on those to keep our cost control intact. And accordingly, this year, we anticipate our EBITDAR margin to be somewhere around 23% and 26% levels, which was roughly the number we announced in our year-end presentation.

[Mehmet Korkmaz, executive]

What is the projected year-end fleet size in 2024? And could you provide further details?

[Murat Seker, executive]

This year, we are expecting to include around 60 deliveries and there will be around 20 retiring aircraft from the fleet. So it will be a net growth of 40 aircraft. And of the deliveries, we will have about 37 aircraft for Turkish Airlines, around 22 for AJet and 1 delivery for Cargo.

[Mehmet Korkmaz, executive]

What are the estimated CapEx and predelivery payment for this year according to the current fleet plans?

[Murat Seker, executive]

Gross CapEx is going to be around $4.7 billion -- $4.3 billion to $4.7 billion. There are going to be some delays in the deliveries of especially the narrow-body aircraft that would come in the last quarter of the year. Because of those delays into 2025, we decreased our CapEx projection for about like $400 million, $500 million. And yes, this will be -- this CapEx mostly will be because of the 40 aircraft additions to the fleet.

[Mehmet Korkmaz, executive]

According to what is your expected net debt position for the year-end?

[Murat Seker, executive]

For this year-end, we revised down our year-end net debt expectation by $0.5 billion for the same reason I just mentioned to [ $9 billion to ] $9.5 billion levels. And relatedly, our net debt-to-EBITDA multiple will be somewhere between 1.6 to 2.1x. This is for 2024. For our midterm leverage target, it's still around 2 to 2.5x levels because in the coming years, more aircraft deliveries will be seen.

[Mehmet Korkmaz, executive]

Murat Bey, can you comment on the AJet's current operation and financial performance along with the transfer process?

[Murat Seker, executive]

Well, the transfer process is completed. Ticket sales started on the mid of March and the scheduled flight successfully launched at the end of March. We have not seen any material issue system-wise or operation-wise. And since the first flight, AJet carried, with its new name and with its new brand, almost 3 million passengers. And together with AnadoluJet, AJet is expected to carry around 24 million passengers in this year, which is -- which will bring an addition of around 10% compared to last year. Aircraft and slot transfers from AnadoluJet to AJet continue. It will be a gradual process to address potential inefficiencies due to the dual operation. Ancillary revenue generation trajectory is promising. Before, we did not have this kind of revenue stream. Now we have introduced, in AJet, onboard catering and Wi-Fi for sale as additional services for our passengers. And we are, of course, continuing to work on projects to increase the profitability to increase its network operation to optimize its 2 hub operation in Sabiha Gokcen and Esenboga Airport in Ankara.

[Mehmet Korkmaz, executive]

About inflation accounting, is it possible to provide us any guidance for the deferred tax item or assets -- deferred asset item to be potentially booked in 2024?

[Murat Seker, executive]

Well, the main reason behind the deferred tax expense in the previous year was the increase of dollar-Turkish lira exchange rate. And as inflation accounting is now implemented on our tax financial statements, increase in the exchange rate could be compensated by the increase in PPI where we use PPI for the inflation accounting. So this was the case in the first quarter. And due to this, we recorded around $48 million deferred tax assets as PPI change was higher than the change in the exchange rate. Considering the current macro outlook, we might expect similar impact on our financials, depending on the relationship between the exchange rate and then the PPI change in the upcoming quarters.

[Mehmet Korkmaz, executive]

Murat Bey, could you give us an update on the negotiations with Boeing about the prospective large orders? And when are you planning to finalize the deal?

[Murat Seker, executive]

Unfortunately, we got this question last quarter, too. So we continue our close communication with Boeing regarding to this order. We have not been able to finalize it yet. I'm repeating myself, but the same issues are still there. It's not just a negotiation between Turkish Airlines and Boeing. It includes engine manufacturers, too. This is a combined effort among the 3 major parties. So -- but we are making progress and continuing to understand each other needs and the timing, especially when we can get the deliveries and how they fit in our strategic development goals, but we have not been able to finalize this deal yet.

[Mehmet Korkmaz, executive]

Recently, some -- there was some news about in media about our subsidiaries. Also, we got a number of questions about potential IPO or strategic partnerships. [ Huseyin Sert ] also asked this question. So what are your thoughts on that?

[Murat Seker, executive]

We definitely, as Turkish Airlines group, have very valuable subsidiaries that could be worth for an IPO, that are worth for an IPO. It's not within our considerations at the moment. The prominent ones and the ones on the news was about for AJet. We just launched AJet as a separate subsidiary. We need to give it some time to have this its operation. The fleet even has not been transferred into AJet yet completely. So they are witnessing some of the aircrafts from Turkish Airlines, and they are still registering for new flight rights. So it's going to take some time before we start considering these kind of proposals. But as I said, Turkish Technic, Turkish Cargo, AJet, these are very valuable assets for Turkish Airlines group that can be considered in the future for potential IPOs, but not at the moment. We don't have any -- anything -- any concrete thinking of such -- in such a way yet.

[Mehmet Korkmaz, executive]

Thank you, Murat Bey. With this question, we conclude our first quarter earnings call. We would like to thank all of our participants for their participation and hope to be with them next quarter. Thank you.

[Operator]

Thank you very much, speakers. Thank you very much. And ladies and gentlemen, yes, thank you for your participation in the conference call. You may now disconnect. Thank you.