Turk Hava Yollari AO

IST:THYAO.E

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, welcome to the Turkish Airlines Second Quarter 2022 Conference Call and Webcast. Thank you very much for standing by.

[Operator Instructions] And with that, I will now hand you over to our speakers. They are Professor Dr. Ahmet Bolat, he's the Chairman of the Board and the Executive Committee; Associate Professor Murat Seker, Member of the Board and Executive Committee as well as Chief Financial Officer; and Mehmet Fatih Korkmaz, Head of Investor Relations. Speakers, the floor is yours.

[Murat Seker, executive]

Excuse me. Hi, this is Murat Seker speaking. I think there was a little bit of a misunderstanding. Our Chairman is with us today, Chairman and -- Mr. Professor Ahmet Bolat is going to start the presentation.

[Ahmet Bolat, executive]

Hello. Thank you, and good afternoon, everyone. Welcome to the presentation of our results for the second quarter of 2022. It's my pleasure to meet with you all of you for the first time as the Chairman of Turkish Airlines.

Let me briefly introduce myself. I studied industrial engineering at Technical University of Istanbul and obtained a master's degree from operational research program at Stanford University and a PhD degree from University of Michigan in industrial engineering. Before joining Turkish Airlines, I had various academic roles at the University of Michigan and King Saud University, Riyadh for 17 years.

I joined Turkish Airlines at 2005 and served as a Senior Vice President of Investment Management and then as Chief Investment and Technology Officer between 2012 and 2022. During my years at Turkish Airlines, I managed strategic growth plan of our company and added around 550 aircraft to our fleet. Additionally, I was responsible for international relations and alliances, ensuring enhanced bilateral relations along with partnership and network development.

I'm pleased to be online with you today. Now allow me to go through highlights of the second quarter of 2022.

When we started the second quarter, geopolitical conflict and soaring fuel prices were on the top of the global headlines. Throughout the quarter, as we get closer to the summer, we started to see strengthening passenger demand. However, this positive development was exacerbated by increasing operational disruptions, especially in Europe caused by staff shortages. Operational readiness and our vast network, combined with surging demand and our low-cost base enabled us to conduct a profitable operation. As a result, we are happy to present you a strong second quarter results.

Turkish Airlines continues to stand out amongst its peers, increasing its global network, market share and profitability. Throughout the pandemic, we retained our highly qualified personnel base, gave special importance to the job training and improved our efficiency. This decision proved itself right as we have been able to ramp up quickly and capture that rapidly, increasing passenger demand across our network in 129 countries, which are 386 aircraft.

Similarly, under the Turkish government guidance, Turkey's airport infrastructure remained intact during this time. Synergy created among the sector players allowed Turkish Aviation to recover swiftly to 90% of the pre-pandemic passengers in June. Istanbul and Ontario airport also maintained the place among the top airports in Europe, ranking first and 8, respectively, in terms of passenger numbers.

Our second quarter capacity exceeded 2019 levels by 12%, which resulted in Turkish Airlines to produce the only network carrier around the globe that surpassed pre-pandemic capacity levels according to the data provided by [ OIG ]. At the same time, we carried more than 18 million passengers, just 1% below 2019 levels. Growing preferences towards Turkey, among foreign travelers resulted in direct international passengers to rise by 23% compared to 11% increase in international passengers.

Substantial increase in passenger traffic, along with the continued strength in cargo unit revenues led to significant improvement in our financial performance compared to last year. Total revenues reached USD 4.5 billion in this quarter, spreading 2019 level by almost 43%. As a result, we recorded around USD 530 million profit from main operations and USD 1.1 billion EBITDA with 25% EBITDA margin. Our net income was more than USD 570 million, similar to the levels generally seen in seasonally strong third quarter.

Our liquidity gained strength as USD 3.4 billion of the net operational cash inflow leveled up our cash and equivalents to USD 4.3 billion. Turkish Cargo continued to perform well even in the seasonally short period. Cargo revenues reached almost USD 1.1 billion, mainly driven by resiliency in unit prices. After combining our cargo facilities in a single hub in February, we have been experiencing improved efficiency in our operations and positive contribution to our cost base. As a result, Turkish Cargo ranked fourth on the world air cargo data list in terms of sales tonnage. With this success, we demonstrated our determination to the among the top 8 cargo carriers globally.

For the remainder of the year, we expect to increase our capacity between 10% to 20% compared to 2019, if there are no adverse development. While increasing our capacity, we are carefully observing possible factors that could adversely affect the demand to travel and global trade, such as macroeconomic uncertainties, geopolitical risks, elevated energy prices and potential results of COVID-19 related restrictions. However, we are ready to adjust our capacity just as we did during the pandemic.

As current shortcomings related to airport operations and workforce shortages put significant pressure in the industry, we differentiated ourselves from our peers with our operational reliability and on-time performance. During May, our cancellation rate was 0.5% over 40,000 departures. This was considerably lower than the European average of 1.7%. Even though delayed inbound flights from Europe effect our on-time performance, we were able to mitigate those negatives on our network as the airport Istanbul outperformed the major European peers. We observed minimal financial impact due to the refunds, accommodating passengers or compensations.

Moving forward, our aim is to continue running a reliable and high-quality operation while offering the widest range of seat availability to our customers. The trajectory of our passenger revenue continues to be positive despite industry-wide operational structures and macro uncertainties. We are well into the third quarter and current booking trends indicate continued strong demand as our passenger sales remain above pre-pandemic levels. Double-digit increase observed in passenger yields in the second quarter sustained in July as well. We are continuously optimistic for the coming matters and closely monitoring our bookings to see any signals of changing passenger sentiment.

I would like to thank all of our stakeholders for the trust they placed in Turkish Airlines. We are quite happy to reciprocate their trust with our strong performance and have a tremendous confidence in further achievements with their valuable support.

As a Turkish Airlines Chairman, from now on, we will have regular strategy meetings with our stakeholders. We'd like to present what we are thinking for our future, Turkish Airlines' fleet growth, passenger growth and so on, also the subsidiaries, what we are thinking, what we are going to do, we will share this with you more regular basis. And from now on, we will also come to you and have roadshows, as we did in the past.

Now after 2019, moved to a new airport, we see that the operational efficiency airport has proven itself and will continue to grow in Istanbul new airport double digits as we did in the past. Meanwhile, for AnadoluJet, we'll have more reliable, dependable strategies. We continue to change the fleet type to modern new technology, NEOs and MAXs, and we are going to grow also in Sabiha.

So with these, I think we know that our share should have similar values like our competitors and we'll stress [Technical Difficulty]. And as I said before, we are quite happy to reciprocate the trust with our strong performance. Thank you very much.

Now I will let Murat Seker to continue with the presentation and elaborate on some of the key results. Thank you.

[Murat Seker, executive]

Thank you very much, Mr. Chairman. I'll continue with the capacity side. Following our strong first quarter, we have continued to increase passenger capacity as we were encouraged by the demand environment. Our system capacity surpassed 2019 level by more than 12% in the 3 months to June. Similar to the previous quarter, pace of our international capacity ramp-up was considerably higher than the European and the global averages as a proportion of pre-pandemic levels.

Even though geopolitical conflicts and soaring fuel prices pose risks to recovery, appetite for travel was the deciding factor for demand. As a result, our revenue passenger kilometers steadily increased throughout the last quarter, exceeding 2019 levels by almost 12%. Load factor showed a similar improvement and recorded 3 percentage points above pre-pandemic levels in June. Contribution of belly cargo capacity reverted back to normal due to the expanding passenger operations. In the second quarter, belly cargo constituted around 50% of our total cover capacity compared to 30% in the same quarter last year.

As government lifted their COVID-related measures, recovery gained momentum in the second quarter. Ongoing operational disruptions and the flight restrictions also drove greater demand towards Turkish Airlines. Additionally, early vacation travelers in June increased the traffic to Turkiye. These factors resulted in double-digit yield increase in our international traffic. Americas continued to outperform all the other regions in terms of increase in passenger numbers and capacity. Strong asset demand, along with the higher business class preference supported the load factors and yields.

Recovery in Europe was also pronounced as passenger capacity and load factors surpassed 2019 level, owing to search in local and transit traffic. After most countries in far east loosened COVID restrictions on international travel, the region became major catalyst for our profitability.

Since the beginning of the third quarter, our passenger sales remain strong. We also anticipate a higher-than-usual demand pattern in early autumn compared to pre-pandemic trends. Yes, we are closely monitoring our bookings and other leading macro indicators to see if there could be any signs of weakening passenger sentiment in the coming months.

As passenger operations gained strength, passenger's contribution of cargo revenues to our total revenue base normalized from the peak level attained during the pandemic. In the second quarter, cargo revenues recorded around $1.1 billion and constituted 23% of our total revenues. We observed that the global air cargo demand continues to be relatively strong due to delays caused by disruptions in supply chain, transition at ports and insufficient [Technical Difficulty] capacity. We expect current trends to continue at least until the end of August. September will be a critical month for further visibility due to inventory order lead time for the winter holiday season. In July, we continued to build on our strong operational performance in the previous months. Total passenger capacity and demand exceeded 2019 levels 18.5% and 22.6%, respectively. As a result, our load factor increased by more than 3 percentage points, reaching to 86%. Also we carried 7.8 million passengers, 10% higher than the same period in 2019.

International demand was particularly strong in July as direct international passengers through Turkiye rose by 44% compared to 21% increase in total international passengers, including transit traffic. The trajectory of our August traffic continues to be strong as load factor remains 3 percentage points above 2019 level.

Let me now head to our financial highlights. As you can see, our cash position increased by around $1.6 billion in the first half to almost $4.3 billion. Going forward, we will continue to manage our liquidity carefully considering the demand environment, pace of deleveraging and our CapEx needs. As visualized in the left bottom chart, strong operational cash inflow helped reduce net debt to $8.8 billion as of June 30. We reduced net debt by $5.3 billion from its peak at the end of 2020.

Currently, our last 12 months net debt to EBITDA stands at 2.1x compared to 3.4x at the end of last year. Our leverage ratio is expected to be around 2.5x -- between 2.5x and 3x at the end of this year.

I would like to point out this parity between our financial performance and credit rating notes. During the last 5 years, when our operational and financial performance were considerably higher than the industry, the rating agencies downgraded ratings up to 3 notches. These downgrades coincided with our record-breaking operational profit and cash generation levels. Unfortunately, we are seeing a continuation of that trend as our ratings move in the opposite direction with our strong financial and operational performance. In the upcoming quarters, we expect our ratings to reflect the state of our operations and alleviating this contrast.

Next, allow me to talk about the key financial and operational data. Increasing passenger and cargo yields, along with the high volume, led passenger revenues in the second quarter to be realized 25% above 2019 and cargo revenues to more than double. With strong revenue generation, during this quarter, total revenue exceeded 2019 level by 43%, both profit from main operations and net income realized around $530 million and $580 million, significantly better than our pre-pandemic profitability. Strong operational performance translated into 25% EBITDA margin, up almost 7 percentage points above 2019.

Let me talk about our expenses in the second quarter. Unit costs increased around 13% in the second quarter compared to 2019. This was mainly driven by higher fuel expenses. On the other hand, ex-fuel costs decreased by almost 11%. Personnel cost was significantly below 2019 level, owing to the depreciation of Turkish lira against the currencies and increasing productivity. Turkish lira depreciation also played a positive role in reducing catering and handling expenses.

Unit costs decreased this in the airport and handling items, supported by higher [ stay length ]. Sales and marketing cost was also down by around 9% as a result of the lower marketing budgets. Fuel expenses increased around $850 million in the second quarter compared to 2019 due to rising fuel prices and higher demand. We have been experiencing an increased pass-through ability of fuel cost to ticket prices as demand remains robust.

In the last quarter, we were able to reflect almost 45% of our fuel expenses as surcharges. $55 million of hedge gains also allowed us to mitigate some portion of the negative impact from soaring fuel prices. Our hedge ratio for the remainder of the year is around 30% with a breakeven price of $72. As you recall, we paused hedging in February due to relatively high Brent prices. Going forward, we are considering adding new positions depending on the [Technical Difficulty] and volatility levels.

At AnadoluJet our aim is to construct a strategy to lower cost base, to grow fleet and to attain high utilization with increased network. To that end, AnadoluJet more than doubled its international capacity in the second quarter compared to 2021. Number of passengers carried increased by 52% to 3.7 million by the second quarter of 2022. With 70 new generation aircraft entries in this year, we are targeting to past 2019 capacity levels by almost 90%.

AnadoluJet network will grow further in international destinations in Europe and the Middle East. Additionally, we are targeting to capture increasing travel demand from Europe to Turkiye, especially through direct international flights to holiday destinations.

Thanks to our large network and crew size, we are able to adjust capacity efficiency according to the market conditions. Seeing July traffic results and current forward bookings, we are confident about the strength of summer season demand. As a result, capacity in the third quarter is expected to be 10% to 20% higher than 2019. For the full year, we plan our capacity to be above 2019. On the cost side, our ex-fuel cost target is lower than 2019. We expect CapEx to be around $4 billion to $4.5 billion, including aircraft, engines, spare parts and other fixed investments.

We see sustainability as one of our focus points in our growth strategy. Our modern fleet and carefully designed and sustainability initiatives are the key in lessening our environmental impact. Working with zero-waste policy in sustainability, we have committed to a number of projects such as bio fuel usage and carbon offset program in order to combat climate change by decreasing our emissions. All of our efforts in the second quarter allowed us to save almost 18,000 tons of fuel and prevented emissions of 56,000 tons of carbon to atmosphere.

Our colleagues from different countries and cultures are the basis of our success. We implement policies to give them equal opportunity across our organization. One recent example towards test is our participation into IATA 25by2025 program. With this initiative, we aim to increase the representation of women in executive roles and technical field by 25% until 2025.

As a result of our efforts, we have recognized as the most sustainable flight carrier airline by World Finance, one of the foremost organizations in international finance world. We will continue our endeavors with the perspective that protects both the present and our future.

This concludes our presentation, and we can now continue with the Q&A session.

[Operator]

[Operator Instructions]

[Mehmet Korkmaz, executive]

Hello, everyone. This is Fatih speaking. And now we are going to ask your questions. Now we can begin with the first question.

Murat, can you give us an update about our fleet expansion plans for 2023 and beyond?

[Murat Seker, executive]

Even though there are some uncertainties regarding the fleet development as there are, as you know, delays by the both OEMs, roughly speaking over the next 2 years, '23 and '24, we are expecting about 30 deliveries. 10 of these are narrow body and 19 wide body, 20 wide body. And between '25 and '28, we are expecting around 40 to 45 deliveries, roughly speaking, about 35 to 40 narrow-body and 46 wide body. So the numbers are weak, but roughly speaking, that's our expectation over the coming 5 years.

[Mehmet Korkmaz, executive]

Now one of the questions that our analysts are curious about is that on AnadoluJet. What is the current situation in AnadoluJet? Can you provide us with details regarding their operations?

[Murat Seker, executive]

Well, as I tried to answer through our presentation, we definitely are very committed to grow AnadoluJet business in the international market. Their fleet is growing, where currently they have about 60 aircraft, and we are planning to grow their fleet in the coming year with some operating lease aircraft and new generation actually aircraft. And this is going to translate into roughly speaking, 20% to 25% growth in -- the fleet growth that we have seen so far translates into 20% to 25% growth in AnadoluJet. And in the coming year, we expect to grow this fleet.

Our focus will be on the high-growth leisure markets, allowing us to penetrate this market deeper, especially in Europe and Middle East. And we will also be increasing the weight of AnadoluJet in our total operation. So its unit costs are going to decrease and it's going to be able to run a more efficient operation.

[Mehmet Korkmaz, executive]

We started with AnadoluJet and fleet but actually, our analysts are curious about our drivers behind our successful second quarter results.

[Murat Seker, executive]

There are a few reasons behind this. One of them is the current demand environment. Demand is much stronger than the available capacity that is being provided in our region. So this translates into higher yields. Passenger yields have passed 2019 and 2021 levels in the second quarter by about 12% and roughly 14%, respectively. The revenues overall as a result of the higher load factor and higher yields, total passenger revenue passed 2019 level by 25%. So better yields is one factor.

And the contribution of cargo fleet continues to be very strong. 24% higher cargo yields were attained -- achieved in the second quarter compared to the second quarter of 2021. And overall revenues increased by 13%. And on the cost side, excluding fuel, ex-fuel CASK was down by about 11% compared to 2019. So we have advantages both on the cost side, but more strongly on the yield side.

[Mehmet Korkmaz, executive]

Can you give us details about current trends and any clarity on forward bookings?

[Murat Seker, executive]

From May on, despite the double-digit higher ASK, load factors, we're about 2 percentage points higher than 2019 for international travelers. And this trend is expected to continue in the coming months, at least until the end of September. And forward booking performed slightly better for new destinations, Europe and Middle East mainly. And we are also seeing that after the restrictions were decreased in Far East, the demand substantially increased, and this also helped yields from Far East region. And overall, for the June and July, in almost all the regions, we see double-digit yield increases compared to the same period in 2019.

And among these, globally, when we look at the whole picture, best performing regions in these 2 months were Europe and Far East. And we anticipate this strong demand to last until the beginning of fall, but the summer season for this particular year could last a little longer until October.

[Mehmet Korkmaz, executive]

Murat, our analysts are wondering about how the problems in Europe, European airports are affecting us? And what are the extents of these negativities on our operation? And what is the monetary impact of these disruptions?

[Murat Seker, executive]

Well, definitely, our operation is being affected by these disruptions in Europe. We are getting delays and our on-time performance are dropping. And every day, we start our on-time performance with about like 90%, but by noon it decreases. Because as we are a network carrier, delays that are met in Europe are affecting the rest of the operation, especially on the narrow-body fleet.

Even though our on-time performance in European airports decreased by 25% compared to the same term in 2019, the network integrity remained intact due to our operational efficiency in Istanbul airport. Istanbul, the on-time departure is much better performing than on-time arrival, and that shows that in our hub, we are doing the best we can to close the gap in delays we are facing, led by our operations in other airports.

When we look at the financial impact, we are seeing minimal financial impact. In the second quarter, operational disruption costs actually decreased by around 15% compared to 2019. Our completion factor, I mean running our operation smoothly is intact, is doing well. Cost related refunds or re-accommodating passengers on compensation are minimal. Airport expenses such as bridge and parking are charged on per landing basis in Europe. Thus, they don't create additional cost items. And also as the delays are caused by the airports but not by the airline, our customer complaint compensation costs have also not increased materially.

[Mehmet Korkmaz, executive]

Murat, we are seeing some capacity caps in European airports. And do they affect the Turkish Airlines capacity ramp up?

[Murat Seker, executive]

They do. In certain major European hubs, we are being restricted by daily passenger numbers. In order to minimize the revenue loss and passenger discomfort, we are canceling some flights 2 weeks in advance if there is any necessity. And this 2-week period gives us enough time to accommodate those passengers and to minimize the passenger discomfort.

[Mehmet Korkmaz, executive]

Regarding our pilot base, we are hearing some problems in the United States. Does Turkish Airlines having any difficulty in pilot base?

[Murat Seker, executive]

At the end of first half, we had around 100 pilots on duty and roughly 500 cadets in our training pipeline to be ready by the beginning of next year. And preserving our pilot base during the pandemic was a very smart decision and it allowed us to carry out uninterrupted flight operations as we are scaling back up to the levels of 2019. Currently, we don't have additional salary increase plan for our pilots. After signing the new collective agreement at the end of last year, we gave a generous salary adjustment to all of our staff. And as the inflation was high in the first half, we also made an inflation plus 5% adjustment to the whole salary. So our pilots and cabin and ground staff in terms of their income are in a good shape currently.

[Mehmet Korkmaz, executive]

Can you comment on the recovery of business segments?

[Murat Seker, executive]

To our surprise, actually, business segment recovery is faster than we anticipated. Number of business class passengers passed 2019 level by about 25% in the second quarter, and the load factor in business class was 7.5 percentage points higher than 2019 level. The unit revenues in business class was about 7% to 10% higher in second quarter compared to last year. And in July, as we were in the peak season, it was 20% higher than 2019 levels.

[Mehmet Korkmaz, executive]

About domestic markets, what percentage of domestic tickets are sold on price caps?

[Murat Seker, executive]

In the second quarter, it was around 50% to 60%. And in the month of June, it was higher as because the schools get in recessed by mid-June and in the second half of June, the percentage of domestic tickets that were sold on the cap was about above 70%.

[Mehmet Korkmaz, executive]

Now we are heading to the outlook and what is your current capacity and yield expectations for 2022 as of 2019 levels?

[Murat Seker, executive]

2022 capacity in terms of ASK, we expect that to be maybe high single digits, higher than 2019 level. Yet to be seen how much capacity we will need to cut because of the flight restrictions. And so we can expect it to be high single digit above 2019 in terms of ASK. And about the year, overall, we are expecting that to be about double-digit higher than 2019 levels. For the third and fourth quarter of this year, we are expecting to put roughly 15% more ASK compared to 2019 level.

[Mehmet Korkmaz, executive]

Regarding COVID, do you have any concerns about revamping restrictions in case of any resurgence?

[Murat Seker, executive]

Well, this definitely is something beyond our needs in terms of what we are anticipating, given the high vaccination rates all around the world and relatively lower death rates, even though the number of cases are increasing in Europe, in Turkey as well, it has been of our main planning horizon for a while. So we are not too concerned about -- or we don't expect that very severe restrictions will be implemented by the winter. But having said this, if we face such restrictions, we have been operating under those environments over the last 2 years, especially 2021. I mean 2020, we were mainly shutdown. But in 2021, we were operating under very heterogeneous set of countries where certain countries were heavily restricted and certain were much more lenient in that regard. So we will be able to adjust our capacity quickly, swiftly to respond to any new recent developments. But that's not our base case scenario.

[Mehmet Korkmaz, executive]

Murat, in light of those, could you give us any color on guidance for the rest of the year?

[Murat Seker, executive]

So I think in an earlier question I said about the ASK. We said high single digits above 2019. And the second half of the year, about 15% more ASK compared to 2019. In terms of revenues, given the first half performance and the good summer performance, we are expecting to be above 2019 level in revenues. And EBITDA margin last year was very high because of the lower revenue level and high profitability we could attain. EBITDA margin will normalize to prior to pandemic levels is what some of the guidelines that I can share.

[Mehmet Korkmaz, executive]

What is your ex-fuel CASK expectations for 2022?

[Murat Seker, executive]

So a few major factors that affect ex-fuel CASK is the global inflation we are facing. And so that's putting some pressure on our costs and higher personnel expenses, higher handling and catering expenses. As we are generating more revenues and ticket sales are increasing, more marketing and sales expenses are also increasing. So but on the other hand, there is Turkish lira depreciation that we are also seeing. So in the second quarter, we saw ex-fuel CASK decrease by 11%. And we can see about like half of this decrease was led by the capacity increase. So in terms of cost, it decreased. And by the end of this year, we expect ex-fuel CASK to be lower than 2019 level by roughly single-digit levels.

[Mehmet Korkmaz, executive]

You talked about pilot base, but in terms of whole personnel base, what is the estimate to personnel unit cost for 2022? And are you planning any additional bonus or increase in personal wages?

[Murat Seker, executive]

Personnel cost is expected to decrease by about -- it's also going to depend, of course, on the second half inflation in Turkey, but about 15% compared to 2019. And the salaries are set by the union agreement. And so we had inflation plus 5 percentage points in July. And at the beginning of the year, it's going to be adjusted by inflation level. And yes, so we don't expect higher than debt adjustment. About the bonus, while bonus are determined, not preset, they are determined by the performance at the end of the year. If we have a strong performance, our Board might evaluate such a bonus to the staff, but we don't have anything set yet.

[Mehmet Korkmaz, executive]

Regarding your fuel expenses, how do you see fuel unit costs for the remainder of the year? And what is your assumption?

[Murat Seker, executive]

Well, this year, we are expecting 40% to 50% fuel cost increase. This includes the hedge amount compared to 2021. We assume overall year around could be $100 levels.

[Mehmet Korkmaz, executive]

Now we are heading to hedging questions. And what is your fuel hedging ratio and breakeven price for the remainder of the year?

[Murat Seker, executive]

Well, we've completed the second quarter with about 35% hedge ratio and the ratio for the remainder of the year will be around 30%, and our breakeven Brent level is around $72. And we are expecting for the whole year to have a hedge gain of around $200 million. Depending on the price of fuel, we will reconsider to add further hedge positions for the remainder of the year.

[Mehmet Korkmaz, executive]

Are you comfortable with current hedging levels for fuel? And how much of the fuel cost increase did you pass on to tickets in the second quarter?

[Murat Seker, executive]

Even though the ticket prices are determined by the demand and by the market, we have been experiencing increased ability to pass on the fuel price to tickets. One reason for this is the planning horizon for the potential travelers shortened since the pandemic. And this allows us to adjust the price ticket prices more quickly. Furthermore, when we combine the fuel surcharges with our hedging position, we believe we are able to alleviate some portion of the negative impact caused by the higher fuel prices.

[Mehmet Korkmaz, executive]

When was the last time a new fuel hedging contract was executed? And are you considering continue hedging?

[Murat Seker, executive]

So last time we had any position to our total hedge amount was by the end of January. We did not hedge fuel in February and March due to the escalated Brent prices. Well, we are seeing a little bit more easing on the volatility and the level. If we see this trend continuing a little bit further, we might add new position.

[Mehmet Korkmaz, executive]

About currencies, how appreciation of U.S. dollars affected Turkish Airlines financials, especially against euro and Japanese yen?

[Murat Seker, executive]

So depreciation of euro hurts our income statement on the operational front because we have about 30% to 40% of our revenues being in euro denominated. But similarly, depreciation of Japanese yen also hurt on the operational front. But in depreciation of Turkish lira, benefits on the operational front because on the expense side, overall, we have a short position in Turkish lira. The movement of all these main currencies against dollar in the first half -- sorry, in the second quarter, had overall a limited, roughly speaking, $10 million to $15 million negative impact on our income statement. And on the other hand, impact on our bottom line, including the financing part, the total impact is around $70 million to $100 million.

[Mehmet Korkmaz, executive]

And constant recent volatility in currencies, do you have any currency hedging plans?

[Murat Seker, executive]

We have a strategy on FX hedge, and we have been implementing that policy since 2013 for managing our positions in major currencies, euro, dollar and Turkish lira. As we are anticipating considerable cash flow mismatch in either of these currencies, currently, we are not doing any currency hedges and the positions that we carried are almost gone. However, depending on our cash flow projections, if we see any long or short position, we can do hedges. Recently, we added some hedge positions in Japanese yen terms, as in overall we have a short position in yen. We have yen-denominated aircraft financing. And we tried to benefit from the low yen levels going forward to fix some of our financing payments.

[Mehmet Korkmaz, executive]

We are now heading to highlight of this quarter. And which factors led to significant increase in cash flow in the second quarter? And do you see this as a continuing trend?

[Murat Seker, executive]

Excluding the bank loans, the monthly cash accumulation from our operations was around $500 million in the second quarter. And we expect to have a cash level of roughly $3 billion to $3.5 billion by the end of this year.

[Mehmet Korkmaz, executive]

And regarding CapEx, what is your plan for 2022? And do you have any pre-delivery payment plans?

[Murat Seker, executive]

The CapEx for this year remains same compared to earlier calls. And we expect to have about $4 billion, $4.5 billion level, and we anticipate about $150 million PDP outflow, which is included in our CapEx level. And of this CapEx, about $2.5 billion is for new aircraft, $1.8 billion -- between $1.8 billion to $2 billion is for aircraft heavy maintenance, spare engines and our other infrastructure needs.

[Mehmet Korkmaz, executive]

You significantly decreased your net debt level in the second quarter. What is your expected net debt level by the year-end and your leverage target?

[Murat Seker, executive]

The net debt expectation for this year decreased compared to our last call to $10 billion to $11 billion in terms of our strong cash generation capacity in the second quarter. And as a result, net debt EBITDA for this year-end -- current is we revised that to 2.5x to 3x levels.

[Mehmet Korkmaz, executive]

Regarding new fleet entries, what is the current plan?

[Murat Seker, executive]

I tried to answer this question earlier. There are some delays that we are facing by the OEMs, and there is supply chain issues with the producers too. So the fleet development, is there still little uncertain. But overall, for this year, we are expecting 34 entries and 19 exits this year. So overall, the fleet is going to grow by about 15 aircraft.

[Mehmet Korkmaz, executive]

Murat, regarding cargo segment of our business, could you please comment on cargo unit revenue and the capacity in the last quarter? And what is your expectations going forward?

[Murat Seker, executive]

The revenue per ton of cargo yield is about 24% higher than the second quarter of 2021. And the capacity is -- overall, total capacity is more or less the same as the second quarter of 2021. But we see a change in the composition. Now belly cargo capacity is much higher than compared to 2021 level. And overall, we are seeing a strong air cargo demand, and it's still -- last time which we were initially anticipating it to decrease. But due to [Technical Difficulty] and overall supply chain limitations, air cargo demand is still very strong. So we're expecting this current trend to continue at least until September. And this September and October are going to be critical for signaling the 2023 outlook for air cargo demand.

[Mehmet Korkmaz, executive]

Murat, we got additional questions during our webcast. So for example, we have a question from JPMorgan. And Daniel is asking about, is there any update on separation of cargo business from THY?

[Murat Seker, executive]

So that project is still in the pipeline, but there is no rigid or significant steps we are taking forward. It is under evaluation. We are trying to get the best out of our cargo operation. The current structure, the coordination and cooperation with our passenger side is very profitable. They are utilizing both the belly cargo and the passenger capacity very smart and profitably. And so we don't want to take any steps that would disrupt this collaboration.

This doesn't mean that we have completely thrown off the cargo separation project. It is a very elaborate analysis, separating an airline. We can use separate [ AOC ]. Takes a lot of effort in taking the -- applying for the [indiscernible] is in a very involved task. So that project is ongoing, but I am not able to provide a very clear time line when it is going to happen.

On the other hand, we don't feel the rush as cargo is really providing [Technical Difficulty] presented in the slide, providing a huge contribution to our bottom line and to our profit margin.

[Mehmet Korkmaz, executive]

Also, one of our analysts ask about our CapEx for the next year. Even though it's quite hard to say the exact amount, can you give us any range for the next year?

[Murat Seker, executive]

It's similar to this year. As I just answered this year, we expect that to be around $4 billion, $4.5 billion. And next year, it's going to be more or less on the same range, about $4 billion to $4.5 billion. And just like this year, about $2.5 billion to $3 billion will be on aircraft and the remaining $1.5 billion will be on the, again, aircraft-related maintenance, spare parts and continuation to some of our new infrastructure developments in Istanbul Airport. Like, for example, we are aiming to build a new hangar for our MRO business in Istanbul Airport.

[Mehmet Korkmaz, executive]

Murat, I'm going to combine some of the questions. First, Mani form Citigroup. What is driving the yield in CapEx increase this year? What were the main factors?

[Murat Seker, executive]

Well, we answered kind of a similar question. The yield is -- we were more in the air than most of our peers. So we have the first-mover advantage. And our operation is available to a very vast network. So we had a more collective capacity to connect more connectivity than most of our peers. And the demand to Turkiye, the local demand was also very strong. This year, we are expecting to pass probably 2019 tourist level in Turkey. In 2019, we roughly believe that there were 35 million tourists. We expect to have much more incoming tourists in Turkey, and they come, of course, with Turkish Airlines.

So the local demand is very strong. Our network is huge and the possibility the connect is too high. And these are all providing a contribution to our yields. And I also -- as I answered the earlier question, the business segment, business load factor and yields are also higher than before the pandemic levels. So overall, they contribute significantly to our double-digit growth in yield.

[Mehmet Korkmaz, executive]

Murat, regarding current geopolitical events, what is the effect of the current tension between Russia and Ukraine to Turkish Airline's operations?

[Murat Seker, executive]

Well, it's a mixed bag actually. Both of these markets before the war even last year in 2021, where the impact of the pandemic was still out there, we had about overall 5 million tourists from both of these countries. Now one of the countries is completely shut down in Ukraine and one of the country has a limited appetite to travel. So in number of total passengers, leisure travelers coming to Turkey, we see a decrease. But on the other hand, overall, as there is less capacity available, the yields are higher. So it is partially compensating the losses. So overall, it's difficult to say if we were better or worse than before the war. But I mean, there are -- most of the factors are out there for incoming tourists from Russia.

[Mehmet Korkmaz, executive]

Murat, regarding AnadoluJet, do you find Sabiha capacity as adequate for the next year?

[Murat Seker, executive]

It is not, and we are doing our best to find new aircraft for AnadoluJet. This year, we added about 17 new generation, low-cost aircraft to AnadoluJet fleet, and we are planning to finish the year with about 60 aircraft. There will be some more operating leases that we'll be getting next year for AnadoluJet in to Sabiha hub. And it's a place that we definitely want to grow further. We have a limitation about the slots, and we also have a limitation about the aircraft. I mean, we need new aircraft to grow. Our fleet team is working hard to add additional capacity to Sabiha Gokcen next year.

[Mehmet Korkmaz, executive]

Murat, I think we had a problem during our fuel cost question. Could you please repeat the expected effect of fuel on our unit cost?

[Murat Seker, executive]

This year, we're expecting the fuel cost to increase by about 40% to 50%, including hedged compared to 2021 level. And our expectation is about a year around fuel price of $100, $105, on Brent.

[Mehmet Korkmaz, executive]

And you also mentioned our plans for 2023 regarding CapEx. Can you something to add those expectations?

[Murat Seker, executive]

So in terms of CapEx, in terms of the ASK, we are -- I mean, it's difficult to judge depending on how many of the aircraft we will be able to get. For example, we have 10 787 deliveries scheduled for next year, but we haven't -- we were supposed to get 5 of these this year. And as the Boeing still could not have the complete resolution, we still could not get those aircraft. And 10 wide body is a huge capacity. So putting that aside, that uncertainty aside, we can have a high single-digit ASK growth. I'm just thinking out a lot here. We can have a high single-digit ASK growth for 2023.

In terms of financial performance or debt nature, we have been deleveraging since 2021. We were, as you would remember, around like a 3.8x, 3.9x levels, and we decreased that to about 3.5x level. And we will continue to do deleverage going forward into 2023, if we can keep this performance.

[Mehmet Korkmaz, executive]

I think there is one last question regarding the impact of transfer of cargo operations from Ataturk Airport to Istanbul Airport. What was the unit cost impact as a result of increasing efficiency?

[Murat Seker, executive]

So to the benefit, I think this question is asking the benefit of moving to new terminal is roughly 2% decline in ex-fuel CASK.

[Mehmet Korkmaz, executive]

I guess we completed -- we answered all of our questions. And now we can conclude our call. I would like to thank all of you for your participation, and hope to see you in our next call.

[Operator]

Thank you. Thank you, ladies and gentlemen. Thank you, speakers. Thank you for the presentation. Ladies and gentlemen, this now concludes today's webcast call. We thank you for your participation. You may now disconnect.