Turk Hava Yollari AO

IST:THYAO.E

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, welcome to the Turkish Airlines Third Quarter 2022 Conference Call and Webcast. I'll now hand you over to our speakers. Associate Professor Murat Seker, member of the Board and the Executive Committee as well as the Chief Financial Officer; and Mehmet Fatih Korkmaz, the Head of Investor Relations. Speakers, the floor is yours.

[Murat Seker, executive]

Thank you very much, and good afternoon to everyone. Welcome to the presentation of our results for the third quarter of 2022. It's a pleasure to meet with you -- with all of you again. As our Chairman mentioned to you on our previous call, we organized a non-deal road show in New York in September, and we met with the global investors, had a chance to discuss our recent performance, along with our future strategy. Their feedback and appreciation were quite valuable to us.

In the near future, we will visit other financial centers around the world to get in touch with you more frequently. I will address our strategy targets and growth areas in these meetings with you.

Now allow me to go through the highlights of the third quarter of 2022. Apart from continued geopolitical conflicts and escalated fuel prices, third quarter was mainly characterized by strong demand for travel met with operational difficulties, especially in Europe. While industry-wide disruptions effectively kept our peers' capacity, we carried out operations in Istanbul smoothly. This allowed us to benefit from the strong passenger and cargo demand. Our operational reliability, readiness and vast network combined with the robust demand enabled us to conduct a profitable operation. As a result, we are happy to present you our strongest third quarter results. Turkish Airlines continued to stand out among its peers, increasing its global market share.

As of the third quarter, we are the world's biggest network carrier in terms of available seat capacity on international flights. Also, our low-cost brand AnadoluJet international seat capacity surged by more than 4x. Third quarter was successful for the whole Turkish aviation sector. The industry continued its recovery by reaching 95% of the pre-pandemic passenger numbers in September. Istanbul Airport was the busiest airport in Europe, welcoming almost 20 million passengers during the quarter. The airport was the only major European hub where passenger volume exceeded pre-pandemic level. Antalya Airport was also among the top airports in Europe, ranking seventh in terms of passenger numbers in this quarter.

As shortcomings related to airport operations, and workforce put significant pressure in the industry, we differentiated ourselves from our peers with operational reliability and on-time performance. Our flat cancellation rate of 0.3% was almost 5x lower than the European average of 1.7%. Together with our high-quality service offer, our passengers showed their appreciation through Skytrax as we were named as the best airline in Europe. Going forward, we will continue to run reliable and high-quality operation. Substantial increase in passenger traffic, alongside belly cargo demand led to a significant improvement in our financial performance compared to pre-pandemic levels. Highest quarterly revenue of $6.1 billion recorded in the third quarter, surpassing 2019 level by more than 50%.

Increase in revenues, along with the cost discipline, we were able to alleviate negative impact from the escalated fuel prices. As a result, we realized around $1.4 billion profit from main operations and $2.1 billion EBITDAR with 35% EBITDAR margin. Our net income was $1.5 billion. This was our fifth profitable consecutive quarter showing the underlying strength and high potential of Turkish Airlines. In the first 9 months of '22, our liquidity continues to improve and our cash and equivalents reached $4.5 billion.

Turkish cargo performed well as we recorded around $900 million of revenue. Increased utilization of belly capacity strongly contributed to the profitability. To sustain our growth in cargo, we are introducing new products, focusing more on niche cargo segments and facilitating more strongly the efficiency growth by our new cargo terminal in Istanbul Airport, smartest. The trajectory of our passenger revenue remains positive.

In the last quarter of this year, we expect to increase our capacity between 5% to 10% compared with the same period of 2019. In the meanwhile, we are carefully monitoring global travel demand macroeconomic environment and the geopolitical risks. Regarding to the future of our sector, lack of sufficient aircraft and engine availability is going to post an important constraint on growth. Furthermore, under inflationary pressure and possibility of negative demand shocks cost-efficient and structurally sound airlines with well-diversified networks, we will be able to weather any negative macroeconomic development.

To conclude, I would like to thank to all of our stakeholders for the trust they placed in Turkish Airlines. We are quite happy to reciprocate their trust with a strong financial and operational performance.

Now I'll let Mr. Korkmaz to continue with the presentation and elaborate on some of the key results.

[Mehmet Korkmaz, executive]

Thank You, Murat, and good afternoon, everyone. I would like to start with the third quarter's capacity development to give you further detail about our results. After a strong first half performance, we continue to increase passenger capacity in parallel to the robust demand environment. Our system-wide capacity surface 2019 levels by 16% in the third quarter, 4 percentage points higher than the second quarter. Capacity increase is mainly driven by international operations which remains substantially above European and global averages as a proportion of the prepandemic levels. Additional frequencies along with the extended summer season due to the shift in passenger preferences we were able to capture even more demand. Operational disruptions in Europe and flight restrictions also drove greater demand towards Turkish Airlines. Growing popularity of Turkey as a global touristic destination increased our local traffic as well. These factors result in 2 percentage points increase in our total load factor and more than 15% increase in our passengers compared to 2019.

On a regional perspective, Americas continue to be the top performer in terms of increasing passenger numbers and capacity. Demand in Middle East was also fully recovered as [indiscernible] travel to Saudi Arabia supported the traffic. Since our capacity was ready to serve pent-up demand in Far East, lifting restrictions in the third quarter resulted and in gaining market share in new rules. For example, our interline passengers from Australia rose by 40% compared to 2019, increasing our load factors in Singapore, Kuala Lumpur, Bangkok by around 20%. Since the beginning of the fourth quarter, our passenger sales remained strong as it is still 40% higher than 2019 levels.

We also observed structural shifts in the booking curve which becomes more flatter with fewer fix for both weekends and holidays. This allows us better revenue management and more efficient use of our capacity, leading to higher yields and profitability. We are also closely monitoring our bookings and other leading indicators to see if there are any signs of weakening passenger [ centers ]. As a side note, I also would like to give you details about our 2 new strategies. First 1 is introducing a new rate structure for our Far Eastern flight by adding mid-afternoon bank. This will provide better connection times for our flights to and from Europe and North America enhancing our connectivity and aircraft utilization. By doing so, we will deepen our presence in our existing markets and gain market share as we will grow competitiveness through better use of our network.

Additionally, starting from this winter season, we are going to get these 3 -- 0.3% aircraft to the biggest Indian carrier, IndiGo. This collaboration will significantly increase our presence in India, one of the fastest-growing aviation markets in the world and feed our international network.

As passenger operations gain strength percentage contribution of cargo revenues to our total revenue base normalized from the peak level attained during the pandemic. In the third quarter, cargo revenues recorded as around $880 million and constituted 14% of our revenues. Even though air cargo in the third quarter was resilient, we observed that the global cargo demand is under pressure. Macroeconomic uncertainty and tighter financial conditions along with easing supply chain bottlenecks and port congestion resulted in declining global cargo indices recently. Increased availability of ocean capacity, coupled with higher inventory levels are freeing up additional freight capacity as well. Up until now, air cargo revenues affected to a lesser extent from these developments as its relative pricing compared to the sea freight is still lower than pre-pandemic levels.

In the upcoming quarters, we might see further deterioration in the supply-demand balance across the cargo industry due to increased availability of valid capacity related to reopening in Asia and increased containership deliveries in 2023. For us, current strength and profitability of our passenger operations sufficient to compensate and anticipated weakness in the cargo segment. As a result, we are not expecting a material margin deterioration in the near term for our overall operations.

Let us now head to the financial highlights. As you can see, our cash position increased by around $1.8 billion in the first 9 months of this year to almost USD 4.5 billion. Going forward, we will continue to manage our liquidity carefully considering the demand environment, our leverage and CapEx needs. As we visualized in the left bottom chart, strong operational cash inflow helped reducing net debt to USD 8.1 billion as of September 30.

We decreased our net debt by USD 6 billion from its peak at the end of 2020. Currently, our LTM net debt to EBITDA stands at 1.7x compared to 3.4x at the end of last year. This marks the lowest level of leverage in the last 10 years. As a result of the faster-than-expected recovery, we are revising our year-end leverage target downwards from 2.5x to 3x to 2.5x. Next, allow me to talk about the key financial and operational data. Increasing passenger yields, along with the high volume led 45% higher passenger revenues in the third quarter compared to the same period in 2019. Together with the contribution of resilient cargo operations, our total revenues exceeded 2019 levels by 52%.

Net income realized around USD 1.5 billion, substantially better than our pre-pandemic profitability. Strong operational performance translates into 35% EBITDA margin up almost 3 percentage points over 2019. Looking at the unit excess breakdown compared to 2019, we recorded around 19% increase during the third quarter. This was mainly driven by higher fuel expenses in relation to escalated fuel prices. Our ex-fuel CASK on the other hand, decreased by 5% on the back of higher capacity and productivity. Personnel cost is still below 2019 levels, mainly due to depreciation of Turkish lira against hard currencies. Turkish tier depreciation also played a positive role in reducing passenger services and catering expenses as most of our operations located in Turkey.

Our unit grant handling cost increased by around 17% in the third quarter due to increase in unit prices and personal bonuses paid to our subsidiaries, 20% decrease in sales and marketing costs is mainly attributable to reduced advertising spending as current demand environment does not require additional stimulation. Our fuel expenses increased by around $1 billion in the third quarter compared to 2019 due to higher price and consumption.

we have been experiencing an increased testability of fuel cost to ticket prices as demand remained robust. In the last quarter, we were able to reflect almost 50% of our fuel expenses surcharges. As you remember, this ratio was around 45% in the second quarter. On top of that, around USD 50 million of hedge gain allowed us to mitigate some portion of the negative impact from elevated price levels. Our hedge ratio for the remainder of the year is around 26% with a breakeven price of $72. As you'll recall, we post hedging in February due to relatively high Brent prices.

Going forward, we are considering adding new positions depending on price and volatility levels. We are continuing to invest in AnadoluJet in order to lower its cost base and attain higher utilization with diverse networks. With 11 new generation aircraft additions in the first 9 months of this year, AnadoluJet almost doubled its international capacity compared to last year. Similarly, number of international passengers more than doubled, reaching to 5.3 million in the same period. In the following quarters, AnadoluJet will continue to grow its network in Europe, the Middle East and Turkish Republic.

Additionally, we will launch new products to expand its customer base and ancillary offerings to enhance profitability. Now I will briefly talk about our full year expectations. Thanks to our flexible operating structure, we were able to adjust capacity efficiency throughout this year. After seeing October traffic results and current order bookings, we are confident about the demand strength for the remainder of the year. As a result, our capacity in the fourth quarter is expected to be around 5% to 10% higher than 2019. Similarly, for the full year, our capacity will be around 69% higher than 2019.

On the cost side, our ex-fuel cost target is lower than 2019. We expect CapEx to be realized around $4 billion to $4.5 billion, including aircraft engines, spare parts and other fixed investments. We see sustainability as 1 of our main pillars in our growth strategy. Our modern fleet and carefully designed sustainable initiatives are the keys in lessening our environmental impact. Also, we recently joined UN Global Compact, the world's largest corporate sustainable initiatives to concentrate our efforts further. Working with 0 waste policy and sustainability we have committed to a number of projects such as biofuel usage and carbon offset program in order to combat climate change by decreasing our emissions. In addition, last month, we signed global SAF declaration, which aims to complete decarbonize sustainable aviation fuels.

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

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

[Operator]

[Operator Instructions] Speakers, I hand it over to you now to see if there are any written questions coming through. Do you have any?

[Mehmet Korkmaz, executive]

Thank you, Rob. Murat, our analysts are wondering about which factors led to better-than-expected financial results in this quarter?

[Murat Seker, executive]

There is definitely more than a single factor here. Actually, especially in the third quarter, we saw a very strong comeback on the passenger revenue side. The second quarter kind of was showing some signs that the demand, especially direct demand to Turkey could be strong, but the third quarter showed a strong boost and as a result of which the Ministry of Tourism revised the total number of tourists that we expect to come to Turkey for this year, is increased -- he increased the number to 50 million, which is almost on par with the 2019 levels. So the incoming tourist demand leisure travelers to Turkey was a big determinant of the strong financial results. The transit network as most of our peers in Europe as we kind of expressed throughout the presentation had operational issues, we continue to be a good connector throughout the world between the East and West to the United States and Far East after it opened for operation. So this helped us to have the passenger around 20% higher than 2019 levels.

And on the cargo side, even though we were starting to see some drops in the cargo yields we could sustain our cargo yields because, again, the same reason are having a vast network availability of higher belly cargo capacity helped us to keep the cargo yields intact. And further on the cost side, ex-fuel CASK decreased compared to the same period of 2019 by about like a 5 percentage points. So these 3 factors kind of let the strong financial results of the third quarter.

[Mehmet Korkmaz, executive]

Murat, being the third quarter problems in the European airports were on the headline. How these problems affected Turkish Airlines? And was there any monetary impact of these disruptions on our operations?

[Murat Seker, executive]

As we have explained this in our earlier call of the second quarter, we did not lay off any worker through the pandemic. So preserving our pilots and keeping them ready for flight helped us a lot through this strong demand environment and the negative effect of the disruptions in Europe on our operations remained relatively limited. I say relatively because as we have a big network and hub and spoke system, as our aircraft operation started very high on-time performance rates. Throughout the day, we could have some delays, some cancellations led by the disruptions in Europe but they did not have major negative impact on the operation. Just to put it into some perspective, in third quarter of 2019, the operational irregularity cost expenses was about like $15 million to $20 million in 2019 third quarter. And this year, in 2022 third quarter these expenses was about $25 million to $30 million. So it had a limited effect on our overall operation.

[Mehmet Korkmaz, executive]

Regarding demand from Europe, how do you see the flow will be in the upcoming quarters, given the problems in energy security and potential decrease in purchasing power?

[Murat Seker, executive]

This is a little early to have a very clean expectation about the demand from Europe, although we have certain signs on the slowdown of economic activity on -- the PMI numbers are slow. Inflation is still pressing and energy crisis are out there. But we -- as we are in November now, we are still seeing, compared to the November of the earlier years, a relatively strong month. Strong winter is ahead of us. How long this is going to last is uncertain. We do have some expectations that the first quarter of next year could be a little low than we anticipated initially in the middle of this year. And we know that international market capacity in Europe currently is about like 20% below 2019 level. But having seen our performance in the third quarter lack of capacity in the market drove greater demand to Turkish Airlines and our load factor increased as a result of this by about 3 percentage points compared to 2019. And this happened on the top of increasing the capacity in the region by about 10%.

So the third quarter did not reflect any uneasiness in the region. However, we are -- of course, we will be very careful monitoring the developments for the first quarter, especially of next year.

[Mehmet Korkmaz, executive]

Are we expecting to experience any positive impact from World Cup?

[Murat Seker, executive]

To a limited degree. As being a big network carrier, definitely, we will be flying the travelers to Qatar. And we will also put additional demand for the World Cup month. And as we believe golf carriers are going to be planned -- are going to plan to channel their capacity from Far East to Middle East region to solve the urgent demand throughout the event. We will be able to gain some additional markets by focusing more on the Far East region to fill the gap.

[Mehmet Korkmaz, executive]

For the next year, I think the main question will be about our pilot base and aircraft availability. So what is the current situation on the pilot base?

[Murat Seker, executive]

This year, even though our number of pilots were sufficient, I mean to run an operation without much cancellations, we have to cancel some flights because the demand was much more than we could manage with our existing cabin and cockpit size. So as a result of this we are increasing -- recruiting new pilots, and we will be also recruiting new cadets from our pilot school. By the end of this year, roughly, we will be getting 300 captain, first officer and some will be the cadets. And next year, we are planning to get additional 800 to 1,000 pilots, including to the fleet by -- of course, we're not going to do this at once. So with monitoring the demand environment, we will be increasing our pilot size.

[Mehmet Korkmaz, executive]

Murat, can you comment on the operating environment and forward bookings?

[Murat Seker, executive]

In -- as I was saying in the earlier question, in this year, September, October, we -- in Europe and Middle East regions, we recorded highest increase in load factors compared to the levels of 2019. And coupled with the unit revenue increase Americas overall all regions showed a very strong revenue growth, Far East region opened up very late, but the load factor in the month -- the last month of third quarter in September was higher than 2019 level. Yields were also higher than 2019 level.

So we kind of were seeing the recovery all around the world. And looking at the forward reservation, we are anticipating a relatively well managed winter season ahead of us, Christmas season ahead of us.

[Mehmet Korkmaz, executive]

Regarding domestic markets, what percentage of the domestic ticks are sold on price caps? And how about average ticket price change?

[Murat Seker, executive]

The ticket prices -- domestic ticket prices increased twice throughout the year, and it reached about [ TRY 11,000 ] levels. And as the local demand was also very strong, we sold more than 60% of the domestic tickets in the capped price overall in third quarter actually, especially in the July and August months, this went up more than 70% levels. In 2019, in the third quarter, this was about 30% level. And domestic yields also increased in this year by about like a 10% compared to 2019 level in dollar terms, which was helped by the international flights, plus there was more business class sold in domestic market as well.

[Mehmet Korkmaz, executive]

Murat, regarding our outlook before we go into the details, our analysts are wondering about any guidance for next year for demand revenue yields environment, I think we could begin with capacity expectations for this year and maybe any guidance regarding the next one.

[Murat Seker, executive]

So overall, we expect to have an ASK growth of about 8% -- 8% to 9% on the top of 2019 level. Earlier, we were expressing this could be higher than 10%, but the limitations, the cancellations that came through operational disruptions in Europe prevented this and captain shortage also prevented this growth. So overall, we might finish the year with about 7% to 8% ASK growth. The yields overall, as we saw in the third quarter -- I mean, in the first 9 months, had about 20% growth. We are expecting to finish the year with higher than 20% yield growth of this year. And last quarter, we might be adding by 7% to 9% ASK growth on the top of 2019. And next year, we are still working on it. It's a difficult question that stems from how many aircraft that we will -- we have already ordered, we'll be able to enter the fleet. Currently, with the operating leases, we have more than 30 aircraft that we are planning to include to fleet some for AnadoluJet and some for TK. However, there are some delays in deliveries. So that delay is going to be a key determinant of how much capacity we will be able to put, but in a very big ballpark figure, it may be a low single -- low double-digit ASK growth, which will be able to little bit more clear once we have more elaborated analysis so far, '23 budgets.

[Mehmet Korkmaz, executive]

[indiscernible] ask about what percentage of your capacity will be from new destinations in 2023?

[Murat Seker, executive]

For next year, most of the capacity growth will come from additional frequencies as we will be getting a large number of widebodies if I'm not mistaken, about 12 widebodies will be entering the fleet. And with the help of this, we are planning to add a second bank to our network connecting Far East all the way to Americas. So rather than opening up new destinations, we will be -- most of the capacity growth is going to come from increasing frequencies. But we are not going to stop, of course, opening up new destinations. In the U.S., we are planning to open in Detroit. In Japan, we are planning to open in Osaka, which we used to fly in the past and in Tokyo at the second airport, Haneda to the fleet -- to our operation. Overall, about 15% to 12% of the capacity is going to be dedicated to domestic market and the rest will go for the international market.

[Mehmet Korkmaz, executive]

Our analyst from [indiscernible] and Is Yatirim is curious about any color on guidance for this year and the next regarding financial ones.

[Murat Seker, executive]

Financial ones. I mean, actually, the first 9 months was -- is already a strong reflector of how the year is going to turn around. After the end of third quarter, October and November, the traffic continues to be strong, which we announced -- I mean, we are -- we have already shared traffic for October. On the revenue front, we might end up having a revenue increase overall by about more than 20%, 25% by the end of this year. And as, of course, the revenue increases, the EBITDAR margin is going to come down to a more normal level, maybe 25% to 27% levels. For next year, as I said earlier, once we have the budget, we'll be able to share more clarity with '23. But overall, we have an optimistic view. I mean, at least, we don't have a very negative view of '23. We think, especially in the summer months, we might see a reasonably strong demand continuation. But if the weather turns other way around, we'll be prepared for it as well.

[Mehmet Korkmaz, executive]

We have a question from Goldman Sachs. They are -- they look at our NDR presentation our website, and they are wondering about our road map of growth going forward? And could you please elaborate how you are planning to achieve your 2027 targets?

[Murat Seker, executive]

So this is a little bit more about our strategy for the next 5 years. That is also something the executive team is currently working on. Hopefully, early in the first quarter of next year, we will be able to share much, much more clarity on our strategy going forward with TK brand, with our low-cost brand, our cargo brand and our new investments in the digitalization. But overall, the big thinking is we'll keep increasing the fleet. We keep growing the airline with new generation aircraft and we will keep the fleet young. And to do -- places where we cannot reach with our network, as Fatih mentioned in the presentation, as the example of our agreement with IndiGo and similar airlines, we will have cost shares or other collaborative efforts in the East, in the West to increase our exposure. And we definitely will increase our investment -- CapEx investment in digitalization and simplification of our operational processes. Ancillary revenue and our loyalty program requires more investment, which we are currently running certain programs. And Yes. So our third-party sales of our subsidiaries, which have also just like Turkish Airlines shown their endurance throughout the pandemic. They all kind of showed a very strong performance. And we will be able to showing there strong performance continuation through increasing their third-party sales, especially our MRO business and catering services.

[Mehmet Korkmaz, executive]

[indiscernible] and [ James ] from Goldman is curious about our ex- fuel targets for the fourth quarter?

[Murat Seker, executive]

Fuel is a very rather difficult commodity to predict these days. So that put aside, on the ex fuel side, we have shown that the actual cost decreased by about 5% in the third quarter. And by the end of this year, we expect that to be on low single-digit decrease from 2019 levels. The inflationary pressure is, of course, being affecting -- is affecting our operation, handling, catering, fuel, personal expenses all around the world, but we have not seen that being too tremendously negative on our bottom line as we look at it compared to our budget levels. We have not seen significant increase on our cost.

[Mehmet Korkmaz, executive]

Murat, how much additional personnel costs should we assume for potential bonus payments?

[Murat Seker, executive]

Some of these bonus payments is already made. The one that is related to subcontractors and some of our subsidiaries, on catering, on ground handling services, we have not paid any bonus to the TK personnel yet, but there is some work going on it. Once we have it announced to the staff, we'll be able to share more details regarding to the amount of it. This year, and having the actual financial -- looking at the financial numbers, the staff really from its grand service provider to the captains, headquarter staff, blue collar, white collar staff, they all put a great effort for the success. So our Board is going to decide on how much to award the staff but we have not finished that study yet, and we'll be sharing. But to our subsidiaries and the subcontractors to hold on our staff and to keep them happy in this high inflationary environment in Turkey, we overall so far paid a slight over $100 million, as I said, again, to our subsidiaries and the subcontractors that we hire. To the TK personnel, we have not yet finished it -- study yet.

[Mehmet Korkmaz, executive]

How do you see the fuel CASK for this year, on which assumptions?

[Murat Seker, executive]

Fuel CASK, our current expectation is year around, Brent is going to be around $98 to $100 level. And if you take this -- if this assumption holds, it will lead to 40% to 50% fuel cost increase for TK, including our hedge positions.

[Mehmet Korkmaz, executive]

What is your fuel hedging ratio and breakeven price for the remainder of the year and your assumptions?

[Murat Seker, executive]

Our policy is to hedge up to 60% of our fuel consumption. However, starting from the beginning of this year, we stopped hedging after seeing the very high acceleration on Brent price, the high acceleration on the volatility. And since then, we have not hedged. We have not included any new position. Our, in the first 9 months of this year, total hedge position is around 38%. And by the end of this year, if the price continues, the Brent price continues to be around these levels, we are -- and the volatility at these levels, we are not planning to add any new contract. So the hedge ratio can come down to 25% to 30% levels by the end of this year. Our -- Yes. So Brent assumption is already, I think, I said, around $95 to $100 a year around average.

[Mehmet Korkmaz, executive]

[ Artem from TEP ] is asking about our fuel hedging and our plans for the next year.

[Murat Seker, executive]

I think I already answered the similar question. What I can say for the next year is what we are looking at to add new contracts is the current Brent level, we expect that to fall below $90 and the volatility to come further down to be able to make the hedging more attractive. But this does not mean that we are having strong drawbacks from the current high Brent environment. Through the surcharges, fuel surcharges, we are able -- we were at least through the third quarter, we were able to reflect some of the high Brent prices to the ticket prices, having that wide spread network enabled us to reflect some of this cost pressure on the ticket prices.

[Mehmet Korkmaz, executive]

Now we are heading to currency and inflation questions, how depreciation of U.S. dollar affected your financials, especially against euro and Japanese yen?

[Murat Seker, executive]

So yes, dollar on -- just the third quarter increased by about like 5% to 6% on the top of euro. And we were -- our income stated in the balance sheet, we are long in euros -- so this -- we were, sorry, long in euros on the operational front, but including to our financial expenses, which are mainly are the commercial loans and aircraft finances, we are having a balance sheet in euros and dollars. So the depreciation did not have much negative effect. Overall, I think in the third quarter, we might have a negative impact of about $9 million to $10 million. But including the net income effect, which includes the financing part we are benefiting from the current currency environment by more than $150 million. Japanese yen depreciation is also helping us because we have about 30% of our financing -- aircraft financing is denominated in Japanese yen.

[Mehmet Korkmaz, executive]

Murat, you mentioned little bit about our hedging regarding currency.

[Murat Seker, executive]

Currency hedging. We stopped currency hedging actually at the beginning of the year, as I was saying in the earlier question, we used to have long euro positions and which we used to hedge against Turkish lira and other short position. But since the beginning of the pandemic, we don't have any more long euro positions because most of the commercial loans. Actually, almost all of the commercial loans, we had through the pandemic in 2021 were denominated in euros, and we kept adding new Aircraft financing to benefit from the low cost -- low financing environment for euros. So we no longer need to have currency hedges.

[Mehmet Korkmaz, executive]

Murat, I'm going to combine 2 questions regarding interest rates and inflation. First one, do you see higher interest rates globally as a challenge for your business? And the second one regarding the inflationary pressures in Turkey, Sam from SMBC mentioned -- curious about how it'll affect demand.

[Murat Seker, executive]

Higher inflation environment. Well, yes today, we had the inflation numbers above 85% level. So that's definitely looks like a risk key point. However, when I was answering to an earlier question, in the third quarter, we had more than 70% of our domestic ticket were soled on the cap and the load factor was about 90% in the domestic market. So the inflation pressure is definitely affecting the population but Turkey is quite a big country with more than 80 million population. So the overall total impact on our balance sheet despite of the high inflation environment throughout the summer was limited. And regarding to the interest rate, well, luckily, with our current strong financial performance, we have about $4 billion cash, and we are in no need in the near future to add additional financing. So the only thing remains is the deposit rates, which we are benefiting from. And -- so high interest rates will have not a significant impact on our financing needs.

[Mehmet Korkmaz, executive]

Murat, we are hedging to cash and liquidity questions. What factors led to increase in cash flow in the third quarter? And can you provide your full year expectations regarding cash levels?

[Murat Seker, executive]

Well, so as I was, I think, answering the first question, the strong passenger demand, the cargo demand led us to have very strong operational performance. And in the third quarter, we had around $200 million to $250 million cash generation in each month of the third quarter. And this led us together with the strong second quarter results, helped us to deleverage some of our financing and based on the performance -- ongoing performance for the remaining part of the year, we are expecting our year-end cash level to be about $4 billion.

[Mehmet Korkmaz, executive]

What is the CapEx and PDP plan for 2022 and next year?

[Murat Seker, executive]

Of the deliveries that will enter the fleet next year roughly 15 of them will be financed. And -- so we'll be getting some PDP back. And total CapEx for next year is going to be about $5 billion. And about $3.5 billion will be for the new aircraft and the remaining $2 billion will be for maintenance, engines and some remaining construction for our buildings in Istanbul Airport.

[Mehmet Korkmaz, executive]

What is your expected net debt levels by the year?

[Murat Seker, executive]

Expected net debt this year, we decreased our commercial loan book by about $1.5 billion. And with the entry -- with the paying back of some of the aircraft financing, net debt to EBITDA could be around 2x to 2.5x, which is a significant drop from where we were on the top of the pandemic.

[Mehmet Korkmaz, executive]

Murat, on some of the previous questions, you mentioned about our aircraft entries for this year. And maybe you can give us detail about our upcoming fleet entries?

[Murat Seker, executive]

Yes. So next year, overall, 39 deliveries will enter the fleet and roughly 15 of them are from -- directly from Airbus and Boeing our -- the new deliveries and the remaining will come from the leasing lessors. And in '24, so this 39 is for '23, between '24 to '28 currently, we have about 58 deliveries, but our investment management team is looking for new aircraft, especially cargo, for cargo, for AnadoluJet to replace their old narrow-body aircraft. So this number could go up in -- from '24 and on, we might be getting more aircrafts.

[Mehmet Korkmaz, executive]

Murat, we have multiple questions regarding our order book. James from Goldman, [indiscernible] and Kurt Hoffman from Air Transport World is curious about our -- are we having any difficulty regarding next year's deliveries, aircraft deliveries?

[Murat Seker, executive]

Not next year deliveries, but we have been having difficulties in getting our 787 orders especially that we ordered last year. But that problem is hopefully mostly resolved. Of the 787s, one of them is going to be hopefully come by the end of this year, and the remaining 7 are going to enter the fleet by next year. And the rest of the fleet are Airbus, we have neos and A350s. They are going to come as scheduled. What is problematic is to get the new orders soon from the OEMs.

[Mehmet Korkmaz, executive]

Regarding AnadoluJet, are there any developments you may share with us regarding its capacity?

[Murat Seker, executive]

Yes. As I was saying earlier, we are in the market looking for new generation aircrafts for AnadoluJet. We are planning to increase their capacity by around 20% this year. And next year, we are expecting to increase their capacity by additional 15% to 20%. And after the second runway, SaaS operation in Sabiha Gokcen Airport, the second airport in Istanbul, it definitely will be able to observe much bigger capacity growth for AnadoluJet.

[Mehmet Korkmaz, executive]

Murat, on our transcript, we talk about our cargo expectations on detail. But our analysts are quite curious about details, how it will evolve to that end, could you give us -- could you give us a few words regarding our expectations about cargo business?

[Murat Seker, executive]

For this year, cargo really fulfilled what we were expecting from it. Despite over the last few months, we are seeing some erosion in the yield environment, but they are being able to compensate this drop with increasing their -- the total tonne carried with the help of our belly capacity. And -- so like last year, their total cargo capacity was lower than 6%. And in the last -- in the fourth quarter of this year, we expect unit revenues and capacity to be slightly below 2021 period. But cargo is going to keep growing, that's why we are looking for new freighters and extend our wet lease operations with our current leasing companies. So yes, the next year, we'll keep cargo on our top agenda to grow its business.

One question here says, what person comes from cargo? Overall, well, that's difficult to put into perspective because of the belly, which is a significant contributor to the -- both on the passenger side and the cargo operations. But it's definitely -- we are running a very profitable cargo operation. Maybe in the first -- for the first 9 months to put into some perspective about 30% -- 30%, 35% of the profit is coming from cargo.

[Mehmet Korkmaz, executive]

Murat, we have couple of additional questions, Murat, [indiscernible] from Investment Promotion Agency of Qatar is asking about our dividend policy. Are you planning to change your -- change our dividend policy?

[Murat Seker, executive]

I -- no, we don't want to -- we don't -- we are not planning to change the dividend policy, but what prevents us to pay dividend is not our intention to -- where do we stand regarding the policy. What prevents us to pay dividend is the accumulated losses we had in our income statement that is prepared according to Turkish tax costs. And there are numerous reasons for this, and we have elaborated on them many times. But as soon as we are in a position to distribute dividends,we will be more than happy to do so and looking forward to the years ahead of us where we can share some of this profit with our shareholders.

[Mehmet Korkmaz, executive]

[indiscernible] from ICBC. Turkey is asking about, are you planning an acquisition of an airline company in the future?

[Murat Seker, executive]

We are not, at the moment, working on such a project, not acquiring an airline, but increasing our collaborative efforts, which can be through code shares, through JVs, local JVs, regional JVs, to increase our exposure in the Far East market and in the Americas in these 2 regions, in particular, we are looking for more collaborative opportunities with other airlines.

[Mehmet Korkmaz, executive]

I think this answered Kurt Hofmann's second part of the question, the new time back in Asia is our answer to United Emirates Airline Corporation. So I think this answers that question as well. I believe this will be -- this are all of the questions. We would like to thank you for your participation and hope to see you in our next call next year. Thank you.

[Operator]

Thank you, gentlemen. Thank you very much. Ladies and gentlemen, thank you for your participation, and this concludes today's webcast call.