Turk Hava Yollari AO

IST:THYAO.E

Earnings Call Transcript 2024-Q3

[Operator]

[Audio Gap] [Operator Instructions] And now it is my pleasure to introduce today's hosts, Associate Professor Murat Seker, member of the Board and the Executive Committee as well as the Chief Financial Officer of Turkish Airlines; and Mr. Mehmet Fatih Korkmaz, Head of Investor Relations at Turkish Airlines. Good afternoon, gentlemen. The floor is yours.

[Murat Seker, executive]

Thank you, Rob. Good afternoon, everyone, and thank you for joining us today. The results we announced yesterday reflect our agility in navigating through a challenging operating environment marked by geopolitical conflicts, macroeconomic uncertainties, delayed aircraft deliveries and rising operational costs.

As our global network grants us flexibility and capacity allocation, our staff gives us strength to adapt swiftly to the rapidly changing circumstances. Our third quarter results also underscore the positive impact of our strategic financial decision making as a key tool in managing cost pressure.

Before going into the details of our third quarter results, I would like to take a moment to highlight some of our latest achievements.

First, our finance team's efforts greatly contributed to our performance, as demonstrated by our recent achievements at the Airline Economics Aviation Awards in London. At this event, we received the European Overall Deal of the Year award for securing Chinese yuan-denominated aircraft, marking the first time an airline outside of China securing such financing. Additionally, our recent financing of 2 Airbus A350 aircraft in Japanese yen was recognized as the European Supported Finance Deal of the Year.

These awards reflected dedication and hard work of everyone at Turkish Airlines, showcasing our financing capabilities with a diverse geographical base. This capacity enables us to maintain cost efficiency while minimizing currency risks. Moreover, last quarter, we secured our first-ever sustainability-linked loan for 2 Airbus A321 new aircraft. This loan supports our sustainability performance targets, including the reduction of carbon intensity, aligning with international aviation standards.

As an airline that has been recognized by the World Finance for 3 consecutive years as the Most Sustainable Flight Carrier Airline, we are dedicated to explore innovative financing solutions that not only support fleet renewal, but also contribute to our target of becoming carbon neutral by 2050.

I am also happy to announce that our Miles&Smiles! loyalty program has reached a significant milestone, surpassing 20 million members. Simultaneously, we expanded our new distribution capability platform, TKCONNECT, with new partners. The system went live on October 1. This structural improvement will enable us to decrease indirect distribution expenses per passenger in the coming years.

Furthermore, we introduced our new business class Crystal Suites, which was designed to offer an elevated level of comfort and luxury, in line with our goal of becoming the most prestigious airline in the world by 2033.

Moving on, recent additions to our network such as Denver, Detroit and Melbourne are performing strongly and at the same time, contributing our global reach significantly. In the coming months, new route to Sydney and Santiago will further strengthen our leadership in connectivity, followed by Lima in Peru and Phnom Penh in Cambodia next year.

Now I would like to turn your attention to our results for the third quarter.

Our total passenger capacity this quarter increased by 5.4% year-over-year, mainly driven by international operations. We carried 24.5 million passengers with a load factor of 85%, particularly Asia, North America and Africa contributed to this growth. During the July-September period, total revenues rose by around 5% annually, reaching $6.6 billion, and was recorded as our highest quarterly revenue. This increase was supported by the strength of Turkish Cargo as its market share gains continues.

Our cargo revenues saw exceptional growth, increasing by almost 50%. In the third quarter, we recorded an EBITDAR of $2.3 billion with a [ 35% ] margin. Even though this represents 5 percentage points decline compared to the same quarter last year, it is still significantly higher than our historical averages and comfortably within our midterm targets.

The decrease is mainly attributable to increasing personnel expenses due to the lagged impact of inflation and last year's high base. On a positive side, our investment portfolio continued to make a significant contribution to net income, which recorded as $1.5 billion, marking our 13th consecutive profitable quarter. $2.2 billion of free cash flow in the first 9 months increased our liquidity level to about $7.4 billion.

Looking ahead, our bookings for the fourth quarter continued to exhibit strength even amidst highly elevated geopolitical tensions in the Middle East. We must also acknowledge the ongoing challenges related to aircraft deliveries and GTF groundings, which make the budgeting process more difficult.

From our current point of view, we anticipate 5% to 8% annual passenger capacity growth in 2025, down from about 8% increase in this year. A similar picture is also warranted across the industry, which should support the yields, moving forward.

In closing, we believe our diversified network and proven track record of dynamic capacity management will serve us well to adapt to the volatile market conditions ahead. And our third quarter results show that we are on the right track.

I will now pass the call over to Fatih to elaborate on our results and provide additional insights.

[Mehmet Korkmaz, executive]

Thank you, Murat, and good afternoon, everyone. In the third quarter of the year, we expanded our passenger capacity selectively, considering aircraft delivery delays, GTF engine groundings and regional conflicts. The unpredictable delivery schedule is particularly concerning as it causes revenue management inefficiencies due to capacity shifts.

These multidimensional problems urged us to diligently balance our network profitability without further diluting revenue yields. Consequently, we decelerated our annual capacity growth in the third quarter to 5%, which is the lowest level seen in our post-pandemic trend. As other airlines across the globe faced similar problems, our agility and diversified regional exposure should allow us to navigate these challenges comparatively well.

In the third quarter, our international transfer traffic continued to be strong. However, some softness was seen in the direct traffic. The combined effect of a [ 22% ] decline in passenger numbers in the Middle East region, increasing interest from other global carriers in flying to Turkey and a strong base from last year led to 8% decrease in the number of direct passengers. Including domestic operations, we served around 24.5 million passengers throughout the quarter, 3% lower compared to last year.

In the third quarter of 2024, our performance in the Far East improved compared to the previous one. The positive contributions from India, Vietnam, Thailand and Australia support all our results. Still, competitors' aggressive capacity increases continue to put pressure on yields. Accordingly, the region's load factor and yield decreased by around 2 percentage points and 5%, respectively.

Towards the end of this month, we are going to start operating scheduled flights to Sydney, which will be our second destination in Australia. Strong forward bookings suggest that this city will be a valuable addition to our unique network presence within the region.

North America remains a lucrative market for us, but aircraft delivery delays led to suboptimal capacity allocation, driving load factors lower. This can be seen from our capacity changes in the second and the third quarters. Aircraft that were to be delivered before the high season entered our fleet towards the end of August. As a result, capacity increase in the third quarter was more than [ 13% ] higher year-over-year compared to around 5% in the second quarter.

[ Coinciding ] geopolitical issues in the Middle East also did not help, and the load factors deteriorated by 2.7 percentage points annually. Despite these adverse circumstances, our revenue management and sales teams did a great job stabilizing yields around 2% lower.

In South America, relative weakness improved as of the third quarter. We anticipate a constructive trend moving forward with new route additions to Santiago of Chile in December and Lima of Peru in June 2025.

In Europe, passenger traffic was stable overall, with some minor [ tweaks ] on a granular level due to seasonal factors and market-specific conditions. For example, the Paris Olympics materially impacted our bookings as travelers avoided the neighboring region during the event. Even though competitive pressures were evident, we successfully managed these headwinds throughout the period.

In the third quarter, geopolitical developments in the Middle East were increasing felt and were broad-based. Consequently, we initiated a more severe capacity cut since the pandemic and reduced the region's available seat kilometers by 19%.

Currently, 2 destinations within the region remain suspended. While we actively monitor developments, no immediate recovery is in sight, considering the current state of the conflict. On the positive side, our exposure to the region is less than 7% of our revenues, and we are dynamically [ channeling ] our capacity to other destinations.

One of our most promising regions, Africa, performed well in the third quarter. Touristic destinations such as Zanzibar and Mauritius continue to provide momentum. We also observed increasing preference for our transit network from Egypt, South Africa, Nigeria and Ghana.

On the domestic side, air travel within Turkey remains the most viable transport option in terms of comfort, travel time and costs. Consequently, demand was quite robust, with load factors reaching 1.5% during the third quarter. Increased price ceiling, coupled with a stable currency, also contributed to a remarkable 27% increase in yields.

Our ancillary revenues continue to play a vital role in supporting our overall financial performance, driven by the strong demand for services such as paid seat selection, excess baggage and other optional products, ancillary revenues recorded higher growth than passenger revenues.

In particular, seat selection revenues saw a notable increase, especially from Americas, reflecting the changing passenger preferences. Additionally, successful implementation of the initiatives such as dynamic pricing for business class upgrades positively impacted the revenues.

Our passenger revenues in the third quarter were flat due to 4% lower yields and around 1 percentage point decline in load factor. Conversely, our cargo performance was brisk, with revenues surging by [ 47% ] on the back of a 17% increase in volumes. Similar to the last quarter, elevated e-commerce demand originated from China, growth in global trade and destruction in Suez Canal were the main drivers.

Leveraging the capabilities of our state-of-the-art logistics terminal, our vast network, combined with successful execution, Turkish Cargo capitalized on these favorable trends with yields rising by 26% year-over-year and significantly exceeding market rates in nearly all regions.

Recent signals indicate a continued strength in air cargo demand, though to a lesser extent than previous quarters due to base effect. Longer sailing distances driven by security concerns, along with decreasing punctuality in seafreight, continue to enhance air cargoes competitiveness. Port strikes on the U.S. East Coast once again reminded us the fragility of the supply chains.

According to our observations, the relative weakness in China's good exports in August and September did not translate into a negative impact on airfreight. This makes sense as Air Cargo focuses more on high-value niche products, such as electronics, pharmaceuticals or express cargo, making it less susceptible to minor fluctuations in the macroeconomic environment.

Moving forward, the absolute level of cargo prices remain high and the earlier Chinese New Year is expected support yields in the last quarter of the year. On the other hand, the global political landscape and slowing export orders warrant attention.

In the July-September period, AJet decreased its passenger capacity by 5% annually. This was in response to the extraordinary circumstances that led to a decline in on-time performance towards the end of the second quarter. With fleet renewal plans hampered by the aircraft delivery delays, problems related to unanticipated maintenance events and GTF groundings were addressed by increasing the number of backup aircraft and extended block hours.

In turn, its operations are stabilized and on-time performance is back to normal. We plan to keep these measures in place until we see some relief related to aircraft availability. As a result, we now anticipate flat capacity for AJet in 2024 compared to last year.

In the meantime, structural transformation of the company is progressing is at full speed as teams are focusing on generating ancillary revenue, developing new product bundles and simplifying costs.

In the third quarter, strong contribution from our cargo operations led to a 5% increase in revenue compared to the same period last year. Financial performance continued to be negatively impacted by the ongoing challenges related to GTF engine issues and inflationary adjustments on salaries, leading to a decline in profit from main operations by around 22%. Even so, a sizable contribution from our investment portfolio aided net income, helping to offset some pressure.

We recorded around 8.5% increase in total cost per ASK during the third quarter. Although declining Brent prices were supportive, 54% annual increase in personnel expenses impacted ex-fuel costs heavily. This was primarily due to 13% higher number of personnel and the midyear wage adjustments of around 28% in addition to 64% increase at the beginning of the year.

A similar effect can also be seen in labor-intensive handling and passenger expenses. In the third quarter, GTF engine issues create 1.5 percentage point drag on ex-fuel unit costs, which was offset by the recently signed compensation agreement. Lastly, growing cargo operations lifted the unit cost as the denominator lacks a freight ton kilometer adjustment for simplicity.

On the bright side, sales and marketing unit costs decreased by around [ 13% ] year-over-year, mainly due to lower agent incentives and [ GTF ] expenses.

Considering not only our operational and CapEx needs, but also maturity, returns and risk tolerance, our finance team structured approach to fund management continues to yield successful results. Furthermore, their tactical adjustments in our portfolio also acted as a hedging mechanism for the Turkish lira strength and its negative effect on our operational expenses.

Consequently, our on-hand liquidity rose to an all-time high level of $7.4 billion, while our net debt and leverage recorded as $6.2 billion and 1.2x, respectively. We expect to see positive contribution from our investment portfolio in the coming quarters.

Currently, global travel appetite remains constructive. Our daily passenger sales is flowing strongly as deferred income reached to its highest level of $3 billion or 17% of the last 12-month passenger sales.

On the unit cost side, we are revising our 2024 guidance to around 10% year-over-year increase. Our gross CapEx is expected to be around $4 billion to $4.5 billion, with 53 net additions if there are no delays in aircraft deliveries.

With this, we conclude our presentation and can continue with the Q&A session.

[Operator]

[Operator Instructions] And with that, I hand the floor back to our speakers for those written questions. Gentlemen, over to you.

[Mehmet Korkmaz, executive]

We got a number of questions from our analysts and investors along with press. So we touch on the third quarter performance during the first part of our call, but would you like to highlight the main points?

[Murat Seker, executive]

Sure. I have to divide that into two pieces. On the positive front, definitely, as you saw in the presentation, air cargo -- strength in air cargo demand, especially originating from Asia and supported by the disruption in seafreight, was strong. Revenues surged by almost 50%. And volumes -- within this 50% growth, roughly 20% came from the increase in volume and about 25% from the higher-yield environment compared to the third quarter of last year.

And the domestic demand was also very strong. Load factor was around 92%, and the yields were very strong, supported by the strong Turkish lira. And another positive factor was the low fuel price and jet crack spread, which resulted in about 7%, 8% decrease in fuel CASK.

And relatedly, the management of our investment portfolio acted as a good hedge mechanism against the high inflationary environment in Turkish lira, and it contributed our positive gain on our portfolio investment.

On the negative side, the escalated tension in Middle East that started slightly more than a year ago continued to have a negative effect on the region. And the Russia-Ukrainian conflict, there was no easing or improvement there. So these two regions were continuing to have a negative impact.

And then as we saw the full recovery in almost all airlines in the region, it intensified the competition and put further pressure on the yields, which was the main cause of our yield erosion. And furthermore, the delays in aircraft deliveries led to somewhat ambiguity in the fleet -- in the network planning. And as a result, elevated cost pressure, mainly on the personnel expenses due to the salary adjustments, caused an ex-fuel cost increase of close to 9% levels.

[Mehmet Korkmaz, executive]

Can you elaborate on the GTF engines impact on the third quarter results and your outlook moving forward?

[Murat Seker, executive]

So the -- we keep grounding aircraft. Currently, we have about 42, and we expect to reach a size of 45 by the end of this year. We are foreseeing that will be the highest number attained in grounding by the end of this year. And then it will start to decrease towards the mid of next year, but it's not going to be a huge, significant improvement throughout 2025.

But on the positive side, as I said in our last call, we agreed with Pratt & Whitney on compensation, and we started to get part of the compensation in the third quarter results. And the remaining part is going to come in the fourth quarter and part of next year, we'll keep getting this compensation.

[Mehmet Korkmaz, executive]

Could you provide insights into current passenger booking trends network-wide and across the regions?

[Murat Seker, executive]

So currently, the demand is holding okay, except the Middle East region, even though increased competition put pressure on the yields, the booking curve indicates strength in the winter season. We felt the competition most severely on the third quarter. But the last quarter, going forward, we see there will be an improvement on the yields compared to the performance we saw on the third quarter.

And the -- if you look into the regions, fourth quarter, we expect a similar performance in North America region compared to third quarter. And in Europe, we see a somewhat improvement in the last quarter, helped with the winter travel seasons. And also, the capacity decrease of the peers will give us some more opportunity here for additional yield and revenue gain.

Middle East, we decreased the capacity in the fourth quarter as well in response to the uncertainty in the region. And definitely, there is no visibility out of this region.

And the domestic market is looking positive. Even though its contribution to our total revenue base is relatively low, yields have been strong, as I said earlier, due to the strong Turkish lira and a strong trend, we expect that to continue in early next year.

[Mehmet Korkmaz, executive]

We got a number of questions on geopolitical issue in the Middle East. What is the impact of these developments? And can you give us an idea about how much Turkish airlines are flexible in terms of those developments?

[Murat Seker, executive]

So in Middle East region, we are operating in about 40 destinations. And 2 of them, Beirut and Tel Aviv, are closed. Depending on the escalation and tension in the region, we went up and closed some other destinations about -- like within the last month, it went up as high as 9 destinations, including Baghdad and Tehran. But then they were short-lived and we recovered the operation.

So within this context, it's hard to tell how much is going to affect the -- how much the operation is going to be able to recover. But currently, out of the 40 destinations, only 2 of them are shut down. Overall impact, so far in the third quarter, has been about 20% drop in capacity and 30% drop in revenues stemming from the region.

October capacity is also around 30% in terms of ASK. So that's what we are expecting from the region. And how this translates into revenue? We are projecting that it will have about 50% revenue loss in the last quarter of 2024.

[Mehmet Korkmaz, executive]

$50 million?

[Murat Seker, executive]

$50 million, yes.

[Mehmet Korkmaz, executive]

Murat, can we get your comments on the robust cargo performance and, of course, its outlook?

[Murat Seker, executive]

So the cargo has continued its strong promos as was in the last second quarter. We recorded growth in almost all regions. But most notably in Asia, the volume grew by about 47%, and the market growth in the region was almost half of this. So we doubled the market growth from outbound Asia traffic.

This was a direct result of our initiatives that we highlighted in the strategy, our investments in infrastructure, along with new products like the express cargo and specialized cargo. Being successful -- we were successfully capitalized on the strong demand coming out of the region.

And while we keep investing more, we are expanding the SMARTIST, which is our cargo terminal in Istanbul Airport. And hopefully, somewhere around '25, we will be able to start the infrastructure of our new cargo terminal and -- with which, together with the addition of this terminal, we are expecting to grow our cargo capacity to 4 million tonnes from its current level of about 2.5 million tonne.

And for the next -- for the last quarter of this year, the ongoing strength in deliveries coming out of Asia and disruptions in the seafreight are going to continue to play the major tailwinds for our cargo operation.

And considering our last third quarter results and fourth quarter momentum, we are going to revise our cargo volume growth expectations to about 20% year-on-year for '24 from the mid-teens level and the yield to low double-digit levels from the single high-digit levels.

[Mehmet Korkmaz, executive]

Could you discuss your cost expectations for the last quarter? Also, our analysts are wondering about -- is there any one-off costs that will lead to increase in the fuel cost -- ex fuel costs?

[Murat Seker, executive]

The cost feel -- the cost pressure we face in the first 9 months was mainly due to wage increases as a result of inflation compensation and relatively strong Turkish lira. The fleet grew roughly around 8%. And the cabin and cockpit staff grew related at same levels.

For Turkish Airlines on the [ sole ] basis, we had -- only out of the 35,000 staff, we had only about 900 increases in the number of personnel. So there was not really much of a growth in the number of personnel, but the growth came mainly due to the salary adjustments after the agreement with the union at the beginning of this year.

So we had about a 60% increase in the beginning of the year, in Turkish lira terms. And there was additional of about 28% increase in the beginning of July. And overall, that made the big impact in the salary -- personnel expense increases. In dollar terms, this translated to about like a 35% increase. So that was the biggest item.

But going forward, the increases in salaries are going to be much more manageable. The union agreement is -- also comprises of the salary increase of 25. So we are not expecting any surprises there going forward.

And on the second big item, the GTF groundings was the second big driver of the cost increases. And considering all this, we are revising our '24 ex fuel CASK guidance. We now expect around 10% increase year-over-year in 2025 -- 2024, sorry. And through this year our -- the technical adjustments in our portfolio composition was supportive to give us endurance against a high inflation environment, which we were able to use our portfolio gains smartly and -- which resulted in significant financial gains.

[Mehmet Korkmaz, executive]

On the fuel CASK, what is your expectations? And can you also share your hedging ratios?

[Murat Seker, executive]

So we are expecting to have around 20% lower fuel CASK in the last quarter, assuming Brent is going to be around $76. If the price declines below $70 per barrel, it will serve as a catalyst for our hedging appetite. And the volatility levels and competition are also going to be major factors when we make our hedging decision.

Currently, we hedge up around 54% of our '24 consumption and our breakeven price is $75. And we expect to conclude the year with about 55% hedge level. And into '25, we currently have hedged about 21% of our '25 fuel consumption.

[Mehmet Korkmaz, executive]

Our participants are quite curious about our 2025 guidance. But before going to that, could you provide details about our 2024 guidance?

[Murat Seker, executive]

So based on our third quarter results, the fourth quarter has quite a visibility ahead of us. As we have announced in the earlier quarters, our total revenue are expected to be by around 8% to 9% increase on top of '23. And although we increased our ex-fuel CASK, as I just explained, our EBITDAR margin expectations are going to be same in a range of 24% to 27% levels.

[Mehmet Korkmaz, executive]

Going to 2025, how should our analysts think about in terms of capacity and margins? And what are the moving parts? Do you foresee any impact from the issues that OEMs are facing?

[Murat Seker, executive]

So the ongoing issues within the industry regarding the aircraft availability really make the budgeting process of '25 very complex. And we have been getting frequent updates on aircraft delivery timetables along with the engine groundings -- aircraft groundings due to the engine problem, which have posed significant challenges.

So yes, we are seeing a material impact from the issues that OEMs are facing. And on the top of this, if we add the geopolitical tensions and a slightly weak macroeconomic and political outlook, along with the fuel price volatility, next year's budget is going to be a difficult one to make.

From our current point of view though, in '25, we expect to grow our passenger capacity by about 5% to 8% levels. And we expect improving -- somewhat improving in demand environment until the first quarter of next year, through which we have some visibility from today on. Looking at our forward bookings, we see demand is relatively well managed.

However, visibility beyond that is a little low, and actual cost pressures could have lower impact on our results due to better and improved inflation outlook in Turkey and globally, and fuel prices could further be supportive on top of this. But margin-wise, overall, our EBITDAR margin should be between 23% to 25%, in line with our long-term strategic targets.

[Mehmet Korkmaz, executive]

What is the anticipated fleet size by the year-end and 2025?

[Murat Seker, executive]

So this is the -- this is a part really that is moving a lot in the budget, but we are basing our revenue and cost evolution on a case where we are going to have about 45, 46 aircraft in the fleet. So net growth from 490s to 530s. It's a mix of, of course, narrow and wide bodies for -- including Turkish Airlines, AJet and cargo operations. So overall, about 7% to 8% increase in the fleet.

We will, of course, have much more visibility on this. As you know, the strike in Boeing just ended, we got the first communication with them. We will soon get a schedule, an update on the delivery schedules of the aircraft. So we might be in a position to have more clarity on this in the coming months. But currently, this is what we are projecting.

[Mehmet Korkmaz, executive]

Correspondingly, what are the estimated CapEx and PDP figures for this year and the next?

[Murat Seker, executive]

In '24, gross CapEx is expected to be around $4 billion to $4.5 billion, slightly below than our previous guidance. And on the top of this, there will be a sizable PDP payments at the end of this year due to the Airbus order we placed last year.

And considering the current uncertainties about production, aircraft production and engine issues, it's a little early to say something concrete about 2025. However, our current base case, depending upon the fleet expectations I just shared with you, we are -- we can foresee a gross CapEx of around $5.5 billion.

[Mehmet Korkmaz, executive]

Continuing with net debt, what are your expectations?

[Murat Seker, executive]

On net debt, we are going to be revising our year-end net debt expectation by about $500 million to $7 billion to $7.5 billion. And in parallel, we will be revising down our net debt-to-EBITDA multiple to around 1.3x to 1.6x. And main reasons are the continued strength in cash flow generation, higher income from the investment portfolio, the change in the delivery schedules and the composition of the aircraft and then the compensation we got from Pratt & Whitney.

[Mehmet Korkmaz, executive]

Can you briefly comment on AJet's recent performance and its transformational progress?

[Murat Seker, executive]

As was presented in the slides, AJet carried around 16.5 million passengers in the first 9 months. And its fleet reached a size of 102 aircraft, and it's operating to a 30 country -- more than 30 countries. Aircraft and slot transfers from AnadoluJet, from TK to AJet are continuing. It will be a gradual process to address the potential inefficiencies, stemming from having a dual operation.

And we have addressed on-time performance issues of AJet, as Fatih mentioned in the presentation. And AJet's operations are stabilized. Its [ OTP ] is above industry stand average. We strongly believe in AJet's potential. And the initiatives that we have taken with AJet to increase its sales, its online sales through the online channels have significantly improved. Currently, their share the ratio of online sales in total sales went up from 40% levels to almost 48% levels in about 6 months. And we have successfully adapted the new passenger service system, it's PSS. And related also, ancillary revenue generation capacity has increased in AJet as promised.

So these were the targeted steps we wanted to take when we were separating AJet. And all those operations are seemed to be moving in line with our projections. And most recently, AJet was recognized as a Four Star Low Cost Airline by APEX as a result of our efforts towards customer satisfaction.

[Mehmet Korkmaz, executive]

We got a question about share buybacks. So what is your view on share repurchases or buybacks? Should we expect more? In this context, could you talk about your shareholder return strategy?

[Murat Seker, executive]

So the buybacks, we see them as a valuable tool for us to signal the market when our share price deviates materially from its fair value. It also allows us to dampen the -- decrease the volatility levels to a certain extent. And it is -- we see that as a potential medium for capital returns. So yes, we are going to be actively looking into the market to monitor and be opportunistic to buy more shares.

In terms of maximizing shareholder value, I think the increase in our stock price year-over-year has made our investors quite happy.

Regarding to the dividends, we believe there is room to pay dividend to our shareholders. And our balance sheet also accommodates that now, which was a bottleneck for us for a long time because of the differences in our income statement. According to the Turkish tax code and according to IFRS, there were big discrepancies. Now they are removed.

And our Board is going to decide on the best time and the optimum size of capital returns to our shareholders, considering our future investments and uncertainties in macro environment. But we are keen to distribute dividends, going forward.

[Mehmet Korkmaz, executive]

We got two related questions from Kurt Hoffman and [ Melis Pocar ]. How is the process doing for THY to do bring more work in-house to reduce supply chain challenges? And what was the reason behind year-over-year shrinkage in technical revenues in the third quarter?

[Murat Seker, executive]

Well, our vertically integrated business model, through the almost 20 subsidiary, allows us to be self-sufficient in supporting services, including the maintenance, catering, brand handling and fuel uplift. That also enabled us to mitigate some portion of the challenges that the industry face due to the supply chain challenges.

For example, the maintenance MRO operation activity -- MRO activities, it became increasingly crucial as persistent delivery delays of new aircraft growts the backlog. This was, for example, one of the areas where we had a significant amount of personnel increase, about like 11%, 12%, because of aircraft maintenance became more costly and more necessary.

Our technical segment -- as a result, our technical segment focused primarily on servicing our own fleet in this quarter, resulting in reduced revenues from external maintenance services.

[Mehmet Korkmaz, executive]

We have one question related to our results as well. How sustainable are the reductions in commission and reservation expenses? Can we extrapolate these levels for future? Or are there any temporary one-off positives?

[Murat Seker, executive]

Well, the reductions of commissions and the reservation expenses are part of our long-term strategy to increase the direct sales. This strategy aims to increase ticket sales through our online channels without the use of GDS'. TKCONNECT is one of the examples, which complies with the IATA's NDC, new distribution capability standards and offers other business schemes.

This new scheme facilitates direct access to Turkish Airlines' comprehensive content, providing quite a large set of benefits such as the special fares, special promotions and enhanced transparency. About half of the 13% decline in our third quarter sales and marketing unit costs is attributable to this strategy of increasing direct sales through our online sales channels.

[Mehmet Korkmaz, executive]

We have one last question on sustainability. Can you comment on green taxes, given many European airlines becoming increasing vocal about their concerns? What's your take on the industry's long-term growth and competitiveness in that sense?

[Murat Seker, executive]

Well, like us, all airlines are highly sensitive to additional costs, as our ability to reflect cost on passenger is quite low. And we all know that the margins are getting tighter, and we cannot take the whole responsibility on our shoulders where the source is not in our hands.

What I mean with that is, we would like to invest in new-generation aircraft, but the aircrafts are coming with big delays. We would like to invest in SAF, but the supply of SAF is so miniscule compared to the needs of the industry.

So I think we need here more handholding of the whole ecosystem, whole industry, including airlines, civil aviation authorities, the governments and then the related all bodies to increase the SAF production and to increase the means where we can either buy the credits to decrease our net of our CO2 emission or to increase our SAF consumption.

[Mehmet Korkmaz, executive]

Thank you. With this question, we conclude our third quarter earnings call. We would like to thank our participants and hope to be with you next quarter.

[Operator]

Thank you very much, gentlemen. Thank you, speakers. Thank you for the presentation. Ladies and gentlemen, thank you for your participation. This now concludes today's conference call. You may now disconnect. Thank you.