Fuel Price Risk
Turkish Airlines executes a monthly gradually decreasing layered hedging strategy with the aim of reducing the extent of price fluctuations and gaining time to enable pricing to adjust against volatility.
Fuel prices are hedged with a time horizon of 24 months and aim to reach 50% of the month ahead monthly fuel consumption using swaps and option based structures with zero premiums (such as zero-cost collars (2-Way,3-Way and 4-Way Collars)). As of September 30st, 2013, %32 of total jet fuel consumption for the first nine months of 2013 has been hedged and the hedge ratio for the following month is %35 of total budgeted consumption. (could be updated quarterly)
In accordance with the dynamic strategy, hedge level is being updated considering the historical market prices and forward market prices. In this regard, we have the flexibility of having higher hedge ratios in lower prices and vice versa.
Since the correlation between crude oil and jet fuel prices is high and crude oil products have higher liquidity, we are using crude oil based swaps and structured option products to hedge against jet fuel prices.
As of September 30st, 2013, break-even price of the hedged position is $102/bbl, the effect of hedged positions with respect to market price is shown on the graph below:
Fuel Price Risk
Turkish Airlines’ currency hedging policies within the Treasury Department mainly consists of natural hedging. Due to the unique nature of the business, the Treasury maintains a balanced portfolio of currencies analyzing incoming and outgoing payments. This policy of natural hedging enables the organization to match incomes and expenses in the same type of currency.
Also, starting from June 2013, Turkish Airlines is executing a monthly gradually decreasing layered hedging strategy with the aim of reducing the extent of currency fluctuations and market volatility in an organizational structure which comprises of operating and non-operating activities being carried out in several different currencies.
Due to the income-expense structure, Turkish Airlines is long in EUR and short in USD and TRY. As a result, FX risk is being hedged by using forward contracts, which extend to a 24 month period and aim to hedge 30% of TRY short position and 25%-35% of USD short position, which are decided upon forecasted cash flows. The instruments being used, periods and rates are open to be revised according to the market conditions when needed.
Interest Rate Risks
In order to manage interest rate risk, THY engages in hedging with the aim of locking the interest rates on part of its debt portfolio for the duration of loans where possible.
In detail, liabilities are primarily based on operational and financial leases with both fixed and floating interest rates. In order to control the effects of interest rate fluctuations, interest rate market is perpetually monitored and sensitivity analyses are made due to possible interest rate changes. Considering historic trends and expectations, derivative instruments are utilized to determine fixed and fluctuating positions. Currently, around 75% of the total debt is fixed, 17% of the total being fixed with a knock-out option.