Fuel Price Risk
Turkish Airlines has the ability to choose swap, options and zero-cost collar instruments according to the market conditions to reduce the fluctuations of jet fuel cost.
Within the scope of the methodology changed on July 2017, hedging transactions are executed considering the historical trends and anticipations on crude oil and jet fuel prices. According to this methodology, our hedge ratio and tenor can be up to 60% and 24 months respectively.
As of December 31, 2017, 46% of total fuel consumption in 2018 was hedged and break-even price of the hedged position taken on indicated date is $57/bbl.
As a result of mismatch between currencies constituting income and expenses, the fluctuation that may arise on cash flow and profitability due to exchange rate movements is defined as currency risk. Since Turkish Airlines operates globally, it has income and expense over a large number of currencies. In order to minimize the exchange rate risk, the Group primarily applies natural risk hedging methods. For this purpose, basis currency of all contracts is defined to balance the income and expense composition.
On the other hand, even after natural hedging practices, the Group has long position in EUR and short position in USD and TRY currencies. The currency risk due to this mismatch is aimed to minimize by using derivative instruments. In this context, long and short positions in EUR, USD and TRY currencies for upcoming months are forecasted by the cash flow forecast study, repeated on monthly frequency.
According to the methodology, 30% of the forecasted monthly short position in TRY for the following 24 months is hedged by using forward instrument. Also, based on the market conditions, between 25% and 35% of the forecasted monthly short position in USD is hedged by using forwards or zero-cost collar instruments in 24 month-period, similar to TRY. In this way, risk arising due to the exchange rate volatility is diminished and taken under control by either fixing the exchange rate at a predetermined level or controlling them in a range.
Interest Rate Risks
Group’s liabilities mainly arise from operational and financial leases with either fixed or floating interest rates. In order to control the effects of interest rate fluctuations, interest rate markets are perpetually monitored and sensitivity analyses are carried out. In this context, historical trends and anticipations are analyzed and derivative products are used in order to hedge interest rate positions, if it is considered necessary. Currently, around 77% of the total debt is hedged with the composition of 86% IRS and 14% knockout option.