Financial Risk Management Strategy

The financial risk management strategy of Turkish Airlines aims to ensure the sustainability of competitiveness and profitability by identifying and controlling the factors that may pose a risk to cash flow and financial stability.

Tailored hedging strategies are developed and implemented for each identified financial risk. A strong preference is given to natural hedging methods to keep financial risks at a controllable level. When this is not possible, financial transactions can be carried out. In this context, derivative transactions are executed to hedge against possible fluctuations in commodity prices, exchange rates, and interest rates. With these transactions, it is aimed to increase predictability and reduce the resulting financial impact to a reasonable and manageable level.

The functionality and efficiency of the Company’s risk management strategy are regularly monitored by the Treasury and Risk Management Commission, which consists of relevant executives. During regular meetings held by the Commission, current financial conditions, macroeconomic outlook, sector dynamics, and geopolitical developments are evaluated, and necessary decisions are taken for the management of potential financial risks.

Key Financial Risk Elements

Cash-Flow Risk: The disruption of company activities due to a possible mismatch between short-, medium-, and long-term cash inflows/outflows, resulting from operational as well as investment and financing activities.

Fuel Price Risk: The effect of changes in jet fuel prices on cash flow and profitability.

Interest Rate Risk: The effect of changes in interest rates on the cost of financing and portfolio returns.

Foreign Exchange Risk: The effect of changes in the values of currencies in different compositions that form income and expenses on cash flow and profitability.

Counterparty Risk: Losses that may arise in case of default of the financial counterparty institutions in financial transactions.

Cash Flow Risk Management

The establishment and implementation of a sound cash management policy is among the top priorities of the Company. In order to proactively manage cash flow risk, currency based medium and long-term cash flow projections are conducted monthly. This study, which provides foresight about the future cash and currency position, forms the basis for investment and financial decisions.

Additionally, a minimum cash level has been determined to ensure timely fulfillment of financial obligations and operational continuity. Current and forecasted cash amounts are tracked with respect to this threshold, and necessary actions are taken to prevent a drop below the minimum level.

Fuel Price Risk Management

Fuel expense is the highest operational cost item for the Incorporation. Thus, changes in fuel price have the potential to generate a huge fluctuation in both cash flow and corporate profitability. In order to keep this effect at a reasonable and manageable level, a fuel price risk hedging strategy has been developed. Within the scope of this strategy, considering market prices and expectations, hedging transactions can be done covering up to 60% of the forecasted fuel consumption for the following month within a 24-month hedging horizon. In these transactions, swap and option-based derivatives, both with and without premiums, can be used, and transactions can be suspended in cases where prices surge excessively and market expectations become unclear or volatile.

Since there is a historically high correlation between the course of the crude oil price and the jet fuel price, derivative instruments based on crude oil, which have deeper market liquidity, are used in these hedging transactions. Moreover, the fuel surcharge, which is a component of the ticket price, is also important for the management of the fuel price risk. The fuel surcharge is determined by taking into consideration the international market conditions and the competitive environment.

In monitoring fuel price risk, structural changes in market dynamics and fuel prices, along with global macroeconomic and geopolitical developments, are closely followed. Additionally, other strategies applied in the aviation sector are routinely evaluated to ensure competitiveness, and the hedging methodology may be revised if necessary.

Foreign Exchange Risk Management

The difference in the composition of income and expense currencies of the Company creates a potential exchange rate risk. Natural hedging is prioritized in the management of exchange rate risk. In this context, the reference currency used in contracts is selected by considering the currency positions and choosing those that will help balance the net exposure.

As a natural hedging practice, the Company conducted studies in May 2015 to shift the pricing of international flights departing from Türkiye from Euro to US Dollar. As a result of this transition, the long position in Euro and the short position in USD became more balanced. Additionally, for contract-based transactions such as aircraft financing, commercial loans, and procurement operations, currencies that will contribute to a more balanced foreign exchange position are preferred.

Besides the natural hedging approach, forward and option-based derivative transactions, both with and without premiums, can be used when necessary to manage exchange rate risk.

Interest Rate Risk Management

Turkish Airlines carries a long-term debt portfolio due to the financing of aircraft acquisitions, investments, and working capital needs. This debt portfolio can consist of fixed- or floating-rate instruments. On the other hand, the company generates return from cash holdings by conducting financial transactions that prioritize cash flow planning and aim to optimize the maturity-yield relationship.

Within the scope of interest rate risk management, the consolidated effect of changes in interest rates on financing costs and portfolio returns is regularly analyzed. If deemed necessary, hedging transactions are executed using swap and option-based derivative instruments to keep interest liabilities from floating-rate debt at a manageable level.

Counterparty Risk Management

The Company aims to minimize potential losses that may arise in the event of default by financial institutions acting as counterparties in financial transactions. For this purpose, limit and risk methodologies have been developed to determine the maximum transaction volume that can be carried out with each counterparty.

In deposit transactions, the final transaction limit is determined by evaluating various widely accepted financial metrics. In derivative transactions, in addition to these metrics, the counterparty’s probability of default is also taken into account, and limits are assigned accordingly. In this context, “Derivative Transaction Framework Agreements” are signed with domestic institutions, and “International Swaps and Derivatives Association (ISDA)” and “Credit Support Annex (CSA)” agreements are signed with foreign institutions.