Financial Risk Management
Financial Risk Management Strategy
The financial risk management strategy of the Incorporation mainly aims the sustainability of competitiveness and profitability by identifying and controlling the factors that may pose a risk to cash flow and financial stability.
Hedging strategies are developed and implemented for the management of defined financial risks factors. Natural hedging methods are prioritized in order to keep financial risks at a controllable level, and in cases which this is not possible, financial transactions can be made. In this context, derivative transactions are done against possible fluctuations in commodity prices, exchange rates and interest rates. It is aimed to increase predictability and keep the financial impact that will occur as a result of fluctuations in a reasonable and manageable level with these transactions.
The functionality and efficiency of the Incorporation’s risk management strategy are regularly monitored by the Treasury and Risk Management Commission, which consists of relevant executives. At the periodic meetings held by this 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 activities and non-operational activities such as investment and financing.
Fuel Price Risk: The effect of change 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 forms 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 one of the most prioritized issues of the Incorporation. Medium/long term cash flow estimation practices/studies are carried out on the basis currencies regularly on monthly basis, in order to proactively manage cash flow risk. This study, which provides foresight about the future cash and currency position, forms the basis for investment and financial decisions.
Additionally, the minimum cash level that will ensure the healthy continuation of operations has been set as well. Current and forecasted cash amounts are tracked regarding this minimum level, and all necessary precautions are taken to ensure that the minimum cash level is not breached.
Fuel Price Risk Management
Fuel expense is the highest amount of operational cost item of the Incorporation. Thus, changes in fuel price have the potential to generate a huge fluctuation on 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 for the tenor of at most the next 24 months and up to 60% of the forecasted fuel consumption of the following month. In these transactions, swap and option-based derivative instruments with/without premium can be used and transactions can be suspended in cases when the prices are excessively high and the market foresight is distorted,
Since there is a historically high correlation between the course of the crude oil price and the jet fuel price, derivative instruments with crude oil as underlying are used in related hedging transactions, since they have a deeper market. 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 aviation market conditions and the competition.
In the context of monitoring the fuel price risk, structural changes in the fuel price and market dynamics along with the global macroeconomic and geopolitical developments are closely tracked. In addition, other strategies applied in the aviation sector are evaluated in a routine in terms of maintaining competitiveness and the hedging methodology can be revised if seen necessary.
Foreign Exchange Risk Management
The difference in the composition of the income and expense currencies of the Incorporation generates a potential exchange rate risk. In terms of the management of exchange rate risk, natural hedging is primarily targeted. In this context, the basis currency of the contracts to be signed by the Incorporation is determined as to ensure the balance between revenue and expense currencies.
In May 2015, the Incorporation performed studies for the transition from Euro to US dollars in pricing of international flights departing from Turkey, as a natural hedging practice from exchange rate risk. The long position in the Euro and the short position in the US Dollar of the Incorporation became more balanced as a result of this transition. Additionally, in transactions that can be managed on a contract basis such as aircraft financing, commercial loan utilization and purchasing operations, currencies that will make the foreign exchange position more balanced are preferred.
Besides the natural hedging approach, transactions can be carried out to manage the exchange rate risk by using forward and option-based derivatives with/without premium when needed.
Interest Rate Risk Management
Turkish Airlines carries a long-term debt portfolio as a result of the financing of all investments and working capital needs and aircraft procurements. This debt portfolio can consist of fixed and/or floating rate transactions. On the other hand, with priority being given to cash flow planning and keeping the maturity-yield relation at an optimum level, the Incorporation generates returns from the financial investments made by its cash holdings. The consolidated impact of changes in interest rates on financing costs and portfolio returns is regularly analyzed within the scope of interest rate risk management. If deemed necessary, hedging transactions can be made by using swap and option-based derivative products, and thus, keeping the interest liability arising from floating rate financings at a controllable level is aimed.
Counterparty Risk Management
The possible loss that may arise with the default of the counterparty institutions in financial transactions is aimed to be minimized. For this purpose, limit/risk methodologies have been developed in order to determine the maximum transaction volume that can be carried out with counterparty institutions.
For deposit transactions, the ultimate transaction limit is determined by evaluating various financial metrics that are accepted by the market. For derivative transactions, the counterparty’s default probability together with these metrics are also considered, and counterparty transaction limits are determined accordingly. In this context, “Derivative Transaction Framework Agreement” is signed with domestic financial institutions, and “International Swaps and Derivatives Association (ISDA)” and “Credit Support Annex (CSA)” agreements are signed with foreign financial institutions.