3Q21 was strong driven by leisure, VFR (visiting friends and relatives) and domestic traffic, driving ASKs to 80-85% of the same period of 2019; the airline expects Q4 to reach 75-80% and FY21 c70-75% of 2019. Forward bookings are improving but are still notably less indicative than pre-pandemic. The airline is ahead of competition in the pace of recovery and thinks full recovery of its network could take place as early as 2023, where Asia (especially Far East) will play a key role as a laggard so far. Weaker exposure to the business/corporate segment has been a relative advantage vs global peers but business class still represents c20% of passenger revenues.
Cargo yields are proving to be much firmer than anticipated due to
lack of supply and issues with marine transportation globally. Strength will likely
continue into 2022 and, at some point, yields should turn down albeit at a slower
pace than the increase seen in 2020. More belly cargo capacity coming on line and
the move to new cargo premises at Istanbul Airport (end of this year or early 2022)
should push volumes up and cushion likely softening in unit prices. Spin-off of the
cargo operation could be finalised by the end of this year or early next year.
Yields and costs
Passenger revenue yields have been fairly strong on the international side driven by the US market and capacity limitations in other core routes (such as Asia). Yield may see pressure in 2022 due to more capacity coming into service but the pace of recovery makes fuel surcharges possible in the face of rising fuel prices. Costs have probably bottomed out and should trend up in 2022.
New aircraft deliveries will total 21 this year (a mix of wide- and narrow-bodied
new generation aircraft), 15 in 2022, 7 in 2023 and 6 in 2024. With potential exits of
older generation aircraft from the fleet, net additions could be insignificant or even
negative from 2023 onwards when the focus will be on improving load factors and
yields. A shift towards new generation planes will help with fleet age and fuel savings.
Thanks to a strong contribution from cargo, the airline now expects FY21 to finish with no monthly cash burn on average (excluding commercial loan payments). All flights are cash-generative (cover variable costs fully and pay some of the fixed costs). Leverage (net debt/EBITDA) rose to 8-9x in 2020 but should trend down, to 5.0-5.5x in 2021 and 3.5-4.0x in 2023 (5x in a pessimistic scenario).
Raise TP to TRY17, maintain Buy
With slight revisions to our forecasts (mostly driven by FX rates) and DCF roll-forward, we increase our target price to TRY17.00 (from TRY16.90) and maintain our Buy rating based on the implied 20.4% upside.
HSBC Global Research