Turkish Aviation: Heading towards a strong summer

Shift in traffic mix towards international routes should support profitability. Despite the headwinds from Omicron and Russia’s invasion of Ukraine, strength is
building in inbound international traffic, resulting in a positive passenger mix for airlines and airports. The overall strategy of fleet expansion and deployment of new capacity into international flights seems to be paying off so far. Revenue yields are strong and load factors are improving. The latest commentary from our companies on traffic trends, forward bookings, and the trading outlook are all encouraging. We look
for a strong summer season; passenger revenues will likely exceed pre-pandemic (i.e. 3Q19) levels and operating profits should get close, if not exceed.

Fuel cost pressure can be mitigated. In view of prolonged strength in Brent and rising crack spreads, we raise our jet fuel assumptions. We now factor in yearly
averages of USD/t 1,100-1,000-900 for 2022/23/24e from USD/t 900-800-800. This is clearly the main cost headwind for airlines, but one that we believe can be mostly absorbed by strong demand/pricing in international routes, partial hedging, and accelerated additions of fuel-efficient aircraft into fleets. Turkish Airlines has observed no meaningful pull-back in its cargo yields and does not expect normalisation starting
before 4Q22. Pegasus is capitalising on shifting passenger mix by generating all-time high ancillary revenues per passenger. TAV’s business model makes it the most leveraged to rising share of international passengers in the overall traffic mix.

Increase estimates and TPs; retain Buy ratings. Our forecast revisions (2022e EBITDA revised up by 11% for TK, 22% for PGS and 6% for TAV) and use of higher spot FX rates result in higher TPs for all three stocks, as shown in the table below. The airlines in particular currently trade at inexpensive multiples. Our revised TPs imply 2022e EV/EBITDA of 5.5-6.0x for TK and PGS. TAV also appears inexpensive compared to global peer averages (2022e EV/EBITDA 8.8x vs peers 18.5x).


HSBC Global Research