Turkish Aviation: Updating TPs, maintaining ratings

Price Target (TL) Upside

Passenger traffic gained some momentum in 3Q, following the earthquakes, elections and TL appreciation that tempered the momentum in 1H23: Following a deceleration in traffic during 1Q and 2Q, the latest traffic trends in Turkey have seen some improvement in momentum. Also, the government’s raise of price cap on domestic ticket prices from TL1150 to TL1650 and putting an additional price increase allowance for the high load factors (TL2500 for >85% load factors) could support the profitability in domestic routes.

 However, base effect is becoming unfavourable starting 3Q, as, last year, the peak season had extended into 4Q, due to the Omicron wave in early 2022. Also, further room for improvement in passenger yields and oil prices looks limited: The decline in oil prices this year has been a boon for airlines, as fuel costs are the single most important item for airliners (41% and 44% of total costs for THY and Pegasus in 2022).

More importantly, THY and Pegasus had entered 2023 with low hedge ratios (8% and 35%, respectively, vs. EU carriers >50%) and therefore were in an advantageous position. Going forward, however, oil prices may not decline further, while, passenger yields, which had surged due to pent-up demand and capacity limitations, may soften.

 With this note, we are revising our estimates and TPs, while maintaining our ratings.

The outlook remains attractive through the end of the year. However, it is prudent to acknowledge that the appeal of the outlook is waning


  • Turkish Airlines – Buy, TP TL351/s: Despite the earthquake related costs and the decelerating global cargo demand, THY has managed to post strong 1H financial results, thanks to rise in passenger yields and low fuel prices. The operational performance is likely to improve further in the peak season (3Q), as one-off costs are out of way and the yield environment continues to be strong on the back of ongoing capacity constraints and robust travel demand globally. Also, THY’s low oil hedge ratio (18% for 2023) is an advantage during the downtrend in oil prices; and its FX linked revenues (92% in 1H23) make the company as one of the main beneficiaries in a scenario where TL depreciates. Lastly, trading at 2024e P/E of 5x, the stock’s valuation still appears attractive. We raise our TP from TL236/s to TL351/s and maintain our Buy recommendation.

 Pegasus – Buy, TP TL1231/s: Pegasus is showing the strongest earnings momentum within the sector, thanks not only to its lower base vs. THY, but also Pegasus’ industry leading cost management, coupled with its focus on internationalisation and ancillary revenue growth. Going forward, expansion of its fleet with the efficient A321Neo will further strengthen its low-cost business model and support its market share gains. We raise our TP from TL704/s to TL1231/s and maintain our Buy rating.


  • TAV Airports – Buy, TP TL202/s: With its ongoing high capex cycle that has increased the leverage and financial expenses, along with the TL appreciation in 1H23 that hurt the operational profitability, TAV has underperformed the airliners’ outstanding operational results that was boosted by low fuel prices and rising passenger yields. Thus, TAVHL shares underperformed THYAO and PGSUS by 26% and 30% respectively, year-to-date. Going forward, however, with oil prices and passenger yields are approaching their limits, TAV offers a less risky exposure to the ongoing high growth in passenger traffic, compared to the airliners, owing to its regulated fee structure. Also, its recent 24% stake sale at Madinah airport for USD135m improves the company’s leverage and the TL depreciation in June has improved the profitability during the peak season. With this note, we raise TP from TL121/s to TL202/share and maintain our Buy rating.


Excerpt from Unlu Co equity report


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.