1Q'26 Earning Call Transcript

30 April 2026

Chairman of the Board of Directors and the Executive Committee

Chief Financial Officer / Member of the Board of Directors and the Executive Committee

Head of Inves tor Relations

Ladies and gentlemen, welcome to Turkish Airlines' First Quarter 2026 Earnings Call.

Chairman of the Board of Directors and the Executive Committee

Thank you, Rob. Good afternoon everyone, and thank you for joining us.

Before we begin with our financial results, I would like to briefly address recent changes in our senior management.

As announced three weeks ago in our public disclosure, I have assumed the role of Chairman of the Board and Executive Committee. Having served as Chief Financial Officer since 2016 and as a Board Member since 2021, I have been closely involved in shaping Turkish Airlines' strategy and long-term roadmap, together with our new Chief Executive Officer Ahmet Olmuştur and Chief Financial Officer Metin Gülşen. As you may know, prior to joining Turkish Airlines, I held positions at the World Bank and Ziraat Bank, focusing on financial sector development, international funding, and investor relations.

Our new CEO Mr. Olmuştur is one of the most seasoned executives at Turkish Airlines' and has been with the company for the last 26 years, holding a range of junior and senior roles across revenue management, marketing, and sales. Most recently serving as Chief Commercial Officer, he played a key part in strengthening our network and revenue generation capabilities.

In addition, our new CFO, Mr. Gülşen brings extensive experience in financial planning and reporting, having held several senior roles within Turkish Airlines since 2017, most recently as Senior Vice President of Accounting and Financial Control.

We look forward to contributing to the company's strategic direction in these expanded capacities.

With this opportunity, I would also like to sincerely thank Prof. Ahmet Bolat and Mr. Bilal Ekşi for their leadership and dedication over the years. Their vision and contributions were instrumental in shaping Turkish Airlines' strong global position. We are grateful for their decades long services and we wish them continued success in their future endeavors.

With this transition, we believe our leadership structure remains strong and well-positioned to navigate current uncertainties while supporting our strategic priorities and growth ambitions.

Together with Ahmet Olmuştur and Metin Gülşen, we have successfully managed multiple periods of disruption in the last decade, including the pandemic, Boeing MAX crisis, supply chain pressures, and geopolitical shocks. These accumulated experiences provide us a sound foundation to operate effectively in a highly dynamic environment.

In this new phase, we are firmly committed to our core priorities of safety, customer satisfaction, and operational excellence, while continuing to strengthen organizational efficiency and agility. We will leverage our size, strong balance sheet, unique global flight network and human capital effectively to reach our centennial targets.

With that, let me now start by outlining the key recent developments.

The first quarter of 2026 was marked by escalating geopolitical tensions in the Middle East, which developed into a war, triggering a sharp increase in fuel prices. While passenger demand across international markets remained broadly resilient, operating environment has been increasingly challenging. Ever-changing news flows, evolving airspace restrictions, ongoing supply chain constraints and engine availability put significant pressure on the airline industry.

Against this backdrop, Turkish Airlines once again utilized the flexibility of its global network and diversified business model. Our broad geographic exposure and agile capacity management enabled us to maintain intact operational continuity while adjusting swiftly to regional dynamics.

With respect to the ongoing geopolitical developments in the Middle East, we continue to closely monitor the situation and adjust our operations in line with international regulations and real-time risk assessments. Concurrently, we are reallocating capacity toward markets where demand is stronger, adjusting frequencies where needed, aiming to preserve revenue quality.

From a customer perspective, we have taken proactive steps to offer greater flexibility to affected passengers, facilitating rebooking options, and assisting passengers impacted by other airlines' flight suspensions. We remain focused on ensuring minimizing disruption for our passengers and support our industry whenever possible.

From a financial standpoint, the situation is extremely volatile and requires close scrutiny. Elevated fuel prices present a major headwind and we aim to mitigate some portion this impact through revenue management and route-by-route capacity optimization. At the same time, we are observing increased passenger and cargo flows towards our network. Given the progressing nature of the situation, it is early to provide a full outlook, particularly with respect to fuel costs.

Turning to our results, despite ongoing geopolitical developments in the Middle East, our performance was healthy during the first quarter with Eid holiday providing a favorable backdrop. Overall, capacity increased by over 9% as we carried over 21 million passengers, representing a 13% year-on-year increase. Load factor improved by 3 percentage points to 83.5%, reflecting sustained demand under capacity constraints in the Gulf.

March performance was notably strong, marking our highest March results to date. Load factor improved by more than 6 percentage points year-on-year, driven by robust demand across our network. Most notably, load factor in Asia increased by 11 percentage points, reaching 94%, highlighting the market appetite in the region. As a result, first-quarter passenger revenue increased by 20% year-on-year.

On the cargo side, geopolitical developments, including their impact on sea freight, as well as lack of sufficient air cargo capacity were the tailwinds. In this context, Turkish Cargo increased its total volume and yields by 15% and 13% respectively, resulting in a billion Dollar cargo revenue. Meanwhile, Turkish Technic kept its strong trajectory, with external revenues amounting to almost 150 million Dollars.

Building on this operating performance, we delivered our highest first-quarter revenue on record, reaching approximately 5.9 billion Dollars.

On the cost side, we finalized our collective bargaining agreement during the first quarter, resolving a key area of uncertainty in a mutually beneficial manner. This agreement reflects a balanced approach between our cost base and recognizing the dedication of our employees. On fuel side, due to the lag in physical settlement, the impact of elevated kerosene prices was not fully reflected on to the expens es. As a result, EBITDAR rose by 16% annually to almost 770 million Dollars with a margin of 13%. Net Income recorded as 226 million Dollars, driven by the contributions from our investment portfolio.

Looking ahead, visibility remains low amid ongoing developments. While near-term demand trends remain positive, we expect to see the combined material negative impact of Eid seasonality, the conflict and fuel prices in April. Future performance will depend heavily on how the situation progresses in the coming weeks.

In closing, we remain firmly committed to progressing toward our long-term objectives with discipline under unprecedented shifts in the geopolitical landscape. Despite the current volatility, our diversified business model reinforces a resilient profitability profile, with more durable EBITDAR performance compared to the peers. This reflects our proven track record in navigating past periods of disruptions through our world-leading international network, the strategic location of Istanbul, and our competitive cost base.

I will now pass the call over to our new CFO, Metin bey to elaborate on our results and provide additional insights.

Thank you.

Chief Financial Officer / Member of the Board of Directors and the Executive Committee

Thank you, Murat Bey, and good afternoon everyone.

It is a pleasure to be joining you today for my first earnings call as Chief Financial Officer of Turkish Airlines. Having worked closely with Prof. Şeker and our finance team over the past decade in various financial leadership roles, I have had the privilege of contributing to many of the strategic, operational, and financial initiatives that have shaped our company's trajectory. Throughout this period, my focus has been on strengthening our financial planning, reporting, and overall capital structure, while supporting Turkish Airlines' long-term strategic objectives. I am honored to take on this expanded responsibility and look forward to advance our disciplined financial approach as we navigate an increasingly dynamic operating environment.

With that, let me now move on to the details of our financial results.

As briefly outlined earlier by Prof. Şeker, the first quarter was shaped by uncertainties related to the war in the Middle East, the unprecedented rise in fuel prices, and evolving overflight restrictions. Despite these disruptions, we adapted quickly and managed capacity with agility. As a result, we increased passenger capacity by over 9% year-on-year, maintaining operational continuity even as flight activity in certain Middle Eastern markets declined by more than 80% during the quarter.

In the first quarter of 2026, transfer traffic expanded by 10%, growing meaningfully faster than direct traffic and further reinforcing our competitive position as one of the most effective connectors between Asia and Europe. Demand from Europe, Africa, and Asia to Türkiye remained supportive, contributing positively to overall traffic performance. In this context, our diversified regional capacity allocation, reinforced by active capacity management continued to provide a natural hedge against demand volatility.

We also observe sustained adoption of direct sales channels, as this structural shift in our distribution model facilitates greater capabilities for capturing ancillary revenue and improved cost efficiency.

Looking more closely at region traffic, Asia stood out as the leading contributor during the first quarter, despite an increasingly complex operating backdrop.

Demand trends in the region were robust, backed by capacity constraints among certain competitors and resulting shifts in traffic flows toward our network. Over the quarter, we expanded capacity across key markets including China, Hong Kong, Thailand, Japan, Singapore, and Malaysia. This growth was effectively absorbed by demand, with passenger traffic increasing by 19%, resulting in a 5-percentage point improvement in load factor to 90.2%. Performance accelerated further in March, when the peak impact of the war drove load factors as high as 94%. The region also benefited from a healthy mix of transit and corporate traffic, while notable performance in markets such as China supported both traffic and revenue generation. Australia also contributed positively to regional results, particularly in Sydney, where a 41% increase in capacity translated into almost 80% rise in revenues.

Africa maintained positive momentum during the quarter. While North African routes were partially affected by disruptions in Middle East traffic flows, this impact was effectively mitigated by increased demand from Asia. Seasonal strength related to Ramadan Holiday, together with favorable performance in key leisure destinations such as Mauritius and Seychelles, supported both traffic volumes and pricing. As a result, first-quarter capacity increased by around 2.6 percentage points and yields rose by 14%. Forward booking trends also remain encouraging in the region. In response to rising fuel costs, we actively refine regional capacity, while selectively evaluating additional optimization opportunities.

In Europe, the demand environment was mixed. Local demand toward Türkiye softened across several major origin markets, particularly in Germany, the United Kingdom, the Netherlands, and Belgium, where aggressive capacity additions by competing carriers continued to pressure point-to-point traffic. The prolonged disruption throughout the Middle East also weighed more heavily on Balkan markets, creating further pressure on select regional flows. Nevertheless, these headwinds were offset by increased transit traffic toward Asia, Africa, and other international destinations, while premium cabin demand also recorded a s ignificant increase year-on-year. We are also reassessing capacity and frequency deployment across multiple markets, particularly on routes such as Sarajevo, Zagreb, Podgorica, and Porto, where elevated fuel costs are increasingly influencing profitability. Concurrently, strategic growth opportunities remain present. Additional daily frequencies to Amsterdam are being introduced beginning in May to capture available slot opportunities, while newly launched destinations such as Yerevan in Armenia are already performing ahead of expectations and contributing positively to regional performance.

In the Americas, we closely focused on demand sentiment and continue to proactively manage network deployment. Capacity has been selectively reallocated from certain North American markets toward higher-yielding regions, particularly Asia. At the same time, Latin America has maintained its positive trajectory. Looking ahead, Türkiye's qualification for the World Cup is expected to provide an additional tailwind for summer demand, with bookings accelerated materially following the participation announcement. In response, we have already introduced incremental capacity to key host city markets to capture this opportunity.

Overall, our first-quarter operating performance remained robust, with passenger capacity increasing by 9.4 % year-on-year and passenger numbers rising by around 13%, surpassing 21 million. Load factor improved by 3 percentage points to 83.5%, reflecting effective capacity management and sustained demand despite a highly volatile operating environment.

In the first quarter, total revenues increased by 21%, driven by substantial growth in both passenger and cargo operations. Passenger revenue performance was positively affected by sustained network demand, particularly in Asia, where shifting competitive dynamics and capacity constraints provided additional support, especially in March.

Our cargo business continues to serve as a natural hedge for Turkish Airlines, much as it did during previous periods of disruption. Leveraging our broad global network and operational agility, the segment remains an important source of resilience, helping balance volatility while contributing meaningfully to our overall financial performance. As a result, cargo revenues also increased in the quarter by 30%, fueled by volume growth, strategic capacity expansion, and our ability to respond quickly to evolving market conditions.

The first quarter represented a challenging period particularly for AJet as the Middle East accounted for approximately 17% of its operations, while competitive intensity across European markets also remained elevated. Despite these pressures, AJet continued to strengthen its position as a low-cost platform through measured scaling and improving operational performance. International capacity increased by nearly 40% during the period, driving overall capacity growth of 18% year-on-year, while passenger numbers rose by 22%.

This expansion was accompanied by a considerable improvement in load factor, which increased by

6.7 percentage points from to 85.4%. At the same time, RASK increased by 17%, supported by improved traffic composition and growing contribution from international operations.

Turning to our financial performance, the first quarter benefited from a highly favorable demand environment and significantly improved cargo performance which drove notable top-line expansion. Passenger operations remained the primary revenue driver, bolstered by both volume and unit revenue growth, while cargo revenues positively effected from constrained global supply conditions and shifting trade dynamics. On the expense side, the delayed cost impact of fuel prices for the quarter, partially mitigated the pressure. As a result, EBITDAR increased by around 16% to almost 770 million Dollars with a margin of 13%. Contributions from our investment portfolio remained supportive for to net income, which realized at 226 million Dollars.

We recorded around a 8-percentage point increase in total cost per ASK during the first quarter. The rise was within our expectations and primarily driven by higher ex-fuel unit costs, reflecting the impact of the new collective bargaining agreement, seasonally lower capacity production, and ongoing operational inefficiencies related to GTF groundings. Higher airport, ground handling, and passenger service expenses also contributed to the increase, partly reflecting structurally elevated airport fees in Europe, as well as broader inflationary pressures in Türkiye. On the fuel side, although market fuel prices increased sharply in March, the lag in physical fuel settlement limited the immediate impact on Fuel-CASK, partially moderating overall unit cost pressure.

Turning to our balance sheet, we generated 200 million Dollars of free cash flow during the quarter, enabling an increase in on-hand liquidity to around 9.4 billion Dollars.

Strong liquidity position provides us with meaningful financial flexibility at the current backdrop, reinforcing our resilience against ongoing market pressures and positioning us well to navigate future uncertainties.

Net debt increased marginally to 8.4 billion Dollars, mainly reflecting ongoing fleet investments and currency impacts. Overall, our balance sheet remains firm, underpinned by disciplined financial management and substantial liquidity reserves.

Looking ahead, visibility for the remainder of the year remains exceptionally limited given the situation. Under the current environment, providing a reliable full-year outlook remains increasingly difficult, and we continue to approach forward planning with caution.

That said, based on currently available conditions, we aim relatively measured growth in the second quarter, with capacity projected to increase by around flat to 2%. At the same time, ex-fuel unit costs are expected to rise around 10-14%, primarily driven by lower production levels due to extremely high foreseen prices.

Importantly, the full financial impact of elevated fuel prices will become more vis ible in the second quarter as lagged settlement effects diminish. Accordingly, while demand trends remain relatively supportive, EBITDAR growth is currently expected to range between 2-8%, subject to how geopolitical and fuel-related developments evolve.

We remain highly focused on proactive network management, cost control and constantly monitoring the developments. Given the fluidity of the current environment, we stand ready to adjust our plans dynamically as conditions evolve.

With this, we conclude our presentation and can continue with the Q&A session.

Thank you very much. A big thank you to our speakers for today, Professor Murat Şeker and Mr. Metin Gülşen. Gentlemen, thank you for your presentations. Now ladies and gentlemen, we will start our Q&A session. Back to our speakers for those written questions. Gentlemen.

Head of Investor Relations

Thank you, Rob. This is Fatih, Head of Investor Relations. Thank you everyone for joining us today, and it was indeed an eventful quarter. We got actually more than 30 questions; Murat Bey will help us as much as he can. I'm starting with the first question:

Chairman of the Board of Directors and the Executive Committee

Thank you, Fatih. Well, March was a particular month. Actually, through the January and February traffic results was going quite well, which eventually continued during the month of March too. Because of the war, and as we mentioned in the presentation, we had to cut capacity in March, load factor was up by three percentage points, passenger revenue was up by close to 200 million - about more than 10% is coming from a yield improvement. In cargo, even though the volume did not increase compared to the budged, cargo yield was up by more than 25%. Accordingly, we saw a significant improvement in cargo revenue, and as we express ed, it reached close to $1 billion.

On the expenses side, the impact of the fuel price increase did not hit us in March. So, we saw the net positive momentum of the increased demand or lack of competition. So overall, the net negative impact of this war, which we expect to be around $200 million, was not reflected in the March results.

Chairman of the Board of Directors and the Executive Committee

As we listed, there was around 10 countries where we stopped operation, and they amounted to around 6% of our overall passenger capacity. Due to the demand decrease on Middle East to America corridor, flights to and from Americas North and South, America was reduced. We put this capacity to Far East, South and Central Asia, and certain countries in Africa where the demand continued to be strong.

Decreased activity of the carriers from the region also led us to be able to get some of the demand from Europe to Asia corridor as well. We have been planning additional frequencies in the coming summer season in cities like Beijing, Shanghai, Colombo, some exotic destinations like Maldives and Seychelles, Accra, Dar es Salaam.

Overall, currently, 37 additional slots were secured in mainly Far East and Central Asian countries. Based on the increasing fuel prices, we also reduced some frequencies or discontinued some of our routes that could not cover their contribution margins. Some of them are in Europe, some in Africa, and some in Central and South Asia.

Chairman of the Board of Directors and the Executive Committee

Definitely, and we have been very selective and dynamically monitoring each route. What is the contribution margin? What is the network contribution of that route and destination? Accordingly, making adjustments on the frequencies or pausing the route. Overall, the jet price in the destination, the demand, the route profitability, are being monitored closely.

As a result, we channeled 3% of the capacity from America to Far East, with stronger than anticipated demand. In our summer wide body schedule, Middle East capacity will be reduced by about 30%, while Central and South Asia capacity will be increased by 9%. This reallocation is going to optimize our network mix and improve the alignment with the evolving traffic flows and revenue opportunities. Overall, we will probably have a net 1% increase or flattish ASK growth in 2026, whereas our budget was close to 8% to 9% levels. So eventually we will have some reductions, but we will try to allocate the capacity to the routes where we can have the highest return.

Chairman of the Board of Directors and the Executive Committee

Indeed, we have seen it. We are sort of living in an era like we used to see during the pandemic.

The reservation period of individuals or business travelers have shortened. We don't see long term bookings. So, way in advance, forward reservations from today to the month of June, July,

August look negative. But as we get closer to the day of operation, like the ones in April and May, we see there is still a positive momentum.

So overall, there is still lack of visibility for the long-term, but for the short-term, demand seems to be strong, which is something we are seeing in the load factors. So especially in the intercontinental operations, demand is strong. There is a positive momentum, like in April and May months, load factors in the selected long-haul destinations were close to 2 percentage points higher than last year. In particular, for the TK, for our main brand, we had a very strong Easter period. The capacity was about 7% to 8% higher, and the revenue was 20% higher.

In AJet, it was weaker because of their lack of transit traffic or because of their higher reliance to the Middle East region compared to Turkis h Airlines. They have had about 17% capacity growth in this quarter, but the RASK was down by more than 10 percentage points. So, if I look at the other regions, as I said, the demand from Europe to Far East is very strong, like cities like Sydney, Melbourne, Tokyo, Singapore. We have been seeing both the capacity increase and the load factor increase.

In Africa, we are seeing a positive forward booking as we are filling a significant amount of demand capacity there. The only region probably that is not responding very strongly at the moment is the demand to Turkey. We have been seeing some drop from Europe to Türkiye traffic, and we are hopeful that as we get closer to the travel months in summer, like June, July, August, and September, we will see higher reservations. But at the moment, that is one of our weak spots.

Chairman of the Board of Directors and the Executive Committee

Our Minister of Tourism announced a very strong first quarter results. In January, incoming tourists to Turkey was up by 6%. Then in February, we saw a seasonal decline and then in the month of March, we saw again a very strong increase of 8% in the incoming tourists to Türkiye. Also, tourism revenue increased in the month of March. However, probably for the second quarter, we will see some weakening.

I mean, there was the impact of, of course, as we are close to the war zone, even though there is not a direct involvement of Türkiye. We are playing a very politically, geopolitically strong standing against finishing this war. But it had an impact in the, in the reservations, especially group reservations. However, on the contrary to that, we saw that from Far East region, for example, even though there were some group reservation cancellations to Türkiye, we saw an increase in the individual traffic. So overall, there is a mixed picture on the forward reservations for the summer bookings to Türkiye.

Chairman of the Board of Directors and the Executive Committee

I mean, we're trying to manage the domestic capacity very smartly. As we have been about a month and a half into this war, we really have received a lot of mixed signals about when this war could end or how long it could last. So, we did not act quickly and cut a lot of capacity so that the opportunity cost, should not be high. But as we get closer to the summer months, we feel like there is some plateau in where this oil price could sit. Accordingly, we are considering in making capacity adjustments in the domestic market as well as in our international operation.

As I said earlier, we have stopped flying to 21 destinations, some of them until the end of the summer 26, some of them until the end of the winter 27 season. Similarly, we will make some changes in the domestic routes. I also must add in the ticket prices in Türkiye, there is a ceiling on the domestic ticket prices. There has been actually about 30 % increase in Turkish lira terms in that cap which has put a lot of relief on our domestic market revenue. Still, we will be considering making some frequency reductions going forward.

Chairman of the Board of Directors and the Executive Committee

I think in the like two weeks into this war, we have made fuel surcharge adjustments in more than 150 destinations. Then at beginning of April, we have made a second adjustment on the surcharges, which have not affected the load factors. On the top of that, there is a quite a bit of an ancillary revenue items that we have made adjustments. Overall, there were more than 10 different pricing items we have increased, and we have so far seen about $100 million additional revenue from those ancillary items.

Chairman of the Board of Directors and the Executive Committee

I mean, the premium segment has been more resilient than the economy class to the war. The improvement in the yield that we have seen in the first quarter was 4 percentage points higher in the premium segment than the economy segment. Especially in both March and April, business class load factor was five percentage points higher than last year. In the long-hauls, in particular, in Americas North and South and Far East region, we have been seeing very strong business class load factor and yield increase.

Q9 - How do you see the recovery trajectory of Gulf carriers following the conflict and do you expect to sustain your recent market share gains?

Chairman of the Board of Directors and the Executive Committee

This is a case like we have seen again during the pandemic. We have retained some new market share and both in the premium segment as well as in the economy segment. When we put the additional capacity to Far East, we realize that there is a higher connectivity between Africa and Far East region. So, this is a new segment that we due to lack of capacity we have not seen before. For those potential customers seeing our product, we feel we will be able to retain some of this market, some of this customer base going forward. But how much of it is, of course, yet to be seen.

Chairman of the Board of Directors and the Executive Committee

Well, currently, our network reaches 12 of the 16 destinations where the games are going to be held. That's already provides a strong advantage for Turkish Airlines. In Los Angeles, for example, we have in summer period, we have three daily flights. Türkiye being involved in the World Cup, we have put additional flights. I think we have put more than 10 additional flights to the destinations where the Turkish games are going to be held. Forward bookings are looking positive. They are already close to 20% higher than last year in the cities where the games are going to be held.

Chairman of the Board of Directors and the Executive Committee

Well, AJet was more negatively affected than Turkish Airlines main brand, as their operation is more point to point and their network has a bigger weight on the Middle East region. Plus, it was a period in which they were putting a lot of capacity in 2026. So, the cancellations between the end of February and end of April, end of this month, is going to be around 9% of their overall production in terms of ASK.

We have been adjusting the frequencies very dynamically depending on the developments and the demand curve. As I said, as there were some cancellations to Türkiye, their traffic was negatively affected. But more recently, we are seeing that for the last week of April and then early May, some reservations are coming back. In May, for example, they are expecting the load factors to be about five percentage points higher than the budget and the capacity will be lower.

On the international routes, they are being able to increase the prices by about $10 to $15 per ticket. Just like I said for the TK side, they are increasing their ancillary revenues. The unit ancillary revenue for AJet was up by 30%, slightly better than their budgeted performance for this year.

Chairman of the Board of Directors and the Executive Committee

So first, let's look at the globally. Global cargo picture is definitely showing a shift from sea to air due to the maritime logistic bottlenecks caused by the geopolitical risks in not only Hormuz strait, but also Bab-el-Mandeb. In February, the Drewry index was on a downward trend, actually. But as the crisis started, it had almost a V-shaped recovery and roughly showed a more than 15% increase compared to its level in February. So, this has contributed significantly on Turkish Airlines, as well as all other cargo carriers, unit revenue level.

Going forward, we expect this higher yield to continue on air cargo front and especially the high fuel prices on major transpacific routes, in which older generation freighters were heavily used. They are eroding in profitability and threatening a supply. At the same time, because of the lack of capacity of the Gulf carriers compared to the before-war level, we are trying to contribute to this gap with our freighters. You know, today we have 28 freighters, and Turkish Airlines is the third biggest cargo carrier. So, this is going to help us going forward in keeping our double-digit yield growth going forward. And we have added about I think 37 additional

frequencies with our freighters.

Chairman of the Board of Directors and the Executive Committee

In the budget, we have assumed the Brent would be around $65 per barrel, about between $60 and

$65, and jet would be around $700. Yet we have seen the jet going up as high as $1,600, even $1,700 levels. We have three main scenarios, and our base case scenario is that this conflict is going to continue until July-ish, and where the jet will be staying around 1,400 to 1,500 levels until July, and then it will start to decline to a level higher than pre-war level, and we will finish the year with a level close to $1,000.

So, this scenario brings additional $3.5 billion cost burden on our income statement. And we have to dilute this through taking numerous measures, but this is forming our base case scenario. If the improvement happens faster, then we can see a quicker recovery, and then the burden could come down to $2 billion if the Brent goes down to $85, it would be still $25 higher than our budget, but much more in a way that can be mitigated with the strong demand environment.

Chairman of the Board of Directors and the Executive Committee

So, we have introduced our hedge policy in 2012, and then have revised the strategy in 2017. Our strategy is to hedge up to around 50% to 60% of our fuel consumption, and we have been implementing this strategy for quite some time. However, during the pandemic, together with all other major carriers and airlines who do the hedges, we have had a significant amount of losses. After the pandemic, we did not hurry to accumulate that hedge ratio because over the last six years, actually, we have been very successfully reflecting the fuel pressure on our ticket prices like the one we lived in 2022.

We continue to hedge around 40%, and together with the surcharge, we were able to cover a significant portion of our fuel expenses. And if you look at cumulatively last five years -- actually even if you look at the last 10 years, net impact of our hedge policy on Turkish Airlines' balance sheet has been quite limited and quite manageable. So based on that policy, currently we are hedging close to 40% of our consumption and our break-even price is around $68. And at the moment, we don't hedge. I mean, we'll monitor the market closely and when we see an opportunity, we include some new contracts, but overall, we are not continuing our regular hedge policy as jet price and Brent prices are very high.

Head of Investor Relations

Thank you, Murat Bey. I agree hedging is not just a financial exercise, it has a commercial aspect to it.

Chairman of the Board of Directors and the Executive Committee

Well, our diversified network and the fleet can absorb the risks within a reasonable bandwidth. Historically, we were able to achieve a surcharge rate of around 50%. The fuel surcharges updated according to the related route fuel costs. We also raised the ancillary fees, such as seat selection, extra luggage and booking cancellations. As of April, surcharge fuel coverage was 48%.

In the upcoming period, our peer airlines recovery profile, demand trend, consumer behavior, and the macroeconomic setup will be critical in our decision making.

Chairman of the Board of Directors and the Executive Committee

Well, so if you take our base case scenario, average Brent will be about $90, $95 per barrel, and jet fuel average will be around $1,200 per ton, year-end fuel cost is projected to increase by more than 50%. This increase is going to have an additional $3.5 billion burden on our fuel cost. And in order to offset this, year-end RASK needs to improve significantly, more than 13%, probably close to 15%. This, of course, is quite a strong increase, considering the given amount of competition in the world. So, this might be hard to achieve, but that's what is going to be required in order to be able to s ink in all of the pressure from the fuel price increase.

Chairman of the Board of Directors and the Executive Committee

Well, they do provide cost advantage, but nothing particular for this period. Having them as a subsidiary allows us to consume fuel at a reasonable margin, and we are not concerned with the supply risk. It provides us a comfort on having a foreseeable supply amount into the future. But in terms of the price, cost of it we are paying the market price.

We use the Mediterranean Index, CIF MED Index in Türkiye, and then our prices are being determined by that index. So, in Türkiye, we are paying probably around $1,500 per ton. Same thing holds for Turkish OPET, we are supplying fuel from them in a big portion of our Anatolia routes and the price for is being determined by the market rates.

Chairman of the Board of Directors and the Executive Committee

Since the beginning of the war, we have been holding meetings with our senior executives twice a week. And then every day, they get updates from the stations where we operate. For a while, in early April there were concerns that certain stations, certain countries, mainly in Far East Asia and South Asia Pakistan, Vietnam, Philippines, and some African countries there could be limitations of operations. However, so far, we have not stopped operation in any of these destinations because of lack of jet fuel supply. So, it is being maintained. So far, the operations are being run seamlessly. Our projection is that it's not going to be a significant pressure on our operations going forward.

Chairman of the Board of Directors and the Executive Committee

Unfortunately, making a long-term projection is rather difficult. But in the short term, we have much more clarity. As it was presented, the capacity in the second quarter, compared to the capacity of last year's second quarter, is going to be flattish if not about the percentage point increase and then the number of passengers will be similar. Due to the cargo yield improvement and then passenger yield improvement, we'll see increasing revenues by about 10%. Of course, a big part will be negatively affected due to the high fuel price. But how severely is yet to be seen.

Chairman of the Board of Directors and the Executive Committee

Fuel makes about 30% of the costs and the rest is mainly operational expenses. How much of the fuel price is going to be reflected in the world inflation level to be seen. I think it's fair to assume that we might see a low double-digit increase in ex fuel unit cost.

Chairman of the Board of Directors and the Executive Committee

We are currently working on a program for improving operational efficiency, staff efficiency and then deferring some infrastructure projects, delaying some of the sponsorships or procurement. Stopping any work travels and then all of quite a bit of indirect expenses. We are planning to come up with a program close to $1 billion to $1.5 billion worth of cost-cutting initiative. We have already implemented some. Definitely we need to be much more conscious on preserving our liquidity level.

Chairman of the Board of Directors and the Executive Committee

Definitely not. We have really a very strong growth plan ahead of us and 2026 could be a little hiccup on that long route, but in 2027, for example, we are expecting about 30 aircraft deliveries. Then if we did not have this period, we were planning to put an additional 7% to 8% ASK growth. So that's why when we make the cost-cutting projections in 2026, so that not to jeopardize our long-term growth projections. We think this is a transitory problem; it will pass. We don't know how long it's going to last, but it's not going to be an uncertain future. Given that our Istanbul hub we have a significant room to grow. Istanbul and Türkiye are still the most attractive destinations, we will be careful to not risk this growth going forward. So, if anything we might get some delays, but we are going to try to keep up with our 2027, 2028 targets.

Chairman of the Board of Directors and the Executive Committee

At the moment we have around 530 aircraft; by the end of this year together with TK and AJet we are aiming to reach a fleet size of almost 570. And next year, 2027, we were expecting to reach a fleet size of 610-ish. So still a lot of aircraft to purchase for Turkish Airlines.

Chairman of the Board of Directors and the Executive Committee

So current gross Capex is expected to be around $5 billion, but this was before the war and

because of it some of our important infrastructure projects could be delayed. Some other capital expenditures we had in mind for cabin renewals. We might defer them to the following year so this gross Capex can come down by about a Dollars.

Chairman of the Board of Directors and the Executive Committee

Currently we have around 120 GTF powered Airbus neo aircraft and about close to 40 of these are parked and by the end of the year it could go up to 50 and then we'll see how it goes.

Chairman of the Board of Directors and the Executive Committee

Well dividend policy actually was very unfortunate, we started to pay dividends last year as you would remember and we had the decision internally to pay a dividend of a similar portion about like a 5% to 7% of our net distributable income. But when we were about to go to the General Assembly as we got into this war a lot of uncertainties as you would imagine was present during that time. Because of that we have to postpone that decision making but going forward as long as we have more visibility and we make a reasonable amount of profit we are very very keen and interested in paying dividend to our investors.

Chairman of the Board of Directors and the Executive Committee

SAF production has been an area that we have been monitoring very closely. We have been investigating several investment opportunities. DB Tarım is the biggest biodiesel producer in Türkiye and they have a very long-standing presence in the country.