ANNUAL REPORT 2015 TURKISH AIRLINES ANNUAL REPORT 2015 TURKISH AIRLINES ANNUAL REPORT STEERING TURKISH AIRLINES GENERAL MANAGEMENT BUILDING HAPPINESS Atatürk Hava Limanı Yeşilköy 34149 Istanbul Telephone: 0212 463 6363 Fax: 0212 465 2121 Booking: 444 0849 IN THE SKIES! [email protected] (Investor Relations) We are now one big family carrying over 60 million passengers. Our responsibility is also big: we must ensure the satisfaction of every passenger we carry, both on the ground and in the sky. Because we work for them. Although we are not the largest airline in the world yet, we continue to be the best in passenger satisfaction. In terms of satisfaction, our aircraft are fully equipped take off towards happiness! Our aircraft are equipped with various features to boost satisfaction: Award-winning features Special destinations Delicious treats Technological equipment Multilingual crew Exclusive transfer CONTENTS 03 TURKISH AIRLINES AT A GLANCE 04 FOR OUR SHAREHOLDERS 04 Financial Analysis 08 Industrial Developments and Forecast for 2016 10 Message from the Chairman 14 Board of Directors 17 Mission and Vision 18 Strategies 20 TURKISH AIRLINES GROUP 20 Affiliates and Subsidiaries 26 Traffic Figures 28 Fleet 30 Flight Network 34 Turkish Airlines in 2015 36 Activities 36 Cargo 38 Maintenance & Repair 40 Catering 42 Ground Handling 44 Training 50 Other Services 56 Human Resources 58 Quality and Corporate Responsibility 60 Corporate Communication 64 Financial Risk Management 68 Organizational Chart 70 Corporate Governance Principles Compliance Report 81 Assessment of the Board on Effectiveness of Board Committees 82 Assessment of the Board on 2015 Results 83 Disclaimer-Legal 84 Statement of Independence 87 Report on Affiliates 88 Statement of Liability 89 CONSOLIDATED FINANCIAL FIGURES 89 Consolidated Financial Statements and Footnotes as of December 31, 2015 Scan this QR code to read Turkish Airlines Annual Report 2015 online 2 TURKISH AIRLINES ANNUAL REPORT 2015 CROWNED QUALITY Turkish Airlines’ strong commitment to passenger satisfaction has been crowned by Skytrax, the world’s leading and most prestigious airline and airport auditing and consulting firm. “Skytrax Passengers Choice Awards” has chosen Turkish Airlines the “Best Airline in Europe” again, for the fifth time in a row. OVER-THE-TOP ENTERTAINMENT With implementation of numerous innovations, Turkish Airlines makes traveling much more enjoyable by offering pleasant surprises to passengers. Believing that in-flight entertainment systems add a distinctive value to travel comfort, we offer exclusive headsets to our Business and Economy guests for a better music experience. FOR OUR SHAREHOLDERS TURKISH AIRLINES GROUP CONSOLIDATED FINANCIAL FIGURES 3 TURKISH AIRLINES AT A GLANCE SHAREHOLDING STRUCTURE Turkish Airlines OF TURKISH AIRLINES is the airline that flies to the most countries and international 50.88% Other (publicly-traded) 49.12% Privatization Administration of the destinations Prime Ministry of Republic of Turkey worldwide. Turkish Airlines has been operating in domestic and international passenger and cargo transportation by air as its mainline business since its establishment in 1933. 50.88% of the company’s shares are publicly- traded whilst 49.12% are held by the Privatization Administration. Paid-in capital of the Company amounts to TRY 1.38 billion. The Company has 13 subsidiaries in total, of which 3 are wholly-owned subsidiaries and 10 are joint ventures. Turkish Airlines is the airline that flies to the most countries and international destinations worldwide. Moreover, the Company ranks 7th in the number of international passengers and 13th in revenues. By the end of 2015, Turkish Airlines increased the number of aircraft in its fleet to 299 from 261 as at the end of 2014. The fleet consists of 73 wide- body and 216 narrow-body and 10 freighter aircraft. As of 2015, Turkish Airlines flies to 287 destinations in total with 51 domestic and 236 international destinations. The Company’s passenger volume increased by 12.0% year-over- year to 61.2 million in 2015. Passenger volume grew by 15.8% on domestic routes and 9.3% on international routes. The number of passenger aircraft landings increased by 0.9% to 452,982. Cargo-Mail transportation volume has also risen by 7.9% to 720.440 tons in 2015. 4 TURKISH AIRLINES ANNUAL REPORT 2015 FINANCIAL ANALYSIS SALES REVENUES NET PROFIT EBITDAR (USD MILLION) (USD MILLION) (USD MILLION) 1,069 2,580 11,070 10,522 845 2,085 2014 2015 2014 2015 2014 2015 26% 24% Net Profit rose by 26% EBITDAR rose by 24% to USD 1.069 million to USD 2.580 million INCREASED COMPETITION LED TO KEY FINANCIAL HIGHLIGHTS DECLINE IN GLOBAL REVENUES 2015 has been a challenging year in many (USD million) 2014 2015 Variation (%) aspects, both for the aviation industry and for Yield (Net) 11,070 10,522 -5 Turkish Airlines specifically. Up to 35% decrease in fuel costs, which represents the highest Net Profit 845 1,069 26 cost item for airlines, brought in increased Net Profit Margin (%) 7.6 10.2 2.5 capacity and as a result, increased competition EBIT 808 1,039 28.6 in the industry. According to IATA data, global EBIT Margin (%) 7.3 9.9 2.6 passenger and cargo revenues of airlines declined by 5.7% and 17.5%, respectively due to EBITDAR 2,085 2,580 23.8 increased competition. EBITDAR Margin (%) 18.8 24.5 5.7 Fluctuation in exchange rates was another Passenger revenues represented 89% and cargo LEADER AMONG OTHER FLAG CARRIERS factor that had an influence on demand and revenues accounted for 9% of total revenues in Turkish Airlines expresses its profitability and airline financial metrics. Depreciation of Euro, in 2015. cash generation potential in EBITDAR (earnings particular, and the currencies of all developing before interest, taxes, depreciation, amortization, countries against US Dollar caused the industry NET PROFIT AT RECORD LEVEL and rent costs), which is a common performance to have a hard time in pricing and planning Turkish Airlines has the most effective cost criterion in aviation industry. The Company’s issues. Still, global passenger traffic increased by management compared to its competitors in EBIDTAR was USD 2.6 billion with a margin 6%, the highest growth rate recorded for many the industry, and despite the decline in our total of 24.5% in 2015, a record level among other years. As costs decreased, profitability of airlines revenues, we managed to increase our net profit global flag carriers. Turkish Airlines, reaching an rose significantly. by 26% to USD 1.1 billion in 2015, the highest level average EBITDAR margin of 19.5% for the last five ever achieved in our history. According to IATA years, continues to be one of the most profitable In 2015, Turkish Airlines managed to limit the statistics, average net profit margin of airlines airlines in the industry. decrease in its revenues thanks to its effective was around 5% in 2015, however Turkish Airlines revenue management and geographically diverse increased its profit margin from 7.6% to 10.2%, source of revenues. Total sales revenues of the which is well above the industry average. Company decreased by 4.9% to USD 10.5 billion. FOR OUR SHAREHOLDERS TURKISH AIRLINES GROUP CONSOLIDATED FINANCIAL FIGURES 5 AVERAGE EBITDAR 24.5% Turkish Airlines MARGIN 2011-2015: 19.4% 19.5% (USD MILLION) 18.8% 18.8% increased its net 16.0% profits by 26% to 2,580 2,085 1,849 approximately USD 1,598 1,130 1.1 billion in 2015. 2011 2012 2013 2014 2015 USC 8.46 7.92 7.94 7.74 6.42 Total CASK 3.85 3.49 3.63 3.66 3.40 Other/ASK 2.95 3.00 2.96 2.82 1.96 Fuel/ASK 1.65 1.43 1.36 1.26 1.07 Personnel/ASK 2011 2012 2013 2014 2015 NUMBER ONE IN PRODUCTIVITY Turkish Airlines unit costs per available seat kilometers reduced by 17.0% to USc 6.42 in 2015. This reduction mainly resulted from the drop in oil prices, along with the increased labor productivity and effective cost management of the Company. In 2005, Turkish Airlines stepped up its labor productivity with 2.212 passengers per employee, outperforming the average of its main competitors* for 2014 (1.541) by 43%. With 37% of operational costs incurred in Turkish Lira, Turkish Airlines was positively influenced by the depreciation of Turkish Lira against US dollar, maintaining its global advantage of lower unit costs in 2015. “Main Competitors: Delta Airlines, American Airlines, United-Continental Airlines, Lufthansa, Air France-KLM, IAG, Singapore Airlines and Emirates. 6 TURKISH AIRLINES ANNUAL REPORT 2015 FINANCIAL ANALYSIS TURKISH AIRLINES INC. - BIST 100 PERFORMANCE BENCHMARK TURKISH AIRLINES INC. BIST 100 120 100 80 60 July 17, 2015 July 17, July 31, 2015 April 10, 2015 May 22, 2015 May 08, 2015 April 24, 2015 July 03, 2015 June 19, 2015 June 05, 2015 March 13, 2015 March 27, 2015 March 27, August 14, 2015 August 28, 2015 January 16, 2015 January 01, 2016 October 23, 2015 October 09, 2015 February 13, 2015 January 02, 2015 January 30, 2015 February 27, 2015 February 27, December 18, 2015 September 11, 2015 November 06, 2015 November 20, 2015 November December 04, 2015 September 25, 2015 THE SECOND MOST-ACTIVE STOCK BREAKDOWN OF REVENUES BY CATEGORY BREAKDOWN OF REVENUES BY REGION Turkish Airlines’ stocks have been listed on Istanbul Stock Exchange ‘Borsa İstanbul’ Variation Variation (BIST) under the Ticker Symbol “THYAO” since (USD million) 2014 2015 (%) (USD million) 2014 2015 (%) 1990. Percentage of publicly-traded shares of Passenger Revenues 9,858 9,368 -5 the Company rose to 50.88% after the two Domestic 1,429 1,373 -3.9 Cargo Revenues 973 935 -3.9 secondary public offerings in 2004 and 2006.