Turkish Airlines made a financial Loss in 2016? So why?

Turkish Airlines made a financial Loss in 2016? So why?

You may have heard from news media and social media that Turkish Airlines has closed the year 2016 with great loss. I am curious to see if the situation is really like this, and if so, what is the reason causing this, while superficially examining the financial results.

Instead of relying on the comments and superficial reviews in the news sites, I wanted to examine the company's current activity report and its financial results personally and arrive at a conclusion. I hope it will be a useful analysis for all of us. Let's start.

 Photo Credit: Airliners.net

Let’s begin with the Revenues?

While the company's revenues were $ 751 billion in 2014, this figure declined to $ 718 billion in 2015. 

In 2016, revenue continued to fall and amounted to $ 701 billion. The first time we look at it is that THY's revenues have declined by around 2%, although airline passenger transport is growing at about 6% a year. Undoubtedly an alarming light. While we will be examining other factors affecting the number of passengers, please also consider the depreciation of the Turkish Lira against the USD when evaluating the income data. Because a significant portion of the income is collected as the Turkish Lira currency. Meanwhile, despite the increase in cargo capacity in recent years, I can not pass without noting that passenger income and cargo revenue have also fallen.

How about Costs?

Turkish Airlines' costs are undoubtedly fuel and personnel expenses. The depreciation of the exchange rate appears to have positively reflected THY's dollar-based expense. Dollar-based expenses have decreased. These are as 716, 659 and 643 billion dollars respectively from the year 2014. If you take your attention, the decline in expenses is slower than the decline in income, which appears to have adversely affected net profitability.

Status of Orders?

It is not wrong to say that terrorist attacks in 2016, chaos in Syria, coup attempt in Turkey, rating agencies’ downgrades triggered such situation and Turkish Airlines is one of the first companies to be affected of such situation.  In this case, how the large number of aircraft orders will be effected?

The deliveries of 92 A321 NEO, 65 B738 MAX and 10 B739 MAX narrow body passenger planes, planned to enter the fleet between 2018 and 2022, will be 10 adjectives from 34 in 2018, 35 adjectives from 40 in 2019, 42 adjectives from 52 in 2020, 2021 In 2022, there will be 30 pieces from 6 pieces, and 15 pieces will be in 2023. In other words, aircraft deliveries have been postponed as much as possible and those efforts have been made in order to postpone operational losses as much as possible.

Let’s review the Trial Balance First

The balance sheet at the forefront of the most important financial statements tells you what the company is at present, in other words, gives information on how the material situation is, what assets and debts are, how much of the capital is, and gives more meaningful results when compared to the past year. However, the balance sheet gives information only about the current situation of the company with all the past influences rather than the financial result of a certain period (eg 2016). It is important to note that it is not possible to make an analysis of financial performance without considering it alone.

There is a significant increase in long-term investments, which are defined as fixed assets, when there is no significant change in the cash-like assets of the company from 2015 to 2016. The asset of 33 Billion TL has increased to 47 Billion TL in 2016 and it is a very important increase.

The biggest reason for this is the new orders pf course. The company's assets have increased considerably. With this good development in the first place, the profitability of the company, ie the impact on the income table, will not be so pleasing, since increased aircraft capacity will increase operational costs and depreciation expense. We will examine it in the next section.

We see that the company's debts have increased substantially. It is not hard to guess that the biggest reason is that the aircraft that are purchased are financed by debt. Short-term debt - which is a sign that the risks for companies are increasing, and that it is desirable to be as low as possible- has risen significantly in 2016 compared to 2015. Short-term debt, which was TL 727 million at the end of 2015, increased to TL 4.7 billion a year later. With another expression, it's 10 times higher!

What is the situation with long-term debt? Although not as much as short-term debts, long-term debts are not very insignificant and continue to increase. From 20 billion TL to 27 billion TL.
 

It is natural that aircraft purchased by financial leasing management have increased their debts and that short term debts are increasing more than long term debts, indicating that the alarm bells have begun to ring for the company and that 2017 will be very difficult if there is no serious recovery in the economy.

Income Statement - The Most Important Financial Table!

An analysis of the income table alone may lead to misinterpretations, even though it is possible to make at least some comments on the financial situation of the company for at least the last year by analyzing the income statement only. Let's analyze THY's comparative income table for the last 2 years!

I must mention that there is no significant difference between the years 2015 and 2016 in almost all items of the income statement, which is composed of many elements. So if there is a bleeding wound, it will not be hard to find the source of it. For this reason the analysis will be quite simple. However, I will refer to certain items in order to demonstrate that an impartial evaluation has been made and to offer a wider perspective.

The company's sales revenues were 29 billion TL in 2015 and 29.5 billion TL in 2016. Although there is an increase, a 2% increase in passenger traffic per year, which is around 6%, may not be enough to increase profitability. So let's look at how much the costs have increased. Sales increased by 2% while sales costs increased by 13%. I do not need any further analysis! We found the source of the bleeding wound.

Although Turkish Airlines is not profitable in 2016, it has not suffered any serious financial loss. The loss is 50 Million TL which is not a significant amount for such company. However, this company made a profit of 3 Billion TL in the previous year. This is the question that should be questioned.
 

The main reason why the company does not protect the profits of the previous year is that it can not increase the sales to a significant and desired extent, but the costs increase significantly. Among these costs, there are no expenses such as marketing, personnel fees, and general administrative expenses.

With the addition of other expense items, the profit of TL 3.5 billion resulting from the main activity of the company is transformed into an operating loss of approximately TL 1 Billion. That is, the company incurred 1 billion TL loss from its main activities. How was the situation in 2015? In 2015, this company had a profit of 2.5 Billion TL. I do not mention here because of the financing income and expenses, exchange rate income and expenses have not changed significantly compared to the previous year.

In summary, the company has not achieved any profit or created loss in 2016, but the profit of 3 Billion TL in 2015 could not be protected and increased in 2016. There are, of course, many factors that contribute to this, and it can be argued that political and economic circles are at the beginning of these, and in many respects they can be fairly justified. However, the company's own dynamics, which we try to examine here, are aimed at analyzing the performance of the company objectively.

Conclusion:

We reviewed the company's operational results for 2016, the changes in airline passenger traffic, the company's fleet, occupancy rates, income and expenses, debts and receivables in detail. I would also like to mention that all of this information is open for use on the company's web page. As a result of detailed examination of this information;

- the company did not actually suffer large losses in 2016, its loss is around TL 50 million, which is not an insignificant figure for this company,

- however, the profit of 3 Billion TL in 2015 could not be increased and preserved in 2016 despite the 6% increase in passenger traffic in 2016,

- briefly, although the sales revenues have not increased, the sales costs have increased considerably,

So, ultimately, we can briefly say that despite the fact that THY has a significant loss in 2016 is not correct, but there is a decline in the company's financial performance compared to the year 2015.