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Ladies and gentlemen, welcome to Turkish Airlines Third Quarter 2019 Results Conference Call and Webcast. Today's speakers will be Associate Professor Murat Seker, Doctor of Philosophy, Chief Financial Officer; and Kadir Çoskun, Investor Relations Manager. Dear speakers, the floor is yours.
Thank you very much. Dear all, good afternoon, and thank you for joining for our third quarter earning call. It's always a pleasure to be on the line with you today. We left the summer season behind us, already. And in the beginning of the year, our plan was high single-digit capacity increase in the third quarter. However, because of the unexpected Boeing MAX issue and the delays we observed in Airbus new deliveries, we could not reach this target. Yet, we tried to schedule our constrained capacity in the most efficient way throughout the summer. We also started to see improvements in our outgoing domestic passengers towards the end of this quarter, domestic to international passenger segment in particular.
In addition, in our new hub, where we moved all of our operations in April of this year, we are continuing to offer better service quality and increase the efficiencies, such as taxi times and on-time departure and arrival. I will start with a summary of financial and operational performance of Turkish Airlines for the third quarter. The drop in domestic capacity due to external factors, MAX issue and the new delays, amounted to 9.5% in the third quarter, and number of domestic passengers dropped about 10% as a result of this capacity drop.
The same factors also affected international passengers. However, arrival of the 5 Boeing 787 wide-body aircrafts, led to having a positive ASK growth of about 5.6% in the third quarter, and this led to 3.6% increase in international passengers. As the loss in domestic passenger was high, overall, we observed 2% drop in total PAX number in Q3. Two factors, listed above, plus the big hub move in April, led to 2% drop in number of passengers in the first 9 months. Overall, we carried 56 million passengers in the first 9 months.
We are still -- with the end of our third quarter results, we are still in line with our guidance and expecting to carry 76 million passengers by the year-end. We increased our total revenue by almost 2% in the third quarter. Yield environment was weak in this quarter, as in the previous quarter. And cargo business is still being an important contributor to our revenue, despite of the global slowdown in air cargo business and global trade, in general. This year -- we see this year as a transition period for us due to various reasons, which will be -- I will try to elaborate throughout the presentation. Our profit from main operations decreased by 24%, and net income decreased by 8% in this quarter. We recorded $655 million net income. As you would remember, we revised our guidance in the beginning of September. Due to grounded 737 MAXs and delayed new aircraft and flight cancellations due to move to the new airport, we cut our capacity growth target to 4% from 7% to 8% range, which is mainly realized by growth in the stage length, as I mentioned earlier, due to the arrival of the wide-bodies. As a result, we revised down the total passengers carried by 4 million and total revenue by around $700 million. And we increased ex-fuel cost change by 4 percentage points due to increasing fixed costs of unrealized capacity. Yet our EBITDA margin, however, did not change significantly. We now aim the lower end of our EBITDA margin target range, and we revised down the upper end to 23% from 24%.
On the cargo side, transfer between belly cargo and freighters in 2 airports affected us less than initially anticipated, and we revised our cargo tonnage carried by about 3%... Our third quarter results are in line with our year-end guidance expectations. Furthermore, since September, we have been working on a cost-cutting program. With this program, we expect to have some savings this year as well as having a sound, more disciplined cost base for 2020 budget. The cost-cutting program includes savings from increasing organizational and personnel efficiency, improving our operational performance in the new airport, improving the terms in our existing contracts and improving procurement. If you look at the next slide, number of tourists coming to Turkey reached 36.4 million in the first 9 months of '19, which is a surge of 14% from 32 million in the same period of 2018. When you look at the year-on-year development, number of tourists coming to Turkey has been steadily increasing since 2016. Aside from that, number of international passengers, excluding transit passengers, increased by 1% and reached 14.8 million passengers. The increasing demand from tourism has been compensating the decreasing domestic demand caused by the depreciation of Turkish lira and the decreasing purchasing power of Turkish citizens. The total number of tourists is expected to reach 45 million in 2019. 16 million of the tourists are expected to travel to Antalya and more than 90% of Antalya passengers are international direct passengers. We are planning to capture more of this premium demand, as we already assigned new direct flights from Antalya to some cities in Europe and Middle East. After the Thomas Cook's exit from the market, we are also planning to increase direct flights between Antalya, Dalaman and U.K. Let me continue with the operational overview of the third quarter. Our passenger number decreased by 2% in the first 9 months because of the capacity cuts, as I mentioned earlier. Another factor was a slowly recovering domestic demand. The joint impact of these 2 factors led to a decline of 2 million domestic passengers in the first 9 months. On the other hand, we achieved an increase in the number of international passengers by 2.4% compared to the first 9 months of '18. Because of the weakness in demand and increase in competition from Europe and Middle East, the international load factor decreased by 0.7%. These 2 effects balanced each other, and we had an overall slight declining load factor in total, in line with the guided range. In the third quarter of '19, international to international transfer passenger number increased by 7%, which led to an increase of almost 4% for the 9 months ended. This segment represents 55% of the total international passenger number.
Regarding the international breakdown by geography, we only have a slight shift from Africa to Far East, compared to last year. Breakdown of passengers by transfer type shows the decline of domestic demand, which, paired with the increase of the number of international passengers, resulted in a shift from domestic category to international passenger categories. The increase in the most rewarding international direct category could compensate the declining domestic demand. As we expand our fleet to utilize the higher capacity in Istanbul Airport, we invested only in new-generation and environmental-friendly aircraft. Using these aircraft are among the key factors to achieve environmental targets mandated by IATA, which we have adopted. Our fleet will be expanded in this regard -- expanding in this regard, with more than 200 new-generation aircrafts until 2023. We received 11 new-generation narrow-body aircraft and 6 wide-body aircraft in the first 9 months. Narrow-body aircraft consists of 6 A321neos and 5 737 MAXs, which are, on average, 15% to 30% fuel-efficient compared to conventional aircraft types in our fleet. Additionally, we received another 5 787 wide-body aircrafts in the third quarter. These aircrafts are about 20% more fuel-efficient and have a 60% lower noise footprint. On the other hand, on this period, of course, as you know, we have to ground all the MAX fleet since March. And the delivery of 6 A321neos, which were planned to be delivered in '19 had to be postponed to 2020. Overall, 50 new-generation wide-body aircraft that are planned to be delivered between this year and 2023 will be utilized for additional frequencies to existing primary long-range destinations and for growing our network in Asia, Americas and Africa.
These aircrafts will also replace flights performed by A330 and 777 aircraft for secondary long-range destinations. The growth in terms of demand and capacity in cargo operations continued during 9 months of this year. We observed double-digit growth in the past 2 years, as you would remember. We expect a more conservative cargo growth for '19. Our cargo terminal construction is still continuing in the new airport. We expect that to be completed by early 2021. Flight operations are still executed from Atatürk Airport, yet better cargo operations are being performed from Istanbul Airport, which is leading to some decline in the growth of our cargo business.
Second, the global slowdown in trade continued to affect cargo business in this quarter. In the first 9 months, global freight tonne kilometer decreased by 3.3%, according to IATA, whereas Turkish Airlines achieved an increase of 13%. This made for an increase of almost 10% in total tonnage of cargo carried in the first 9 months. Our cargo revenue increased by 2.4% and exceeded $1.2 billion. When we look at the financial data, we see about 1% increase in total revenues in the first 9 months. Grounding of the MAX aircraft continued to limit our capacity and revenue growth. The slowly recovering domestic demand is causing a high base effect from last year, which also affected the revenue improvement. Another factor is the move to the new hub. It caused cancellation of about 5,000 frequencies in April. We generated about $2.2 billion EBITDAR and 22.3% EBITDAR margin in the 9 months. This is 5.8 percentage points lower than in the same period of last year. Decline in EBITDAR margin was mainly caused by the increase in personnel and airport-related expenses, which offset the increase in the top line. Overall, the result was a decrease in profit from main operations. The impact of IFRS 16, which we started to implement at the beginning of 2019 caused an increase in the total operating lease liabilities of $1.4 billion on the balance sheet. In the EBITDAR margin graph, we look at the past few years data. As I mentioned earlier, the slow revenue growth, together with increasing costs, pushed down the margin by 5.8 points -- percentage points. For the full year guidance, though, we expect to be able to fulfill our guidance of 22% to 24% margin. The positive environment in tourism, depreciation of Turkish lira continued to stimulate the passenger and cargo demand in the third quarter. Looking at the geography breakdown, we see a diversified revenue generation capacity against possible regional volatilities. 90% of the revenues in the first 9 months are generated outside of Turkey, with the largest contribution coming from Europe followed by Far East. Fortunately, revenues from Europe and Turkey shifted to Americas and Far East due to the weakening of the European market and slow speed of recovery in the domestic market. Despite the intensive competition in Europe, we managed to maintain a high portion of revenues in this region. With more than 115 destinations we fly to in this region, it continues to be an important region for the network. In Asia, we believe the codeshare agreement with Indigo, which has made -- which we made at the end of 2018, will continue to stimulate our revenues in Indian market. Also, we see a high increase in demand from China in recent months. In ex-currency RASK, we observed a flat picture for 9 months ended due to decrease in the third quarter, which was caused by the contraction in cargo unit revenues. ex-currency, passenger RASK slightly decreased in this quarter, although there is still a strong increase in 9 months. A decrease in revenue yield in third quarter caused a decrease in the same level for 9 months ended, which was affected by the depreciation of Turkish lira and euro against dollar. When we look at the ex-currency development in 9 months, an increase of almost 4% was realized.
We have been increasing our capacity in Far East and Africa regions, where demand has been relatively solid. High single-digit ASK growth in these regions led to a decrease in passenger RASK and yields. On the other hand, competitive price put by Gulf Carriers and higher float affect Far East to Europe markets. U.S. trade war had negative impact on China to Europe demand for both passenger and cargo unit revenues.
We realized revenue yield growth in America and Middle East, while capacity increase was moderate. In Europe, ex-currency revenue yield also increased despite a higher capacity growth. Europe to Turkey and Europe to Middle East traffic got partially impacted by the low-cost carrier capacity shifts.
In domestic market, ticket price cap was increased from TRY 352 to TRY 450, which will lead in return unit revenue increase. Expectation is to have flat load factors, despite the increase in ticket price cap, as the capacity growth is limited for domestic market.
ex-currency yield growth was positive in all regions, except Asia and Africa, where only in these 2 regions we introduced significant capacity growth in Q3. Development in the first 9 months were lower in terms of capacity increase but higher, and accordingly, positive in terms of ex-currency revenue yield in all regions. Other than in the third quarter, we see a more moderate capacity increase in Africa and Far East.
ex-currency revenue yield development in the first 9 months are higher in every region compared to the third quarter. In the third quarter, there is a 2% growth in total revenue. The main driver was increase in volume. However, negative currency effects and lower load factor almost offset this positive change. In addition, positive developments have been observed in cargo. When we look at the revenue development in the first 9 months, we see the same factors as in the third quarter. ex-currency RASK improvement contributed almost $300 million. On the other hand, year-to-date depreciation of Turkish lira and euro as well as many emerging market currencies against dollar led to $419 million loss. Our cost per ASK basis continued to be amongst the lowest among peers, despite the increase in 2019. Nevertheless, as mentioned above, we are working on a cost-cutting initiative for the last month-and-so. ex-fuel cost increased by 12.4% in the third quarter. The main reasons for the increase are higher personnel costs due to salary increase introduced in June and then in October of last year. We expect this quarter to be less period where the low base effect will show such high increases on personnel expenses. Another factor behind the higher personnel expenses is linked to neo and MAX deliveries that were scheduled in '19 and 2020. As we could not utilize MAX aircraft and the 6 new deliveries were postponed to 2020, we could not perform the intended production that increased our personnel CASK. We continue to take measures to alleviate this cost increase. The aircraft ownership costs increased due to the increase in depreciation expenses after IFRS 16 change. Airport and air navigation costs increased in accordance with the guidance due to higher unit costs in Istanbul Airport. Also, linked to the move, ground handling cost increased due to the increased size of the operating area and also the increased number of temporary employment and higher unit costs. The low base effect will continue to be reflected in this cost item until the second quarter of '19 -- sorry, 2020. Sales and marketing costs increased because of 22% higher commissions and incentive costs and 14% higher reservation system costs. Part of the increase in commission expenses was due to the change in the payment rule we implement in certain regions and the commission fee rules that we implement in certain regions. With this change, we became more aligned with the peer airlines. This year, we also revised provision allocation for commissions and incentives for next year in order to decrease the volatility across quarters. A third factor was the increasing interest rates on credit card commissions. Another cost increase occurred in passenger services and catering. Together with the ground handling in catering expenses, a crucial factor for cost increase, was the Turkish lira inflation. In addition, there is also an increase in the cost of the large areas at the new airport due to the increased size. The launch in Istanbul Airport is about twice the size of the launch in Atatürk Airport. Maintenance costs decreased due to several reasons. First, there were deferral of some of the planned maintenance activities. Consequently, these planned overhauls will take place in the following quarters. Second, in the first half, we slowly started to cut the scope of cabin interior maintenance. In this quarter, almost 1 point -- 1/3 of the decline in the maintenance costs comes from the de-scoping of cabin interior maintenance to optimizing this cabin interior maintenance, and we will see the impact of it during the last quarter as well.
Overall, total CASK increased by 6.9% in the quarter. In CASK calculation, though, we do not include cargo capacity under our ASK definition. However, we include cargo costs in the calculation of total costs. With the increase in cargo capacity, cargo-related costs also increased significantly. When we adjust total ASK with its cargo ASK, ex-fuel cost increase dropped from 12.4% to 9%, and total cost increase decreases from 6.9% to 3.7% in the third quarter when we adjust with the cargo capacity. Looking at the fuel cost breakdown, we see that lower fuel price in the third quarter offset the hedging effect and the volume increase. Most of the positive price effect has been realized in the third quarter, so that the total fuel cost increase in the first 9 months is -- was around 4%. Even though the unit costs are not affected, the main reason for the fuel expense increase is the lower hedging profit as compared to last year. The main reason behind the significant decrease in profit from main operations lies in the increase in ex-fuel unit costs and underperforming revenue development.
While our profit from main operations in the third quarter is negatively affected by the currency effect, we still see a positive effect for the 9 months. 2.6% increase in utilization contributed positively, while we were not being able to attain the targeted capacity growth. The continuing pressure from negative ex-fuel unit cost effect throughout the year caused a significant drop in our profit from main operations compared to 9 months of last year. As shown in the graph, we continue to be long in euro and short in Turkish lira. Share of Turkish lira declined to a 2% level due to the depreciation observed against dollar in the last year -- since last year. We used monthly based decreasing layered hedging policy with a maximum 24-month contract period. On fuel hedging, share of fuel costs within our total cost base is around 35%. Even though we used the layered hedging strategy, volume and type of hedging contracts are aligned depending on the forward fuel price curve. When it exceeds a certain level, we decrease the hedge ratio and use alternative hedging tools. 57% of the consumption in '19 and 30% of consumption in 2020 are hedged as of Q3, and our breakeven price cost for Brent is $65. Our financial lease liabilities decreased from $8.1 billion by the end of June to $7.9 billion by the end of September. On operating lease side, total obligations decreased to $1.4 billion. Weighted average interest rate continued to be around 2.6% and 60% of our lease liabilities are fixed. This concludes my presentation, and we'll go to the Q&A now.
[Operator Instructions]
Hi, everyone. This is Kadir from Investor Relations. I will be reading out the questions. From OYAK Yatirim, there are a lot of questions about 2020 outlook. I'll read out one of them. Can you share us with your initial thoughts for 2020 outlook? Can we expect strong capacity growth? What are your expectations for tax yield, load factor and cargo revenues? And do we expect a significant decline in unit costs?
Well, due to the slowing global growth and global trade expectations going into 2020, we'll continue to be cautious -- on the cautious side. And actually, when you look at past capacity development through the last 3 years after '16, you will see that ASK growth, on average, was about 3%. So we have already been cautious and conservative on our growth projections.
Going forward, we could see slight decrease in RASK in 2020, but we are also expecting a decline in CASK after seeing increase in CASK of 2 consecutive years in '18 and '19. We are expecting about 30 aircrafts to be joining the fleet in 2020, as we are planning to add about 14 wide body to the fleet, a mix of A350s and 787s. ASK growth will be heavily affected by the stage length increase.
However, ASK growth is expected to be in high single digits. And the main regions for capacity increase will be long-haul regions, like Americas, Far East and Africa. For example, we are planning to introduce new routes, Vancouver in Canada, Newark in U.S., Shiyan in China, Haneda in Tokyo as an additional frequency. We are planning to open back again Osaka in Japan. And all of these cities have, we believe, very high potential. For example, Shiyan will be our fourth destination in China after 10 years.
Other than these new destinations, we are, with the wide-bodies, we are also planning to increase frequencies in our highly profitable routes, like Singapore, Kuala Lumpur, Washington, D.C. and Los Angeles.
Okay. We have a number of questions about the last quarter outlook also. I'm reading one of them. Can you please comment on your latest outlook for Q4 '19, ASK load factors and yield development.
In the last quarter, we expect to have a flattish yield and flattish load factor and a high single-digit ASK increase because of the delayed neos. About 7 of those will be entering the fleet in the last quarter. And compared to the prior quarters, we are seeing a recovery in demand and yields, especially in the domestic side. As you would recall, the peak of the crisis on the domestic market, when Turkey lira depreciated, happened towards the end of the -- towards the middle of August, and we saw the biggest impact on domestic market starting from September and October, continuing to October.
In the last quarter of this year, we are expecting a very mild change in CASK, which is going to be affected by the cost-cutting measures, as I mentioned in my presentation.
Yes. MAX is a hot topic, and we have a lot of questions regarding MAX's share as well. Do you see any further delays in the clearance of [ lifespan ] on the MAX aircraft? What are your action plans if the issue persists throughout 2020? How are the negotiations evolving with the manufacturer regarding the compensation?
As you know, we are the only major airline in our region, a flag carrier, a network carrier airline, that has had significant MAX orders. And we had already 12 in the fleet. 7 -- no, 9 of them came -- some of them came last year, and 5 of them came in the first quarter, which we had to ground after the March incident. And there were supposed to be about 12 additional that were supposed to come in the second quarter of this year. So we are -- we end up planning a year with missing 24 MAXs. So it definitely had some negative impact on our projections. The issue is still ongoing, and we still don't have any clear time line on when MAXs will start -- will come back to the operation. But unlike this year, we are well prepared, and we don't expect any capacity problem due to MAX issue going into 2020. We are in discussion with several lessors about possible operating leases to compensate the MAX-related capacity losses. About discussions with Boeing, we are in very close coordination with them regarding to the -- any possible compensation. They are aware of our losses. And we are both taking positive steps to have a cooperative resolution. We don't have any concrete results yet. I'm not able to disclose anything further, but we definitely will keep you posted once we have any concrete results about any possible methods and means of compensation. About future deliveries, again, at the moment, we don't have any information about those as well. There was supposed to be certain MAX deliveries going into 2020. And overall, there are an order book of 63 MAX aircraft. But we are holding on to those until we get any new and clear information, not only from MAX, of course, also from the -- our Civil Aviation Authority as well.
A question from TEB Yatirim. How is the competitive environment? Any remarkable change? Are you seeing more competitive moves with the new hub? What's their market share in international routes and domestic?
Overall, I can say the market share of Turkish Airlines in the new hub did not change, and there are definitely newcomers, but we're also growing, so they are balancing each other out. The new airport is definitely providing much bigger capacity and it will provide even more capacity going forward.
But in Istanbul Airport, our market share is about -- is around 80% -- 79% total. In domestic market, we make 87%, and in international market, is 76%. And this is not too different from the distribution in Atatürk Airport. And about the competitive environment, we have not seen a significant change in the new hub. There are new entries, there are some Chinese airlines coming, and from Asia, we see new entries. We still put -- continuing to produce the majority of the operations from the hub. And since the operating fees, especially airport fees are higher than Atatürk Airport, so far we have not seen any low-cost airlines coming to Istanbul Airport for operation, with the exception of Indigo, an Indian airline. And as you know, they started operations after establishing an exclusive codeshare agreement with Turkish Airline.
Next question from Yapi Kredi Yatirim. How do you consider the current capacity outlook in main international markets and competitive environment?
The competitive environment, well, we are expecting a moderate capacity increase from our peers in Europe, due to the slowing economic activity, especially in key European markets. In Far East, we see a competitive environment, more aggressive coming from Middle Eastern airlines, and as I mentioned in the presentation also from Aeroflot, which put pressure on our unit revenues. Also, we started to see some drop in Chinese trade market. The Chinese market to Turkey is still sound, but the trade market from China to Europe, we see some drop there due to the trade dispute between U.S. and China. The North Africa region, we observed similar pressure coming from the low-cost carriers. Also, the political uncertainty in the region has been putting some pressure on passenger growth. In South Africa, the competition continues to be from Middle East and African Airlines. North Africa is a region where we see positive developments on yield as well as the tax growth. South America phase, we started to see increasingly weaker economic outcomes and it is affecting the RPK development negatively.
In the domestic market, as I also mentioned, the growth -- the recovery has been slow, but especially after September, we started to see that turning into somewhat more positive. And the currency after -- on Turkish lira is also helping on this outlook.
We have several questions about guidance. Again, let me pick one of them. Given the 9 months realization and forward bookings, do you see any upside or downside risk to your revised guidance?
For 2019, also as I mentioned, our third quarter results were in accordance with our guidance figures. And looking into the quarter 4, when we look at the forward reservations, we don't expect any change. We expect a flattish load factor in November and December. October load factor was very flat also as of last year.
So overall, we expect stable Q4 results in aligning -- and aligned with our guidance.
There is a question from BGC Partners about the third runway. It's a specific one. Recently, there were news that the third runway might be completed until 2020 summer. If the length of the third runway is decided to be 3 kilometer versus initial plans of 3.75 kilometer, when do you expect the third runway to be completed? What is the implication on Turkish Airlines if the runway is 3 kilometers?
So that's quite a detailed question, and that's true. The discussion was changed from 3.75- to 3-kilometer runway. And the expectation and the discussions we held with airport authorities, state airport authority and airport operator, IGA, was that they are going to try to finish it in June, and with test, it could be overall completed in July.
The -- having a 3-kilometer versus a 3.75 kilometers is not going to make a difference because that third runway is going to be mostly used for domestic flights. The peer, the closest peer, to that runway is a domestic peer. And they're mostly narrow body. And for short distances, also the 3-kilometer runway will be sufficient for wide-bodies as well. So that doesn't pose any risk for our utilization of 3 parallel runways.
Yes. The next question is about the Istanbul Airport tariffs. In the past, you had mentioned about negotiations regarding lowering price at the new airport. Could you give us an update on the development?
Those discussions with the airport operator are still continuing. We believe we are making progress, and we have already negotiated some improvement, but there is a little bit more room to go in our expectations. So there is definitely strong positive progress on discounts. Just the discussions, the negotiations are still in progress.
Next question is about Airbus neo deliveries. Do you expect further disruptions in Airbus neo deliveries? Question from VTB Capital.
That's a very, very difficult question to answer at the moment. And we have brought this issue up iteratively with -- I'm talking about the Airbus side, as the Boeing issue is completely different -- on a different base. I mean, we need to have the FDA approval, IATA and then Turkish Airport authorities, state airport -- sorry, Civil Aviation Authority approval.
But on the Airbus side, we have made mutually a lot of progress on -- after delaying the 9 neos to next year, we are optimistic that there won't be any more delays. And this is what they have been informing us about. So we are, on average, around, we'll be having 15 neos in 2020 throughout the year, 9 of which are the delays from this year. And there will be some delays from the next year's delivery, but we are kind of about to shake hands on this new schedule. There are a few details that we are still working on.
So overall, we are optimistic that there won't be significant changes as we saw in 2019 in the neo deliveries. This year, on average, each neos we received was delayed on about 2.5 to 3 months.
Okay. Next question from TEB Yatirim. THYAO owned 42 aircraft as of the end of first half '19. And assuming further additions to owned aircraft, do you have any sell and leaseback plan for 2020, for owned aircraft, I guess? What's your target owned/lease aircraft contribution in your fleet?
What was the last part, Kadir?
What is your target owned/leased aircraft contribution in your fleet?
Okay. Our Chairman and our -- actually, the Board, has been a very strong advocate of keeping the fleet young. And as a result of this, of this 40-some aircrafts in our ownership, we have been interested in either selling down some of them or selling leaseback some of the aircrafts. We have checked the market on -- actually, we are still in inquiries, having active inquiries about sell and lease some of our 777s and 737s NGs. But obviously, because of the MAX problem, we kind of paused on our NG, SLB proposals and discussions. Once we have a little bit more room or once we get more clarity on our operating lease, which we are planning to have next year, we are going to reintroduce that study and we'll be either selling or sell and leaseback some of our old NGs, 737 NGs, and some of the old 777s.
A mix of SLB to financial leases, as I understand, this is for the new and for the fleet, for the fleet, we are expecting to have about at least 1/4 of our financings through the SLBs.
Okay. We have several questions again from -- for cost-cutting plans. A question from Kerem Tezcan. What are the main areas that management is planning to cut costs? And to what extent do you expect that cost-cutting will materialize?
Okay. So this is, of course, an area that we attack all through our organization. We are looking to do -- we have been looking into the personnel expenses. We have been looking into the maintenance expenses. We have been looking into the sales and marketing expenses, commissions, overhead, airport charges, not only for our Istanbul hub but also for the old hubs that we are servicing to. We went back to renegotiate a lot of our existing contracts on ground handling, catering, fuel. So we come -- we saw some improvements on fees and fares. And we saw some improvements on efficiency gains which, roughly speaking, is difficult to put a number at the moment because these are work in progress, but we believe we'll be able to attain 100 million drops in our expenses in the last quarter.
But more importantly, this study that we ran through all through our organization brought some important cost-cutting initiatives for our 2020 budget. So we will be able to see a more significant contribution of the efforts that we are taking now in our 2020 budget.
Okay. The next question is about the Ex-fuel CASK increase for third quarter from [ Shipram ]. The annual 14.2% -- 12.4% increase in Ex-fuel CASK in third quarter was above the annual increase in the second quarter. Considering this ramp-up in new airports in third quarter compared to the second quarter and higher base due to pilot rate increases started in third quarter, what is the reason for higher year-over-year ex-fuel cap increase in third quarter?
Well, so the -- about, I think, 7% of this Ex-fuel CASK increase came from the Turkish lira depreciation against the currencies. And the remaining increase was mainly due to the higher tariff and the extended operations in the new hub.
Okay. Okay. The next question about yield environment. There we have several questions. How is the current yield environment? And should we attribute the weakness in Far East Asia and Africa in third quarter to new capacities? Or is there something else? You already mentioned during the presentation, but...
The main -- the reason for far Eastern Europe weakness in yield is the price competitions between Turkish Airlines, Aeroflot and some of the Gulf carriers who want to increase their market share. And in addition, the decrease in the belly cargo revenue, which is a significant contributor of our Far East profitability, also declined. And the direct flight to Turkey by pure airline like China Southern, Sichuan Airlines and Indigo and the depreciation of yen currencies against dollar due to the trade war between U.S. and China, which affects -- which also is the global slowdown effect, resulted in our decrease in unit revenues. In Far East region, our yields declined by about 1.5% to 1.7%. In Africa, the regional competitors like Royal Air Maroc, Air Arabia, they influence North Africa route profitability. And Ethiopian Airways -- Ethiopian Airlines and British Airways, they affect both the number of passengers and the yields. And the grounded MAXs, of course, also had cost increase impact on this region. The yield declined about 2%, and the load factor decreased close to a percentage point in this year -- in this region.
Next question is from Osman Memisoglu, Ambrosia Capital. What is the latest on your plans regarding airport investments, in or out of Turkey?
Well, at the moment, we don't have any interest in investing in an airport. Our focus for 2020 mainly will be on the investment side to complete our investments in the new hub. There are still certain investments like the catering building, the -- on our MRO facility, the cargo buildings, construction is still ongoing. So we will be focusing on our CapEx to complete these investments.
Next question is from [ Kemal Hadra ]. Are you planning to restructure your debt with the goal to decrease costs? Are you planning to issue debt instruments more frequently?
So I understand this as not aircraft financing but our corporate debt, I think, which we have mentioned in the earlier quarter investor calls that we have accumulated and about $1 billion worth of corporate loan to finance the investment projects for the new airport.
And as the rates are coming down, we are in discussions with several banks to coordinate with them, and we are taking certain actions to renew -- and I wouldn't call it restructure but to renew the debt, bank loans, corporate loans, with new terms, and it is also giving us an opportunity to extend the duration of the credit. And the second part was, are we planning to issue debt instruments more frequently. Well, we are also -- regarding to our corporate debt exposure, we are trying to diversify. We have started to work on a Eurobond issuance project, and we have been working on the documentation. And when we see the market is accommodative for our needs, we might have a bond issuance. As you would remember, several years ago, we had our first WTC issuance. Again, if the market is right in the second part of this year, we could also look into [ debt ] facility. We also have very preliminary studies down to look into the other more structured, secured lending opportunities to bring down the cost of corporate debt.
Next question from BGC Partners. What is the expected net debt position at the end of 2020, depending on the solution, no solution to the MAX issue. I guess, it is hard to answer the...
The solution, no solution. Yes, that is really very, very difficult. I mean, but I must -- rest assured, we saw the kind of the peak of the difficulty really through this year, and I think we could manage to handle it. Like, when we were lagging the capacity growth, our aircraft utilization increased by almost 2.5% to compensate some of the losses, but still we had to cut the capacity cost -- capacity growth by half.
As I mentioned in the earlier question, our infrastructure development investment in Istanbul Airport and aircraft deliveries are going to continue. The application of IFRS 16 started in 2019. This also resulted in an increase in our net debt. And as a result of this, we expect the net debt to be close to $11 billion at the end of this year. And going forward, we expect it to go up by about $400 million, $500 million more by the end of 2020.
The next question is from JPMorgan, Hanzade Kilickiran. Do you still need to recruit more staff to adjust the new airport size and fleet? How do you see your salary adjustment risk in 2020?
Do I see -- what is this salary adjustment risk? That I didn't understand too well.
Maybe for pilots.
Well, the recruitment of more staff -- so we did a huge move to a humongous top and in order to have that facilitating very smoothly, there were our ground handling subsidiary as well recruited some temporary workers, and they knew that they were temporary. And so that is coming down. And also to run the, like the baggage claim, system, the ground-handling personnel to be able to service the customers in numerous counters, we recruited the staff. But after 6 full months of operation in the new airport, now we have a lot of information about the best, most efficient utilization. So in this regard, we are not planning to recruit a significant amount of staff for 2020. Also, on the flight crew, as there were some recruitments done this year, we think that we'll be able to cover significant portion of our next year needs. We still are going to be, I think, as I mentioned earlier, a single high-digit capacity next year. So there will be more recruitment, but it will be mostly on the flight crew rather than the general staff recruitment.
And if we see salary adjustment risk, we signed the term with the -- with the union last year for the next 3 years after months of negotiations. At the moment, we don't see anything risky on this regard. And we don't see any unplanned, unintended increases on salaries for 2020.
Murat, we've run out of time, but I will pick one last question to clarify the explanation during the presentation. To clarify, are you planning USD 100 million cost-cutting only in the last quarter? Or this is combined figure for '19 and '20?
No, it's not -- it doesn't include 2020. Sorry, for the misleading. I meant $100 million was for last quarter of this year. What I intended to say is the initiatives that we discussed through the organization, we will see the reflections of those on cost improvements throughout the 2020 budget as well. We believe it will be higher than this $100 million number. But at the moment, as still it is work in progress, I couldn't quote a number there. But $100 million is for the last quarter of this year.
Okay. Thank you very much, everybody, for attending the quarter's results. Thank you.
Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation. You may now disconnect.