Turk Hava Yollari AO
IST:THYAO.E
Earnings Call Analysis
Q4-2023 Analysis
Turk Hava Yollari AO
In the earnings call, Turkish Airlines reported robust performance for the year, exceeding $20 billion in revenue and achieving a full-year net profit of $2.9 billion, driven by robust passenger demand supported by operational strength and an extensive network. Despite facing challenges like geopolitical tensions and air traffic congestion, the company demonstrated agility and resilience. Turkish Airlines received prestigious awards, including Best Airline in Europe by Skytrax. The strategic focus on sustainability and growth, including significant aircraft orders, highlighted the company's forward-looking approach.
In 2023, Turkish Airlines saw a 16% increase in revenue year-over-year, totaling nearly $21 billion, with a 24% increase in passenger revenue amounting to $17.7 billion. Cargo revenues decreased by around 30% to $2.6 billion due to unit revenue erosion. The company's total free cash flow to equity generation over the past 3 years amounted to $5.4 billion. Turkish Airlines emphasized sustainability efforts and strategic growth plans, aiming to serve over 170 million passengers by 2033 and achieve consolidated revenue of over $50 billion through network expansion and a shift towards a low-cost carrier model.
Turkish Airlines experienced a 16% increase in international passenger capacity in 2023 compared to pre-pandemic levels, surpassing the recovery trajectory of the airline industry. The company's international market share rose from 2.4% to 3.5% over the last 4 years, reflecting effective leveraging of post-pandemic opportunities. Despite challenges in certain regions, the Far East and Americas stood out as top-performing areas. Initiatives like incorporating AnadoluJet into a wholly-owned subsidiary aimed to diversify business models and strengthen market presence.
Looking ahead to 2024, Turkish Airlines expressed optimism about the demand environment and planned to grow capacity similarly to the previous year. Initiatives to enhance digital offerings and streamline operations, like the introduction of TK Wallet and TK Pay, aligned with creating a value-generating ecosystem for customers. The company's ability to adapt to varying operating environments through an expanding network was seen as a strategic asset that provided resilience to operations.
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Ladies and gentlemen, welcome to the Turkish Airlines Fourth Quarter 2023 Earnings Call. [Operator Instructions]. I'll now hand you over to your host, Associate Professor, Murat Seker, Member of the Board and the Executive Committee as well as the Chief Financial Officer; and Mehmet Fatih Korkmaz, Head of Investor Relations. Speakers, the floor is yours.
Thank you very much, and good afternoon, everyone, and thank you for joining us. Today's announcement -- announced results underscore our industrial-leading position with the revenue exceeding $20 billion and achieving a full year net profit of $2.9 billion, excluding the one-off gain caused by the inflation accounting adjustment. The robust passenger demand supported by our operational strength and vast network enabled us to have a successful year. Our staff was an integral part of our success and work hard to serve our customers flawlessly. We are very grateful for all of our Turkish Airlines family for such a remarkable performance. Before going into details of our results, I want to provide a broader view of last year's operating environment. 2023 posed a number of challenges on an evolving basis. Early in, we faced one of the most tragic disasters in our country's history. As the nation of the carrier airline, we have committed ourselves to aiding the recovery efforts in the affected areas through humanitarian flights, donations and housing support. Later on, increased geopolitical tensions, air traffic congestion in Europe and manufacturer-related problems, put significant pressure on to the industry and our operations. We try to alleviate these drawbacks with our operational agility and resilient business model. Combined with our high-quality services, our passengers showed appreciation through the leading airline rating programs. In 2023, Turkish Airlines was named as the Best Airline in Europe by Skytrax and received a world-class award along with the 5-star global airline rating from Apex. Additionally, our commitment to sustainability was acknowledged with the title of Most Sustainable Flight Carrier Airline by World Finance. More recently, CDP moved Turkish Airlines to the leadership category in their 2023 sustainability assessment, placing us above the air transportation sector. These recognitions not only reflect our achievements, but also affirm our ongoing efforts to further elevate our global presence, improve service quality and enhanced sustainability initiatives. Last year, we also announced a strategic plan for Turkish Airlines Centenary in 2023, with a focus on sustainable and profitable growth. As a leading global airline, we are targeting to serve over 170 million passengers with a fleet of over 800 aircraft by 2033. Our goal is to achieve consolidated revenue of over $50 billion by the that year through expanding our passenger network, creating a logistic ecosystem around our cargo business and transforming into low-cost carrier. Throughout the past year, we started implementing this strategy and also shared the details with our stakeholders. One of the major components of our strategy was aircraft orders. In December, we finalized the discussions with Airbus and placed an order of 355 new-generation aircraft. Our talks with Boeing still continue. These orders not only reflect our commitment to modernizing our fleet, but also strategically secure our growth prospects, considering the current aircraft backlog and limited availability of production slots. Regarding our cargo operations, Smart East, our cargo terminal in Istanbul Airport plays a crucial role in advancing our strategy. Created to fortify our envision logistic ecosystem, it enhances efficiency and facilitates entry into niche segments. Doubling smartest capacity to 4 million tonnes in the coming years, will allow us to capitalize on the expanding opportunities in the global cargo market. Another important development last year was incorporation of AnadoluJet into AJet as a wholly owned Turkish Airlines subsidiary. This strategic move aims to strengthen our market presence in the low-cost segment and further diversify our business model. The transformation of AJet aligns perfectly with our broader goal of complementing our passenger network while offering competitive pricing with customization options. We are not only expanding AJet's fleets and routes, but also remodeling its operating model for more efficiency. Also, we recently introduced TK Wallet which simplifies payments and refund processes for our loyalty program, Miles&Smiles! In the upcoming months, we will expand our digital portfolio with the launch of TK Pay, an electronic money and payment services platform. These new ventures aim to establish a value-generating ecosystem, and at the same time, offer a more digital travel experience for our customers. Now I would like to turn your attention to our financial results. In 2023, we carried 83.4 million passengers with a 16% increase year-over-year. As Turkish Airlines continues to be the busiest network carrier in European aerospace, our full year capacity rose by 16% year-over-year, and also surpass 2019 level by 25%. Despite the earthquake impact and relatively softer demand, at the beginning of the year, our cargo operations experienced a gradual improvement towards the end of 2023. As the freight tonne kilometers was almost on par with 2022, Turkish Cargo ranked fourth in the world as reported by IATA. A substantial increase in passenger traffic coupled with a low digit increase in yields led to a passenger revenue of $17.7 billion, marking a 24% increase year-over-year. Cargo revenues, on the other hand, decreased by around 30% to $2.6 billion, mainly driven by unit revenue erosion. Combined with the contribution of $0.5 billion from Turkish Technic, our total revenues climbed to 14%, reaching nearly $21 billion. On the cost side, operating leverage, lower fuel prices and our methodological approach to fuel hedging played a favorable role in supporting our profitability. As a result, we achieved around $2.9 billion profit from main operations and $6.1 billion EBITDAR with around 29% EBITDAR margin. $5.4 billion of total free cash flow to equity generation in the last 3 years also underlines the robustness of our business model and showcasing our ability to sustain profitability despite unfavorable developments. These results did not occur in isolation. They reflect our diversified approach across regions, which increases our ability to adapt to various operating environments, from 243 destinations in 2013, to 345 destinations in 2023, our expanding network created an important strategic asset and provided resilience to our operations. As we are increasing our international capacity, we observed a corresponding rise in visitors to Turkey, demonstrating joint growth between Turkish Airlines and Turkish tourism industry. Recovering swiftly immediately after the pandemic, Turkey stands as a top tourism destination, aligning closely with its ambitious goal of welcoming 82 million visitors by 2028. Both Istanbul and Antalya emerged as leaders on the global tourism stage with Istanbul's visitor numbers outpacing all other major cities and Antalya not very far behind. Turkish Airlines have been instrumental in this journey, connecting travelers around the world to Turkey. Looking ahead in 2024, we expect the industry supply and demand imbalance to continue, though in a lesser extent compared to last year. The lack of sufficient aircraft production and ongoing issues with GTF engines will constrain growth. Currently, the trajectory of our passenger revenue growth continues to be positive. As a result, in 2024, we expect to increase passenger capacity by about 10%, accompanied by a small decline in yields compared to last year. We will continue to closely monitor our booking trends, global travel appetite and macroeconomic environment and adjust our projections as necessary. In closing, 2023 was a year marked by resilience, growth and a strategic progress. In this challenging operating environment, Turkish Airlines continue to strengthen its position in the global aviation industry. I will now pass the call over to Fatih to provide further details.
Thank you, Murat, and good afternoon, everyone. We now move into the details of our operational and financial performance. As the global appetite continue to be healthy throughout the fourth quarter, our capacity surpassed the same period of 2022 by 16%, almost on par with the increase in the first 9 months. For the whole year, our international passenger capacity exceeded the pre-pandemic level by 27%. In contrast, the airline industry continues to navigate its recovery. Consequently, our international market share experienced a notable increase, rising from 2.4% to 3.5% in the last 4 years. This achievement, coupled with the sustained profitability underscores how effectively Turkish Airlines has leveraged opportunities within the post-pandemic operating environment. In 2023, our number of international transit passengers increased by 27% annually. As Murat highlighted, Turkey's rising popularity as a global trust destination also supported our local traffic. The number of passengers we flew directly to Turkey exceeded prior year and was 22% higher than in 2019. Including our domestic operations, we carried more than 83 million passengers in 2023, recording our highest annual total. From a regional perspective, Far East and Americas were our top-performing regions in the last 3 months of 2023. As the Far East continues to recover, we increased our capacity there by more than 30%. However, the aggressive capacity additions by peers and the slower-than-anticipated recovery in group travel in China created a drag on this positive trend. As a result, our load factor dropped slightly by about 1 percentage point. After opening of our Osaka route in last December, we start flights to our first destinations to Australia with Melbourne in March. This new route will contribute our load factors, especially for key Balkan destinations such as Greece and Macedonia. Looking into 2024, we are optimistic about the demand environment in the region and plan to grow our capacity similar to last year. In the Americas, strong demand and increased interest in our premium products kept revenue yield steady even with a 21% increase in capacity in the fourth quarter. However, our total load factor dropped by about 3 percentage points year-over-year, mainly because of the high base and partly affected by the geopolitical situation in Middle East. We managed to lessen the impact of the suspended Tel Aviv route by generating more traffic from India and Southern Europe. In 2024, we plan to expand our footprint in the region by commencing flights to Denver in the U.S. and Santiago in Chile. Our passenger traffic in Europe was supported by the demand from Far East. However, rising competition led to a 3 percentage point decrease in our load factor during the fourth quarter. In the Middle East, ongoing conflicts lowered the demand, resulting in a 3.5% drop in load factors with around 3% reduction in capacity year-over-year. On a positive side, the introduction of new Visa regulation significantly boosted umrah travel, which partly compensated the decreasing demand. The tragic earthquake in Morocco increased competition and FX shortages affected our operations in Africa. The introduction of the Visa for Turkish citizens by Egypt fell short of recouping the demand. In 2024, we aim to expand our services to holiday destinations in the region to support our yields and load factors. Our passenger revenues in the fourth quarter rose by 8%, largely due to higher volumes. Annual decrease in cargo revenue slowed down to 3%, thanks to better yields and increasing credit cargo volume. Compared to the third quarter, year-over-year decline in these two metrics improved by around 15 percentage points. Recent signals indicate a favorable trend in air cargo demand, largely driven by the strength in e-commerce activity before recent holidays, like Christmas and Chinese New Year. We also observed that the Red Sea and Panama Canal distractions have also a positive spillover effect for air cargo, resulting supply chain pressures and newly introduced surcharges by sea freighters make air cargo more competitive as the industry offers predictability, stability and timeliness. Additionally, early signs of inventory stocking suggests a potential contribution to cargo traffic. However, uncertainties remain a tighter financial conditions and a vague macro outlook continue to apply downward pressure on the sector. Consequently, we remain on the cautious side and anticipate modest cargo performance. Before going into the next slide, I would like to highlight Turkish Tickets performance. One of the most important players in the global aircraft MRO markets, our subsidiary increased its external revenues by 45% in the 2023 to $0.5 billion. We expect this growth trajectory to country on the back of rising market share and favorable global demand due to limited availability of new aircraft. In 2023, our on-hand liquidity increased by over $1.5 billion to over $6.4 billion. Strong operational cash inflow reduced net debt by $6.7 billion to $7.3 billion as of December 31, down from its peak level of $14 billion at the end of 2020. As a result, our leverage decreased to 1.3x by the end of the quarter. Given our average cost of funding of 3%, our strong liquidity level in the high interest rate environment in 2023 contributed significantly to our bottom line. As the current macroeconomic picture indicates, elevated interest rates for longer, we expect this benefit to continue although to a lesser extent than in the previous year. Our robust operational performance on the back of annually lower fuel prices translated into $6.1 billion of EBITDA for the year. As you recall, in the first 9 months, we had several one-off cost items amounting to $370 million due to earthquakes in Turkey and personnel compensation against the inflation. As we concluded the year we made a profit share payout to our employees, including our subsidiaries amounting to 14% of net operating profit. In the fourth quarter, we also delivered on our pledge to fund the construction of 1,000 houses in the earthquake struck region. On the other hand, in 2024, we recorded around $200 million from compensation income related to late aircraft deliveries and expired revenues. Total negative impact from these items reached to almost $900 million for the full year. We have been gradually increasing our fuel hedging position since the beginning of 2023, considering the price levels and volatility. Last year, fuel surcharges combined with 20% hedging level provided around 90% protection on average. However, intensifying competition among airlines suggests decreasing pass-through capability for the upcoming quarters. Consequently, we are closely monitoring developments in both oil markets and airline industry while adding new positions. Let's now take a closer look at the financial impact of inflation accounting on our results. Inflation accounting is applied when the producer price index increase exceeded 100% over the preceding 3 years. This is a requirement of tax procedural in Turkey, according to which we prepare our legal books. Although Turkish Airlines used U.S. dollars as its reporting currency in international financial statements, our financial statements prepared under the tax procedure law are denominated in Turkish lira. As our fleet is the most significant nonmonetary assets, aircraft values needed to be adjusted to reflect their true value in Turkish lira kept statutory accounts. Let's illustrate the reasoning behind this adjustment. Assume an aircraft worth $100 million into our fleet in 2017. While it is recorded in our IFRS statements which is original currency, Turkish lira equivalent of the aircraft value recorded in the legal accounts. Coming to 2024, amortized value of the aircraft on the IFRS balance sheet is now $80 million. On the other hand, on the legal accounts, it's dollar equivalent is just $10 million. As of 2023, total value difference between these 2 financial statements was around $3.1 billion. This difference was closed after implementing inflation accounting by adjusting the aircraft book values with PPI in the tax financial statements and reversing the deferred tax liability in the IFRS statements accordingly. The reversal of the deferred tax liability in our IFRS balance sheet resulted in recording one-off tax gain amounting to $3 billion. With adjustments coming from our subsidiaries, total impact to our bottom line rose to around $3.1 billion. As a result of our adjustments in our IFRS statements, EBITDA was not changed materially nor leveraged an EV to EBITDA. On the other hand, price-to-earnings and price-to-book ratios were materially affected due to increasing profits. We recorded around 3 percentage point increase during the fourth quarters. Looking at the unit expense breakdown 7.8% decrease in fuel CASK on the back of lower annual fuel mostly compensated 6.8% increase in fuel CASK. Main contributors to the cost growth or personnel expenses, airport fee hikes and higher sales commissions. Note that the increase in ex-fuel was less pronounced than the first 9 months due to normalizing cost base. Also, 16% higher passenger capacity led to lower operating leverage, which reduced the ex fuel CASK by around 5 percentage points. In the fourth quarter, passenger capacity of AJet rose by around 27% year-over-year, and its number of aircraft reached 91. We also unveiled its new corporate identity and brand repositioning. As we seek to increase efficiency, more than half of the new fleet additions in 2023 were new-generation aircraft. At the beginning of this year, AJet obtained its operating permit and our new airline commenced its flight at the end of last month. Especially after our recent order from Airbus, analysts and investors have been inquiring about our CapEx requirements for the upcoming years. Before going into the details of the guidance, I would like to shed some light on our financing structure, which directly affects CapEx and free cash flow. Historically, more than 80% of our CapEx were aircraft related. And because of that, its financing constitutes a major part of Turkish Airlines debt composition. Offering long-term borrowing option and cross-border taxes opportunities, aircraft finance include it's instrumental to our growth. We have been able to fund our CapEx needs with weighted average cost of just 2.8% with maturity up to 12 years. Going forward, we will continue to utilize aircraft-based funding and expect that percentage of gross CapEx financing to remain comparable to the levels of previous years. In order to preserve our funding flexibility depending on market conditions, we prefer to guide gross CapEx instead of net CapEx. As a result, considering the financial portion while incorporating our gross CapEx guidance into the free cash flow calculations, it's an essential part of the analysis. Currently, global travel appetite remains constructive, yet geopolitical issues pose a downside risk to the demand environment and competition to the yields. Consequently, as Murat said, we are aiming to increase our passenger capacity by around 10%, slowing down from 16% last year, excluding an unexpected events. On the cost side, our ex-fuel unit cost increase will continue to normalize. Accordingly, we anticipate that the ex-fuel CASK to be up by low single percentage point compared to last year. For 2024, we expect our gross CapEx to be around $4.5 billion to $5 billion with 44 net aircraft additions, including wet leases, if there aren't any delivery delays. In our strategy for the coming decades, sustainability is at the center by increasing number of new generation aircraft in our fleet, expanding SAF consumption and boosting renewable energy usage in our buildings, we are aiming to manage our carbon footprint carefully and became a carbon natural airline by 2050. To that end in 2023, we signed global SAF declaration which aims to decarbonize aviation industry and committed to implement TCFD recommendation. We also introduced Tomorrow Onboard initiative which embodies our mission to integrate sustainability into every aspect of our journey, promising a greener, more responsible future. Working with a zero waste policy, we are also carrying out several projects with the prominent universities in Turkey to combat climate change and offer our passengers a sustainable travel experience. As a result of our efforts, last year, we were recognized as the most sustainable Flight Carrier Airline second year in a row by World Finance. Also, we recently moved to leadership category at CDP, which are new climate change score of A-. These developments, combined with the continuous improvement of our ratings in major sustainable indices show that we are on the right track to reach our 2050 goals. With this, we conclude our presentation and can continue the Q&A session.
[Operator Instructions]
Hello, everyone. This is Fatih speaking, Head of Investor Relations. I'm here with Murat And we are starting our Q&A session. First question regarding GTF engines, how many aircraft were grounded due to the GTF engine issues? And will these challenges impact your operational and financial targets for 2024?
Thank you, Fatih. Well, as of the first -- end of first quarter, we have around 17 Neos grounded because of the engine problem, and we are expecting with the most recent updates from Pratt & Whitney, we can get as high as 40 to 45 aircraft by the end of this year, depending on the our supply, the planning into these aircraft. But to minimize this, we leased around 15 to 20 new aircraft to increase our overall utilization and -- with these additional leased aircraft, I think we will be able to meet our roughly 10% capacity growth for 2024. And in the meantime, of course, we are continuing our negotiations with Pratt & Whitney regarding a compensation and how we can find ways to reduce this engine backlog. And of this, also, I want to say 40 grounded aircraft, 30 are with TK and roughly 10 will be with AJet.
What were contributors to the performance in the fourth quarter?
Well, continue the strength in passenger demand, especially in Far East and the Americas was a big contributor, and yields were about 25% higher than the last quarter of 2019, even though they were slightly below the last quarter of 2022. So overall, we can say the long-haul demands are still strong. A challenge to this is, of course, increasing competition in the long haul. We started to see in the last quarter and which we expect for the coming -- for 2024. Another positive development was the favorable trend in air cargo business due to strong e-commerce and continuation of the sea freight disruptions. Our cargo volumes increased by about 12% in the last quarter compared to the earlier 9 months has also Fatih showed in the presentation. A third factor I can say is the lower fuel cost, jet fuel cost in the last quarter compared to the earlier year. So these are the positive effects. On the negative side, unfortunately, the geopolitical situation in the Middle East region has not eased at all. And the cost pressure, due to higher inflation, the cost pressure coming from the personnel expenses, which also affect our handling and catering expenses and also airport and commission expenses are the negative challenges that we had to meet in the last quarter.
Could you provide details on the one-off items from the last quarter? And do you expect any similar items to occur this year?
So there were a few big one-off items. One of them, as we also shared with you in the earlier calls was the earthquake-related funds dedicated to the region, the housing project plus the donation plus our free personal and cargo carrying service. Overall, they had an impact of around $300 million roughly. The bonuses that we paid last year, considering the strong financial performance of '23 and also adjusting our personnel income to the high inflation environment. There were 2 big items on the expense side. We also got some income from the late aircraft deliveries from the producers, and so they were on the positive side. Looking into 2024, there will be some bonuses. One of them was paid for before the holidays, the eid holiday in Turkey, probably it will cost around $100 million. But the salaries for this year are going to be adjusted after the union agreement. So we don't expect a very high bonus, but that, of course, will be eventually determined by the Board towards the end of the year after we have a better view of how 2024 is going to materialize.
Kurt Hofman from Aviation Week, Melis Pocar from OYAK, [indiscernible] asked a similar question. What are your expectations for global passenger demand in 2024? Accordingly, what is your capacity and yield guidance?
So currently, the visibility for the passenger demand remains constructive. The first quarter, we saw a strong capacity and passenger numbers increased. Part of it is, of course, was affected because of the earthquake that took place in the February of last year. So there is a little bit of a base effect there. But given the constraints in the capacity providing on the widebody side, the limitations on the capacity growth in the global aviation sector, we see that this will help us our load factor and the demand environment, we still expect that to be relatively strong. We are seeing that overall air travel was just recovered to 2019 level by the traffic numbers announced by IATA. And still considering the recovery from the COVID effect was not all similar all around the world. The divergence in the recovery across the regions, we'll see -- we still see some opportunities to grow business. And on the overall, due to these factors, we expect to put around 10% capacity growth into 2024. On the yield side, we expect some erosion, but I think it's going to be in the low single-digit levels and considering putting about 16% ASK in 2023, and on top of that, aiming for another 10% capacity growth in 2024, some erosion -- and plus the increased competition level, some erosion on those would be understandable and would not disturb too much our bottom line figures.
Melis Pocar from OYAK, Esra Suner from Is Yatirim, and Hanzade Kilickiran from JPMorgan asked the similar question. Could you provide insight into current trends in forward bookings, particularly from different regions? Can you also please comment on point-to-point versus transit passenger demand?
Well, the forward bookings indicate a positive outlook. When we look at the 6 months ahead of us, the coming months, we see that the forward reservations are positive. And the demand in Europe, Far East and Americas demand are still strong despite we are putting a huge amount of capacity in these regions in 2024. In Far East, especially annual capacity increase will be higher compared to the other regions because of its lower base as compared to the last year. And we are optimistic about our load factors, but the unit revenues, again, is the reason I mentioned earlier, will be a little under pressure due to higher competition and a larger amount of capacity. When we look at the summer sales, we see that both our direct and transit sales are likely to increase by high-teen percent levels compared to last year. Looking into the transit and domestic or international domestic traffic, they are going to be in tandem with each other. We are -- for the summer of this year, we are expecting around -- in the amount of ticket sales, probably a 25% -- 20% to 25% increase could be seen for the summer -- summer to summer comparison in 2024. So overall, we're expecting a strong summer. This is also actually highlighted by the tourist numbers. Last year, we had about 57 million tourists coming to Turkey. And this year, we expect around 60 million tourists, and that high macro level number is also reflected in our forward bookings and sales projections.
There are some concerns regarding considering the high inflation environment and expected real appreciation Turkish lira hurting Turkey's competitive advantage. Do you see any risks in tourist arrivals to Turkey in summer?
This was actually more of a concern last year because especially the first half of the year, Turkish lira was relatively strong compared to dollar. And in the last quarter of the year, we started to see high deflation and high depreciation of Turkish lira. So we don't see this as a significant concern going into 2024. As I just said, growing popularity of Turkey has also been presented in the presentation. The Istanbul was the most visited destination. Turkey was in the top 4. So this strong tailwind is going to continue into 2024. It's not just, of course, see and sent, but the health, the culinary, the religious tourism are gaining traction in Turkey. So we expect the strong tourism demand to continue in Turkey.
Now we got numerous questions on cost outlook. Could you discuss the cost expectations for 2024? What are the main challenges? And what is the projected ex-fuel CASK?
Well, the ex fuel CASK, of course, is going to be affected by the global inflation, which still is high even though we expect that to decrease throughout this year, but it will have an effect on our cost structure. We expect our ex-fuel CASK to be around low single digit in 2024. It is -- inflation is going to be an issue, but it will be a lesser of a concern, not just inflation in Turkey but global inflation will be a lesser concern in 2024. We will see increase -- the items that are mostly affected by the inflation is personnel expenses. And we have already agreed with the Union as I mentioned earlier. This year, in the first half of 2024, there will be in Turkish lira terms, a 64% increase in salaries. And in the second half of the year, the salaries will again be adjusted by the CPI. So the whole effect of inflation will be reflected in personnel expenses, but we also, of course, expect depreciation in Turkish lira. So in dollar terms, the total impact of this inflationary pressure will be limited. Personnel CASK, overall, considering the new personnels we are going to be hiring will be around 10% to 20% increase in 2024. Yes, so this will be the main effect on the -- the biggest item will be the personnel, the others will be quite limited in dollar terms.
Murat, what is your expectation for fuel CASK? And what assumptions are this based on? Can you also share your hedging ratios?
Well, this year, we expect low single-digit decrease in fuel CASK compared to 2023. And our assumption is the average Brent price to be around -- to be between $85 to $90. And we are -- we keep adding new positions to our hedge amount, and our hedge portfolio is around 37% currently, and the breakeven price of Brent is $83. By the end of the year, we expect our hedge ratio to be between 45% to 50% levels. Yes.
Is it possible to talk about revenue and margin forecast for 2024?
Well, incorporating our yield and capacity guidance, our revenues expected to increase somewhere between 8% to 10% levels. And in 2024, we anticipate our EBITDAR margin to be between 23% to 25%. And on nominal terms, actually, it will be quite comparable to our '23 performance.
Kurt Hofmann from Aviation Week, Hanzade from JPMorgan and other analysts are wondering about what is the projected year-end fleet size in 2024? Could you provide further details?
We are expecting to finish '24 with about 484 aircraft, and the year-end '23 was 440 aircraft. So overall, there will be 52 entries and 8 exits. So it will be a large fleet growth. And of these entries, roughly 10 will be for a AJet, 5 for cargo and the remaining for TK.
And what is the respective CapEx and PDP this year?
The growth CapEx, we expect that to be around $4.5 billion to $5 billion, and around -- there will be, as I said, 40 additions -- 40 net additions to the fleet -- sorry, around 40 of the fleet additions will be financial and operational leases. And PDP for this year, well, it will be limited because our PDPs are most of that weight will be in the new order book and narrow bodies are coming in late '27 or '28 and the first widebody in '26. So it will have a limited impact on net PDP payment in 2024.
What net debt position do you forecast for the year end and 2025? What is a sustainable level of CapEx for the midterm considering your aircraft orders?
Well, the year-end net debt expectations is somewhere between $9.5 billion to $10 billion, and net debt to EBITDA multiple, as I said, we finished '23 with 1.3x. We expect that to go up somewhere between 1.8x to 2.3x level somewhere in between. And in the midterm, due to our strong growth projection in the fleet and the financing needs of this fleet, we expect a leverage target in the next 5 years to be around 2x to 2.5x levels. And by midterm, by 2025, net debt expectation will be probably around $11 billion to $12 billion. So from $10 billion this year, by the end of next year, we expect that to go up to $12 billion. So there was also -- there are so many questions. Considering this fleet growth, our gross CapEx will be around 15% to 20% of the revenue for the next 5 years.
Murat, we got questions for AJet transformation online and from [indiscernible] can you update us on the progress of AJet transformation and indicate then you might start reporting financial and operational data separately? Furthermore, we have [indiscernible] here with asking about any potential AJet partnership?
Okay. So AJet, as we announced last year, started its operations last week, and we expect AJet to carry about 24 million passengers in 2024. And their fleet will be around 104 aircraft this year, which will go up to about 200 aircraft by 2028. It is expected to reach 30 million -- the Sabiha Gokcen Airport, the hub is expected to reach 37 million passengers in this year. So AJet is also going to have a house to be able to accommodate its growth. Meantime, we are working on the projects to increase its profitability, such as its network optimization, product standardization and implementation of its new PSS with the dynamic pricing opportunity and sales of onboard catering started. This is a product. This segment we did not have with AnadoluJet with our old brands. So all these new marketing tools and ancillary revenue opportunities is going to bring the profitability of AJet to desired levels. So we have to give it a little bit more time before we report its full financial separately. But of course, we'll be reporting its traffic and passenger numbers to shed more light into how its operation is evolving. Regarding to your question about potential partnerships, it's too early to have a word on this. We just separated it. I mean we are aware that it's not a brand-new company. We separated an airline with say 100 aircraft. So it's already a massive scale, but we want to have it to continue a little bit longer on its way to have this ancillary revenue to its IT system, all well established. It is now currently looking into new destinations to increase this international presence. So once we are comfortable with that, then if we see a good opportunity, we can inquire about potential partnerships.
Cenk Orcan from HSBC is asking about, can you also please touch upon cargo volume and the use outlook along with the midterm plans?
Sure. Cargo unit revenues book, I think, by the end of the last -- through the last quarter of 2023, cargo unit revenues turned down from its decreasing yield environment. And of course, the disruptions we see in seafreight also demand some of the air cargo back up. We expect this current trend to continue into 2024. The first quarter traffic and yield environment for cargo operations was quite supportive. However, these dynamics are still fragile. It's early to have a more conclusive remark on how the 2024 is going to continue. But we think overall, the performance is likely to be better than '23 performance in air cargo from the traffic results and also, more importantly, from the yield environment.
With the record net profit achieved this year resulting from operational strength and inflation accounting adjustments in your tax-based financials, is there any plan to distribute dividends?
So one of the biggest bottleneck or drawback in front of us that prevented us to pay dividend was recovered, was sold after the inflationary adjustment. So now that income statement according to the statutory tax payment, the financial reporting is going to allow us to pay dividend. Going into 2024, seeing our financial performance and our growth CapEx needs ahead of us, we can consider paying dividend. I mean we have the intention to pay dividend to our shareholders. We were not being able to do it because of the big differences, discrepancies in amounted to income statements. That is a result. So going forward, we'll just merely look into our CapEx needs, our projections. And once we feel comfortable with those projections, we will be happy to pay dividend to our shareholders.
We have one question from [indiscernible]. Even it is hard to predict, can you give us any guidance for deferred tax item to be potentially booked in 2024?
Well, this is -- there are 2 big factors that -- there are 2 factors that affect this. One of them is how much Turkish lira is going to depreciate. The second one is, what is the purchase supply index going to be in 2024? So both of these factors play a critical role in generating that deferred tax income. Currently, our expectation is that these 2 numbers are going to be similar, going into 2024, the PPI and Turkish lira depreciation can be quite aligned. So if that's the case, then there is not going to be too much of a discrepancy between the two statements. And we might not -- we won't be able to see such a huge correction in the income statement going into 2024. But we probably should get this question -- we'll be able to say more about this question once we have the first half of the year gone by.
We just received a question. What is the main reason behind extending flight cancellations to Israel until March 2025.
Well, they were mostly security-related issues. And once we have our security teams have been going back and forth, evaluating the situation. And if we see normalization in the region earlier than anticipated, we might change the state, but we are seeing that the uneasiness is not just happening between Israel and the Palestinian region, but we also see affecting the Syria, Lebanon. So the air -- is even affecting the air travel from the region. So once we see more clarity, we can reevaluate this cancellation decision.
Do you intend to continue share buybacks?
So share buyback decision, our main standpoint on that is if we see a huge -- not huge -- but if we see more than anticipated more than expected large amounts of volatility in our stock price, we want to enter and then take an action to decrease that volatility. That's our kind of a first line of action in share buyback decision. But secondly, is also we see a good opportunity to support our share price, we won't stand back from that decision also.
We also got some online questions. Maybe you will also like to answer them.
Are you planning to make a capital increase through bonus issues? At the moment, we don't. Are there changes from support of Istanbul Airport, which you expect any addition or not? Are there changes from the support of Istanbul Airport? I mean, we have a long-term contract with Istanbul Airport. I didn't quite get what does it mean with the support. And we don't get any special support from Istanbul -- from the airport authority.
Maybe he mentioning about incentives or...
I was just going to say that the incentives are go with the scale of the operation, the number of landings, and I don't -- we are not going to get any extra treatment. We only got some special treatment, but not just Turkish Airlines through the pandemic region, pandemic episode. But other than that, there is no special treatment we get from the airport authority. What else do we get? How do recent issues and the management changes at Boeing effect business for Turkish Airlines? Is that delaying the new aircraft order? So actually just a few days ago, our Chief Investment Officer had a meeting with Boeing executives. Our negotiations are still continuing. I mean with the max in particular, the decisions could be a little later. But with the widebodies, we don't see any technical problem. It's just that the negotiations on the aircraft plus the engines, which we try to manage simultaneously are continuing.
I think that's it. We would like to thank all of you for your participation. And if you have any further questions, just get in touch with us through our emails, and we would like to say thank you.
Thank you very much.
Thank you, speakers. Thank you very much for that. And ladies and gentlemen, this concludes today's conference call. Thank you for your participation.