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Operator: Ladies and gentlemen, welcome to Turkish Airlines' Third Quarter 2025 Earnings Call. [Operator Instructions] Now I will leave the floor to our host. Sir, the floor is yours.
Murat Seker: Thank you very much. Good afternoon, everyone, and thank you for joining us. During the third quarter, the airline industry's operating environment was shaped by a number of external and internal factors. Traveler confidence in North America weakened amid unpredictable immigration policies, while the competition across Europe intensified as carriers increased capacity to capture peak season demand. Persistent supply chain constraints in aircraft and engine manufacturing, combined with cross-border tensions continue to affect market conditions. In this context, Turkish Airlines remained agile and disciplined. Our third quarter results reflect our ability to adapt dynamically to rapid evolving market conditions while maintaining a firm focus on our long-term strategy. In the third quarter, we also underlined our commitment to sustainable shareholder returns with the second installment of our dividend payment amounting $110 million. Before moving to the financial results, I would like to highlight the major developments and achievements of the quarter. Most importantly, we took an important step towards preserving our growth trajectory by placing orders for 50 firm and 25 options for Boeing 787 aircraft. Deliveries are scheduled between '29 and '34. Once completed, they will significantly elevate our operational efficiency, flexibility and passenger comfort across our network. Similarly, we completed negotiations with Boeing regarding the purchase of a total of 150 737 MAX aircraft, consisting of 100 firm and 50 option orders. Currently, we are working on the details of the deal with the engine manufacturer, CFM International. These steps reflect our goal of operating in an entirely new generation fleet by 2035 in addition to our annual capacity growth target of 6% for the coming decade. During the last quarter, we launched flights to Seville in Spain and Port Sudan, while resuming operations to Aleppo in Syria and Misrata in Libya, rebuilding our presence in these important regional markets. Turkish Airlines continued to be recognized internationally for its achievements in both service and quality and aircraft financing capabilities. We received the World Class Award from APEX for the fifth consecutive year, along with best-in-class distinctions in both sustainability and food and beverage categories, reflecting our strong commitment to delivering an exceptional passenger experience. Moreover, at the Airline Economics Aviation Awards in London, we were recognized with 3 major titles: European Overall Deal of the Year for an Islamic finance lease in Swiss francs, European Supported Finance Deal of the Year for a Balthazar-guaranteed JOLCO financing and Sustainability Aviation Overall Deal of the Year for our sustainability-linked JOLCO financing. These achievements underscore the depth of our financial expertise and our ability to secure competitive diversified funding from global markets. Following these updates, I would like to briefly touch on the rationale behind our investment in Air Europa. Based in Madrid, Air Europa operates a fleet of 57 aircraft across 55 destinations, carrying more than 12 million passengers annually. As a leading carrier between Europe and Latin America, its strong regional presence and complementary network will further strengthen our role as a bridge connecting continents. This investment also aligns closely with our long-term strategy, enhancing our access to the fast-growing Latin American market and creating new opportunities for both passenger and cargo traffic between Spain and Turkiye. By linking these 2 major global tourism destinations, we will improve connectivity across Europe, Latin America, the Middle East and Asia, offering passengers greater options, new travel itineraries and smoother connections. The collaboration will also foster tourism flows between Turkiye and Spain, supporting both economies and deepening cultural exchange. Importantly, this partnership is structured as a minority investment, ensuring Air Europa maintains its independent identity while benefiting from Turkish Airlines operational expertise and global network. Now let's take a closer look at our results. In the third quarter, Turkish Airlines total passenger capacity rose by around 8% annually. We carried more than 27 million passengers to their destinations, reaching a record number in a single quarter and recorded a load factor of 85.6%. Growth was largely driven by robust demand in Asia and Africa. On the other hand, softer demand in North America, intensifying competition in Europe and the geopolitical situation in Middle East presented the headwinds. During the July-September period, total revenues increased by 5% year-on-year, reaching nearly $7 billion. Passenger revenues rose by 6%, benefiting from strong volume growth. Meanwhile, cargo revenues declined by 7% to around $850 million, mainly reflecting ongoing trade tensions and increased competition from sea freight. Despite the revenue growth, profitability was lower compared to last year, mainly due to sequentially higher jet crack spread, the second half wage adjustment and partly softer yields. As a result, EBITDAR stood at almost $2.1 billion with a margin of 29.6%, while net income realized -- was realized close to $1.4 billion. With the slowdown in cost inflation, our structural improvements will become more visible as we progress in our initiatives to improve flight productivity, accelerate organizational streamlining and advance more centralized back-office functions. On the revenue side, we are taking steps to strengthen our passenger mix with increased premium offerings while supporting ancillary revenue generation through our Miles&Smiles loyalty program, TK Holidays, along with our express cargo subsidiary, Widect. Looking ahead, our forward bookings indicate optimism, supported by buoyant demand across Asia and Africa in addition to swift recovery in the Middle East after the peace deal. As evidenced by our October traffic results, improvement was across the board. Compared to same month last year, our number of passengers was up materially by 19% load factor by 2 percentage points, yields by 1% and RASK by more than 3% despite substantial capacity increase. Cargo volume rose by 16%, 10 percentage points higher on a monthly basis, demonstrating a good start to high season. Together with easing cost pressures and supportive fuel prices, we anticipate an EBITDA growth in the last 3 months of the year. In closing, against the headwinds, our positive traffic trajectory is encouraging us as we approach '26, supported by continuous investment in our business, and capitalizing on new opportunities, we remain strongly confident in the potential of our long-term strategy and return targets. I will now pass the call over to Fatih Bey to elaborate on our results and provide additional insights.
Mehmet Korkmaz: Thank you, Murat Bey, and good afternoon, everyone. In the third quarter of the year, we expanded our passenger capacity selectively considering aircraft delivery delays, GTF groundings and regional conflicts. Sequentially, capacity growth increased by 1 percentage point from the previous quarter, standing 43% above pre-pandemic levels, while European peers recovered only 9% during the same period. Despite of the busy summer air traffic, our on-time departure performance increased by almost 10 percentage points compared to the third quarter of last year. In the July-September period, international transfer traffic expanded faster than direct traffic. On short-haul routes, particularly within Europe, direct growth remained relatively subdued due to intensified competition. However, a closer look at figures shows a significant increase in direct traffic from Latin America and Asia to Turkiye, demonstrating the continued appeal of our network's global reach. Similar to the second quarter, over 80% of total sales were made through direct channels, reflecting the success of our new distribution platform, TKCONNECT. This shift not only supports profitability by reducing costs, but also enhances our ability to offer personalized products and promote ancillary services more effectively. Accordingly, these results in cost savings of $48 million in the first 9 months of the year. Details of our traffic results show that the Far East remained one of the strongest regions. Compared to the same period last year, almost 9% capacity increase combined with a more than 11% higher demand led to almost 2 percentage points in rising load factor, well above our budget and encouraging for the upcoming months. Demand in Japan stayed robust, supported by sustained travel appetite and ongoing Osaka expert. Starting from the fourth quarter, we plan to expand capacity to Tokyo Narita by 40%. China also stands out as a key -- another key growth market where we will gradually raise weekly frequencies from 21 to 32. Given the strength of demand, we do not expect any weakness in load factors in near term. Further capacity growth is also planned in Indonesia, Thailand and Vietnam in addition to the launch of scheduled flights to Phnom Penh in December. On the other hand, rising competition in Malaysia and Singapore may put some pressure on unit revenues. Africa delivered another quarter of strong performance. Following a substantial capacity expansion, demand remained highly resilient with particularly remarkable results from our newly launched Libya routes. Benghazi and Misrata performed above expectations and contributed to overall regional momentum. The recent capacity increase in China is also expected to support growing flows towards West Africa, enhancing our network connectivity across the continent. In the North America, the impact of U.S. policy changes continue to weigh on the ethnic travel demand. As peak travel season came to an end, we are now transferring part of the capacity towards Asia to better align with market dynamics. On the other hand, Latin America demand continues to perform well, particularly on rout to Panama and Argentina. In Europe, competition remained intense throughout the quarter as local carriers significantly expanded capacity and pursued aggressive pricing strategies. Capacity additions from low-cost carriers have also negatively impacted AJet unit revenues. Demand from key markets such as Germany, U.K. and Scandinavia was slightly weaker, while increasing transit traffic partially offset the slowdown in local demand. Consequently, we observed a slight slowdown in direct travel from Northern Europe to Turkiye. Demand to and from Middle East began to recover as tensions that had escalated in June started to ease. Following the peace agreement, bookings have accelerated noticeably, pointing to a swift normalization in the region. In the domestic market, yields declined by 7% due to base effect and change in passenger mix. Last year's low economic class availability prompted more passengers to trade up to business class. With this year's higher capacity, economy availability increased, which in turn reduced the business class share. During the July-September period, passenger revenues rose by 6%. Strong performance in ancillary and technical services also contributed positively to our growth. External technical revenues grew by more than 28%, reflecting continued demand for maintenance services as production bottlenecks persist and the utilization of older aircraft remains elevated. We expect this momentum to continue in the coming quarters given the limited availability of new aircraft deliveries. Conversely, cargo revenues followed a different pattern. Trade restrictions and tariff measures weighed on overall cargo flows, which led to a 7% lower revenue in the third quarter. Apart from trade tensions, additional capacity from new vessel deliveries as the order book-to-fleet ratio is at its highest point in more than 15 years and expectations of a reopening of Red Sea continue to pressure yields. In the third quarter, AJet carried more than 7 million passengers. Despite groundings related to GTF engine issues, capacity increased by around 23%. During the period, AJet continued expanding its international network from Ankara, adding capacity to markets such as Egypt, Sweden, Uzbekistan and Kyrgyzstan. New direct services to European cities, including Madrid and Barcelona strengthened Ankara's role as a regional hub, connecting Europe, the Middle East and Central Asia. This expansion remains central to Ajet's strategy of positioning itself as a competitive low-cost carrier with a strong presence beyond Turkiye's borders. By the end of September, active fleet recorded 80 aircraft. With additional deliveries planned for the remainder of the year, annual capacity is expected to rise around by 15%, accompanied by higher load factors. As in previous periods, revenue growth during the third quarter was mainly supported by passenger operations benefiting from capacity increase. Conversely, lower cargo revenues and softer yields in certain regions limited overall profitability. On the cost side, although Brent fuel prices remained favorable, higher crack spread, wages and weaker U.S. dollar negatively affected performance. Consequently, profit from main operations declined by around 21% to around $1.1 billion, while EBITDAR decreased by 12% year-over-year to almost $2.1 billion. In the third quarter, total cost per ASK increased by 2.8% year-over-year, mainly driven by higher personnel expenses following the midyear inflation adjustments. On the fuel side, even though average jet fuel prices were lower than last year, widening crack spread limited the overall benefit compared to the previous quarters. Meanwhile, strict control over advertisement spending and a higher share of direct sales and fewer wet-leased aircraft partially offset the cost pressures. Negatively, airport and air traffic-related unit costs increased by almost 12%, mainly due to revised fee schedules at major European hubs and stronger euro. Aircraft maintenance CASK also remained elevated, reflecting the ongoing GTF engine issue. Free cash flow generation remained healthy during -- in the third quarter, amounting to around $350 million. Accordingly, 12-month community free cash flow reached $1.6 billion. After debt service, liquidity rose by $200 million sequentially to almost $7.9 billion. On the other hand, net debt increased by $700 million compared to previous quarter, mainly due to new aircraft deliveries and the weaker U.S. dollar. Correspondingly, leverage recorded is 1.4x, well below the target range of 2 to 2.5x. As mentioned by Murat Bey earlier, while travel demand remains positive in the fourth quarter, the softness observed in North America during the summer led us to slightly revise down our revenue growth guidance by 1 percentage point to 5% to 6%. Since the beginning of this year, ex-fuel unit cost development followed our expectations. In the final quarter, we anticipate a notable improvement in cost performance driven by base effect. With that, we are on track to reach our unit cost guidance of a mid-single-digit annual increase. Taking these factors into account, we are maintaining our 22% to 24% EBITDA margin expectation for 2025. With this, we conclude our prepared remarks section of our earnings call. Now back to Maria for the investor questions.
Operator: [Operator Instructions]
Mehmet Korkmaz: Welcome back. Before we start the Q&A question, I would like to just briefly mention about a couple of actions that we took during the summer. Summer was a busy period not only for our operations, but also for our Investor Relations team. As part of our improving IR activities, we conducted a perception study to gather valuable feedback from you, our analysts and investors. In the coming period, we will be gradually implemented the suggestions offered to strengthen our engagement with you. And with this occasion, I would like to thank all of the participants for taking time to share their views. Now let's continue with the Q&A section of our call. Murat Bey, we got quite a few questions from our analysts and investors. Starting with, could you walk us through the main factors that shape the third quarter performance?
Murat Seker: Sure. Thank you, Fatih. On the positive side, the first thing comes to mind is the strong demand we have been seeing in the Far East and Africa and then third wise, the domestic market. In the Far East, for example, RPK was up by double-digit 11%. In Africa, it was up by almost 20%. And the third-party revenue share of Turkish Technic, which currently is the third biggest MRO provider in Europe. The revenue from third party went up by 28% in this quarter. These were the positive developments, plus brand continuing to be lower than projected. And the structural tailwinds that Fatih also touched upon a little bit, the improvements on our distribution and sales costs as we started to use more of our direct channels, they were also helpful in the -- to the bottom line. On the negative side, the volatile geopolitical situation and unpredictable immigration policies and cargo yields being down by almost 16% year-over-year, the jet crack spread being up by 8% to 10% level, and the inflation adjustment on salaries, personnel expenses were the 3 big items that provided a negative development for this quarter's performance.
Mehmet Korkmaz: Murat Bey, can you provide an update on the current status of the GTF groundings and how they are impacting your operations? We got this question from [indiscernible] and [ Kurt Hofton ].
Murat Seker: Well, I mean we know we have been in a very, very close coordination with Pratt & Whitney, who is trying to solve the problem in this speediest way. Still, we have quite a sizable number of aircraft that are grounded. Of the 100 GTF-powered neo aircraft we have in the fleet, today, 40 of them are parked. And this seems to be continuing around 40. It will go up to 50 come down a little bit, all throughout '26 as well. So there has been a major improvement. But this, of course, is a little related to the fact that we keep getting more GTF-powered neos to the fleet. So we keep using them so that our staff -- the capital utilization and aircraft utilization continues.
Mehmet Korkmaz: Murat Bey, could you also provide insights into current passenger booking trends? October results were quite strong. And maybe region-wise, you may elaborate on the details.
Murat Seker: Sure. Well, as I just said, Far East, Africa and domestic have done well so far. And looking into the future, this -- in the Far East, for example, we expect to have a 13% and then another like a 13% to 15% capacity growth in the next 2 quarters, including the fourth quarter of this year and the first quarter of next year. Overall, before getting the region-specific details, we are planning to put 10% to 11% ASK growth with a flattish yield in the last quarter of this year in overall our growth. Into the regions, I just mentioned Far East. Then after Far East, we will see a very significant growth in the Middle East. There is, of course, a lot of the base effect here. And then Africa is going to have about 13% to -- 12% to 13% capacity growth in the next 2 quarters. The forward reservations from November for the next 6 months look quite positive. We are expecting a busy winter travel seasons ahead of us, especially from December to April of next year, we see double-digit capacity growth month-over-month, and then we also see mid-single-digit yield growth going forward.
Mehmet Korkmaz: The unit revenues in some regions has been weaker in recent months, particularly in North America. Have you made any adjustment in pricing or market share strategy? And do you consider to defer some aircraft deliveries to reduce capacity growth?
Murat Seker: As we keep saying in almost every investor call, the diverse network we have is allowing us to channel the capacity between regions easily depending on the demand environment. While relative softness in North Africa -- North America, sorry, we have started to transfer that capacity to Asia at the beginning of the quarter where the demand has been much stronger. Additionally, we expanded the product segmentation in pricing to all international regions after implementing it in Americas and Europe. Also in Asia, we have done some tactical adjustments like increasing the capacity to Bali and exotic destination and getting a larger share of the segment traffic out of Philippines, for example.
Mehmet Korkmaz: This is quite a popular question. We have been getting a lot of this from our investors. Some suggest that Turkiye is becoming a more expensive travel destination compared to its peers. Considering the third quarter performance, what is your view? How the demand looks like in the upcoming period?
Murat Seker: Well, according to the tourism figures of the first 9 months, which was announced last week, number of visitors to Turkiye went up by 2% to 50 million, which actually aligns closely with the updated annual growth target of 4 million for 2025 from about 62.5 million to 65 million, which was the number announced at the beginning of this year. Moreover, over the last 5 years, tourists to Turkiye increased tremendously. When you compare the amount of tourists we had in 2024, compare that with the number in 2021, it is more than -- it has more than doubled. And just from -- it has even went up higher than its 29 (sic) [ 2019 ] level of about 20%. So when you look at this macro scale, number of tourists coming to Turkiye has been increasing dramatically. However, in particular in '25 -- in '24 to '25 we have been seeing some slowdown in the pace which we think is natural. So it cannot keep continuing 10%, 15% year-over-year. When you look at the third quarter, in particular, still number of tourists coming to Turkiye was up by almost 2%. And then it's -- as I said, it resonates well with our year-end target numbers. For Turkish Airlines, in the third quarter, we carried almost the same number of passengers to Turkiye compared to last year. So we don't see much of a deterioration or shrinkage in this segment. Although there might be some negative effects due to relative strength of Turkish lira, tourism members -- tourism numbers suggest the resiliency of this industry. Also, we have been seeing some change in the composition where the tourist is coming from. Latin America, and Far East has been growing rapidly, which yield higher ticket price and tourism income for the country. For example, we have recorded 7% increase in number of passengers traveling from Far East to Turkiye in the first 9 months of this year, especially after we opened our route to Australia. And in addition to that, to Japan, South Korea and Thailand were sending a significant number of tourists to Turkiye.
Mehmet Korkmaz: Thank you, Murat Bey. Can you also share how premium cabin performance compared with the economy during the quarter because most of the peers also mentioned about the strength of the premium class.
Murat Seker: Well, the network-wide, we actually have been observing stronger premium segment performance than the main -- the economy cabin. Passenger profile for the premium segment is much less sensitive, both the economic volatility and the low-cost competition. In the third quarter, premium segment revenue yield change was almost 11% -- sorry, 11 percentage points higher than the main cabin. In the second quarter of this year, the difference between premium and economic class was 5%. So in the summer months, the difference in the passenger yield went up by more than twice. As a result, premium resilience to competition has been showing itself. '25 is the record year for our premium class load factors. In terms of aircraft, wide-body performance has been much, much stronger. Demand is being driven by the flows mainly from the Asian countries like Japan, China, Vietnam and Hong Kong.
Mehmet Korkmaz: How would you assess cargo performance last quarter? And what is the outlook for the remainder of the year?
Murat Seker: Well, the -- by its nature, the third quarter is typically a soft season for air cargo. Nevertheless, Turkish Cargo demonstrated a strong tonnage performance, achieving an increase of more than 10% compared to the previous year. On the other hand, unit revenue performance was significantly negatively affected by tariff-related concerns and effect of these tariffs on trade flows, especially on Asia, North America axis. And to some extent, spillover effects of the conflict in Middle East region. However, the recent trade deal between the U.S. and China, along with the peace talks in Middle East could potentially improve the outlook as we enter the high season for cargo. Internally, though, our new cargo revenue management system, which went online recently, is expected to bring additional 2% to 3% revenue in 2025. We continue to expect close to flat cargo revenues with a high single-digit increase in volumes, which we hope to compensate most of this drop in the yields with higher load factors.
Mehmet Korkmaz: Continuing with the cost questions, what are your expectations for fuel unit costs, on what assumptions? Can you also share your hedging ratios? And do you anticipate any changes in this ratio in near term?
Murat Seker: Well, although the oil prices trend downward with slight volatility, jet fuel costs tend to stay high, which reduces the benefit attained from the low Brent price. We expect around 10% lower fuel cost year-over-year in '25 with the assumption that year over average is going to be around $68, $69 levels. Our current hedging ratios for '25 is around 50%. And for '26, it is around 23%, respectively, with a breakeven price of approximately [ $64.5 ]. We expect a minimal fuel hedge loss this year, less than $20 million. And we maintain a structured and scenario-based approach designed to remain effective under various market conditions.
Mehmet Korkmaz: Murat Bey, could you also share your ex-fuel unit cost expectations for 2025? And are there any efficiency measures to be implemented?
Murat Seker: Well, the ex-fuel CASK, as you saw in the presentation on the third quarter, it was quite high. We expect that to come down to mid-single digits lower than 5% -- lower than 4% levels year-over-year in '25. And the reason for this improvement on the top of 9-month results is, first, we see moderation in inflation, which is decreasing the pressure on the inflation adjusted costs. And we have paused hiring, except for capacity growth. This will enhance our operational leverage and generate greater efficiency. And we have been increasing the crew and aircraft utilization through both schedule optimization and improving our on-time performance. Capitalizing corporate-wide functions like -- and scaling down the international organization structure is another component of it. We have put significant KPI monitoring scheme to all of our subsidiaries and the expansion of our direct sales channel, TKCONNECT has been improving our distribution and sales costs. Further, we are implementing quite a few AI projects on customer support and for back-office automation, which is also bringing us some internal efficiencies. We expect these items on the personnel efficiency, on strongly monitored KPIs and on more utilization of the AI tools to bring ongoing efficiency gains for Turkish Airlines.
Mehmet Korkmaz: Murat Bey, just to add a couple of things. Hanzade from JPMorgan also asked about why staff costs are increasing ahead of our initial expectations while agreements are fixed and seem to have favorable sport cost inflation this year? Hanzade, be honest, the Turkish lira depreciation was lower than our expectation. At the same time, Turkish lira inflation was higher than expectation. So there is a mix of between 2. So we saw around 2 percentage points of ex-fuel CASK headwind from that impact. And continuing with the guidance question, are there any changes to your guidance for the fourth quarter considering third quarter revenue and forward bookings?
Murat Seker: For the whole year, we are keeping our profitability target the same, while lowering the revenue growth guidance by 1 percentage point to 5% to 6% increase. As you might recall, in the earlier calls, we were targeting 6% to 8% revenue growth. This mainly is due to the softer revenue performance of the third quarter. The fourth quarter EBITDAR will be closer to last year with 22% margin. And for the whole year, thus, our EBITDAR margin expectation is going to be again between 22% to 24% levels. Nominally -- and nominally, we should be slightly lower than last year's amount of $5.7 billion EBITDAR.
Mehmet Korkmaz: As we approach the year-end, we are getting a frequent question about our 2026 guidance, maybe just in terms of capacity and margins. What are the moving parts?
Murat Seker: So we're still working on the budget. There is a lot of mileage we need to take before we share our '26 expectations. But roughly speaking, on the capacity-wise, I can say that we'll keep the growth continuing. This year, in '25, ASK growth expectation was around 8%. And next year, we expect that to be around 9% levels. For TK, it will be around like 7%. AJet is getting a lot of new aircraft. So the growth -- ASK growth, capacity growth for AJet is going to be larger. And thus, we are expecting overall 9% capacity growth. One, of course, big uncertainty here is the fleet. Although we believe all the deferrals that were supposed to be deferred in this year are planned and scheduled from Boeing and Airbus side. So we don't expect any surprise. But if anything, that might be one critical issue that would change our projections. For the profit evolution, we are going to be guiding somewhere between 24% -- 22% to 24% EBITDA margin as in '25, ex-fuel cost pressure should have less negative impact on our bottom line due to the better domestic and global inflation outlook. Still though, as I mentioned, because we have not agreed with the union yet, there is a collective bargaining agreement to be discussed, which is going to be initiated within the next few months. So that could bring some uncertainty. But overall, helped with the inflationary -- lowering of the inflationary pressure, we believe 22% to 24% EBITDAR margin will be attainable.
Mehmet Korkmaz: What is the latest projection for the fleet size by the end of 2025? And any guidance for 2026?
Murat Seker: So for '25, assuming getting our aircraft deliveries on time for the remaining 2 months, we expect around 35 net entries this year. Overall, we will be getting about 70 aircraft. This is together with TK, AJet and Cargo, and there will be 34 aircraft exiting the fleet. With the updated aircraft delivery table, we increased our '25 year-end fleet expectation to somewhere between 525 to 530 aircrafts. In '26, we are expecting roughly 50 net aircraft additions to the fleet. For TK -- sorry, for TK, it will be about 26 new additions, 20 narrow-body, 6 wide-body. For AJet, about 50, but a big portion of it will be replacing the old aircrafts and then short-term lease aircrafts. And then we'll get a cargo aircraft as well. So overall, there will be roughly 80 entries and 30 exits.
Mehmet Korkmaz: In various mediums and public disclosures, you announced a number of significant non-aircraft investments in line with your growth strategy. Is it possible to elaborate on those?
Murat Seker: There are significant investment projects we are undertaking, which were postponed during the pandemic. Starting from 2023, mainly, we started to revisit those projects. We needed a new aircraft maintenance hangar, which we initiated in '23. We need an additional second phase of our cargo terminal, and we need a new catering building in Istanbul Airport. These will be the biggest -- these 3 will be the biggest investment, non-aircraft-related investments ahead of us, a new cargo terminal, a new catering building, a new maintenance hangar. And in addition to these 3, after our agreement with Rolls-Royce to maintain A350 engines, we are going to be starting very soon to build an engine overhaul facility in Sabiha Gökçen Airport -- in Istanbul Airport. These 4 will be the major investments. However, they are not the whole list. As we are expanding our flight academy, we are expanding our simulator center with adding new simulators, and we are building data centers for Turkish Airlines' own needs.
Mehmet Korkmaz: Third quarter leverage exceeded the guidance. And what were the main reasons? And we will be able to reach year-end targets? And how should we think about the expected leverage and net debt level?
Murat Seker: So we were guiding a leverage of somewhere between 1.1 to 1.3x. In the third quarter, we realized 1.4x leverage, which is a net significant deviation, but it still is higher than our expectation. The reasons for this change is we had to lease additional aircraft to compensate the GTF-related groundings, which was about 9 aircraft of a value of about $1 billion. Then as -- the second factor, as the U.S. dollar was devalued against euro, the U.S. dollar equivalent total debt of Turkish Airlines increased because we have a significant amount of euro-denominated aircraft financing. It also led to an increase in the leverage. And third, slightly lower EBITDA due to the relatively softness in the demand that we saw in third quarter was the factors for this slightly higher leverage. For the new guidance to the end of 2025, factoring the above items plus the cash outflow regarding to Air Europa's share buy, we will see that the net debt-to-EBITDA multiple could be somewhere between 1.6 to 1.8x for 2025.
Mehmet Korkmaz: Can you also comment on AJet's performance? And when will you -- when will AJet announce their results separately from Turkish Airlines? What is the capacity increase in AJet at year-end? And one last question about this -- IPO plans.
Murat Seker: Well, AJet carried 7 million passengers in the first 3 quarters -- in the third quarter and more than 17 million passengers in the first 9 months of this year. So despite of the aircraft groundings due to GTF engine issues, passenger capacity increased by 24% in the third quarter. So the demand has been really strong on AJet side. They also have been investing heavily to improve their on-time performance, which was about 5 percentage points higher than 2024, and it reached 76% level. The annual capacity growth expectation is around 15% and 3.5% points higher load factors. So these all show that [indiscernible] work for AJet is going well. However, their cost base, their fleet is still needs to settle and then needs to improve. We believe we still have some more time to be able to separately report AJet's financials, but we are planning to report their traffic early next year separate than Turkish Airlines. This strong revenue evolution and improvements in the fleet have -- are going to increase -- improve its bottom line. For this year, for 2025, we are anticipating their revenue to be above $1.5 billion. And about the IPO, at the moment, we don't have such a plan. We think AJet is on a good and strong track. Next year, more than 70% of their fleet is going to be new generation aircraft. And then they are increasing their net operation in Europe, CIS region and North Africa. So the network is developing their sales channels and then ancillary revenue capacity is increasing. So -- and we are not in a rush to IPO AJet. Once it's on a seamless -- it's on a strong path of sustainable growth, we might consider such an option, but it's not in our agenda at the moment.
Mehmet Korkmaz: Are we interested in any other deal like Air Europa in the foreseeable future?
Murat Seker: Well, we did a little bit of an introduction about why we chose Air Europa and why we went through such an investment. So on the big picture, of course, being such a big network carrier, we are always open in similar collaborations throughout the world, being in Europe, in Americas, in Asia, Africa or Middle East. As long as we see a valuable value addition proposition, and it doesn't need to be only through an equity acquisition. It can be through several other channels, too, like the airline JV we had with Thai Airways. So as long as the partnership complements and supports our operation and it creates synergies, we remain open to this kind of opportunities.
Mehmet Korkmaz: Murat, we also got another question related to Air Europa. Are there any -- I'm going to answer that, just sake of time. Are there any potential risks related to regulatory or required operator approvals at this stage? Could you also share any insights on lease expense or true EBITDAR performance and net debt level? To be honest, at this moment, due to regulatory application process, we are not able to answer any of those questions. Continuing with the fleet size, you expect a significant expansion. How will we manage the capacity increase? Do you believe the market will grow enough to accommodate your future capacity? Should we consider an erosion in margins due to massive capacity expansion?
Murat Seker: Well, currently, our flight network is spanning about 355 destinations across 130 countries. And we believe there is still potential of growth in the market. To put it into some perspective, our network currently is reaching over 90% of the world's population, GDP and trade volume. We see Istanbul as a very strategic location, which is sitting across major global passenger and trade corridors connecting Asia to Europe, Middle East to Africa, Asia to Americas. And each of -- each new route that we open and each new frequency we add exponentially increases our unmatched connectivity. The aviation is currently expected to grow around 4% annually over the next decade. So our guidance of around 6% annual growth is seeming to be reasonable. And we are not going to keep adding new destinations. A very significant portion of this growth is going to come through increasing frequency in the existing markets and getting deeper in our existing network. And by our -- in our 2033 strategy, we have already factored in a low single-digit decline in unit yields by taking the competitive pressure and market dynamics into account. Thus, a growth of 6% ASK growth and EBITDAR margin between 20% to 25% is -- we think is reasonable.
Mehmet Korkmaz: You also got a number of questions regarding our Boeing orders. Could you update us on the recent Boeing order and deals? What is the expected delivery schedule? And also, we got additional online questions. For example, Hanzade is asking about, do you see any risks on Boeing orders given continued engine negotiations in case of a decision not to proceed, would you be able to meet your capacity targets?
Murat Seker: So the Boeing order, I think the question is referring to the narrow-body side because the wide-body is already placed and the deliveries, as I said, are going to be between '29 to '34, '35. On the narrow-body side, actually, next week or within 2 weeks, there will be another face-to-face meeting. But no matter how the meeting goes, we don't see this as a big threat on Turkish Airlines growth projections because we have proven that when the -- we don't get a direct order from the both OEMs that missing capacity has been successfully fulfilled through operating leases. Last 5 years, in particular, we were -- we had a lot of deferrals in our orders from Boeing and Airbus, yet we could grow the fleet size by more than 150 aircraft between 2020 and 2025. So we don't think it's going to be a big threat. And in any case, even if we place the order today with Boeing, the first delivery of this narrow-body is going to start in 2029 or 2030. So it's still -- we are talking about too far into the future. And there are a lot of options being from the Airbus, being from the leasing companies in the market that can be considered. So keeping these options there, to Hanzade's question, we don't see a threat on our growth projections. But this doesn't mean that we are not going to be continuing to discussions with Boeing. It has been quite a long time together with the wide-body order book. We have started negotiations together on the wide and narrow-body front. It's 150 aircraft, narrow-body aircraft. And once we settle the few remaining issues with CFM, we believe we might also be in a position to announce this deal not too far in the future once the negotiations finalize and meet our demands.
Mehmet Korkmaz: Considering recent results and the operating environment, will there be any update on the 2023 strategy? Do your expectations align with the recent results?
Murat Seker: When you look at it more broadly, we introduced our strategy by 2023, and we are in 3 years now into the strategy. When you look at the bottom line, we are fully in alignment with our strategic profit targets. But when you break it down, you'll see that because of the delayed deliveries, we are a little below from our strategic targets on the revenue front. And because of the higher inflation than anticipated, there has been pressures on the cost side. But the demand, again, which was not factored in to be this strong, the stronger-than-anticipated demand in '23 and '24 alleviated these negative factors and allowed us to be able to achieve from our -- to achieve the profit targets. So we are not revising our 2033 targets, but we will make an adjustment in the -- hopefully, by the first quarter of 2026, we will make some adjustments on the strategy, mainly because now it is -- seems impossible that we will be able to achieve the fleet and -- as we were targeting in '26 and '27. So those numbers need to be adjusted. But the bottom line, we don't think a big change on the profit and profit margins.
Mehmet Korkmaz: Could you also provide information about the contribution of technical segment to operational profitability?
Murat Seker: So usually, our main purpose of Turkish Technic is to serve Turkish Airlines maintenance needs. And as in the world, aircrafts are getting older, their maintenance requirements are increasing and to keep the fleet in operation in the busy summer months becomes more and more important. And due to Turkish Technic's strong capabilities in maintaining a very wide range of aircraft, its geographic location, its capacity to maintain aircraft currently in 3 -- in 4 different airports is giving it a lot of opportunities for third parties. As a result of this, in the first 9 months of this year, their total revenue went up by 75% to almost $2 billion. And -- by 2033, we keep investing in our MRO capacity. It will go up from the existing level of around like 65 aircraft being that we can maintain simultaneously. This number is going to go up to about -- it's going to double like 120 aircraft by 2033.
Mehmet Korkmaz: Murat, we have 2 more questions, and I can quickly address them if you allow me. First, is there any major operational impact on your North America operations currently due to the airport slowdowns caused by current shutdowns? Before joining the earnings call, I spoke with our flight operation control center, and they said that it is related to the U.S. domestic market. So no, we are not seeing any impact. And also, we got questions about October traffic results. Could it purely something about extending season? To be honest, we don't believe so with -- by transferring capacity from United States towards Asia, that allows us to feed our after new flights in Istanbul. So that also increased our connectivity. And as a result, we expect fourth quarter passenger results to be strong because of that connectivity improvement. And with this question, we conclude our earnings call. Thank you all for your participation, and we look forward to being with you next quarter.
Operator: We would like to once again thank you all for the presentation. So ladies and gentlemen, this concludes today's conference call. Thank you for your participation.