TURKISH AVIATION SECTOR - Garanti Yatırım · Please see the last page of this report for important disclosures. 5 February 11, 2014 Aviation TURKISH AVIATION SECTOR Pegasus Airlines

RESEARCH

Please see the last page of this report for important disclosures.

TURKISH AVIATION SECTOR

Secular growth rather than cyclical

February 2014

Analyst: Baris Ince

+90 (212) 384 1141

[email protected]

Sales Contact:

+90 (212) 384 1155

[email protected]


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Table of Contents

EXECUTIVE SUMMARY 3

Recommendations & Valuations 4

A closer look at the aviation sector 8

A study on LCC vs. FSC 13

Turkey in Global Rankings 14

Global Sector Outlook 17

Turkish Aviation Sector at a glance 19

Our Passenger Forecasts 24

Airports in Turkey 26

Capacity Enhancement Studies 26

The Third Airport 29

Recent Developments in Turkish Aviation Sector 30

Airline Terminology 31

THY 32

Investment Positives 34

Investment Negatives 36

Valuation 38

Peer Comparison 38

Model Assumptions 40

How we stand alongside the consensus 41

2014 Guidance vs. Garanti Securities 41

Bussiness Overview 41

Recent Developments 49

The Company Overview 51

The Company Profile 55

PE and EV/EBITDAR graphs 57

Pegasus 58



Valuation 63

Peer Comparison 63

Model Assumptions 65


Bussiness Overview 66


PE and EV/EBITDAR graphs 77

THY vs. Pegasus 80

TAV 82



Valuation 86

Peer Comparison 87



Key DCF Assumptions & Forecasts 91

The Company Profile 101

Disclaimer 105


RESEARCH

Executive Summary

Strong traffic momentum since sector deregulation

Passenger numbers have risen at a CAGR of 16% in Turkey between 2003 and 2013, 3x the real GDP growth in the same period.

Even in 2009, when real GDP contracted by 5%, passenger numbers in Turkey expanded by 6%. We believe that Turkey’s

underpenetrated aviation market, its geographically advantageous position, the lack of alternative transportation infrastructure, its

increasing attractiveness as a tourism destination and the government’s supportive approach to the sector will help sustain this above

average growth. Only 1.2 flights are taken per capita in Turkey - half of the EU15 average. The ambitious fleet expansion plans of

Turkey’s two largest carriers’ to double their fleets in the next decade signal the anticipation of strong demand in the sector as well.

We project an 10% CAGR in Turkish air passenger traffic between 2013-2016.

Turkey’s priceless geographical advantage

Although Gulf countries and Turkey are both well positioned to attract and distribute European passengers through Africa, Southern

Asia and the South Pacific thanks to their geographic advantage, Turkey’s position is within reach Europe, Africa and India with short-

haul flights from its Istanbul hub; however, the UAE and Qatar need wide-body aircraft to collect passengers from Europe to distribute

them to India, Southeast Asia and the Southern Pacific. However, more than 40% of world-wide international traffic from Turkey is

within the range of narrow body aircraft. Although the recently-placed massive aircraft orders by Gulf Carriers is likely to spell an

increase in competition in the region, we do not see the Gulf carriers as a major threat to Turkish Carriers. To illustrate this, THY’s

total pax numbers have grown at a CAGR of 16% over the past five years, compared to the 13% CAGR notched up by Emirates. The

deviation was more pronounced in 2013, when THY achieved 24% YoY growth vs. the 16% growth at Emirates.

THY Outperform, Pegasus Outperform, TAV Market Perform

We reinitiate our coverage of the Turkish Aviation Sector with this report with Outperform ratings for Turkish Airlines (THYAO) and

Pegasus Airlines (PGSUS); Market Perform rating for TAV Airports (TAVHL). Our valuations for the airlines is based on 2014E target

EV/EBITDAR levels (6.3x for THY and 8.0x for Pegasus) while we value TAV through a sum-of-the parts (SOTP) valuation. On

multiple comparison side, THY and Pegasus trade at 8% and 30% discounts on the basis of their 2014 P/E multiples. THY appears

expensive on the basis of its 2014E EV/EBITDA, but it offers stronger revenue growth compared to peers. We do not rely on

comparisons for TAV, as we believe there is no perfect peer for the company given that the concession agreements differ.

Our preferred play is THY

We prefer THY over Pegasus on the back of i) having the lowest exposure to Turkey, given rising macro concerns for the time being

(domestic passengers constitute 41% of the total vs. 61% for Pegasus), ii) increasing competition from THY at Pegasus’s main hub

(Sabiha Gokcen Airport) and iii) Pegasus’s limited visibility on international expansion. We believe that capacity expansion at Ataturk

Airport and a potential delay in Istanbul’s new airport have recently served as catalysts for TAV shares and is now priced in . Aside

from ongoing political events, which could have a negative impact on growth, the current theme on Turkish Equities is exchange rate

volatility, and aviation stocks are no exception. We believe TAV is the least exposed to domestic macro concerns and the main

beneficiary of TL weakness, with Pegasus being relatively the most vulnerable. Bear in mind that TAV and Pegasus’s functional

currencies are EUR while that of THY is USD although all three report in TL.

Risks

A slowdown in passenger growth momentum, weaker than expected unit revenues or a deteriorating cost base are key risks for

airlines. In addition, failure to win new airport tenders or increasing political tension in the region where TAV operates in, as well as a

heavy dependence on Istanbul Ataturk Airport are considered as key risks for TAV. Specifically, a potential sale of the Privatization

Administration’s stake (49.12%) or a verdict in favour of Pegasus regarding its appeal to the Competition Board would lead to share

price weakness for THY.

February 11, 2014


Company Ticker Recomm. Mcap

3M Avg

Volume

Target

Price Upside

Revenue

CAGR

EBITDAR

CAGR

Net

Income

CAGR

EBITDAR

margin

(TLmn) (TLmn) (TL) 2014-2016E 2014-2016E 2014-2016E 2014E 2015E 2014E 2015E 2014E 3M YTD

Pegasus Airlines PGSUS Outperform 3,119 72 40.00 31% 18% 21% 24% 6.3 5.4 10.0 8.4 20.9% -7% -11%

Turkish Airlines THYAO Outperform 9,715 205 9.20 31% 20% 19% 17% 7.0 6.8 8.9 7.8 17.3% 9% 16%

TAV Airports TAVHL Market Perform 5,722 21 18.80 19% 10% 12% 11% 4.3 4.1 9.7 9.4 47.5% 35% 8%

Source: Garanti Securities

EV/EBITDAR P/E

BIST-100

Relative

Performances


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RECOMMENDATIONS & VALUATIONS THY

Recommendation: OUTPERFORM. THY has differentiated itself on the basis of

service quality and competitiveness in recent years. Istanbul’s geographical

advantage and the airline’s relatively low labour costs (especially when compared

to European carriers) enhances THY’s competitiveness. As an emerging

international travel hub, Istanbul is in the position of enabling the airline to boost

its transit passenger numbers and better utilize the fleet (especially its narrow

body aircraft) and seat capacity. With a young fleet (6.7 years on average),

improved brand awareness and increased capacity, THY is in a position to capture

market share from EU carriers, which struggle to offer high quality service and

capacity additions with their relatively old fleets. THY shares have outperformed

the index by 39% in 2013 and 16% ytd and now trade at a 8% discount to its peer

group on the basis of its 2014E PE. Ongoing TL weakness and anticipated strong

traffic figures should have a positive impact on profitability in 2014.

Risks. A decline in the economic activity, rising oil prices, Euro weakness against

the Dollar and the Privatization Administration’s sale of its stake in THY pose risks.

A negative outcome of Pegasus’s legal action at the Competition Board and

geopolitical tensions could also emerge as risks.

2014-end target price of TL9.20/share. Our 2014-end target share price of

TL9.20 derived from our target EV/EBITDAR multiple offers 31% upside potential

for THY. Our valuation for THY is based on the 2014E target EV/EBITDAR

multiple. To reach our target Mcap, we adjusted net debt to 8x aircraft related

rental expenses and current PDP receivables. We employed a 6.3x target multiple

for THY, which is the 5-year average EV/EBITDAR multiple.

Target EV/EBITDAR mutiple (x) 5.75 6.00 6.25 6.50 6.75

GS 2014E EBITDAR(TLmn) 4,399 4,399 4,399 4,399 4,399

Target EV (TLmn) 25,294 26,394 27,494 28,593 29,693

Adj. Net debt (TLmn) 14,794 14,794 14,794 14,794 14,794

Target Mcap (TLmn) 10,500 11,600 12,700 13,799 14,899

Outstanding number of shares (mn) 1,380 1,380 1,380 1,380 1,380

Target share price (TL) 7.61 8.41 9.20 10.00 10.80

Current share price (TL) 7.04 7.04 7.04 7.04 7.04

Upside potential 8% 19% 31% 42% 53%


THY Valuation Summary


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Pegasus Airlines

Recommendation: OUTPERFORM. Given its proven track record on growth, we

believe that Pegasus stands out as a preferred play in an underpenetrated sector

coupled with its ambitious expansion plans and effective cost management. As

the number one LCC and second largest carrier in Turkey, Pegasus will be one of

the key beneficiaries of increasing GDP and attractive demographics, which

bodes well for discount carriers. Using Istanbul Sabiha Gokcen Airport as its main

hub, Pegasus differentiates itself from an ordinary LCC whose business models

are based on only point to point travel; Pegasus operates like both a network and

point to point carrier, thanks to Istanbul’s geographical advantage connecting 50

countries within 3 hours’ flying time. Furthermore, we think Pegasus’ low cost

management enables the airline to boast one of the lowest CASK levels on the

back of its young fleet, strong punctuality, high utilization and low labour costs. We

expect a CAGR of 18% in net sales, 21% in EBITDAR and 24% in net profit over

the 2014-16 period. We believe these are outstanding figures that place Pegasus

as a clear growth play in the coming years. Pegasus is not an undiscovered stock;

it outperformed the index 116% since IPO in April 2013. Yet, the shares still look

cheap, despite the prospect that Pegasus offers stronger growth for foreseeable

future. We initiate our coverage of Pegasus with a Outperform recommendation.

Risks. The key risks would be an increase in oil prices, unrest in Turkey and

neighbouring countries, stiff competition, limited international expansion and EUR

weakness against the USD.

2014-end target price of TL40.00/share. We value Pegasus using a 2014E

target EV/EBITDAR multiple. On our EV/EBITDAR multiple valuation, we apply a

2014E EV/EBITDAR multiple of 8.0x, inline with the peers. Finally, to reach our

target Mcap, we adjusted net debt for 7x aircraft related rental expenses and 0.5x

PDP receivables.

EV/EBITDAR multiple (x) 7.50 7.75 8.00 8.25 8.50

GS 2014E EBITDAR (TLmn) 646 646 646 646 646

Target EV (TLmn) 4,844 5,005 5,166 5,328 5,489

Adj. Net debt (TLmn) 1,074 1,074 1,074 1,074 1,074

Minorities (TLmn) 2 2 2 2 2

Target Mcap (TLmn) 3,768 3,929 4,091 4,252 4,413

Outstanding number of shares (mn) 102 102 102 102 102





Pegasus Valuation Summary


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TAV Airports

Recommendation: Market Perform. TAV Airports is Turkey’s leading airport

terminal operator. The Company operates Istanbul Ataturk, Ankara Esenboga and

Izmir Adnan Menderes Airport, located in Turkey’s three largest cities. TAV

Airports’ business structure ensures high operating leverage, and since the

passenger fees are mainly fixed, higher volumes going forward will be the major

growth driver for TAV, also supporting the company’s retail operations. In addition

to a solid long term outlook, we believe the company should benefit from the

current macro environment, as the lion’s share of revenues are based in hard

currencies. Moreover, we believe that the Company is a good proxy to benefit

from growth in number of pax in Turkey without the fuel risk. The Company has

outperformed the BIST-100 by 102% in 2013 and by 8% so far in 2014, a trend we

would attribute to the company’s revenue structure, which is mostly € and $

denominated, and its strong operational performance along with the mounting

expectations of a delay in the third airports project and planned capacity

expansion in its flagship Istanbul Ataturk Airport.

Risks. Key risks include a slowdown in passenger traffic growth, increasing

political tensions in its regions of operation, failure to replace IAA or overpaying in

acquisitions.

2014-end target price of TL18.80/share. We value TAV Airports using sum-of

the parts (SOTP) analysis based on target Net Asset Value (NAV). We employed

DCF analysis to value each of the Company’s operations separately. Our

valuation is solely based on DCF, as we believe DCF analysis is the most

appropriate means of reflecting TAV Airports’ long-term growth potential as well as

TAV Airports’ well designed structure. We only valued TAV Airports’ existing

airport operations, not taking into account any terminal value and assuming that

the Company would neither win any new tenders, nor would it be awarded another

term upon expiry of its current concession agreements. On the other hand, as the

services companies’ operations will not end with the expiry of operating rights at

the airports, we did include a terminal value in calculating the value of the services

companies. We put HAVAS to our valuation on its transaction value in late 2012.

TAV had paid EUR80mn for 35% of HAVAS at that time.


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TAV Airports

SOTP Valuation

Concession

Due

Equity Value

(€mn)

Valuation

Method

TAV's stake

(€mn)

Contribution

(€mn)

% share

in total

Airport Operations 2,657 2,105 82%

TAV Istanbul Jan-21 1,168 DCF 100% 1,168 45%

TAV Izmir Jan-32 124 DCF 100% 124 5%

TAV Esenboga May-23 144 DCF 100% 144 6%

TAV Gazipaşa May-34 15 DCF 100% 15 1%

TAV Tunisie May-47 264 DCF 67% 177 7%

TAV Georgia Jan-27 241 DCF 76% 183 7%

TAV Macedonia Mar-30 38 DCF 100% 38 1%

TAV Medina 2037 663 DCF 33% 219 9%

TAV Zagreb 2042 246 DCF 15% 37 1%

Services 675 467 18%

ATU 357 DCF 50% 179 7%

HAVAS 229 Transaction Value 100% 229 9%

BTA 90 DCF 67% 60 2%

TOTAL 2,572

(-) Others (€mn) 187

Target Value for TAV Airports (€mn) 2,385

Current Mcap (€mn) 1,886

2014-end target price per share (TL) 18.80

Current share price (TL) 15.75

Upside potential 19%



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A closer look at the aviation sector

Before going into the company sections, we believe it would be instructive to set

out our understanding of the dynamics of the aviation sector, as the companies

under our aviation coverage operate in different subsectors of the aviation sector:

THYAO (Full Service Carrier), PGSUS (Low Cost Carrier) and TAVHL (airport

operator).

Differences between the LCC model and the FSC model

The key differences between the LCC model and the more traditional FSC model

are shown in the table below. We would note here that the low-cost carriers

should not be confused with regional airlines that operate short flights without

service, or with full-service airlines offering some reduced fares. Some airlines

have recently actively sought to market and advertise themselves as low-cost,

budget, or discount airlines while maintaining products usually associated with

traditional mainline carriers, which often result in increased operational complexity.

We will put the differences into perspective, comparing low cost carriers with full

service carriers with the following examples of THYAO and PGSUS:

Service

LCC’s ticket prices are usually based on a low amount of service, since generally

no service is associated with the ticket price before the flight, while passengers

may instead be charged for a wide range of services during or just before the

flight. To make up for revenue lost by the lower ticket prices, the airline may

charge for extras like food, priority boarding, seat allocation and baggage. In case

of delays or cancellations, customers should not expect meals and/or

accommodation to be provided for them; and on the whole, no free food or drinks

are provided during the flight on LCCs, but rather may be purchased at relatively

inflated prices. However, the FSC ticket price includes a range of services which

would be treated as extras in LCCs. After the flight, FSCs generally help their

Differences between Low Cost Carriers and Full Service Carriers

LCC FSC

Low er service level (ancillary revenues) High Service Level

Faster turnaround times Low er turnaround times

One type aircraft in f leet Diffrent types of aircraft in f leet

Point-to-Point model Hub and spoke model

Higher seat density Low er seat density (multiple classes)

Secondary or regional airports Primary airports

Higher share of online sales channel Low er share of online sales channel

Limited frequent f lyer programme Attractive frequent f lyer programme


Companies at a glance

Name Ticker

Mcap

(USDmn)

Listed

since Main Business

# of destinations or

countries of operations

as of 2013-end

# of

employees

as of 9M13

Total # of

passenger in 2013

(mn)

12M trailing

revenues as of 9M13

(TLmn)

Pegasus PGSUS TI 1,430 Apr-13 Low Cost Carrier 45 int'l + 31 domestic 3,005 16.8 17,776

THY THYAO TI 4,382 Dec-90 Full Service Carrier 201 int'l + 42 domestic 22,971 48.3 2,279

TAV TAVHL TI 2,606 Feb-07 Airport Operator 7 countries* 13,904 83.6 2,307

Source: The Company data, Garanti Securities

**Turkey, Georgia, Macedonia, Saudi Arabia, Tunisia, Latvia, Croatia


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customers with connecting flights, transport to the city center or hotels, baggage

and in other areas, while LCCs generally would not.

Turnaround

LCC’s generally aim for low turnaround times; typically the flight schedules only

allow for less than an hour for the turnaround. This leaves only a short period of

time for passengers to disembark, baggage to be offloaded and boarding to be

complete with a new load of passengers and baggage to be completely loaded.

The fact that LCCs do not use air bridges also helps speed up this process as

passengers walk straight out of the aircraft as the stairs pull up beside the aircraft

and passengers can use both the front and back exits. As these airlines do not

serve free food and drink on-board, this also speeds up the turnaround between

flights as the cabin crew is only required to perform a quick cleaning during stops;

a thorough clean is only carried out at night. This cannot be done on full service

airlines. The low turnaround time also means that LCC’s are able to increase their

daily aircraft utilisation, in what can be considered as one of the main cost

advantages over full service airlines, as LCC’s are then obviously able to carry out

more round trips between a given city pair than an airline with longer turnaround

times. As of 2013, Pegasus’ turns per day stood at 7.4 vs. THY’s 4.5 according to

our calculations.

Fleet

LCC’s are generally pursuing a strategy of a homogenous fleet with only one type

of aircraft, enabling important cost savings with respect to pilot training and

maintenance. FSC’s are of course forced to use a mixed fleet, operating both

short-haul and long-haul flights, in contrast with LCC’s. PGSUS’s fleet is currently

composed entirely of Boeing 737-800s but the airline will shift to Airbus from 2016,

when the airline will start to receive deliveries from its 100 Airbus orders in 2H16.

On the other hand, THYAO has a range of aircraft in its fleet (45% being Boeing

49% Airbus at the end of 2013).

Point-to-point or hub-and-spoke

Point-to-point and hub-and-spoke terms stand out as one of the main differences

between LCC’s and FSC’s. Point-to-point travel basically means that the airline is

only responsible for carrying you between two points, and is usually applied by

LCC’s as it minimizes connections and travel time. In addition, given the lack of

interdependency of flights and hubs, a delayed flight or a closed airport will not

significantly affect other flight schedules. On the other hand, FSC’s tend to

operate a hub and spoke model, consisting of a hub (usually the primary airport)

and spokes, which are secondary airports that feed the hub with passengers in

order to fill the aircraft. Another reason FSC’s prefer the hub and spoke model is

that they can schedule more frequent flights along each route and make full use of

the capacity of each plane, while centralizing operations at the hub also give rise

to economies of scale. However, in contrast with most LCCs, Pegasus

differentiates itself by operating like a network carrier rather than a point to point

carrier, thanks to Istanbul’s / Turkey’s natural geographical hub. That was

emphasized by the Chairman of Pegasus Airlines, Ali Sabancı; “We aim to

combine the network benefits of full-service carriers, and the price benefits of

LCCs, to provide low cost travel, on-time performance and new planes.”.


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Seat density

Higher seating density is an important element of the LCC business model and a

source of potential cost advantages. The average seat pitch in an LCC is normally

more restricted than the economy class seat of a FSC. This obviously allows

LCC’s to fit more seats into their aircraft, increasing the maximum capacity of each

flight. For example, Pegasus fits 188 seats on average into their fleet while THY

fits 168 seats, which would – assuming similar operating costs – translate into

lower costs for Pegasus. However, it is worth highlighting that a reason for the

lower number of seats on THY aircraft is the presence of a business class section

which command considerably higher ticket prices than economy class seats, thus

producing much higher yields, thus offsetting some of the cost of a lower seat

density.

Airports

Airports are generally categorised in 3 categories; primary airports, such as

Ataturk Airport in Istanbul; secondary airports, which are smaller but still near

major cities, like Sabiha Gokcen, also in Istanbul; and thirdly, regional airports,

which are typically situated in the province some distance from city centres.

Regional airports are typically characterised by the lowest levels of traffic. The

primary airports are mainly used by the larger network carriers as the “hub” in their

hub-and- spoke systems and are therefore command a strong position with regard

to bargaining power, given that they have the size and infrastructure needed to

process large passenger numbers. To illustrate this, Istanbul Ataturk Airport

processes more than 50mn passengers annually. Primary airports are the most

expensive when it comes to airport fees and charges, which include landing fees,

a charge per passenger and/or tonne of freight handled, aircraft parking charge

and other charges such as airport traffic control and air bridges. In a bid to lower

these costs, low fare carriers like Pegasus have followed a strategy of developing

routes to secondary and regional airports, while still maintaining a presence in

primary airports such as Istanbul Ataturk Airport (with only three aircraft). Another

reason for choosing secondary airports is the large volume of traffic in primary

Geographical Advantage

Source: THY presentation


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airports, which can often become congested – hardly optimal for LCC’s aiming for

low turnaround times, which would often be compromised by delays caused by

congestion in primary airports. Using less utilized secondary and regional airports

resolves this problem. The downside for passengers is, of course, that regional

airports are far from city centres. As shown below, it seems that fees and charges

between Istanbul Ataturk Airport and Sabiha Gokcen Airport are generally similar

except ground service expenses.

Typically a contract between the airport and airline states that the airport provides

its aeronautical services (passenger fee, ground handling, landing, parking and

fuel). The operators also generate revenues from non-aeronautical charges such

as duty-free, food and beverages, car parking (see revenues sources of TAVHL

below). Once the initial investment in airport facilities has been completed, the

marginal costs of accommodating the extra traffic are very low, because additional

traffic improves the utilization of spare capacity for which airport management has

already paid. Given that additional passengers carry relatively low marginal

terminal costs, we think airports may prefer to add or alter the mix of retail shops

to maximize the revenue generated by the increased passenger numbers as they

focus more on non-aeronautical services, if the charges for aeronautical services

become unfavorable.

Istanbul Ataturk Airport vs. Istanbul Sabiha Gokcen Airport

Fees / Charges Istanbul Ataturk Aırport (IST) Istanbul Sabiha Gokcen (SAW)

per Passenger

Domestic 15$ 15 €

international 3 € 3 €

İntl to intl 5 € 5 €

per Aircraft

Domestic

Landing 0.8 TL 0.4 €

Parking 0.55 TL 0.3 €

Illimunation 33 TL 15.0 €

International

Landing 6.7 € 6.5 €

Parking 2.0 € 2.0 €

Illimunation 41.0 € 40.0 €

Ground services

Seat Capacity

101-150 125.0 € 113.0 €

151-200 167.0 € 149.0 €

201-250 215.0 € 191.0 €

Follow me 34 € 33 €

Source: DHMI,HEAS


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Sales channels

The majority of LCC´s ticket sales are realised through the online channel. Both

LCC’s and FSC’s prefer the internet as a means to distribute tickets rather than

travel agents or call centres, in a bid to cut costs. No paper tickets are issued, and

the issue of a booking code, which may be presented upon check-in, reduces

distribution costs.

Unions

In countries with strong unions, it is very difficult for airlines to reduce their labour

costs by cutting wages or reducing the size of the workforce when they are hit by

downturns in the sector. The employees of many LCC’s are not unionized, helping

these airlines keep labour costs under control. Pegasus has no unionized staff,

while THY has experienced some troubles with its labour union in the past.

THY's Revenue by point of sale Pegasus' sales breakdown by channel

Source: The Company data

Europe29%

Turkey23%

Asia/Far East11%

Middle East9%

America8%

Africa5%

Internet/Call Center

14%

Other1%

Internet46%

Agent44%

Call Center2%

Other8%

Country Passenger fee Ground Handling Landing Parking Fuel Duty-free Food and Beverage Car park

Istanbul x x x x x

Ankara x x x x x

Izmir x x x x x

Gazipasa x x x x x x x x

Enfidha x x x x x x x x

Monastır x x x x x x x x

Tbilisi x x x x x x x x

Batumi x x x x x x x x

Skopje x x x x x x x x

Ohrid x x x x x x x xx

Latvia Riga x x

Saudi Arabia Medina x x x x x x x x

Source: The Company

Macedonia

Aeronautical charges Non-aeronautical charges

Turkey

Tunisia

Georgia


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Frequent flyer programs/alliances

Frequent-flyer programs are marketing schemes by airlines which offer their

passengers a gift, usually free travel, when they have completed a certain amount

of travel with the airline. These programs have resulted in many passengers,

especially business travelers, preferring a certain airline or airline alliance as they

would receive bonus flights, free hotel accommodation or other free gifts provided

through the scheme, although at the same time these passengers may be able to

buy cheaper flights with another airline. The reason has often been that the flights

are paid by their companies, but the individual employee receives the air miles or

associated awards. Such programs/alliances are not generally provided by LCC’s,

while FSC’s generally do offer them. Pegasus has no intention to join any alliance

while THYAO is a part of the Star Alliance and has various frequent flyer

programs.

A Study on LCC vs. FSC

Cost gap between low cost and full service carriers is diminishing

According to a KPMG survey on airline unit costs, the cost gap between legacy

and low cost carriers has narrowed to 2.5 US cents per ASK from 3.6 between

2006-2011. The global crisis in 2009 resulted in more focus on the cost side.

Although many of the easily applicable cost minimization targets have been

achieved and both LCC’s and FSC’s continue their focus on cutting costs, it is

thought that the cost gap will never be fully closed for the following reasons; i)

FSC’s will be unable to eliminate their historical staff costs and practices, ii) Only

LCCs would viably be able to maintain further efficiencies creating by single fleet

types and iii) LCC’s have an inherent ability to operate at lower cost airports and

routes stemming from the lack of network limitations. However, LCC’s will

continue to capture market share from FSC’s by targeting their higher value

customers. This will pave the way for the launch of new products and services

such as free luggage, priority boarding and pre-assigned seating. In this respect,

the key challenge will be to maintain cost control to remain competitive in the face

of increasingly streamlined competitors. On the other hand, FSC’s will need to

evolve their business models through partnerships, joint ventures and mergers

and acquisitions to overcome the cost challenges and compete with the newer

and large hub carriers.

Turkey capacity seats share by alliance system (8-14 April, 2013)

Source: IATA

58.7%

1.5%

2.9%

36.8%

Star

oneworld

SkyTeam

Unalligned


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TURKEY IN GLOBAL RANKINGS

In 2012, the biggest movers in the overall World Top 50 list include THY, which

jumped seven places to rank 15th globally, while the Indonesian carrier Lion Air

vaulted eight places to enter the global Top 40 for the first time. Iberia and India's

Jet Airways fell four and seven places in the 2012 rankings, respectively.

As far as LCC’s are concerned, Southwest Airlines remains the world's biggest

LCC, extending its lead over Ryanair, in second place, thanks to the Ryanair’s

marked reduction in capacity. The Top Five LCC rankings remain unchanged, but

there has been significant movement lower down the list. India's IndiGo and the

US-based Spirit continue to rise up the leaderboard, while AirAsia X has dropped

back as it redeployed capacity from long-haul European sectors to shorter Asian

routes. The Europe based Vueling has grown by a remarkable 40% in terms of

ASK, with IndiGo and Lion Air each expanding by 35%. Turkey’s Pegasus ranked

at 23rd.

In terms of seats offered, Turkey largest airport, Istanbul Ataturk Airport is in the

world’s top 20.

LCC Capacity Share (%) of Total Seats: 2001 - 2013*

Source: IATA

* Jan-April

8.0%9.5%

11.4%13.5%

14.9%16.7%

19.3%

21.9%23.4%

24.3%26.1%25.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013*

Cost Gap Betweeen LCC and FSC is diminishing

Source: KPMG 2013 Airline Disclosures Handbook

3.6

0.10.5

0.70 0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Costadvantage to

low costcarriers in

2006

2007 2008 2009 2010 2011 Costadvantage to

low costcarriers in

2011

Cost Gap Betweeen LCC and FSC in 2006-2011 by category

Source: KPMG 2013 Airline Disclosures Handbook

3.6

0.2 0.10.4

0.1 0.1 0.1 0.1 0.1 0.0 0.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Cost

dis

advanta

ge

to le

gacy

carr

iers

…

Fue

l

Manpow

er

Oth

er

exp

ense

s

Engin

eering

Selli

ng a

nd

Mark

etin

g

Dep, A

mor

t, a

nd O

pLease

IT

Landin

g &

Park

ing

Fee

s Airm

eals

Oth

er

AO

V

Cost

dis

advanta

ge

to le

gacy

carr

iers

…


15

February 11, 2014

Aviation


RESEARCH

The World's Top 20 Airports by Capacity Offered (starting week 31 March 2013)

Rank Airport Total Seats

1 ATL Atlanta Hartsfield-Jackson International Airport 2,183,726

2 PEK Beijing Capital International Airport 2,068,130

3 HND Tokyo Haneda Airport 1,887,497

4 LHR London Heathrow Airport 1,774,606

5 DXB Dubai International Airport 1,639,176

6 ORD Chicago O'Hare International Airport 1,534,449

7 LAX Los Angeles International Airport 1,491,895

8 DFW Dallas/Fort Worth International Airport 1,445,441

9 HKG Hong Kong International Airport 1,440,997

10 CDG Paris Charles De Gaulle Airport 1,421,231

11 CGK Jakarta Soekarno-Hatta International Airport 1,400,299

12 FRA Frankfurt Airport 1,394,143

13 SIN Singapore Changi Airport 1,371,158

14 BKK Bangkok Suvarnabhumi International 1,237,778

15 CAN Guangzhou Baiyun Airport 1,225,526

16 DEN Denver International Airport 1,176,220

17 JFK New York John F Kennedy International Airport 1,172,450

18 PVG Shanghai Pudong Airport 1,154,933

19 KUL Kuala Lumpur International Airport 1,134,217

20 IST Istanbul Ataturk Airport 1,125,132

Source: Innovata


16

February 11, 2014

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World's top 50 airlines by capacity (ASKs per week): Dec-2012 vs Dec-2011**

Ranking

Dec-11 Dec-12 Variance

United Airlines* 3,676,173,972 6,149,398,758 67.30% 4 1 3

Delta Air Lines 5,659,984,201 5,643,676,049 -0.30% 1 2 -1

Emirates 4,217,428,241 4,992,911,535 18.40% 3 3 -

American Airlines 4,740,187,417 4,800,884,481 1.30% 2 4 -2

Southw est Airlines 3,052,855,291 3,276,525,770 7.30% 6 5 1

Lufthansa 3,232,470,602 3,158,824,795 -2.30% 5 6 -1

British Airw ays 2,969,790,657 3,049,528,888 2.70% 7 7 -

Air France 2,947,863,927 2,825,526,843 -4.20% 8 8 -

China Southern 2,338,943,535 2,596,677,741 11.00% 10 9 1

Singapore Airlines 2,284,561,770 2,375,715,435 4.00% 11 10 1

Cathay Pacif ic 2,518,689,815 2,311,927,122 -8.20% 9 11 -2

Air China 1,975,786,807 2,193,529,512 11.00% 13 12 1

US Airw ays 2,148,315,118 2,016,797,120 -6.10% 12 13 -1

China Eastern 1,802,997,303 1,987,445,996 10.20% 15 14 1

Turkish Airlines 1,546,786,987 1,918,119,411 24.00% 22 15 7

Qantas Airw ays 1,967,029,665 1,863,468,681 -5.30% 14 16 -2

Qatar Airw ays 1,653,642,624 1,798,311,481 8.70% 19 17 2

KLM 1,743,421,204 1,785,622,278 2.40% 16 18 -2

Korean Air Lines 1,699,049,358 1,734,522,605 2.10% 17 19 -2

Thai Airw ays 1,601,385,091 1,702,802,250 6.30% 20 20 -

Air Canada 1,698,644,091 1,671,164,061 -1.60% 18 21 -3

All Nippon Airw ays 1,246,645,650 1,549,773,945 24.30% 25 22 3

TAM 1,484,265,530 1,494,027,291 0.70% 23 23 -

Ryanair 1,590,511,473 1,476,213,184 -7.20% 21 24 -3

Japan Airlines 1,392,363,846 1,375,619,611 -1.20% 24 25 -1

JetBlue Airw ays 1,189,448,769 1,214,788,293 2.10% 27 26 1

Aeroflot 1,032,936,073 1,197,672,318 15.90% 29 27 2

Etihad Airw ays 989,471,343 1,135,831,421 14.80% 32 28 4

easyJet 1,056,070,278 1,124,069,015 6.40% 28 29 -1

Iberia 1,197,798,613 1,046,122,223 -12.70% 26 30 -4

Malaysia Airlines 1,020,187,141 1,039,171,244 1.90% 30 31 -1

Virgin Atlantic 974,968,392 1,005,248,585 3.10% 33 32 1

Gol 1,007,352,569 913,465,718 -9.30% 31 33 -2

Asiana Airlines 801,526,420 876,324,179 9.30% 36 34 2

Air India 897,084,182 869,253,552 -3.10% 34 35 -1

Alaska Airlines 807,036,820 866,811,809 7.40% 35 36 -1

Saudi Arabian 797,784,368 859,673,901 7.80% 37 37 -

China Airlines 797,010,713 824,521,813 3.50% 38 38 -

Lion Airlines 602,332,879 810,548,478 34.60% 47 39 8

Hainan Airlines 756,248,033 789,659,041 4.40% 40 40 -

SWISS 735,342,198 768,204,291 4.50% 41 41 -

Jetstar Airw ays 627,376,629 732,129,754 16.70% 46 42 4

Air New Zealand 727,101,490 710,174,817 -2.30% 42 43 -1

Westjet 677,374,415 703,526,653 3.90% 45 44 1

Alitalia 713,564,199 702,771,404 -1.50% 43 45 -2

Jet Airw ays 766,255,713 682,168,104 -11.00% 39 46 -7

Transaero Airlines 590,637,778 681,909,360 15.50% - 47 n/a

Air Berlin 704,680,454 678,119,686 -3.80% 44 48 -4

Virgin Australia 563,988,380 667,351,376 18.30% - 49 n/a

EVA Air 600,022,403 661,811,048 10.30% - 50 n/a

GRAND TOTAL 81,823,394,427 87,310,342,925 6.70%

Source: Innovata

*United and Continental has been combined for 2012 but not 2011 **Representative sample w eek in December of each year

Note: US major airlines include the regional services operated by other carriers but marketed by the majors only.

Airline Dec-11 Dec-12 % changeGlobal rank


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February 11, 2014

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GLOBAL SECTOR OUTLOOK

Airlines expecting a 31% increase in passenger demand by 2017

The International Air Transport Association (IATA) released the IATA Airline

Industry Forecast for 2013-2017, finding that airlines expect to see a 31%

increase in passenger numbers between 2012 and 2017. Total passenger

numbers are expected to reach 3.91bn by 2017, up from the 2.98bn carried in

2012.

The IATA Airline Industry Forecast 2013-2017 is a consensus outlook for system-

wide passenger growth. Demand is expected to expand at an average CAGR of

5.4% between 2013 and 2017. This would compare to the CAGR of 4.3% in global

Top 25 LCCs worldwide by capacity (ASKs per week): Dec-2012 vs Dec-2011

Ranking

Dec-11 Dec-12 Variance

Southw est Airlines 3,052,855,291 3,276,525,770 7.30% 1 1 -

Ryanair 1,590,511,473 1,476,213,184 -7.20% 2 2 -

JetBlue Airw ays 1,189,448,769 1,214,788,293 2.10% 3 3 -

easyJet 1,056,070,278 1,124,069,015 6.40% 4 4 -

Gol 1,007,352,569 913,465,718 -9.30% 5 5 -

Lion Airlines 602,332,879 810,548,478 34.60% 9 6 3

Jetstar Airw ays 627,376,629 732,129,754 16.70% 8 7 1

Westjet 677,374,415 703,526,653 3.90% 7 8 -1

AirTran Airw ays 704,027,357 593,301,841 -15.70% 6 9 -3

AirAsia Berhad 514,497,106 592,750,621 15.20% 10 10 -

Indigo 363,580,357 489,547,961 34.60% 14 11 3

Norw egian 376,017,532 460,529,531 22.50% 12 12 -

Condor 408,981,174 400,293,763 -2.10% 11 13 -2

Virgin America 350,169,261 387,519,726 10.70% 16 14 2

Spirit Airlines 297,900,830 373,126,368 25.30% 19 15 4

Volaris 305,039,639 348,697,350 14.30% 18 16 2

Frontier Airlines 363,405,399 330,101,798 -9.20% 15 17 -2

Wizz Air 314,854,410 330,075,746 4.80% 17 18 -1

SpiceJet 270,033,409 313,233,746 16.00% 20 19 1

AirAsia X Sdn. Bhd. 367,668,226 306,214,544 -16.70% 13 20 -7

Cebu Pacif ic Air 262,579,589 285,040,540 8.60% 21 21 -

Air Arabia 247,294,792 275,508,189 11.40% 23 22 1

Pegasus 247,563,308 268,113,218 8.30% 22 23 -1

Vueling Airlines 175,838,664 246,848,248 40.40% 24 24 -

Allegiant Air 173,834,741 217,749,960 25.30% 25 25 -

GRAND TOTAL 15,546,608,096 16,469,920,012 5.90%

Source: Innovata

Representative sample week in December of each year

Airline Dec-11 Dec-12 % ChangeGlobal rank


18

February 11, 2014

Aviation


RESEARCH

passenger numbers between 2008 and 2012, largely reflecting the negative

impact of the 2008 global financial crisis and the recession that followed. Of the

new passengers, approximately 292mn will be carried on international routes and

638mn domestically.

The emerging economies of the Middle East and Asia-Pacific will see the

strongest international passenger growth with a projected CAGR of 6.3% and

5.7%, followed by Africa and Latin America with CAGR rates of 5.3% and 4.5%.

Routes to or within China will be the single largest driver of growth, accounting for

30% of new passengers during the forecast period. Of the anticipated 227.4mn

additional passengers, 195mn will be domestic and 32.4mn will be international.

The Asia-Pacific region (including China) is expected to add around 300mn

additional passengers by the end of the current forecast horizon. Of these, around

225mn or 75% are expected to be domestic passengers.

With 677.8mn domestic passengers in 2017, the United States will remain the

largest single market for domestic passengers, although it is only forecasted to

add 70mn passengers over the forecast period (marking a 2.2% CAGR). This

reflects the market’s maturity. China is firmly established in second place

(487.9mn passengers by 2017, with a 10.2% CAGR.). The US also will reclaim the

top spot from Germany for international passengers by the end of the forecast

period. Germany will add 27.2mn passengers to the 149.4mn in 2012 (3.4%

CAGR), while the US will add 28.2mn international passengers, the number

increasing at a CAGR of 3.5% from 149.3mn in 2012 to 177.5mn in 2017.

Forecast Highlights

International Passenger Development

International passenger numbers are expected to rise by 25% from 1.2 bn in 2012

to 1.5bn in 2017, bringing 292mn additional passengers (4.6% CAGR).

Uzbekistan (10.3% CAGR) has displaced Kazakhstan (9.0% CAGR) as the fastest

growing market for international passenger traffic. The next eight fastest growing

markets are Russia (7.7% CAGR), Turkey (7.6% CAGR), Oman (7.5% CAGR),

China (7.1% CAGR), Vietnam (6.9%CAGR), Saudi Arabia (6.9%), Azerbaijan

(6.8% CAGR), and Pakistan (6.7% CAGR). No Latin American or African countries

are among the fastest growing markets.

The United Arab Emirates will see air passenger numbers increase by 29.2 mn (a

6.6% CAGR) over the forecast period, nearly as many additions as in China. For

international traffic, routes between the Middle East and Asia-Pacific will see the

most rapid growth.

Domestic Passenger Development

Domestic passenger numbers are expected to rise from 1.82 billion in 2012 to

2.46bn in 2017, an increase of 639mn reflecting a CAGR of 6.2% over the period.

Brazil will firmly establish itself as the third largest domestic market after the US

and China, with 122.4mn passengers in 2017, an increase of 32 million


19

February 11, 2014

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passengers from the 90mn 2012 (a 6.3% CAGR).

Turkey will enter the top 10 largest markets with 26.3mn passengers carried with

an addition of 17.2mn more (10.6% CAGR) over the forecast period. It is also the

second fastest growing domestic market.

The lower five of the top ten fastest growing markets on the basis of domestic

passenger numbers, the bottom five are all in Latin America: Brazil, Peru,

Colombia, Mexico and Ecuador.

Regional Outlook over the 2013-2017 forecast period

Asia-Pacific passenger traffic is forecast to grow at a CAGR of 5.7%. Traffic within

the Asia-Pacific region will represent 31.7% of global passengers in 2017, up from

28.2% in 2012. North America and Europe will continue to see their share decline,

from 26% to 24% for North America, and from 24% to 23% for Europe.

The Middle East is set to follow the strongest international passenger growth, with

a CAGR of 6.3%.

Europe is on course to see international passenger demand grow at a CAGR of

3.9%.

North America is projected to see the slowest international passenger demand

growth with a CAGR of 3.6%.

Latin America is forecasted to see international passenger demand grow at a

CAGR of 4.5%.

TURKISH AVIATION SECTOR AT A GLANCE

Turkish air passenger traffic posted a 16% CAGR in 2003-2013

Passenger traffic in Turkey has witnessed strong momentum since the

deregulation of the sector in 2003. Passenger numbers have grown at a CAGR of

16% in Turkey between 2003-13, at a multiple of 3x real GDP growth. Even in

2009, when real GDP contracted by 5%, passenger numbers in Turkey grew by

6%. The Turkish aviation industry continued to register high rates of growth, even

at the time of the global financial crisis (in 2008-09), the SARS outbreak (in 2004)

and natural phenomena such as the volcanic eruption in Iceland (in 2011).

Domestic passenger numbers have also surged on the back of affordable fares

with a CAGR of 24% between 2003-2013, surpassing the CAGR of 11% in

international passenger numbers. We think that Turkey’s geographical position, its

increased tourism potential, its still under-penetrated nature and a generally

supportive approach to the sector by the government will help sustain this above-

average growth. Turkey’s two biggest carriers THY and Pegasus plan to double

their fleet size by 2021, indicating their anticipation of strong demand. We project

air passenger traffic to reach 150mn by 2016, marking a CAGR of 9.3% CAGR for

2014-2016E vs. State Airports’ Authority’s projection if a 9.9% CAGR (see page

25 for details).


20

February 11, 2014

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Under penetration offers potential growth for Turkish aviation industry

Turkey lags far behind EU countries and the US in terms of the number of air

passenger movements per capita. Although Turkey has higher or similar GDP

figures compared to some European countries, the level of air travel in the country

is considerably lower at 1.2 (pax per capita) – virtually half the figure seen in larger

European economies.

Pax growth vs. GDP growth

Source: DHMI, Garanti Securities

*2013E GDP growth

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Total pax growth GDP growth

Pax numbers evolution since 2003

Source: DHMI

0

20

40

60

80

100

120

140

160

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Domestic International Total

Domestic 24% CAGR 2003-2013International 11% CAGR 2003-2013

Total 16% CAGR 2003-2013


21

February 11, 2014

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Natural geographical hub

With almost 50 countries within a 3-hour flight of Turkey, the country is placed as a

natural geographical hub. Turkey’s geographical advantage is one of the main

triggers of the Turkish aviation industry, as it helps the country to capture more

transit passengers and there are plans in Turkey to establish Istanbul as an

international hub. For this end, the government plans to build one of the world’s

largest airports in Istanbul with an initial capacity of 70mn by 2018 and a final

capacity of 150mn by 2027. (see page 29 for details).

Pax per capita (2011)

Source: Pegasus presentation

0.4 0.5 0.4 0.3

2.0

0.4 0.3 0.80.81.4 1.6

1.9

0.5

2.2

2.9 2.8

1.2

1.9 2.0 2.22.5 2.6

3.23.6

0

0.5

1

1.5

2

2.5

3

3.5

4

Turkey Italy France Germany US EU-15 UK Spain


Low penetration levels and geographical advantage

Source: Pegasus Presentation


22

February 11, 2014

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Ambitious growth plans of THY and Pegasus

Turkish airlines and Pegasus recently placed massive aircraft orders to expand

their operations, both internationally and domestically. According to their plans,

THY’s fleet will expand from 232 aircraft in 2013 to 436 by 2021, nearly doubling

the airline’s total seating capacity from 42,200 to 83,500. Meanwhile, Pegasus

ordered 100 new aircraft (75 firm orders plus 25 optional) in December 2012. After

the deliveries, Pegasus’ fleet size is estimated to be between 75-126. We believe

the orders will bode well for growth in the industry.

Turkey’s attraction for tourism

We believe Turkey’s tourism industry offers tremendous growth potential, given

that 50 countries are all within a 3 hour flight of Turkey, Turkey’s long coastal

regions and its relatively warm climate compared to Europe. As with Spain and

Greece, Turkey could continue to benefit from an increased number of tourists

going forward, as observed in the recent years. As seen below, Turkey has

recorded an 8% CAGR in tourist arrivals over the last decade. Note that Antalya,

located on Turkey’s South coast of Turkey, has Turkey’s second largest airport in

terms of passenger numbers, after Istanbul’s Ataturk Airport. The overwhelming

majority of tourists come to Turkey by air. Gazipasa Airport (operated by TAV),

another airport serving the area near Antalya, has recently entered operation –

another clear sign of Turkey’s increasing tourism potential.

Fleet profiles of Turkish carriers


233

45 32 32 14

206

79

60

25

0

100

200

300

400

500

600

THY Pegasus Onurair SunExpress Atlasjet

Existing On order Options

Tourist figures

Source: TUIK

*Jan-Nov 2013

0

5

10

15

20

25

30

35

40

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Tourist numbers (mn)

8% CAGR 2004-2012


23

February 11, 2014

Aviation


RESEARCH

Supportive demographics

Turkey is the second largest country in Europe in terms of population, after

Germany, with a demographically young population; half of the population is under

the age of 30, meaning more people tend to fly as they reach working age. In

Turkey, it is believed that passport ownership ratio is yet at low teens and we

believe the majority of passport holders are Turkish citizens living in other

countries. We believe the high passport fees are one of the reasons for the low

passport ownership in Turkey. There has been increasing controversy on that

issue with campaigns to ensure passport ownership is more affordable or easy.

Growth in air travel supported by lack of alternative transport system and

mountainous terrain

As a generally mountainous country, Turkey currently lacks a developed network

of railways, high speed trains and infrastructure. Despite high special duties on

motor vehicle purchases (on top of VAT) and petrol, Turkish people still prefer

road travel, which accounts for 90% of total transport in Turkey. We believe that

with mounting competition, increasing seat capacity and attractive fares, the

growth in air travel will outpace road travel. Along with the increasing GDP,

disposable income rises, resulting in an increase in awareness of time value of air

travel compared to car or bus transportation. Although the government is about to

finalize a high speed rail link between Turkey’s biggest two cities of Istanbul and

Ankara, we do not expect this to significantly compromise growth in the domestic

aviation sector, as Turkey needs a much more comprehensive network of high

speed trains. According to government plans, high speed railways are going to

connect many Turkish cities. They could negatively affect the growth in domestic

air travel by the 2020s. Yet, at this stage, we do not find those plans are

worrisome.

Special Consumption Tax on autos (%)

Engine size 2002 2014

below 1,600 cc 27% 45%

1601-2000 cc 46% 90%

above 2,000 cc 50% 145%

Source: ADA

Transportation of domestic passengers in Turkey

Current 2023 Target

Road 90% 72%

Rail 2% 10%

Air 8% 14%

Sea 0% 4%

Source: Transportation Ministry

Number aircraft and seat capacity in Turkey

Source: Civil Aviation Authority

-

50

100

150

200

250

300

350

400

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Seat capacity (lhs) Number of aircrafts (rhs)


24

February 11, 2014

Aviation


RESEARCH

Competition

Turkish Airlines (THY): Turkish Airlines was founded in 1993 under the

supervision of the Ministry of National Defence. THY initiated its operations with a

fleet of just 5 aircraft and initiated cargo transportation operations in 1995. It is

now the 3rd biggest airline in terms of pax carried, the 4th largest in terms of ASK

and 5th largest according to RPK among AEA (Association of European Airlines).

At the end of 2013, it was operating with a fleet of 232 aircraft and served 48.3

million passengers (vs. 22.6 million in 2008). The airline generated USD8.3bn of

revenue in 2012 (vs. USD4.7bn in 2008). The airline uses Istanbul Ataturk Airport

as its hub and was flying to 42 domestic and 201 international destinations as of

2013. THY was ranked as Europe’s best airline by Skytrax three years in a row

(2011, 2012 and 2013).

Pegasus: Established in 1990, and acquired by Esas Holding in 2005, Pegasus

was Turkey’s first low cost carrier and is the second largest carrier after the

national flag carrier, THY. Based at Istanbul Sabiha Gokcen Airport, Pegasus was

flying to 76 destinations as of 2013, 31 of which were domestic and the remaining

45 international. As an LCC, ancillary revenues comprised of excess luggage,

cancellations, seat selection and meals represented 13% of total revenues in

9M13. Pegasus is named as the fastest growing LCC in Europe in 2010 and 2011

in terms of seat capacity, according to OAG.

SunExpress: SunExpress was founded in 1989 as a subsidiary of THY and

Lufthansa. SunExpress is one of the leading airlines in terms of passenger

numbers between Germany and Turkey. The home base of SunExpress is in

Antalya on the Turkish Riviera The second most important base is the hub Izmir

on the Aegean coast. As of 9M13, it flies to/from 22 airports in Germany, 21 in

Turkey and 44 in other countries and operates with 21 B737-800 aircraft with total

seat capacity of 3.969. it carried 4.3mn passengers as of 9M13, by achieving load

factor of 84.4%

AnadoluJet: Founded in 2008, as THY’s low cost carrier brand, Anadolujet uses

Ankara Esenboga Airport as its hub and is focused on domestic operations. It has

27 aircraft in its fleet, according to its website.

OnurAir: Founded in 1992, Onur Air has a fleet of 23 aircraft. It mainly operates for

charter flights both internationally and domestically. It flies to 80 destinations

internationally and serves 15 domestic airports.

Atlasjet: Founded in 2001, Atlasjet operates 17 aircraft. It also provides cargo

transportation in domestic and international routes through scheduled and non-

scheduled flights, in addition to passenger services.

OUR PASSENGER FORECASTS

Turkish air passenger traffic grew by 15% in 2013 (vs.11% in 2012), with

international passenger numbers reaching 73mn on the back of 12% annual

growth while domestic passenger traffic increased by 18% to 76mn in 2013.

We project that total passenger traffic will reach 150mn by 2016E, following a

10.3% CAGR between 2013-2016. We forecast 10.4% growth in international


25

February 11, 2014

Aviation


RESEARCH

passenger traffic with 10.3% growth in domestic passenger traffic during the same

period. The State Airports Authority (DHMI) anticipates a CAGR of 9.9% between

2013-2016, in parallel with our forecast in overall terms.

Pax Projections (mn)- our numbers are inline w ith DHMI

Source: DHMI, Garanti Securities

-

50

100

150

200

250

Gara

nti

Secu

rities

Dom

estic

Inte

rnation

al

DH

MI

Dom

estic

Inte

rnation

al

2014E

2015E

2016E

Passenger Assumptions (mn) 2011 2012 2013 2014E 2015E 2016E

THY

Domestic 14.5 15.9 20.1 25.4 31.1 37.6

growth 6.8% 9.5% 26.3% 26.7% 22.4% 20.9%

International 18.1 23.2 28.2 32.0 37.4 43.5

growth 16.9% 27.7% 21.8% 13.4% 16.7% 16.3%

Total 32.7 39.0 48.3 57.4 68.5 81.0

growth 12.2% 19.6% 23.6% 18.9% 19.2% 18.4%

Pegasus

Domestic 6.8 8.3 10.2 12.1 14.4 17.0

growth 36.4% 22.7% 23.3% 18.6% 18.4% 18.2%

International 3.9 5.3 6.6 7.9 9.4 11.1

growth 29.4% 33.7% 24.8% 20.3% 19.0% 18.0%

Total 10.7 13.6 16.8 20.1 23.8 28.1

growth 33.7% 26.8% 23.9% 19.3% 18.6% 18.1%

Market Shares (%)

THY 37.0% 40.0% 43.3% 46.0% 49.6% 54.0%

Domestic 49.8% 49.2% 52.7% 58.5% 65.3% 73.5%

International 30.7% 35.4% 38.4% 39.3% 41.4% 44.0%

Pegasus 12.1% 13.9% 15.1% 16.1% 17.3% 18.7%

Domestic 23.2% 25.7% 26.9% 28.0% 30.2% 33.2%

International 6.7% 8.1% 9.0% 9.7% 10.5% 11.3%

Turkish Market

Domestic 29.2 32.3 38.1 43.4 47.6 51.1

growth 15.5% 10.7% 18.0% 14.0% 9.7% 7.4%

International 59.0 65.4 73.4 81.4 90.3 98.8

growth 13.1% 10.8% 12.2% 10.8% 11.0% 9.5%

Total 88.2 97.7 111.5 124.7 137.9 149.9

growth 13.9% 10.8% 14.1% 11.9% 10.5% 8.7%

Source: DHMI, The Company data, Garanti Securities


26

February 11, 2014

Aviation


RESEARCH

AIRPORTS IN TURKEY

Currently, 49 airports are open to civil aviation in Turkey, 44 of which are operated

by the General Directorate of State Airports (DHMİ) while Istanbul Sabiha Gökçen

International Airport is run by a private company (HEAŞ; Airport Operations and

Aviation Industries Ltd.), which operates under the control of the Defence

Industries Undersecreteriat. A total of 24 of the airports are used for both domestic

and international flights, with 25 of used solely for domestic flights.

Capacity Enhancement Studies

Istanbul Ataturk

Istanbul Atatürk Airport (IAA) is the biggest in Turkey in terms of total number of

passengers. It served 51mn passengers in 2013, and is the world’s 20th largest

airport in terms of pax handling capacity. The airport is operated by TAV under a

concession agreement which continues until January 2021, and is estimated to

have a current capacity of 60-65m passengers. Therefore, capacity constraints

appear inevitable within the next couple of years given the strong growth potential

of air traffic. For this reason, the State Airports Authority (DHMI) will take some

measures to expand the airport’s capacity to handle traffic properly until the third

airport is completed (see page 29 for details). It is believed that with the measures

on tower management, aircraft movements would be able to increase from the

current 58 to 80 per hour, while 43 additional parking positions will be made

available later this year. In addition, a new international terminal could mean 21

additional boarding gates, which could increase the terminal capacity from 42mn

to 63mn. Furthermore, there would be some managerial measures such as i) easy

-pass implementation, ii) the privatization of passport control and iii) the

elimination of security checks at the terminal entrance. It is thought that these

measures could a set the stage for a 30% increase in capacity.

Airports in Turkey

Source: Civil Aviation Authority


27

February 11, 2014

Aviation


RESEARCH

Source: DHMI

International vs Domestic Passenger Growth in Istanbul Ataturk Airport

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Jan-1

1

Feb

-11

Mar-

11

Apr-

11

May-

11

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct-11

Nov-

11

Dec-

11

Jan-1

2

Feb

-12

Mar-

12

Apr-

12

May-

12

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-12

Nov-

12

Dec-

12

Jan-1

3

Feb

-13

Mar-

13

Apr-

13

May-

13

Jun-1

3

Jul-13

Aug-1

3

Sep-1

3

Oct-13

Nov-

13

DomesticInternationalDomestic averageInternational average

Source: DHMI

International vs Domestic Passenger('000) in Ataturk Airport

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Jan-1

1

Feb

-11

Mar-

11

Apr-

11

May-

11

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct-11

Nov-

11

Dec-

11

Jan-1

2

Feb

-12

Mar-

12

Apr-

12

May-

12

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-12

Nov-

12

Dec-

12

Jan-1

3

Feb

-13

Mar-

13

Apr-

13

May-

13

Jun-1

3

Jul-13

Aug-1

3

Sep-1

3

Oct-13

Nov-

13

Dec-

13

Domestic ('000) International ('000)

Istanbul Ataturk Airport Capacity Enhancements

Source: THY presentation


28

February 11, 2014

Aviation


RESEARCH

Sabiha Gokcen Airport

Sabiha Gokcen Airport (SAW) is Istanbul’s second airport and the main hub for

Pegasus Airlines. The airport was privatized in 2008 and air traffic has increased

considerably since then, as shown below. The total number of passengers using

the airport has increased at a CAGR of 34% between 2008 and 2013 and reached

to 18.6mn. Although the airport operates with a relatively low capacity (75%), the

DHMI plans to double its capacity to 50mn within the next two years following the

completion of a second runway. Since the planned third airport in Istanbul will be

located further (60km) from the city centre than Sabiha Gokcen Airport (35km), we

believe the attraction of Sabiha Gokcen for air travel will increase going forward.

Furthermore, Sabiha Gokcen is located on the Anatolian side of Istanbul, a more

rapidly developing region of the city compared to the European side.

Source: DHMI

International vs Domestic Passenger('000) in Istanbul Sabiha Gokcen Airport

0

200

400

600

800

1,000

1,200

1,400

Jan-1

1

Feb

-11

Mar-

11

Apr-

11

May-

11

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct-11

Nov-

11

Dec-

11

Jan-1

2

Feb

-12

Mar-

12

Apr-

12

May-

12

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-12

Nov-

12

Dec-

12

Jan-1

3

Feb

-13

Mar-

13

Apr-

13

May-

13

Jun-1

3

Jul-13

Aug-1

3

Sep-1

3

Oct-13

Nov-

13

Dec-

13

Domestic ('000) International ('000)

Source: DHMI

International vs Domestic Passenger Growth in Istanbul Sabiha Gokcen Airport

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Jan-1

1

Feb

-11

Mar-

11

Apr-

11

May-

11

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct-11

Nov-

11

Dec-

11

Jan-1

2

Feb

-12

Mar-

12

Apr-

12

May-

12

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-12

Nov-

12

Dec-

12

Jan-1

3

Feb

-13

Mar-

13

Apr-

13

May-

13

Jun-1

3

Jul-13

Aug-1

3

Sep-1

3

Oct-13

Nov-

13

Dec-

13

Domestic International

Domestic average International average


29

February 11, 2014

Aviation


RESEARCH

The third airport

In line with the government’s target of Istanbul being an international hub for air

travel, a tender for a 3rd airport in Istanbul was held in May 2013, where the

Cengiz-Kolin-Limak-Mapa-Kalyon consortium submitted the winning bid, offering a

total of EUR22,152mn in rent (EUR26,139mn including 18% VAT) over a period of

25 years (EUR1,046mn per annum). The new airport will be completed in four

phases. Once complete, the airport will have a pax capacity of 150mn. The first

phase, which will have a pax capacity of 70mn, is expected to be completed within

42 months. The Minister of Transportation, Binali Yildirim, recently said that the

construction of the 3rd airport would begin in 1Q14 at the latest. Nihat Ozdemir,

from the winning consortium, stated that the 3rd airport would enter operations by

the beginning of 2019. However, given the current global liquidity conditions and

mounting political turmoil in Turkey, we believe delays in the construction of the

3rd airport project are likely.

Istanbul’s 3rd Airport at a glance…

There will be a pax revenue guarantee for the first 12 years of the concession, as

indicated in the table below. Pax fees are consist of €20 per international outgoing

passenger, €5 per transfer passenger and €3 for each domestic outgoing

passenger transferring to an international flight.

Istanbul's Third Airport 1st phase 2nd phase 3rd phase 4th phase Total

New terminal capacity/passenger per annum 70,000,000 20,000,000 30,000,00 30,000,000 150,000,000

# of terminals 2 1 1 4

Runways 3 1 1 1 6

Taxiways 8 3 2 3 16

Aircraft parking capacity 500

*Phase 4 to be completed by 2027

(mn €) 1 2 3 4 5 6 7 8 9 10 11 12 Total

Rev. guarantee 316 334 351 367 541 563 585 607 628 649 670 690 6,300


30

February 11, 2014

Aviation


RESEARCH

Recent Developments in Turkish Aviation Sector

Price ceiling

On December 2, the Minister for Transportation, Binali Yıldırım, stated that

economy class domestic fares will be capped at TL299 with effect from December

3. This TL299 price cap will remain in effect indefinitely until market conditions

allow otherwise. We believe the aviation sector will not be affected by the price

ceiling exercise, considering only 1.5% of domestic travellers paid more than

TL300 for their flights. We are not especially troubled by the price ceiling for

domestic fares.

Fewer security points at airports

The National Civil Aviation Council plans to reduce number of security control

points at airports from two currently to one. If approved, the new plan would

initially be implemented at Istanbul Ataturk Airport. We believe the new plan would

be positive for the aviation sector as it would decrease the amount of time spent at

security and increase efficiency at the airports. Less time spent at security control

points could support duty free spending improve punctuality levels.

Government plans to expand air space capacity

There have been reports in the media that commercial flights may be able to use

air space that is normally specifically reserved for the air force when air traffic

requires an increased number of air corridors. The use of air force flight corridors

would reduce the amount of time spent in holding patterns and lower the incidence

of delays. This would result in lower fuel consumption and maintenance costs for

airlines and increased efficiency for airports.

Airports in Istanbul

Source: Pegasus Presentation, Garanti Securities

3rd Bridge Project


31

February 11, 2014

Aviation


RESEARCH

Airline Terminology

Revenue passengers: Revenue passengers represents the total number of paying

passengers flown on all flight segments.

Revenue passenger kilometers (RPK): Revenue passenger kilometers (RPK)

represents the numbers of kilometers flown by revenue passengers

Available seat kilometers (ASK): Available seat kilometers (ASK) represents the

aircraft seating capacity multiplied by the number of kilometers the seats are

flown.

Load factor: Load factor represents the percentage of aircraft seating capacity that

is actually utilized (calculated by dividing RPK by ASK).

Breakeven load factor: Breakeven load factor is the passenger load factor that will

result in passenger revenues being equal to operating expenses.

Aircraft utilization: Aircraft utilization represents the average number of block hours

operated per day per aircraft for the total aircraft fleet.

Block hours: Block hours refers to the elapsed time between an aircraft leaving an

airport gate and arriving at an airport gate.

Yield per passenger kilometer: Yield per passenger kilometer represents the

average amount one passenger pays to fly one kilometer.

Passenger revenue per available seat kilometer: Passenger revenue per available

seat kilometer represents passenger revenue divided by available seat kilometers.

Operating revenue per available seat kilometer (RASK): Operating revenue per

available seat kilometer (RASK) represents operating revenues divided by

available seat kilometers.

Average stage length: Average stage length represents the average number of

kilometers flown per flight.

Operating expense per available seat kilometer (CASK): Operating expense per

available seat kilometer (CASK) represents operating expenses divided by

available seat kilometers.

Wet Lease Arrangement: A wet lease is a leasing arrangement whereby one

airline (lessor) provides an aircraft, complete crew, maintenance, and insurance,

to another airline (lessee), who pays by hours operated. The lessee provides fuel,

covers airport fees, and any other duties, taxes, etc. The flight uses the flight

number of the lessee. A wet lease generally lasts one month to two years,

anything less would be considered an ad-hoc charter. A wet lease is typically

utilized during peak traffic seasons or annual heavy maintenance checks, or to

initiate new routes. Ground handling is usually done by the lessor although this

can vary from country to country. In some cases the lessee provides these

services (or one of its partners).


RESEARCH

February 11, 2014

Turkish Airlines Outperform (Maintained)

Current Price TL 7.04TL

2014-end Target Price TL 9.20TL

Potential Return TL 31%

Current Mcap (TLmn) 9,715

Current EV (TLmn) 24,509

4,367

Bloomberg/Reuters:

1 mth 3 mth 12mth

5% 9% 53%

95.5

YTD TL Return: 9%

1,380

Free Float (%): 51

64%

Financials and Ratios 2012 2013E 2014E 2015E

Net Sales (TLmn) 14,909 19,057 25,422 30,430

EBITDA (TLmn) 2,640 2,788 3,190 3,787 Research Analyst: Baris Ince

EBITDAR (TLmn) 3,064 3,598 4,399 5,190 +90 (212) 384 1141

Net Income (TLmn) 1,133 989 1,086 1,240 [email protected]

EBITDA Margin 17.7% 14.6% 12.6% 12.4%

EBITDAR Margin 20.6% 18.9% 17.3% 17.1% Sales Contact:

P/E (x) 8.6 9.8 8.9 7.8 +90 (212) 384 1155-58

EV/EBITDA (x) 6.3 7.3 6.7 6.3 [email protected]

EV/Sales (x) 1.11 1.06 0.84 0.79

EPS (TL) 0.82 0.72 0.79 0.90

DPS (TL) 0.13 0.22 0.24 0.27

Current Mcap (US$mn)

Price Performance (TL)

Stock Market Data

THYAO.TI / THYAO.IS

Relative Performance:

52 Week Range (TL): 5.56 / 8.7

Average Daily Vol (US$mn) 3 mth:

Shares Outstanding (mn):

Foreign Ow nership in Free Float :

1.50

3.00

4.50

6.00

7.50

9.00

01.1

2

03.1

2

05.1

2

07.1

2

09.1

2

11.1

2

01.1

3

03.1

3

05.1

3

07.1

3

09.1

3

11.1

3

01.1

4

THYAO BIST-100

Growing globally on a natural hub

We re-initiate coverage of THY with an Outperform

recommendation. Our 2014-end target price of TL9.20

indicates 31% upside potential.

THY trades at a 8% discount based on the 2014E P/E of 8.9x

for its emerging market peers, while trading at a slight

premium over the peers on the basis of its 2014E EV/EBITDA

of 6.7x, reflecting the airline’s bullish growth prospects.

We deem THY to still be one of the best growth stories on the

Bourse Istanbul with its attractive passenger growth

potential and cost efficiencies driven by a young fleet and

relatively low workforce expenses.

Attractive passenger growth is the key for THY

After posting a CAGR of 16% in passenger numbers between 2008

and 2012 (vs. the 13% in Turkey), THY’s total passengers grew by

24% YoY in 2013. As well as a strong domestic market, Turkey’s

growing status as an international transfer hub given its geographical

advantage – at the juncture of East-West corridor of global air traffic

– and improving brand awareness are the main factors behind the

strong growth in demand. We project a CAGR of 19% in passenger

numbers for THY between 2013 and 2016, lower than the company’s

target of 20%+.

Growing in a profitable manner thanks to competitive cost base

THY’s CASK is among the lowest in its peer group, driven by better

utilization of the fleet and lower labour costs. THY aims to almost

double the size of its fleet by 2021, suggesting 9% CAGR in seat

capacity in 2013-2021. Implementation of a new yield management

scheme and capacity expansion (30%) at its main hub would be

another plus for the company in sustaining its competitive edge and

boosting its market share (currently number 3 among AEA airlines in

terms of passenger numbers as of 9M13).

Turkey - Equity - Airlines

Re-initiation of Coverage


33

February 11, 2014

Aviation


RESEARCH

SUMMARY FINANCIALS (TLmn) The Company in Brief

Turkish Airlines is Turkey’s flag carrier with a fleet of

232 aircraft as of 2013. Following the SPO in 2006,

the Government’s stake was reduced to 49.12%, thus

THY is considered as a private company. THY

became a full member of Star Alliance in 2008.

Shareholders

Privatization Administration 49.12%,

Free Float 51.88%

Income Statement 2012 2013E 2014E 2015E 13E/12

Net Sales 14,909 19,057 25,422 30,430 28%

Operating Expenses -13,861 -17,828 -24,043 -28,838 29%

Operating Profit 1,048 1,229 1,378 1,592 17%

Consolidated EBITDA 2,640 2,788 3,190 3,787 6%

Consolidated EBITDAR 3,064 3,598 4,399 5,190 17%

Net Other Income/ Expense 557 95 127 152 -83%

Profit (Loss) from Subsidiaries 5 167 223 267 3143%

Net financial Income/ Expense -253 -254 -370 -461 1%

Profit (Loss) before Tax 1,357 1,237 1,358 1,550 -9%

Tax -224 -247 -272 -310 10%

Net Income 1,133 989 1,086 1,240 -13%

Ratios

EBIT Margin 7.0% 6.4% 5.4% 5.2% -0.6 pp

EBITDA Margin 17.7% 14.6% 12.6% 12.4% -3.1 pp

EBITDAR Margin 20.6% 18.9% 17.3% 17.1% -1.7 pp

Net Income Margin 7.6% 5.2% 4.3% 4.1% -2.4 pp

Balance Sheet 2012 2013E 2014E 2015E 13E/12

Current Assets 3,917 4,412 6,778 8,796 13%

Cash and Cash Equivalents 1,833 1,480 3,061 4,365 -19%

Short-Term Trade Receivables 777 1,194 1,436 1,712 54%

Inventories 259 398 493 579 54%

Other Current Assets 1,048 1,340 1,787 2,139 28%

Long Term Assets 14,881 21,382 24,780 30,038 44%

Total Assets 18,798 25,794 31,558 38,834 37%

Short Term Liabilities 4,551 6,515 8,356 10,051 43%

Short-Term Financial Loans 897 1,340 1,622 2,062 49%

Short-Term Trade Payables 912 1,382 1,730 2,012 51%

Other Short-Term Liabilities 2,742 3,793 5,004 5,976 38%

Long Term Liabilities 8,842 12,255 15,418 20,131 39%

Long-Term Financial Loans 7,801 10,722 12,976 16,497 37%

Other Long-Term Liabilities 1,041 1,534 2,441 3,634 47%

Shareholders Equity 5,405 7,024 7,784 8,652 30%

T. Liabilities & SE 18,798 25,794 31,558 38,834 37%


34

February 11, 2014

Aviation


RESEARCH

Investment Positives

A growing focus on the international market

THY has been one of the world’s fastest growing full service carriers in last

decade. THY operates an effective network and implements marketing strategies

aimed at increasing profitability in parallel with its growth. The airline is expanding

its network by adding new destinations, having become renowned worldwide for

its expansion strategy. THY’s current growth strategy has mainly hinged on

increasing its presence in medium to long haul routes since 2010. In terns of

number of destinations, medium and long-haul routes accounted for 45% of all

routes in 2013, compared to 35% in 2009. The airline’s main focus is to increase

the share of transit passengers in total pax carried to 50%+ from current 23%

compared to around 50% for Lufthansa. In parallel with this strategy, THY’s

domestic revenues accounted for 14% of its total in 9M13, compared to the 21%

in 2008.

Istanbul is the key for growth

Istanbul, being a transfer point on Europe- Middle East, Europe-Far East and

Asia, Europe-Africa, and America-Middle East lines, reduces flight time and

introduces the flexibility to use a variety of fleets of diverse capacity. Thanks to its

geographical position, Istanbul offers more convenient connections when

compared with other potential transfer points. Istanbul serves as a geographical

bridge between East and West, enabling the use of a narrow body fleet, thus

providing considerable cost advantages and contributing to competitive

superiority. In 9M13, a total of 8.5mn international passengers arrived from

various points on THY flights and transferred through Istanbul to fly to another

international destination. Notably, this number was 29% YoY higher when

compared to 9M12.

Revenue maximization/cost minimization efforts have gained importance

We believe the company’s strategy of opening new routes and increasing market

share in international markets will continue to put pressure on revenue yields until

2017. We observed a 6% decline in revenue yields in USD terms in 9M13 after

the 4.6% fall in 2012. According to our assumptions, revenue yields will drop by

1.2% per annum over the 2013-2016 period, vs. the 4.7% between 2008-2012. It

is worth highlighting that the management started to implement new yield

management software from the beginning of 2013. The new system uses an origin

-destination formula (O&D) rather than a point-to-point formula. As THY’s flight

network expands, a new revenue management system will be required to value

each seat on the network more precisely. The new system, O&D based revenue

management, maximizes the total revenue of the network by using sophisticated

demand forecasting and flight optimization tools, developed by the leading vendor

in the industry. Accordingly, the system displays the availability for each O&D pair

separately, resulting in the overall maximum gain. The CEO of THY stated that

2013 would be a calibration period for the new software and that yields would tend

to increase once transition was completed later this year. Therefore, we believe

the airline will more focus on unit cost minimization as observed in recent years

but which had been interrupted in 9M13 due to the one-off increase in

maintenance and personnel costs. We are not assuming a major change in unit

costs in 2013 after the 4.9% decline in 2012. Our projections suggest that unit

costs will register a 1.1% decline between 2013-2016 compared to the 2.7%


35

February 11, 2014

Aviation


RESEARCH

decline in 2008-2012, driven by a younger fleet, a more efficient workforce and the

delivery of wide body airliners.

Fleet to almost double by 2021

The company aims to nearly double the size of its fleet from 233 aircraft in 2013 to

436 aircraft by 2021. The total order stood at 265 aircraft as of 2013, of which 212

were firm orders and the remainder optional. The airline would record a 9% seat

capacity increase per annum between 2013-2021. In March 2013, THY had

placed a massive order for 117 narrow-body aircraft from Airbus, of which 82 were

firm orders and 35 optional, with the aircraft to be received between 2015-2020.

THY then placed another substantial order in April, this time for Boeing aircraft, for

95 narrow-body planes (70 firm and 25 optional) to enter the fleet between 2016

and 2021. A young and narrow-body denominated fleet would help THY to sustain

its competitive edges compared to both European and Gulf carriers.

Increasing brand awareness

The airline has undertaken a number of important projects to further develop its

global brand image. In addition to effective and successful campaigns in the social

media, the airline has invested heavily in its brand through a variety of platforms

including sponsorship agreements and global advertising. In recent years, THY

has made extensive use of the most popular communication channels in

disseminating corporate news in the fastest possible manner, to better

communicate with its passengers and become a part of their daily lives. THY’s

continuing investment in increasing quality and improving its branding has

recently won recognition by international aviation ranking organizations. THY has

been selected as Europe’s best airline by Skytrax for the last three years in a row

(2011, 2012 and in 2013).

Inorganic growth

THY has always been in search of inorganic growth opportunities, as indicated by

its previous attempts to acquire the Polish LOT and Portuguese TAP. However,

THY abandoned its attempts to acquire LOT due to EU regulations. The chairman

of THY, Mr. Hamdi Topcu was recently quoted as saying that THY was working on

an acquisition in Africa. An acquisition in a growing African market would likely be

perceived positively by investors, in our view, depending on price.

Strike concerns are over

THY reached an agreement with the new management of labour union, Hava-Is,

on pay for 2013-2015, officially ending the prolonged strike. Accordingly, pay will

be raised by 8.1% cumulatively in 2013 (backdated), 6.1% cumulatively in 2014

and 6.1% cumulatively in 2015. Importantly, THY agreed on a gross one-off

payment of TL5,500 to each unionized member of staff, subject to proportionate

days of worked during 2013 for each relevant member of staff. At the end of

9M13, THY had 22,971 personnel on its payroll, most of which were unionized.

The one-off payment could result in an additional expense of around TL100mn,

which we would not find worrisome. Occasional threats of strike action have long

been an issue affecting the share price.

2014 budget guidance implies strong top line, but cautious cost side

According to THY‘s 2014 budget guidance, the management of THY aims to

generate US$11.4bn in revenues (GS estimate: US$11.7bn). The company

anticipates a total pax number of 59.5mn, implying 23% YoY growth vs. our own

forecast of 19%. Total pax numbers are expected to be driven by domestic growth


36

February 11, 2014

Aviation


RESEARCH

(30% YoY expected) in 2014 more than by international growth (15% expected).

THY aims to boost its ASK by 21% to 141bn in line with our forecast of 20%

growth. Regarding the load factor, the airline is assuming a 78.8% load factor (GS

estimate : 79.0% vs. the 79.0% in 2013). As far as yields are concerned, THY

expects a 2% decline in domestic (TL) yields, but a 1% increase in international

(EUR) yields. We believe that achieving a 1% increase international yields could

present a challenge to the airline given the observed yield contraction in recent

quarters. However, we find the airline more cautious on the cost side, expecting a

2% increase in its CASK ex-fuel (USD) in 2014. We appear to be more optimistic

on the cost side; we do not have any information on what exchange rates were

budgeted by THY in 2014 but we believe that exchange rates assumptions would

be the reason behind this divergence. (see details on page 41)

An attractive valuation

Our 2014-end target share price of TL9.20, derived from target EV/ EBITDAR

multiple, offers 31% upside for THY. Our valuation for THY is based on the 2014E

target EV/EBITDAR multiple. To reach our target Mcap, we adjusted net debt for

8x aircraft related rental expenses and current PDP receivables. We employed a

6.3x target multiple for THY, which is inline with its 5-year average EV/EBITDAR

multiple. THY trades at a discount of 8% to its peers on the basis of its 2014E P/E,

but 14% premium based on its EV/EBITDA which is justified with THY’s strong

prospects, in our view, based on our forecasts.

Investments Negatives

High sensitivity to oil prices and FX rates

THY’s major cost item is fuel, which accounts for around 37% of overall COGS,

followed by staff costs (18%). The company has a strategy of passing 50% of fuel

price increases to customers through the fuel surcharge, while hedging 50% of its

fuel expenses; we did not factor in the potentially positive effect of the fuel

surcharge and hedging in our assumptions. Considering its lower hedging ratio

when compared to the 60% levels of its European peers, THY’s margins - and our

valuation – are highly sensitive to movements in fuel prices. Due to the currency

mismatch in THY’s operations (FX denominated costs account for 74% of THY’s

total costs, while FX denominated revenues account for 86% of revenues), the TL

weakness effectively serves to support THY’s profitability.

Deterioration in demand and higher than expected contraction in yields

THY’s expansion and its fleet plans are based on increasing demand; hence lower

than expected demand in any of the markets where THY operates in represents a

key risk for the company. The airline industry is highly volatile and exposed to a

number of risks, including macro conditions, geopolitical tensions in the region

and natural disasters. Other than that, the opening of new routes and increased

capacity coupled with stiff competition on its routes would result in a steeper than

expected contraction in yields.


37

February 11, 2014

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RESEARCH

Capacity constraints at Istanbul Ataturk Airport (IAA) – THY’s main hub

IAA served 51mn passengers in 2013, not far short of its capacity of 60-65mn.

However, the capacity constraint is less of concern now as the government plans

to increase capacity at the airport by 30% with some new measures. Through

such capacity enhancements, the company will seek to handle operations at the

airport properly until the 3rd Airport enters operation. Recall that the Minister of

Transportation, Binali Yildirim, said that the construction of a 3rd airport would

begin by 1Q14 at the latest, and that the President of Limak Holding, Nihat

Ozdemir, stated that the 3rd airport would enter operation by the beginning of

2019. Given the current global liquidity concerns and political turmoil in Turkey, we

would not expect the delays in the completion of Istanbul’s new airport to hurt

THY’s operations. Alternatively, THY also has a presence at Istanbul Sabiha

Gokcen Airports (SAW) which currently has a pax capacity of 25mn. As of 9M13

the airline operated 14 aircrafts from the airport serving 30 destinations (19

domestic and 11 international). It carried 2.6mn passengers (+100% YoY) in 9M13

with 77% load factor. The airline plans to appoint 24 aircraft to SAW and to fly to

36 destinations (9 domestic and 27 international) in 2014. After the completion of

a second runway at the airport, SAW’s capacity will reach to 50mn pax.

Pegasus’ legal action at the Competition Board

There is an ongoing investigation into THY after Pegasus filed a complaint to the

Competition Board. This is a long running dispute related to the question of

whether THY abused its dominant position in domestic and international flights

from Istanbul and blocked others seeking to penetrate the market. The

Competition Board had earlier ruled against THY, but the decision was later

overruled in court, whereupon the Competition Board re-opened the investigation.

As far as we know, there are currently no further developments. A negative

outcome related to the investigation would cause share price weakness for THY.

A potential SPO

The Privatization Authority holds a 49.12% stake in THY and announced back in

December 2010 that it would evaluate advisory/consultancy services for a further

stake sale in THY. Therefore, a potential secondary offering could create

overhang on the shares.


38

February 11, 2014

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RESEARCH

VALUATION

Multiple Valuation

2014-end target price of TL9.20/share. Our 2014-end target share price of

TL9.20 derived from our target EV/EBITDAR multiple offers 31% upside potential

for THY. Our valuation for THY is based on the 2014E target EV/EBITDAR

multiple. To reach our target Mcap, we adjusted net debt to 8x aircraft related

rental expenses and current PDP receivables. We employed a 6.3x target multiple

for THY, which is the 5-year average EV/EBITDAR multiple.

Peer comparison. We have presented multiples for international airlines to put

THY’s valuation into perspective. As shown below, THY trades at a 8% discount to

its emerging market peers on the basis of its 2014E P/E, while at 14% premium

on the basis of EV/EBITDA multiples, which is justified with THY’s strong growth

prospects, in our view.

Target EV/EBITDAR mutiple (x) 5.75 6.00 6.25 6.50 6.75

GS 2014E EBITDAR(TLmn) 4,399 4,399 4,399 4,399 4,399

Target EV (TLmn) 25,294 26,394 27,494 28,593 29,693

Adj. Net debt (TLmn) 14,794 14,794 14,794 14,794 14,794

Target Mcap (TLmn) 10,500 11,600 12,700 13,799 14,899

Outstanding number of shares (mn) 1,380 1,380 1,380 1,380 1,380





THY Valuation Summary


39

February 11, 2014

Aviation


RESEARCH

Recommendation: OUTPERFORM. THY has differentiated itself on the basis of

service quality and competitiveness in recent years. Istanbul’s geographical

advantage and the airline’s relatively low labour costs (especially when compared

to European carriers) enhances THY’s competitiveness. As an emerging

international travel hub, Istanbul is in the position of enabling the airline to boost

its transit passenger numbers and better utilize the fleet (especially its narrow

body aircraft) and seat capacity. With a young fleet (6.7 years on average),

improved brand awareness and increased capacity, THY is in a position to capture

market share from EU carriers, which struggle to offer high quality service and

capacity additions with their relatively old fleets. THY shares have outperformed

the index by 39% in 2013 and 16% ytd and now trade at a 8% discount to its peer

group on the basis of its 2014E PE. Ongoing TL weakness and anticipated strong

traffic figures should have a positive impact on profitability in 2014.

Risks. A decline in the economic activity, rising oil prices, Euro weakness against

the Dollar and the Privatization Administration’s sale of its stake in THY pose risks.

A negative outcome of Pegasus’s legal action at the Competition Board and

geopolitical tensions could also emerge as risks.

Peer Comparison*

Company Country MCAP (US$) 2014 2015 2014 2015 2014 2015

Full Service Carriers (FSC)

Developed 0.45 0.43 4.46 3.58 13.08 8.17

Deutsche Lufthansa AG GERMANY 11,070 0.30 0.29 3.0 2.4 11.8 7.3

Air France-KLM FRANCE 3,508 0.37 0.37 4.3 3.7 11.4 6.1

International Consolidated Airlines Group SA BRITAIN 14,108 0.58 0.55 4.8 3.9 14.5 9.4

Air Berlin PLC GERMANY 325 0.24 0.23 10.4 7.9 n.a n.a

Qantas Airw ays Ltd AUSTRALIA 2,141 0.36 0.35 5.1 3.7 n.a n.a

Virgin Australia Holdings Ltd AUSTRALIA 1,053 0.63 0.59 12.7 8.8 n.a n.a

Emerging 1.10 0.93 5.86 4.99 9.74 7.87

Cathay Pacif ic Airw ays Ltd HONG KONG 7,810 0.89 0.83 6.6 5.8 12.3 9.6

Air China Ltd CHINA 8,310 1.04 0.94 5.7 5.1 9.8 7.6

Aeroflot - Russian Airlines OJSC RUSSIA 2,555 0.43 0.40 3.7 3.4 4.8 4.8

Gol Linhas Aereas Inteligentes SA BRAZIL 1,209 0.66 0.60 6.4 5.2 n.a 18.2

China Airlines Ltd TAIWAN 1,774 1.05 1.01 5.2 n.a 12.3 n.a

China Eastern Airlines Corp Ltd CHINA 5,049 0.79 0.72 5.6 4.8 8.2 6.1

China South City Holdings Ltd HONG KONG 3,198 2.94 2.01 6.7 4.2 8.4 5.7

THYAO multiples 4,367 0.8 0.8 6.7 6.3 8.9 7.8

Discount/Premium to Developed FSC 87% 84% 50% 77% -32% -4%

Discount/Premium to Emerging FSC -24% -16% 14% 26% -8% -1%

Source: Bloomberg, Garanti Securities

EV/SALES EV/EBITDA P/E


40

February 11, 2014

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RESEARCH

MODEL ASSUMPTIONS

2011 2012 2013E 2014E 2015E 2016E

# of total passengers (mn) 32.7 39.0 48.3 57.4 68.5 81.0

YoY 12.2% 19.6% 23.6% 18.9% 19.2% 18.4%

Load factor 72.6% 77.7% 79.0% 79.0% 79.1% 79.2%

YoY (pps) -1.1 pps 5.1 pps 1.3 pps 0.0 pps 0.0 pps 0.1 pps

ASK (mn) 81,167 96,131 116,423 140,133 163,325 189,741

YoY 24.7% 18.4% 21.1% 20.4% 16.6% 16.2%

RPK (mn) 58,918 74,705 91,981 110,761 129,169 150,275

YoY 22.8% 26.8% 23.1% 20.4% 16.6% 16.3%

RASK (US cents) 7.5 7.6 7.7 7.5 7.5 7.4

Revenue Yield (US cents) 10.2 9.8 9.7 9.4 9.4 9.3

Revenue (TLmn) 11,813 14,909 19,057 25,422 30,430 36,415

YoY 40.2% 26.2% 27.8% 33.4% 19.7% 19.7%

CASK (US cents) 8.4 8.0 8.0 7.9 7.9 7.8

CASK-ex fuel (US cents) 5.5 5.1 5.1 5.1 5.0 5.0

EBITDA (TLmn) 945 2,640 2,788 3,190 3,787 4,566

YoY 4.5% 179.5% 5.6% 14.4% 18.7% 20.6%

Revenue yield-CASK (spread) 1.8 1.7 1.6 1.5 1.5 1.5

EBITDA margin 8.0% 17.7% 14.6% 12.6% 12.4% 12.5%

YoY (pps) -2.7 pps 9.7 pps -3.1 pps -2.1 pps -0.1 pps 0.1 pps

EBITDAR (TLmn)** 1,365 3,064 3,598 4,399 5,190 6,218

YoY 3.9% 124.5% 17.4% 22.3% 18.0% 19.8%

EBITDAR margin 11.6% 20.6% 18.9% 17.3% 17.1% 17.1%


Net Income (TLmn) 19 1,133 989 1,086 1,240 1,493

YoY -93.5% 6020.1% -12.7% 9.8% 14.2% 20.4%

Net margin 0.2% 7.6% 5.2% 4.3% 4.1% 4.1%


ROAE 0.4% 22.9% 15.9% 14.7% 15.1% 17.7%

YoY (pps) -7.5 pps 22.4 pps -7.0 pps -1.2 pps 0.4 pps 2.6 pps

Average Brent price (USD) 111 112 108 103 103 103

YoY 38% 1% -3% -5% 0% 0%

Capex (TLmn) 5,475 2,635 6,604 2,655 4,138 4,507

YoY -52% 151% -60% 56% 9%

2011 2012 2013 2014E 2015E 2016E

USD/TRY-eop 1.89 1.78 2.13 2.20 2.29 2.38

USD/TRY-avg 1.67 1.79 1.90 2.17 2.25 2.33

EUR/TRY-eop 2.44 2.35 2.93 2.86 3.09 3.26

EUR/TRY-avg 2.32 2.30 2.53 2.90 2.98 3.17

EUR/USD-eop 1.29 1.32 1.38 1.30 1.35 1.37

EUR/USD-avg 1.39 1.29 1.33 1.34 1.33 1.36

Basket (EUR+USD)-eop 2.17 2.06 2.53 2.53 2.69 2.82

GDP growth 8.8% 2.2% 4.0% 1.5% 4.0% 4.0%

CPI 10.5% 6.2% 8.2% 7.7% 6.0% 6.0%

Source: The Company, Garanti Securities

*Figures are based on our own calculations may differ from company's figures

** Our EBITDA[R] calculation includes net other income/(expense) and income/(loss) from associates

Model Assumptions at a glance*

Macro assumptions


41

February 11, 2014

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RESEARCH

HOW WE STAND ALONGSIDE THE CONSENSUS According to the forecasts compiled by Bloomberg, we are generally in line with

consensus at the top line and EBITDA line for 2013E and 2014E; however, our

2014E net income forecast is 16% lower than the consensus estimate.

2014 Guidance vs. Garanti Securities THY management provided its guidance for 2014 on 30 December. THY

management targets revenue generation of US$11.4bn (GS estimate: US$11.7bn)

by carrying 59.5m passengers (GS estimate: 57.4m) and increasing its ASK by

21% (GS estimate: 20%) with a 78.8% load factor (GS estimate: 79.0%). THY

plans to open 16 new routes in 2014 and have 267 aircraft in its fleet by the end of

2014. In terms of unit revenue, THY anticipates a 2% decline in domestic revenue

yields (in TL terms), in line with the GS estimate, but a 1% increase in

international revenue yields in EUR terms (GS estimate: 1% decline). On the cost

side, the airline expects a 2% increase in CASK (ex-fuel) in USD terms (GS

estimate: 1% increase). THY management’s passenger targets are 4% higher

than our own passenger forecasts, but we are in line with the airline for the top

line. We do appear to be more optimistic on the cost side. We have no information

regarding the exchange rate levels which were budgeted by THY in 2014 but we

believe exchange rate assumptions would be the reason behind the discrepancy.

BUSINESS OVERVIEW

Revenue

The passenger segment is the main source of revenue, followed by cargo. As of

9M13, THY generated 89% of its top line from the passenger segment, with 14%

of this derived from domestic flights. THY’s strong pax figures (which followed a

CAGR of 16% between 2008-13) was the main reason behind the strength in

passenger revenues. The airline recorded 24% growth in 2013 (see details for

traffic figures on page 50). We forecast a 19% CAGR in pax numbers for the 2013

-2016 period. Relatively robust GDP growth and Turkey’s rising attractiveness for

tourism, coupled with the country’s geographical advantage, supporting transit

passenger numbers, were seen as the key drivers of passenger growth. THY has

been diversifying its geographical exposure as shown below. Cargo is the second

largest segment in total revenues, with an 8% share in total revenues. We assume

cargo revenues will comprise around 9% of total revenues going forward.

Consensus vs. Our estimates

THYAO

(TLmn) 2013 2014 2015 2013 2014 2015 2013 2014 2015

Net Sales 18,878 24,730 28,714 19,057 25,422 30,430 1% 3% 6%

EBITDA 2,689 3,323 4,077 2,788 3,190 3,787 4% -4% -7%

Net Profit 940 1,300 1,553 989 1,086 1,240 5% -16% -20%

EBITDA Margin 14.2% 13.4% 14.2% 14.6% 12.6% 12.4% 0.4 pps -0.9 pps -1.8 pps

Net Income Margin 5.0% 5.3% 5.4% 5.2% 4.3% 4.1% 0.2 pps -1.0 pps -1.3 pps

Target Share Price


Bloomberg Garanti Securities Difference

9.00 9.20 2%

2014E Guidance Garanti

Total Pax (mn) 59.5 57.4

-Domestic 26.2 25.4

-International 32.3 32.0

- Hajj and charter f lights pax 1.0

Revenue (USDbn) 11.4 11.7

Total ASK growth 21% 20%

-Turkey 33%

-South America 29%

-Africa 25%

-Far East 22%

-North America 20%

-Europe 16%

-Middle East 13%

Load Factor 78.8% 79.0%

Passenger revenue yield

-Domestic (TL) -2% -2%

-International (EUR) 1% -1%

CASK-ex fuel growth (USD) 2% 1%



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February 11, 2014

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RESEARCH

Passenger revenue yield (US cents)

Along with the increasing share of medium/long haul routes in THY’s network

between 2005 and 2011, the airline managed its unit revenues successfully and

increased them by 2.4% over the same period. However, it would appear that this

trend was reversed in 2012 and 2013 as a result of the airline’s strategy to tap

markets in the hinterland of major carriers (in Europe, the Far East and the

Americas) by introducing a significant volume of seating capacity, giving rise to

stiff competition in these regions. Furthermore, the calibration of the airline’s new

revenue system has had a negative impact on yields in 2013. The transition to a

new system is expected to be completed in 2014 and we assume a further 2%

decline in unit revenues in 2014. We believe yields will come under pressure till

2017 in view of the airline’s intention to open new routes and boost its market

share in international markets. We project a 1% contraction in yields in 2013 after

the 5% decline in 2012. We also assume a 1.3% decline in yields between 2013

and 2016 with declines of 2.3% in 2014, 0.8% in 2015 and 0.8% in 2016.The

positive outcomes of the airline’s more effective revenue yield management and

potential rationalization in terms of competition coupled with the likelihood of lower

capacity additions could prove upside challenges to our numbers.

Revenue Yield evolution(US cents)


12.112.2

11.8

11.0

9.49.1

8.8

11.9

11.0

9.59.9

9.5 9.49.4 9.4

9.3

9.69.3

10.010.2

9.8 9.79.4

9.49.3

9.9

9.3

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

2010 2011 2012 2013E 2014E 2015E 2016E 9M12 9M13


THY Revenue Split by geography


44%

15%

23%

9%

6% 3%

2003

Europe

Far East

Domestic

Middle East

America

Africa

34%

21%14%

13%

10%

8%

9M13

Europe

Far East

Domestic

Middle East

America

Africa

THY Revenue by segment


89%

8%2% 1%

9M13

Passenger

Cargo

Other

Charter


43

February 11, 2014

Aviation


RESEARCH

Load Factors

THY’s load factor has been improving since 2011 after registering an annual

decline of almost 110 bps in 2011 as the company was unable to keep its load

factor at reasonable levels, especially on its routes to the Far East, the Americas

and Africa, and as the airline had difficulty filling in the increasing capacity in those

regions. The airline’s load factor did increase by 510bps in 2012 to reach 77.7%,

and this was followed by a further 130 bps improvement in 2013. The 2013’s load

factor figure was better than the 78.8% figure initially guided by the management.

We expect a 79% load factor in 2014, marginally higher than the airline’s own

guidance of 78.8%. The company plans to increase its seat capacity by 15% per

annum between 2014 and 2016 (after increases of 18% in 2013 and 12% in 2012)

and we believe the company’s load factor will continue to hover around 79% for

the next three years.

In addition to THY’s relatively lower operating costs when compared to major

airlines, enabling it to offer lower ticket prices, the maturity of routes opened in

recent years and Istanbul’s increased appeal for transfer passengers could result

in higher load factors along with improving brand awareness globally. The

company plans to increase its ASK by 21% in 2014. In terms of region, the

strongest increase is expected in flights within Turkey (33%) followed by flights to

South America (29%) and flights to Africa (25%), illustrating the airline’s target of

benefiting from the strong demand in those regions.

Available Seat Km ('000) 2012 2013 YoY 2014 Budget YoY

Middle East 8,936,948 10,536,040 17.9% 13%

Europe 30,251,679 36,714,670 21.4% 16%

Far East 22,206,118 25,800,389 16.2% 22%

N.America 11,177,957 13,715,060 22.7% 20%

Africa 7,601,716 9,800,327 28.9% 25%

S.America 1,499,985 2,045,469 36.4% 29%

Domestic 11,942,667 15,227,947 27.5% 33%

Total 93,617,070 113,839,902 21.6% 21%

Source: The Company

THY's ASK vs. Load Factor


73.7%72.6%

77.7%

79.0% 79.0% 79.1% 79.2%

68.0%

70.0%

72.0%

74.0%

76.0%

78.0%

80.0%

-

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

2010 2011 2012 2013 2014E 2015E 2016E

ASK (mn) Load Factor (%)


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February 11, 2014

Aviation


RESEARCH

Seat Capacity Evolution

Source: The company

16%

17%

13%

15%

8% 8%

11%

1%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Average Daily Flight Utilization (hours)

Source: The Company

12:31

13:26

12:49

13:20 13:18

14:21 14:21

14:59

11:0011:32 11:40

11:55

11:20

11:48 11:5512:1911:13

11:40 11:3912:02

11:40

12:14 12:1812:43

2007 2008 2009 2010 2011 2012 9M12 9M13

WB Long Haul NB Medium Haul Total

Load Factor (%) 2012 2013 YoY (ppt) 2014 Budget YoY

Middle East 71.9 72.4 0.6

Europe 76.8 78.2 1.5

Far East 80.5 81.3 0.8

N.America 82 83.6 1.6

Africa 74.6 76.2 1.6

S.America 72.5 81.4 9

Domestic 79.1 79.4 0.4

Total 77.9 79.1 1.2 78.8

Source: The Company


45

February 11, 2014

Aviation


RESEARCH

Cost

As with all airlines, fuel is the largest operating cost item, followed by personnel

costs. Given the growth in operations, we believe these two items will continue to

challenge the airline’s profitability.

TLmn 2011 2012 2013E 2014E 2015E 2016E

Jet fuel expenses 3,999 5,159 6,602 8,553 10,382 12,530

as of total revenues 33.9% 34.6% 34.6% 33.6% 34.1% 34.4%

as of total cogs 34.9% 37.2% 37.0% 35.6% 36.0% 36.3%

per ASK in US cents 3.0 3.0 3.0 2.8 2.8 2.8

Personnel expenses 2,237 2,470 3,186 3,990 4,605 5,374


as of total cogs 19.5% 17.8% 17.9% 16.6% 16.0% 15.6%


Lease expenses (dry+wet) 421 425 810 1,209 1,403 1,652


as of total cogs 3.7% 3.1% 4.5% 5.0% 4.9% 4.8%


Depreciation 812 1,030 1,297 1,462 1,776 2,127


as of total cogs 7.1% 7.4% 7.3% 6.1% 6.2% 6.2%


Maintenance 385 391 572 763 913 1,092


as of total cogs 3.4% 2.8% 3.2% 3.2% 3.2% 3.2%


Ground Handling 786 879 1,048 1,398 1,674 2,003


as of total cogs 6.9% 6.3% 5.9% 5.8% 5.8% 5.8%


Advertisement 146 169 216 288 344 412


as of total cogs 1.3% 1.2% 1.2% 1.2% 1.2% 1.2%


Commission 379 523 668 891 1,067 1,277


as of total cogs 3.3% 3.8% 3.7% 3.7% 3.7% 3.7%


Other costs 2,289 2,817 3,430 5,489 6,673 8,010


as of total cogs 20.0% 20.3% 19.2% 22.8% 23.1% 23.2%




Cost Assumptions at a glance


46

February 11, 2014

Aviation


RESEARCH

CASK

THY’s unit costs came in at 8.4 US cents in 2011, up slightly from the 7.9 US

cents in 2010 mainly due to the sharp increase in fuel costs (oil prices increased

to USD111 in 2011, up from the USD80 in 2010). Although the airline recruits

personnel before the delivery of aircraft for training purposes as a part of its fleet

expansion in a bid to successfully manage its growing operations, we have

observed a declining trend in personnel costs per ASK over the past three years.

At the beginning of 2012, costs started to ease and the company lowered its

CASK to 8.0 US cents. Despite the relatively lower oil prices in 2013 when

compared to 2012, we believe that airline will have closed 2013 with a similar

CASK figure to 2012, as we have observed an increase in costs (mainly

maintenance) other than fuel and personnel in 9M13. We anticipate that CASK

and CASK-ex-fuel levels to remain little changed for the 2013 full year. Looking to

2014, we anticipate a 1% increase in CASK (ex-fuel) yet a 2% decline in CASK,

thanks to our assumption of a 5% decline in the oil price. However, the airline is

more cautious on CASK-ex-fuel, budgeting for a 2% YoY increase in 2014. We

assume a 1% decrease for both CASK and CASK-ex-fuel for 2015 and 2016

considering the airline’s ongoing cost cutting efforts. To recap, we do not factor in

any fuel hedging to our estimates.

EBITDAR margin

According to our calculations, the airline has averaged a 16% EBITDAR margin

over the 2010-2012 period. As of 9M13, THY’s EBITDAR margin had improved to

21.3% from the 19.7% in 9M12. We forecast a 160 bps YoY decline in the

EBITDAR margin in 2014 due to yield contraction and increase in ex-fuel costs.

Based on the forecasts we have set out above, we expect the EBITDAR margin to

remain close to its current levels over the 2014-2016 period, parallel to our

revenue-cost yield spread forecast, which is projected to stand at around 1.5 US

cents during the same period under the assumption of no one-off time unit cost

spikes. The increasing aircraft utilization, wide body deliveries, the young fleet of

the airline and its relatively low cost workforce could set the stage for further

efficiencies, helping EBITDAR margins improve beyond our projections.

CASK evolution (US cents)


7.9

8.4

8.0

8.0 7.9 7.9 7.8 7.8 7.9

1.8 1.7 1.4 1.4 1.3 1.3 1.2 1.5 1.3

2.2 3.0 3.0 3.0 2.8 2.8 2.8 3.0 3.0

4.0 3.83.6 3.6 3.8 3.8 3.7

3.3 3.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2010 2011 2012 2013E 2014E 2015E 2016E 9M12 9M13

CASK Personel/ASK Fuel/ASK Others/ASK


47

February 11, 2014

Aviation


RESEARCH

Fleet

THY had 232 aircraft in its fleet at the end of 2013, 78% of which were narrow

body aircraft. The number of wide body aircraft has been increasing more rapidly

than its narrow body fleet, in line with THY’s strategy of increasing its presence in

medium/long haul routes. The airline plans to almost double its wide body fleet by

2016.

As shown above, according to the fleet expansion program, the airline aims to

reach a fleet of 436 aircraft by the end of 2021, raising its seat capacity from the

end-2013 figure of 42,200 to 83,500 by 2021.

Net debt-capex

As of 9M13, THY’s debt position stood at TL9.1bn. According to our calculations,

THY had an adjusted net debt level of TL14.7bn as of 9M13. Some 76% of THY’s

financial debt has fixed rate interest, while the rest is subject to floating interest

rates. According to our calculations, we anticipate an adjusted Net Debt/EBITDAR

ratio of 4.8x in 2013E, up from the 3.3x in 2012E, as we believe operating

profitability will decrease in 2014, assuming there is no repeat of the one-off gain

in other income, as was recorded in 2012 (TL351mn).

Considering the fleet expansion program above mentioned, we have assumed a

40% manufacturer discount in calculating our fleet expansion cost, and assumed

that it would be financed through a ratio of 90% financial leasing and 10%

operational leasing, in line with the airline’s general approach.

2013 2014 2015 2016 2017 2018 2019 2020 2021

A330-200 8 14 14 14 12 12 11 11 11

A330-300 12 17 25 30 30 30 30 30 30

A340-300 7 7 7 7 7 7 7 7 7

B777-3ER 12 16 23 29 32 32 32 32 32

Wet Lease 3 0 0 0 0 0 0 0 0

Total 42 54 69 80 81 81 80 80 80

B737-900ER 10 10 15 15 15 15 15 15 15

B737-9 MAX 0 0 0 0 0 0 5 10 10

B737-800 48 55 55 75 74 65 65 65 65

B737-800 WL 22 35 34 32 32 30 28 20 20

B737-8 MAX 0 0 0 0 0 20 30 55 65

B737-700 3 3 3 1 1 0 0 0 0

B737-700 WL 10 8 2 2 2 0 0 0 0

A320-200 33 36 33 33 26 22 15 12 12

A321-200 41 43 56 66 68 68 68 66 64

A320 NEO 0 0 0 4 4 4 4 4 4

A321 NEO 0 0 0 0 4 31 56 88 88

A319-100 14 14 14 14 11 9 8 6 6

Total 181 204 212 242 237 264 294 341 349

A310-300 2 2 2 2 2 2 2 2 2

A330-200 5 5 5 5 5 5 5 5 5

Wet Lease 2 2 0 0 0 0 0 0 0

Total 9 9 7 7 7 7 7 7 7

GRAND TOTAL 232 267 288 329 325 352 381 428 436

Year End Fleet*

Wide Body

Narrow Body

Cargo

Type


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February 11, 2014

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THY's debt profile

Source: The Company

10%

90%

OperationalLease

FinancialLease

51%41%

8%

US$

EUR

JPY

24%

76%

Floating

Fixed

Maturity Profile of Debt Balance

Source: The Company

189

743 733

821

606539 526

642

535

158

6912

0

200

400

600

800

1000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

US

$m

n

THY Indebtedness


3.3

4.8 4.8 4.9

1.9

2.4

2.72.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-

5,000

10,000

15,000

20,000

25,000

30,000

2012 2013E 2014E 2015E

Adj. Net Debt (TLmn) EBITDAR (TLmn)

Adj. Net Debt /EBITDAR (rhs) Adj. Net Debt /Equity (rhs)


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February 11, 2014

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Sensivities

THY’s profitability and valuation are highly sensitive to fuel prices and currency

moves, since 86% of the company’s revenues (41% in EUR; 16% in USD) and

74% of the company’s expenses (55% in USD; 12% in EUR) are in hard

currencies.

RECENT DEVELOPMENTS

Lufthansa’s decision to end the code share agreement with THY

On November 26, 2013, Lufthansa announced that it had decided to end the code

sharing agreement with THY by March 2014. Lufthansa also stated that it would

credit their customers with only a quarter of the status miles they could earn on

Lufthansa when flying with THY. After this decision, THY issued a statement

where it announced that the code sharing revenues accounted for just 2% of the

airline’s total consolidated revenues, adding that “although Lufthansa has reached

a decision to end its code-sharing agreements with Turkish Airlines, we will still

maintain a close relationship within the context of the Star Alliance. We do not

expect this to affect Turkish Airlines’ business in the future. As Turkish Airlines

continues to grow, strengthen and extend its network with more destinations and

increased frequency of flights, it is natural for strategic partnerships in the

business to change and evolve”. More recently, the managements of both THY

and Lufthansa met in Istanbul. Mr.Hamdi Topcu, the Chairman of THY, was quoted

as saying that Lufthansa would review its decision to end the code sharing

agreement. Although we do not attach a great deal of importance to the code

sharing agreement between THY and Lufhansa considering that it only accounts

for around 2% of revenues, as stated above, a move by Lufthansa to reconsider

THY Revenue by currency THY Expenses by currency


EURO, 41%

USD, 16%

TL, 14%

Other, 28%

9M13

EURO, 12%

USD, 55%

TL, 26%

Other, 7%

9M13

Impact on THY ----- US$5/bbl increase ----- ----- 5% increase -----

2014E estimates Oil price EUR vs.USD

EBITDA (TLmn) -13% 24%

EBITDAR (TLmn) -9% 18%



50

February 11, 2014

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its recent decision could bring hopes of a partnership between THY and Lufthansa

back on the table.

Strong Traffic figures in 2013

THY’s pax numbers rose by 24% YoY to 48.3mn and its load factor increased by

1.4 pp YoY to 79.0% in 2013 (see details below). Hence, THY exceeded its 2013

pax target of 46mn. We anticipate 57.4mn pax for THY in 2014, implying 19%

growth on an annual basis. The airline will likely to release its January traffic

figures in the second week of February. Stronger than expected traffic results

would have a positive impact on the share price, despite the weak seasonality

generally seen in the first quarter.

Cumulative Figures 2009-12M 2010-12M 2011-12M 2012-12M 2013-12M

Number of Landing 213,953 243,348 265,628 302,416 369,572

Available Seat Km (mn) 56,574 65,056 81,167 96,131 116,423

Revenue Passenger Km (mn) 40,130 47,928 58,941 74,658 92,003

Passenger Load Factor (%) 70.9% 73.7% 72.6% 77.7% 79.0%

Revenue Passengers (mn) 25.1 29.1 32.7 39.04 48.27

Cargo and Mail (Tons) 238,060 313,410 371,033 470,636 565,338

Fleet 132 156 179 200 233

Seat Capacity 23,549 27,886 32,554 36,504 42,236

Number of Destinations 156 171 189 217 243

Km Flow n ('000) 312,869 358,326 449,565 542,293 690,561

Hours Flow n 540,492 621,718 707,066 836,953 1,016,092

Change YoY 2009-12M 2010-12M 2011-12M 2012-12M 2013-12M

Number of Landing 12% 14% 9% 14% 22%

Available Seat Km (mn) 22% 15% 25% 18% 21%

Revenue Passenger Km (mn) 17% 19% 23% 27% 23%

Passenger Load Factor (%) -3.06 pp 2.74 pp -1.05 pp 5.05 pp 1.36 pp

Revenue Passengers (mn) 11% 16% 12% 19.6% 23.6%

Cargo and Mail (Tons) 20% 32% 18% 27% 20%

Fleet 4% 18% 15% 12% 17%

Seat Capacity 6% 18% 17% 12% 16%

Number of Destinations 10% 10% 11% 15% 12%

Km Flow n ('000) 19% 15% 25% 21% 27%

Hours Flow n 19% 15% 14% 18% 21%

Source: The Company


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THE COMPANY OVERVIEW

Turkish Airlines was founded in 1933. In 1990, a 5% stake in Turkish Airlines was

sold to the public, followed by a 23% stake in 2004 and 29% in 2006. Currently,

the Privization Authority holds 49.12% of the shares in THY, with the remaining

stake floating freely on the stock exchange. THY has been a member of Star

Alliance since 2008. According to Skytrax's World Airline Awards, Turkish Airlines

was ranked as Europe's best airline in 2011, 2012 and 2013. Turkish Airlines is

Europe’s third largest airline in terms of passenger numbers, and the world’s

seventh biggest according to the number of destinations served. The company

flies to a total of 239 destinations (42 domestic and 197 international) with a fleet

of 233 aircraft as of the end of 2013.

Ownership Structure

There are two types shares for THY; A-type and C-type. Six A-type type

shareholders and one C-type shareholder are represented on THY’s Board of

Directors. The Privatization Authority is represented on the board through its C

type share ownership, which bear some privileges and provides the state with

special management and approval rights. The Privatization Authority is evaluating

the sale of a further stake in THY and appointed a consulting firm to determine the

strategy for the process in December 2010. According to THY’s Articles of

Association, foreign ownership may not exceed 40%, suggesting the Privatization

Authority would not sell a stake exceeding 7% to foreign investors unless an

amendment was made to the Articles of Association; foreign ownership in THY is

hovering at around 65%. We would not deem a potential SPO in THY to be very

likely.

SUBSIDIARIES

THY Turkish Technic

Turkish Technic offers maintenance, repair and technical support to Turkish

Airlines and more than 100 domestic and international airlines. Established in

2006, the company is a wholly-owned subsidiary of Turkish Airlines.

With its subsidiary operations and more than 2,000 employees, Turkish Technic

conducts its activities with the goal of becoming an important regional air transport

technical maintenance base by supplying the full range of maintenance, repair,

and technical and infrastructure support the aviation industry requires.

THY ownership


49.12%50.88%

PrivatizationAuthority

Free Float


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February 11, 2014

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SunExpress

Founded in 1989, SunExpress is a joint venture between Turkish Airlines and

Lufthansa, in which each holds a 50% stake. It is the market leader in charter

flights between Germany and Turkey.

Having inaugurated its flights in 1990, the company has served the charter market

for many years. It began to operate on the Antalya-Frankfurt route as the first

privately owned airline in Turkey to operate a regularly scheduled international

flights. The airline currently has a fleet of 23 aircraft and a workforce of 1,695

employees as of 2012.

Turkish OPET Aviation Fuels

Turkish OPET Aviation Fuels, established in 2009, is a joint venture between

Turkish Airlines and OPET Petrolcülük A.Ş, in which each holds an equal stake. It

provides jet fuel storage and supply services at İstanbul Atatürk and other airports

in Turkey.

The company commenced operations on 1 July 2010. In addition to all kinds of

aviation fuel , it also engages in the domestic and international sale, import,

export, distribution, and transport of chemicals, lubricants, and paints.

Turkish Ground Services

The company provides ground handling services at İstanbul Atatürk Airport and at

five other airports in Turkey. Established in 2009 as a joint venture between

Turkish Airlines and HAVAŞ Havaalanları Yer Hizmetleri A.Ş under TAV, in which

each holds a 50% stake, TGS (Turkish Ground Services) has been in operation

since the beginning of 2010.

Providing services to high international standards, TGS serves approximately 70

domestic and international airlines in addition to Turkish Airlines at Turkey’s

İstanbul Atatürk, Ankara Esenboğa, İzmir Adnan Menderes, Antalya, Adana, and

İstanbul Sabiha Gökçen airports. Employing over 7,000 personnel, TGS has

provided ground services to more than 400,000 flights to date.

THY Turkish DO & CO

The Company provides catering services to Turkish Airlines and more than sixty

other domestic and international airlines. Commencing operations in 2007,

Turkish DO&CO is a joint venture between Turkish Airlines and DO&CO

Restaurants & Catering AG (DOCO TI, NR), in which each holds a 50% stake.

Headquartered at İstanbul Atatürk Airport, it provides catering services to

domestic and international airlines out of kitchens operating at nine locations in

Turkey. These kitchens turn out around 140,000 meals a day, each choice of

which is carefully prepared by Turkish DO&CO’s own culinary staff. Turkish

DO&CO has been responsible for substantial improvements in the quality of

catering on THY flights.


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Pratt&Whitney THY Turkish Engine Center (TEC)

This company, established in 2008, provides aircraft engine maintenance, repair,

and overhaul services to customers both in Turkey and its hinterland. It is a joint

venture between Turkish Airlines and United Technologies, a subsidiary of Pratt &

Whitney. Turkish Airlines holds a 51% stake in TEC. Operating out of a high-tech,

environmentally-friendly maintenance centre with an area of around 25,000 m² at

İstanbul Sabiha Gökçen International Airport, TEC has the capacity to perform

maintenance on more than 200 aircraft engines per year.

Goodrich Turkish Airlines Technical Service Center

The company provides high quality services for maintenance and repair of

nacelles, thrust reversers, related parts and rotable support at its Gebze facilities.

Established in 2010, the Goodrich Turkish Airlines Technical Service Centre is a

joint venture between Turkish Technic (40%) and TSA-Rina Holdings (60%), the

latter being a subsidiary of the Goodrich Corporation.

The Goodrich Turkish Airlines Technical Service Centre aims to be an important

player in the industry by providing maintenance and repair services meeting

international standards to Turkish Airlines and other international airline

companies, underpinned by technical certification.

Turkish Cabin Interior Systems Industries Inc.

This company aims to capture a share of world markets with its cabin interior

system products. Formed in 2011, it is owned by Turkish Airlines (30% stake),

Turkish Tecnic (21%) and Türk Havacılık ve Uzay Sanayi A.Ş. (TUSAŞ -TAI)

(49% stake).

TCI’s objective is to undertake the design, manufacture, logistical support,

modification and marketing of aircraft cabin interior systems and components, and

to capture a share of the international markets with the goods and services that it

produces.

Aircraft Seat Manufacturing Industry & Trade Inc.

Established to design and manufacture airline seats, and to make, modify, market,

and sell spare parts to Turkish Airlines and other international airline companies,

the company is a joint venture with the Assan Hanil Group. Formed in 2011, the

company is 50% owned by the Assan Hanil Group, 45% by Turkish Airlines and

5% by Turkish Tecnic.

HABOM Aviation Maintenance, Repair and Modification Center

This facility, established in Sabiha Gokcen International Airport, aims to become

the largest centre of its kind in the region, providing maintenance, repair and

modification services. The company was established in 2011 as a wholly-owned

subsidiary of Turkish Airlines.

HABOM’s principal business activities consist of buying, selling, renting, leasing,

maintaining, repairing, and modifying all manner of aircraft and aircraft equipment,

as a full range of aviation related equipment, instruments and engines; it also


54

February 11, 2014

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provides a comprehensive spectrum of training activities related to such

undertakings, including, but not limited to seminars and courses.

TURKBINE Technical Gas Turbines Maintenance & Repair Inc.

The company is a collaboration that derives its strength from international

experience, technically competent personnel and strong brand underpinning.

Established in 2011, it is a joint venture of Turkish Technic and Zorlu O&M Enerji

Tesisleri İşletme ve Bakım Hizmetleri A.Ş., in which each holds an equal stake.

The signed agreement envisions the provision of maintenance, repair, and

overhaul services for a variety of aircraft engines that are beyond the activity

scope of existing subsidiaries, and also for industrial gas turbines used at power

plants.

THY Aydın Çıldır Airport Management Inc.

The company was established in 2012 as a wholly-owned subsidiary of Turkish

Airlines. To commence operations, it was established to operate Aydin Çıldır

Airport, provide aviation training, organize sports-training flights and conduct all

activities related to the transportation of passengers with aircraft types

appropriate to the prevailing runway length.

THY's subsidiaries

Source: The Company

Source: The Company


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THE COMPANY PROFILE

Market share among AEA Airlines

Source: The Company

3.7% 3.9%

4.2%

5.6%6.3%

7.2%

8.5%

10.1%

3.3% 3.7% 4.1%5.2%

6.0%6.8%

8.4%

10.0%

4.8% 5.2%6.1%

7.5%8.2%

8.7%

10.3%

12.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2006 2007 2008 2009 2010 2011 2012 9M13

ASK % RPK % Pax %

THY ranking: #3 in Pax#4 in ASK#5 in RPK

International to International Transfer Passengers

Source: The Company

1,563 2,229

3,129

4,445

5,147

6,249

8,976

6,550

8,457

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2006 2007 2008 2009 2010 2011 2012 9M12 9M13

THY Passenger Breakdown as of 9M13

Source: The Company

Domestic, 41%

Int'l Direct, 20%

Int'l-Dom Transfer,

16%

Int'l-Int'l Transfer,

23%

Int'l Passenger breakdown by geography

Source: The Company

Europe, 60%

Middle East, 14%

Far East, 12%

Africa, 8%

America, 6%

THY Revenue by passenger class


80%

17%

3%

9M13

Economy

Business

Comfort


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EBITDAR Margin Comparison vs. Peers (2012 and 9M13)

*LH is based on airlines business only. Others based on Group Financials.

** April-June 13, 1st quarter results in the 9M13 column

Source: The Company

18.3%

15.7%

9.4%8.3% 8.2%

6.9%

20.9%

16.5%

11.1%9.1%

10.4% 10.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

TK SQ** AF-KL LH* IAG UA

2012 9M13

Pax per personnel (2012)

LH is based on airlines business only. Others based on Group Financials.

Source: The Company

2,184

1,866

1,660

927 917 826 769

-

500

1,000

1,500

2,000

2,500

TK LH* UA SQ IAG EK AF-KL

CASK (US cents)-9M13

*LH is based on airlines business only. Others based on Group Financials.

** April-June 13, 1st quarter results in the 9M13 column

Source: The Company

5.3 6.6 4.6 4.1 4.8 3.9 4.6 3.6

3.4 3.3

3.4 3.5 3.6

3.3 2.5 3.0

3.7 2.1 2.6 2.1 1.0 2.2 2.0

1.3

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

AF-KL LH* IAG AA SQ** UA DL TK

Others/ASK Fuel/ASK Personnel/ASK


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February 11, 2014

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APPENDIX 12M Forward P/E and Trailing EV/EBITDAR graphs for THY

THY 12M trailing EV/EBITDAR

Source: Bloomberg

3x

4x

5x

6x

7x

8x

9x

Jan-1

1

Mar-

11

May-

11

Jul-11

Sep-1

1

Nov-

11

Jan-1

2

Mar-

12

May-

12

Jul-12

Sep-1

2

Nov-

12

Jan-1

3

Mar-

13

May-

13

Jul-13

Sep-1

3

Nov-

13

Jan-1

4

12M trailing EV/EBITDAR 3-year Average +1 std dev

-1 std dev +2 std dev -2 std dev

Current: 6.6x vs. Hist. avg of 6.1x

THY 12M forward PE

Source: Bloomberg

0x

2x

4x

6x

8x

10x

Jan-1

2

Feb

-12

Mar-

12

Apr-

12

May-

12

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-12

Nov-

12

Dec-

12

Jan-1

3

Feb

-13

Mar-

13

Apr-

13

May-

13

Jun-1

3

Jul-13

Aug-1

3

Sep-1

3

Oct-13

Nov-

13

Dec-

13

Jan-1

4

Feb

-14

12M forward PE 2-year Average +1 std dev


Current:7.4x vs. Hist. avg of 6.1x


RESEARCH

February 11, 2014

Pegasus Airlines Outperform (pre. Not Rated)






1,402

Bloomberg/Reuters:

1 mth 3 mth Since IPO

-18% -7% 116%

33.4

YTD TL Return: -16%

102

Free Float (%): 35

73%


Net Sales (TLmn) 1,920 2,438 3,097 3,603

EBITDA (TLmn) 296 415 554 644 Research Analyst: Baris Ince

EBITDAR (TLmn) 380 498 646 763 +90 (212) 384 1141

Net Income (TLmn) 126 191 311 370 [email protected]

EBITDA Margin 15.4% 17.0% 17.9% 17.9%


P/E (x) 24.7 16.3 10.0 8.4 +90 (212) 384 1155-58


EV/Sales (x) 2.25 1.47 1.10 0.91

EPS (TL) 1.23 1.87 3.05 3.62

DPS (TL) 0.00 0.00 0.00 0.00


Stock Market Data

PGSUS.TI / PGSUS.IS


52 Week Range (TL): 18.2 / 43.5





10.00

17.00

24.00

31.00

38.00

45.00

04.1

3

05.1

3

06.1

3

07.1

3

08.1

3

09.1

3

10.1

3

11.1

3

12.1

3

01.1

4

PGSUS BIST-100

Sees the first benefits the most

We initiate coverage of Pegasus Airlines with an Outperform

recommendation. Our 2014-end target price of TL40.00

indicates 31% upside potential.

As Turkey’s first LCC, we believe Pegasus is well positioned

to benefit from underpenetrated high growth potential

markets, while also benefiting from significant cost

efficiencies when compared to its competitors.

Although Pegasus trades at a c30% discount to its peers,

based on their 2014-15 multiples-an unjustified discount, in

our view, given the airline’s strong growth prospects, with

our forecasts posting to a 24% CAGR in earnings and 21% in

EBITDAR over the 2014-2016 period.

Cost advantage

Pegasus commands a significant cost advantage over its

competitors, enabling the airline to offer attractive fares. Thanks to its

young fleet, high utilization and low cost execution capabilities, we

believe the airline will be able to maintain its competitive advantages.

Pegasus’s CASK of 4.2 Euro cents is considerably lower than the

average for airlines, and compares with the CASK of 3.2 cents for

Ryanair, 5.4 cents for Easyjet and 6.0 cents for THY in 2012.

Potential to increase ancillary revenues

Ancillary revenues accounted for 13% of overall sales as of 9M13.

Ancillary revenues per pax improved from EUR7.1 in 9M12 to

EUR7.8 in 9M13. We think there is more room for growth in ancillary

revenues considering the EUR15.20 figure for Ryanair and

EUR11.60 for Easyjet. Pegasus aims to lift its ancillary revenues to

EUR10 within the next 2-3 years, in line with our projections.

Fleet expansion plans

Pegasus placed an order of 100 aircraft (75 firm with the option for a

further 25) in 2012 and Pegasus plans to expand its fleet, currently

49 aircraft, to between 75-126 aircraft by 2022.

Turkey - Equity - Aviation

Initiation of Coverage


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February 11, 2014

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SUMMARY FINANCIALS (TLmn)

The Company in Brief

Pegasus Airlines is a low cost carrier with a fleet of

49 aircrafts and c9k total seat capacity. Founded in

1990 to provide charter services, Pegasus’s business

model was changed following its acquisition by Esas

Holding in 2005. The Company operates at 4 airports

in Turkey, using Istanbul Sabiha Gokcen Airport as

main hub. and flies to 31 domestic and 45

international destinations. The Company carried

16.8mn passengers in 2013. In 2012 Pegasus placed

100 aircrafts (75 firm + 25 optional) orders to be

delivered through 2016- 2022.

Shareholders

Esas Holding 62.92%,

Sabancı Family Members 2.57%

Free Float 34.51%


Net Sales 1,920 2,438 3,097 3,603 27%


Operating Profit 188 294 414 484 56%

Consolidated EBITDA 296 415 554 644 40%

Consolidated EBITDAR 380 498 646 763 31%

Net Other Income/ Expense 4 5 6 7 16%

Profit (Loss) from Subsidiaries -2 -2 1 1 27%

Net financial Income/ Expense -36 -58 -31 -29 62%

Profit (Loss) before Tax 155 239 389 463 54%

Tax -29 -48 -78 -93 65%

Net Income 126 191 311 370 52%

Ratios

EBIT Margin 9.8% 12.1% 13.4% 13.4% 2.3 pp

EBITDA Margin 15.4% 17.0% 17.9% 17.9% 1.6 pp

EBITDAR Margin 19.8% 20.4% 20.9% 21.2% 0.6 pp

Net Income Margin 6.6% 7.9% 10.1% 10.3% 1.3 pp


Current Assets 339 1,095 1,589 2,321 223%

Cash and Cash Equivalents 210 893 1,390 2,044 325%

Short-Term Trade Receivables 44 111 83 143 153%

Inventories 2 1 3 2 -42%

Other Current Assets 83 90 114 132 8%

Long Term Assets 1,870 2,149 2,411 2,695 15%

Total Assets 2,209 3,245 4,000 5,016 47%

Short Term Liabilities 538 657 814 991 22%

Short-Term Financial Loans 186 135 167 219 -27%

Short-Term Trade Payables 130 140 145 186 8%

Other Short-Term Liabilities 222 382 502 586 72%


Long-Term Financial Loans 1,241 1,219 1,506 1,974 -2%

Other Long-Term Liabilities 103 211 211 211 106%

Shareholders Equity 327 1,157 1,469 1,839 254%

T. Liabilities & SE 2,209 3,245 4,000 5,016 47%


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Operating in an underpenetrated market as the largest LCC

Pegasus is the second largest carrier in Turkey after THY, with a market share of

around 27% in the domestic market in terms of passenger numbers and around

9% in international passenger numbers. Using Istanbul Sabiha Gokcen Airport

(SAW) as its main hub, the airline flies to 45 international and 31 domestic

destinations. The penetration level of LCCs in Turkey and the surrounding region

(mainly the CIS) is lower than in Europe. Therefore, we believe the airline offers

high growth potential. An average of only 0.4 flights are taken per capita each year

in Turkey compared to 0.8 in Spain, while it is believed that passport ownership

ratio is yet at low teens and we believe the majority of passport holders are

Turkish citizens living in other countries, another sign of the under penetration.

Increasing GDP (positive for disposable income) and a young population (around

half of the population are under the age of 30) are also very positive for the long

term growth potential for the airline.

Istanbul is a natural geographical hub

Turkey stands out as a natural geographical hub, with 50 countries within a 3-hour

flight. This helps Pegasus operate with a network model, rather than a point-to-

point one, as is the case for Ryanair and EasyJet. This approach is also summed

up by the Chairman of Pegasus, Ali Sabancı, when he says “we aim to combine

the network benefits of full-service carriers, and the price benefits of LCCs, to

provide low cost travel, on-time performance and new planes.” SAW currently

operates with a capacity of 25mn (with a CUR of around 75%) which is expected

to double in two years’ time after the completion of a second runway. Benefiting

from this geographical advantage, Pegasus aims to increase the share of

international to international transfer passenger traffic in its total passenger

numbers (current 12%). In 9M13, 24% of Pegasus’ passengers were transit

passengers, who either transited to a different part of Turkey or to other

international destinations. The company plans to continue using SAW as its main

hub after the completion of Istanbul’s new airport, which is planned to have an

initial capacity of 90mn by 2017 and later reaching 150mn by 2027.

Effective cost management

Pegasus commands a significant cost advantage over its competitors, enabling

the airline to offer attractive fares. Thanks to its young fleet, high utilization and

low cost execution capabilities, we believe the airline will be able to maintain its

competitive advantages. Pegasus’ CASK of 4.2 Euro Cents in 2012 was below the

average for airlines, and compares with the CASK of 3.2 cents for Ryanair, 5.4

cents for Easyjet and 6.0 cents for THY in 2012. Pegasus has been always in

search of cost cutting initiatives and to this end, it employs a "continuous

improvement team" (CIT) management team charged with the duty of closely

following and controlling costs by developing efficiency initiatives. Thanks to its

cost-efficiency, Pegasus realizes higher EBITDAR margins than its peers.


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The potential to increase ancillary revenues

Ancillary revenue is the revenue from non-ticket sources, such as baggage fees

and on-board food and services, and has become an important financial

component for low-cost carriers. Higher margin ancillary revenues accounted for

13% of overall sales as of 9M13. Ancillary revenues per pax rose from EUR7.1 in

9M12 to EUR7.8 in 9M13. There is more room for growth in ancillary revenues, in

our view, considering the EUR15.20 figure for Ryanair and EUR11.60 for EasyJet.

Pegasus aims to lift its ancillary revenues per pax to EUR10 within 2-3 years. We

forecast that Pegasus will attain ancillary revenues of EUR10.1 per pax by 2016 -

which would be at the lower end of the management target within three years.

Fleet expansion plans

Pegasus has a fleet of 49 aircraft with an average age of 4 years. The airline has

recently placed an order for 100 new aircraft (75 firm + 25 optional). Accordingly,

its fleet could reach a size of between 75-126 aircraft by 2022. We expect

Pegasus to register a CAGR of 18% in its seat capacity between 2013-2016.

The potential beneficiary of a slowdown in economy

Our macroeconomic scenario projects 1.5% GDP growth in 2014E compared to

the 4% in 2013E on the back of increased interest rates and a weaker currency.

Domestic and foreign demand will contribute 0.6 pps and 1.7 pps to 2014E GDP

growth, respectively. Domestic revenues account for 42% of Pegasus’ total

scheduled revenues, Turkish passengers could trade down in a weaker economy.

That could be positive for Pegasus as its competitive prices were also highlighted

by a recent report by a flight comparison website, WhichAirline. After comparing

20 airlines, the survey found Pegasus to be the cheapest low cost carrier in

Europe, with an average total fare of EUR63.19 per one-way flight (including the

20kg baggage allowance and a transaction fee).

Valuation

Pegasus trades at a 33% discount to international LCC peers on 2014E multiples

(37% discount on the basis of the P/E and 29% discount on the basis of its EV/

EBITDAR). Our multiple based valuation suggests a target price of TL40.00,

offering a 31% potential return.

Investment Negatives

Bilateral agreements

Generally, airlines need to secure operating rights for international flights which

are designed by bilateral agreements between the countries. As the flag carrier,

THY has the upper hand over other Turkish carriers when it comes to obtaining

the rights in most international markets. Therefore, the requirement to be a part of

bilateral agreements could limit the visibility of international expansion. Pegasus’

international expansion is focused on in its routes to the Middle East, the CIS and

Eastern Europe, which are deemed as catchment areas; international pax

revenues account for 46% of Pagasus’ total revenues. The company added nine

international destinations to its network and announced that it will start flying to

Frankfurt, Germany and Madrid, Spain and Kuwait starting from late March 2014.


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Increasing competition at SAW

THY has been stepping up its presence at SAW in recent years, mainly due to

capacity constraints at Istanbul Ataturk Airport (IST). THY operated with 14 aircraft

at SAW airport in 9M13, serving 30 destinations (19 domestic and 11 international)

with these flights carrying 2.6mn passengers (up 100% YoY) with 77% load factor.

In 2014, THY plans to appoint 24 aircraft to SAW and fly to 36 destinations (9

domestic, 27 international). This should result in more competition and increased

congestion at SAW, which could compromise Pegasus’ high rankings regarding

metrics of on-time performance (90%), turns per day (7.4) and aircraft utilization

(12.6 BH) as of 2013.

Change in fleet type

Pegasus currently operates with a fleet of Boeing aircraft with an average age of 4

years. In a marked shift, however, the airline had lodged 75 firm orders for Airbus

aircraft with a further 25 optional orders ahead of the IPO, with deliveries to start

by 2H16. Although the new generation Airbus aircraft consume around 15% less

fuel, the transition to a dual type fleet would result in an increase in maintenance

and personnel costs. The management believes the fuel efficiency of the new

aircraft will compensate for the extra costs stemming from operating a dual fleet.

Therefore, the airline’s margins may come under pressure until the successful

completion of the transition.

Sensitivity to FX and oil prices

Although the airline implements fuel hedging and fuel surcharges, its profitability is

still highly sensitive to oil prices as fuel is the largest item (accounting for around

35% of the total) in Pegasus’ COGS. The company’s hedging policy covers up to

60% of projected fuel consumption. Under this policy, the airline has hedged 48%

of its projected fuel consumption for 2013 at USD947/tonne and 35% of its

expected fuel consumption for 2014 at a price of USD926/tonne. Pegasus hedging

ratio stands below its peer of Ryanair and EasyJet, which have hedging ratios of

around 90%. Pegasus’s functional currency is the EUR while it reports in TL.

Some 55% of Pegasus’s total revenues are denominated in hard currencies (11%

in USD; 40% in EUR) while 66% of total costs are in hard currency (36% in USD;

29% in EUR), therefore, Pegasus benefits from a strong EUR against the TL and

USD from an operational perspective. The airline uses a swap/forward mechanism

to eliminate the adverse impact of exchange rate movements.

Risk of new supply

A 34.5% stake in Pegasus was offered to the public through an IPO in April 2013.

The stock’s average trading volume is around USD33mn. According to the terms

of the IPO, there is a 365 day lock-up period for pre-IPO shareholders. There is a

risk that further supply may come to the market after the lock-up period ends in

April 2014.


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VALUATION

Multiple Valuation

2014-end target price of TL40.00/share. We value Pegasus using a 2014E

target EV/EBITDAR multiple. On our EV/EBITDAR multiple valuation, we apply a

2014E EV/EBITDAR multiple of 8.0x, inline with the peers. Finally, to reach our

target Mcap, we adjusted net debt for 7x aircraft related rental expenses and 0.5x

PDP receivables.

International peer comparison. We present the multiples of international LCCs

to put Pegasus’s valuation into perspective. Accordingly, Pegasus trades at a

significant discount on all 2014-15 multiples.

EV/EBITDAR multiple (x) 7.50 7.75 8.00 8.25 8.50

GS 2014E EBITDAR (TLmn) 646 646 646 646 646

Target EV (TLmn) 4,844 5,005 5,166 5,328 5,489

Adj. Net debt (TLmn) 1,074 1,074 1,074 1,074 1,074

Minorities (TLmn) 2 2 2 2 2

Target Mcap (TLmn) 3,768 3,929 4,091 4,252 4,413

Outstanding number of shares (mn) 102 102 102 102 102





Pegasus Valuation Summary

Peer Comparison*


Low cost carriers (LCC)

Devekoped 1.55 1.44 8.48 7.35 16.01 13.03

Ryanair Holdings PLC IRELAND 13,358 2.03 1.94 10.1 8.8 19.6 15.3

easyJet PLC BRITAIN 11,121 1.36 1.28 9.0 8.0 15.5 13.4

AirAsia BHD MALAYSIA 1,937 2.39 2.17 7.7 7.0 8.0 7.1

Spirit Airlines Inc UNITED STATES 3,353 1.44 1.14 7.4 6.0 16.0 13.1

JetBlue Airw ays Corp UNITED STATES 2,380 0.71 0.66 4.9 4.4 11.8 10.1

Norw egian Air Shuttle AS NORWAY 1,312 0.56 0.48 7.0 4.7 12.6 7.5

WestJet Airlines Ltd CANADA 3,038 0.75 0.71 4.6 4.0 12.2 10.1

Emerging 1.95 1.71 10.23 8.32 14.35 12.15

Cebu Air Inc PHILIPPINES 673 1.04 0.89 7.5 6.5 12.6 10.4

Air Arabia PJSC UAE 2,084 2.25 1.98 11.1 8.9 14.9 12.7

PGSUS multiples 1,402 1.1 0.9 6.1 5.1 10.0 8.4

Discount/Premium to Developed LCC -29% -37% -28% -31% -37% -35%

Discount/Premium to Emerging LCC -44% -47% -40% -39% -30% -31%




64

February 11, 2014

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Recommendation: OUTPERFORM. Given its proven track record on growth, we

believe that Pegasus stands out as a preferred play in an underpenetrated sector

coupled with its ambitious expansion plans and effective cost management. As

the number one LCC and second largest carrier in Turkey, Pegasus will be one of

the key beneficiaries of increasing GDP and attractive demographics, which

bodes well for discount carriers. Using Istanbul Sabiha Gokcen Airport as its main

hub, Pegasus differentiates itself from an ordinary LCC whose business models

are based on only point to point travel; Pegasus operates like both a network and

point to point carrier, thanks to Istanbul’s geographical advantage connecting 50

countries within 3 hours’ flying time. Furthermore, we think Pegasus’ low cost

management enables the airline to boast one of the lowest CASK levels on the

back of its young fleet, strong punctuality, high utilization and low labour costs. We

expect a CAGR of 18% in net sales, 21% in EBITDAR and 24% in net profit over

the 2014-16 period. We believe these are outstanding figures that place Pegasus

as a clear growth play in the coming years. Pegasus is not an undiscovered stock;

it outperformed the index 116% since IPO in April 2013. Yet, the shares still look

cheap, despite the prospect that Pegasus offers stronger growth for foreseeable

future. We initiate our coverage of Pegasus with a Outperform recommendation.

Risks. The key risks would be an increase in oil prices, unrest in Turkey and

neighbouring countries, stiff competition, limited international expansion and EUR

weakness against the USD.


65

February 11, 2014

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MODEL ASSUMPTIONS

2011 2012 2013E 2014E 2015E 2016E

# of total passengers (mn) 10.7 13.6 16.8 20.1 23.8 28.1

YoY 33.7% 26.8% 23.9% 19.3% 18.6% 18.1%

Load factor 74.9% 78.2% 80.2% 80.7% 81.2% 81.7%


ASK (mn) 13.5 16.4 20.2 22.9 25.9 29.3

YoY 26.6% 22.0% 22.7% 13.4% 13.4% 13.1%

RPK (mn) 10.1 12.8 16.2 18.4 21.0 23.9

YoY 25.3% 27.3% 25.9% 14.0% 14.1% 13.8%

RASK (EUR cents) 3.6 3.8 3.7 3.6 3.5 3.4

Ancillenary revenue/pax (EUR) 5.9 7.4 8.5 9.1 9.8 10.1

YoY -0.6% 25.4% 16.1% 7.0% 7.0% 3.3%

Revenue Yield (EUR cents) 4.8 4.9 4.6 4.4 4.3 4.2

Revenue (TLmn) 1,484 1,920 2,438 3,097 3,603 4,313

YoY 51.8% 29.4% 27.0% 27.0% 16.3% 19.7%

CASK (EUR cents) 4.8 4.6 4.2 4.1 4.0 4.0

CASK-ex fuel (EUR cents) 2.8 2.7 2.5 2.4 2.4 2.4

EBITDA (TLmn) 81 296 415 554 644 781

YoY -2.5% 266.1% 40.3% 33.6% 16.3% 21.2%

Revenue yield-CASK (spread) 0.1 0.3 0.4 0.4 0.3 0.2

EBITDA margin 5.4% 15.4% 17.0% 17.9% 17.9% 18.1%


EBITDAR (TLmn)** 192 380 498 646 763 951

YoY 19.3% 97.7% 30.8% 29.8% 18.1% 24.6%

EBITDAR margin 13.0% 19.8% 20.4% 20.9% 21.2% 22.0%


Net Income (TLmn) -13 126 191 311 370 477

YoY n.m n.m 51.6% 62.7% 18.8% 28.8%

Net margin -0.9% 6.6% 7.9% 10.1% 10.3% 11.1%


ROAE -7.2% 49.0% 25.8% 23.7% 22.4% 25.2%

YoY (pps) n.m 56.1 pps -23.2 pps -2.1 pps -1.3 pps 2.8 pps

Average Brent price (USD) 111 112 108 103 103 103

YoY 37.9% 0.7% -2.8% -5.5% 0.5% 0.0%

Capex (TLmn) 637 421 345 395 437 566

YoY -33.8% -18.2% 14.7% 10.6% 29.4%

2011 2012 2013 2014E 2015E 2016E

USD/TRY-eop 1.89 1.78 2.13 2.20 2.29 2.38

USD/TRY-avg 1.67 1.79 1.90 2.17 2.25 2.33

EUR/TRY-eop 2.44 2.35 2.93 2.86 3.09 3.26

EUR/TRY-avg 2.32 2.30 2.53 2.90 2.98 3.17

EUR/USD-eop 1.29 1.32 1.38 1.30 1.35 1.37

EUR/USD-avg 1.39 1.29 1.33 1.34 1.33 1.36

Basket (EUR+USD)-eop 2.17 2.06 2.53 2.53 2.69 2.82

GDP growth 8.8% 2.2% 4.0% 1.5% 4.0% 4.0%

CPI 10.5% 6.2% 8.2% 7.7% 6.0% 6.0%



** Our EBITDA[R] calculation includes net other income/(expense)

Model assumptions at a glance*

Macro assumptions


66

February 11, 2014

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HOW WE STAND AGAINST CONSENSUS

According to the forecasts compiled by Bloomberg, we are generally in line with

consensus at the top line for 2013E and 2014E; however, our 2013E and 2014E

EBITDA and net profit forecasts are 11% and 4% lower than the consensus

estimate.

BUSINESS OVERVIEW

Revenue

Scheduled revenues accounted 78% of total revenues (45% for international and

33% for domestic) in 9M13, representing the main source of revenues, while

ancillary revenues - the second largest source of revenues – accounts for a 13%

share in the total. Ancillary revenues include various service items such as service

fees, check-in fees, online seat selection fees, travel insurance, duty-free sales

offered on international flights, reservation changes/cancellation charges and

excess baggage charges. Considering the strong growth expected in Pegasus’s

passenger numbers (19% CAGR for domestic and international between 2013

and 2016), we believe scheduled revenues will remain the largest item in the

revenue structure; however, we expect international markets (besides Europe) to

account for as much as 14% of total scheduled revenues by 2016, up from the

11% in 2013, illustrating the company’s increasing exposure to markets outside

Europe. As the second largest source of revenues, we expect the share of

ancillary revenues in total revenues to increase from 13% in 9M13 to 20% in

2016; we believe these revenues offer strong growth potential given the lower

level of ancillary revenue per pax ratio of Pegasus (7.8 EUR in 9M13) compared

to Ryanair (11.6 EUR) and EasyJet (15.2 EUR). We assume that ancillary

revenues per pax will reach 10.1 EUR by 2016, denoting a CAGR of 35%

between 2013-2016, vs. the 56% CAGR between 2010-2012.


PGSUS

(TLmn) 2013 2014 2015 2013 2014 2015 2013 2014 2015

Net Sales 2,366 2,989 3,463 2,438 3,097 3,603 3% 4% 4%

EBITDA 474 578 678 415 554 644 -12% -4% -5%

Net Profit 216 324 405 191 311 370 -11% -4% -9%

EBITDA Margin 20.0% 19.3% 19.6% 17.0% 17.9% 17.9% -3.0 pps -1.4 pps -1.7 pps

Net Income Margin 9.1% 10.8% 11.7% 7.9% 10.1% 10.3% -1.3 pps -0.8 pps -1.4 pps

Target Share Price



40.54 40.00 -1%


67

February 11, 2014

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RESEARCH

Pegasus Revenue Split by segment

source: The Company data

44%

32%

13%

10%1%

2010Internationalscheduled

Domesticscheduled

Charter

Ancillary

Other

45%

33%

7%

13%2%

9M13

InternationalscheduledDomesticscheduledCharter

Ancillary

Other

Scheduled Revenues breakdown by geography (%)

source: The Company data

Domestic, 42%

Europe, 56%

Other, 1%

2010

Domestic, 42%

Europe, 46%

Other, 12%

9M13

Ancillary revenue per pax (EUR) - 2011


5.57.4 7.1 7.8

32.2

15.212.3 11.6 11.6 10.0 9.8 9.6

7.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Pegasu

s 2

011

Pegasu

s 2

012

Pegasu

s 9

M12

Pegasu

s 9

M13

Spirit

easy

Jet

Tig

er

JetB

lue

Rya

nair

Norw

egia

n

GO

L

Copa

AirA

sia

Ancillary Revenue Development


0

5

10

15

20

25

30

35

0

100

200

300

400

500

600

700

800

900

2010 2011 2012 2013E 2014E 2015E 2016E 9M12 9M13

Ancillary Revenue (TLmn) (lhs) Ancillary Revenue per pax (in TL) (rhs)


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February 11, 2014

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Passenger revenue yield (EUR cents)

According to our calculations, Pegasus’s passenger revenue yields increased by

2% in 2011 and by 8% in 2012. The improvement in the load factor and shorter

stage length was the main reason behind this positive trend. However, taking into

account the tougher competition and new route launches in international markets,

we expect yields to decline in 2013 and 2014, as observed in 9M13 (3% YoY de-

cline according to our calculations). We project a 3% decline per annum in inter-

national yields (in EUR terms) between 2013-2016 while forecasting an decline in

domestic yields of 5% in 2014, 3% in 2015 and 2% in 2016. We believe that the

risks to our passenger revenue yield assumption are limited, given the airline’s

relative better focus on unit revenue management.

Load Factors

Pegasus improved its load factor by more than 3pps in 2012 and 2pps in 2013.

Strong seat utilization on international routes (up 2.5pps YoY in 2013) supported

the improvement in the load factor vs. up 1.7pps on domestic front. Domestic load

factor increased by 1.5pps to reach 82.0% in 9M13, comparing with the 84.4%

load factor of THY’s LCC arm, SunExpress, which carried one third of Pegasus

total pax during the same period. Given the THY’s strong domestic passenger

target for 2014 (THY budgets a 2% YoY decline in domestic yields (TL) in 2014)

and the allocation of majority of ASK growth to Turkey, we believe Pegasus’s load

factor improvement will lose some momentum, with a 0.5 pp improvement per

annum between 2014 and 2016. We believe we are in line with the airline in our

assumptions, as Pegasus’s short-midterm target is to achieve load factors of over

80% by adding 12-16% of additional ASKs annually to its network over the next

three years, comparing to our forecast of 13% for 2013-2016.

Revenue Yield evolution(EUR cents)


5.55.2

5.75.3

5.14.9 4.8

5.85.7

4.3

4.64.4

4.24.1

4.0 3.9

4.44.3

4.7 4.8 4.94.6

4.44.3 4.2

4.9 4.8

3.0

3.5

4.0

4.5

5.0

5.5

6.0

2010 2011 2012 2013E 2014E 2015E 2016E 9M12 9M13



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February 11, 2014

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Cost As with all airlines, fuel and personnel costs account for the largest share of total

costs. Fuel costs accounted for 46% of its total costs in 9M13, with personnel

comprising a 13% share.

Pegasus' ASK vs. Load Factor


75.7% 74.9%

78.2%

80.2% 80.7%81.2%

81.7%

70.0%

72.0%

74.0%

76.0%

78.0%

80.0%

82.0%

84.0%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2010 2011 2012 2013 2014E 2015E 2016E

ASK (mn) Load Factor (%)

TLmn 2011 2012 2013E 2014E 2015E 2016E

Jet fuel expenses 611 702 848 1,084 1,280 1,503


as of total cogs 41.0% 40.6% 39.6% 40.4% 41.0% 40.4%

per ASK in EUR cents 2.0 1.9 1.7 1.6 1.7 1.6

Personnel expenses 162 198 296 334 379 441


as of total cogs 10.9% 11.4% 13.8% 12.5% 12.1% 11.8%


Lease expenses (dry+wet) 112 85 83 92 118 169


as of total cogs 7.5% 4.9% 3.9% 3.4% 3.8% 4.6%


Depreciation 76 104 117 134 153 181


as of total cogs 5.1% 6.0% 5.5% 5.0% 4.9% 4.9%


Maintenance 109 70 98 124 144 173


as of total cogs 7.3% 4.0% 4.5% 4.6% 4.6% 4.6%


Ground Handling 100 111 149 189 220 263


as of total cogs 6.7% 6.4% 6.9% 7.0% 7.0% 7.1%


Advertisement 35 37 47 68 79 95


as of total cogs 2.3% 2.1% 2.2% 2.5% 2.5% 2.5%


Commission 18 25 34 43 50 60


as of total cogs 1.2% 1.5% 1.6% 1.6% 1.6% 1.6%


Other costs 267 399 473 616 696 837


as of total cogs 17.9% 23.0% 22.1% 22.9% 22.3% 22.5%




Cost Assumptions at a glance


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February 11, 2014

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CASK (EUR cents)

As mentioned in the earlier sections of this report, unit costs are relatively low

compared to full service carriers, in line with the nature of the low cost carrier

business. Pegasus is no exception, and indeed has some of the lowest unit costs

among its peers. Based on our calculations, Pegasus’ CASK figure was 4.6 EUR

cents in 2012 vs. 4.8 EUR cents in 2011. We assume a CASK figure of 4.2 EUR

cents for the 2013 full year and 2.5 EUR cents for CASK-ex-fuel. Given our

assumption of a lower oil price and lower non-fuel operational costs, we assume a

4% and 5% decline in both CASK and CASK-ex-fuel in 2014, followed by a 1%

decrease for both between 2014-2016. We believe Pegasus’s competitiveness on

the cost side will be sustainable, thanks to its young fleet, strong punctuality, high

utilization, lower labour costs and potential for further cost reductions.

EBITDAR margin

According to our calculations, Pegasus posted an EBITDAR margin of 19.9% in

2012, up from its average of 16.4% in the 2010-2012 period and wrapping up a

stunning 54% CAGR in its EBITDAR between 2010 and 2012. We forecast a

CAGR of 21% in the airline’s EBITDAR between 2014-2016, driven by strong

revenue growth coupled with initiatives aimed at curtailing costs, leading to better

margins. A comparison of margin performances with European carriers would

indicate that Pegasus has fared better than its peers. Based on our above

mentioned forecasts, we expect the EBITDAR margin to hover at around 21-22%

over the 2014-2016 period.

.

CASK evolution (EUR cents)


4.5

4.8

4.64.2

4.1

4.0 4.0

4.7

4.2

0.6 0.5 0.5 0.6 0.5 0.5 0.5 0.5 0.5

1.6 2.0 1.91.7 1.6 1.7 1.6

1.91.7

2.32.3

2.22.0 1.9 1.9 1.9

2.3

1.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2010 2011 2012 2013E 2014E 2015E 2016E 9M12 9M13

CASK Personel/ASK Fuel/ASK Others/ASK


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Fleet

Pegasus had a fleet of 49 aircraft with an average age of 4 years as of 2013-end.

The fleet is mainly composed of Boeing 737-800 aircraft, with 2% of the planes

owned by the airline with 55% operated under financial lease. The company

ordered 100 Airbus aircraft (75 firm orders with an option for a further 25) in 2012.

The firm orders (57 A320neo and 18 A321neo aircraft) will be delivered between

2015 and 2022. According to the airline’s fleet expansion plan, Pegasus will have

a fleet of between 75-126 aircraft by 2022. With the deliveries, Pegasus’ fleet will

mostly shift from the current Boeing dominated fleet to one consisting largely of to

Airbus planes. This will lead necessitate additional costs like training and

maintenance - but the company is confident that the new generation Airbus

aircraft are much more efficient than the Boeing aircraft, and that the anticipated

efficiencies could compensate for the extra costs related to the shift in fleet. That

was also emphasized in the media by the CEO of Pegasus, Sertac Haybat, when

he said that new generation engines will be used in 100 of the aircraft orders, with

the new engines achieving 15% savings in fuel consumption.

Net debt-capex

Pegasus had TL537mn of net debt as of 9M13 vs. TL1.2bn at the end of 2012.

The airline’s indebtedness has declined thanks to the cTL500mn of IPO proceeds.

Based on our calculations, Pegasus had an adjusted net debt of TL1.2bn as of

9M13 and we expect the adjusted Net Debt/EBITDAR ratio to ease down from

1.9x at the end of 2013 to 1.3x by the end of 2014. We assume a 30%

manufacturer discount on aircraft list prices when calculating our fleet expansion

cost, and assume that it will be financed by financial and operational leasing in a

55:45 ratio, broadly in line with the current approach. However, our understanding

is that the airline will likely shift to a more balanced system of financing of 50:50.

Total Fleet 2012

Aircraft Type Year End 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Boeing 737-800 38 38 42 44 46 47 48 48 48

Boeing 737-400 2 1 1 1 1 1 1 1 1

Airbus A320 CEO 0 0 0 0 2 5 6 6 6

Airbus A320 NEO 0 0 0 0 0 0 0 0 0

Airbus A321 NEO 0 0 0 0 0 0 0 0 0

Total 40 39 43 45 49 53 55 55 55

Source: The Company

2013 2014

2012

Financing Type Year End 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Ow ned 3% 3% 2% 2% 2% 2% 2% 2% 4%

Financial Lease 65% 67% 60% 58% 55% 51% 49% 49% 49%

Operational Lease 33% 31% 30% 29% 31% 36% 40% 40% 40%

Wet lease 0% 0% 7% 11% 12% 11% 9% 9% 9%

Source: The Company

2013 2014


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February 11, 2014

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RESEARCH

Sensivities

Pegasus’ profitability and valuation are highly sensitive to movements in fuel

prices and the exchange rate, since 55% of the airline’s revenues and 66% of the

company’s expenses are FX-denominated.

Pegasus Indebtedness


4.9

1.9

1.3 1.2

5.7

0.80.6 0.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2012 2013E 2014E 2015E

Adj. Net Debt EBITDAR

Adj. Net Debt /EBITDAR Adj. Net Debt /Equity

Pegasus Revenue by currency Pegasus Expenses by currency


EURO, 40%

USD, 11%

TL, 45%

Other, 4%

9M13

EURO, 29%

USD, 36%

TL, 34%

Other, 1%

9M13

Impact on Pegasus ----- US$5/bbl increase ----- ----- 5% increase -----

2014E estimates Oil price EUR vs.USD

EBITDA (TLmn) -5% 9%

EBITDAR (TLmn) -4% 7%



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February 11, 2014

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TRAFFIC FIGURES

Pegasus Airlines carried 16.8mn passengers in 2013, corresponding to 24% YoY

growth. The airline’s load factor reached 80.2% in 2013, up by 2.0pps on an

annual basis, with a 22% YoY increase in ASK. The airline managed to increase

block hours by 15% YoY with a 21% YoY increase in the number of destinations.

The airline also achieved better utilization of aircraft, with 12.6 BH in 2013 vs. 11.7

BH in 2012, while the number of landings (cycle) increased by 20% YoY in 2013.

Meanwhile, although the load factor has been improving, it can still be considered

low for an LCC and we believe that increasing aircraft utilization should

compensate for the yield pressures to some extent.

Pegasus Airlines Traffic Figures

Domestic 2010 2011 2012 2013 YoY 4Q12 4Q13 QoQ

Pax (mn) 4.96 6.76 8.30 10.23 23% 2.06 2.63 28%

Seat (mn) 6.35 8.91 10.39 12.54 21% 2.65 3.27 23%

Load Factor (%) 78.2% 75.9% 79.8% 81.6% 1.7 pps 77.6% 80.4% 2.9 pps

Cycle 38,152 50,229 55,726 66,756 20% 14,119 17,412 23%

Pax per cycle 130 135 149 153 3% 146 151 4%

ASK (mn) 3.68 5.18 5.98 7.17 20% 1.53 1.90 24%

International 2010 2011 2012 2013 YoY 4Q12 4Q13 QoQ

Pax (mn) 3.05 3.95 5.28 6.59 25% 1.23 1.61 31%

Seat (mn) 4.23 5.39 6.96 8.42 21% 1.67 2.09 25%


Cycle 24,604 29,979 38,074 46,029 21% 9,160 11,442 25%

Pax per cycle 124 132 139 143 3% 134 141 5%

ASK (mn) 6.95 8.29 10.45 12.93 24% 2.50 3.13 25%

Total 2010 2011 2012 2013 YoY 4Q12 4Q13 QoQ

Pax (mn) 8.01 10.71 13.58 16.82 24% 3.29 4.24 29%

Seat (mn) 10.58 14.30 17.35 20.96 21% 4.32 5.36 24%


Cycle 62,756 80,208 93,800 112,785 20% 23,279 28,854 24%

Pax per cycle 127.67 133.58 144.76 149.13 3% 141.25 146.95 4%

ASK (mn) 10.63 13.47 16.43 20.10 22% 4.03 5.03 25%



74

February 11, 2014

Aviation


RESEARCH

THE COMPANY OVERVIEW A leading low-cost airline in Turkey, Pegasus was founded as a joint venture

between Aer Lingus Group, Silkar Yatırım ve Insaat Organizasyonu A.S. and Net

Holding A.S. in 1990, entering commercial operation with two airplanes. After

being acquired in 2005 by Esas Holding A.S., which is owned by Sevket Sabanci

and his family, Pegasus started scheduled domestic flights.

Initial Public Offering (IPO)

IPO price was TL18.40/share. Pegasus Airlines shares started trading on the

Bourse Istanbul on April 26, 2012. 34.5% of the company was offered to public at

a price of TL18.40/share (vs. price range of TL17.0-20.4). Esas Holding was the

main selling shareholder. According to the final structure of the partnership

following the IPO, 62.9% of the shares are held by Esas Holding A.S, and the

remainder owned by Sevket Sabanci and his family. The company increased its

paid in capital from TL75mn to 102.3mn. The company raised TL502mn cash from

the IPO and injected the entire amount into the company. Pegasus Airlines’ aims

to use IPO proceeds to finance its fleet and network expansion.

Since IPO, Pegasus Airlines outperformed the index and THY significantly until

mid-January 2014 as shown below. After then, anticipated yield contraction on

stiff compettion and rising macro concerns for Turkey coupled with poltical risks

for 2014 resulted in a weakness on Pegasus Airlines shares. Pegasus Airlines

underperformed the index and THY by 11% and 23% YTD.

Pegasus ownership


62.92%

34.51%

2.57%

Esas Holding

Free Float

Sabanci Family Members

Airlines Share performances since Pegasus' IPO on 26 April 2013

Source: Rasyonet, Garanti Securities

65.0

100.0

135.0

170.0

205.0

240.0

Apr-

13

May-

13

Jun-1

3

Jul-13

Aug-1

3

Sep-1

3

Oct-13

Nov-

13

Dec-

13

Jan-1

4

PGSUS BIST100 THYAOS


75

February 11, 2014

Aviation


RESEARCH

Pegasus high ranking on selected metrics


16.5%

7.1%15.3%

78%

89%82%

92%88% 91%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Pegasus easyJet Ryanair

ASK 2010-12 CAGR Load Factor(%) On-Time record

Turns per day vs. Aircraft utilisation


5.66.3 6.6 6.5 6.9

7.4

10.911.5

12.0 11.8 11.712.6

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013

Turns per day Aircraft utilisation (BH)

Pax evolution (mn)


5.0

6.88.3

10.2

12.1

14.4

17.0

3.13.9

5.36.6

7.99.4

11.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2010 2011 2012 2013 2014E 2015E 2016E

Domestic International


76

February 11, 2014

Aviation


RESEARCH

Aicraft Utilisation vs. Average Stage Length (2012)


11.7 11.0

8.5

9471096

1241

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0

200

400

600

800

1000

1200

1400


Aircraft Utilization (BH) Average Stage Length (km) (rhs)

2008-12 pax CAGR vs. İnternational peers


38%

29%

19% 18%

12% 11%9% 8% 7% 7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Pegasu

sS

chedule

d

Air A

sia

Tig

er

Norw

egia

n

GO

L

Spirit

Copa

Rya

nair

easy

Jet

JetB

lue

Strong growth compared to peers



35%

12%17%

56%

17%14%

0%

10%

20%

30%

40%

50%

60%


2010-12 Revenue CAGR 2010-12 EBITDAR CAGR

Internet Sales share in total


41% 42% 41% 46%

99% 98%

80%67% 65%

11%

0%

20%

40%

60%

80%

100%

120%

Pegasu

s 2

011

Pegasu

s 2

012

Pegasu

s 9

M12

Pegasu

s 9

M13

Rya

nair

easy

Jet

Norw

egia

n

Spirit

Air A

sia

Copa


77

February 11, 2014

Aviation


RESEARCH

APPENDIX 12M Forward P/E and Trailing EV/EBITDAR graphs for LCCs

Pegasus Airlines 12M forward PE

Source: Bloomberg

6x

7x

8x

9x

10x

11x

12x

13x

14x

Jun-1

3

Jun-1

3

Jun-1

3

Jul-13

Jul-13

Aug-1

3

Aug-1

3

Sep-1

3

Sep-1

3

Oct-13

Oct-13

Nov-

13

Nov-

13

Nov-

13

Dec-

13

Dec-

13

Jan-1

4

Jan-1

4

Feb

-14

Current:9.7x vs. 8M average of 10.4x

Ryanair 12M forward PE

Source: Bloomberg

4x

6x

8x

10x

12x

14x

16x

Jan-1

1

Mar-

11

May-

11

Jul-11

Sep-1

1

Nov-

11

Jan-1

2

Mar-

12

May-

12

Jul-12

Sep-1

2

Nov-

12

Jan-1

3

Mar-

13

May-

13

Jul-13

Sep-1

3

Nov-

13

Jan-1

412Mforward PE Average +1 std dev



easyJet 12M forward PE

Source: Bloomberg

5x

7x

9x

11x

13x

15x

Oct-11

Feb

-12

Jun-1

2

Oct-12

Mar-

13

Jul-13

Dec-

13

12Mforward PE Average +1 std dev




78

February 11, 2014

Aviation


RESEARCH

Air Arabia 12M forward PE

Source: Bloomberg

3x

5x

7x

9x

11x01.1

1

05.1

1

09.1

1

02.1

2

06.1

2

10.1

2

03.1

3

07.1

3

11.1

3

1 year forward P/E Average +1 std dev



Ryanair 12M trailing EV/EBITDAR

Source: Bloomberg

4x

5x

6x

7x

8x

9x

10x

Jan-1

1

Mar-

11

May-

11

Jul-11

Sep-1

1

Nov-

11

Jan-1

2

Mar-

12

May-

12

Jul-12

Sep-1

2

Nov-

12

Jan-1

3

Mar-

13

May-

13

Jul-13

Sep-1

3

Nov-

13

Jan-1

4

12M trailing EV/EBITDAR 3-year Average +1 std dev



easyJet 12M trailing EV/EBITDAR

Source: Bloomberg

0x

2x

4x

6x

8x

10x

Jan-1

1

May-

11

Sep-1

1

Feb

-12

Jun-1

2

Oct-12

Mar-

13

Jul-13

Nov-

13

12M trailing EV/EBITDAR Average +1 std dev




79

February 11, 2014

Aviation


RESEARCH

Air Arabia 12M trailing EV/EBITDAR

Source: Bloomberg

6x

7x

8x

9x

10x

02.1

1

06.1

1

10.1

1

03.1

2

07.1

2

11.1

2

04.1

3

08.1

3

12.1

3

12M trailing EV/EBITDAR Average

+1 std dev -1 std dev

+2 std dev -2 std dev



80

February 11, 2014

Aviation


RESEARCH

THY vs. PEGASUS Although THY and Pegasus both operate in the same region, they differ in terms

of their business models, specifically in fleet structure, revenue and their approach

to cost management . While Pegasus’s fleet is primarily composed of Boeing B737

-800NGs, THY has a wider range of aircraft in its fleet. Based on our calculations,

Pegasus fits an average of 188 seats into its aircraft, compared to the 168 seats

for THY’s aircraft. That is obviously means a lower operational cost, assuming all

else is equal. However, THY offers more seat classes with high yields (such as

business class) compared to the one class seating in Pegasus’s aircraft. More

importantly, as mentioned before, THY’s growing focus on the international

market, mainly through international transfers from the domestic market, is one of

the advantages for Pegasus operating as an LCC in an underpenetrated market.

THY’s domestic revenues accounted for 14% of its total in 9M13, down from the

21% in 2008. On the other hand, while the share of international transfer

passengers in its total increased from 16% in 2005 to 23% in 9M13, it remains far

below the 50% levels for Lufthansa. The other difference is on the average stage

length side, where THY has a strategy of focussing on long haul routes and

operating with a hub and spoke model rather than the point to point model

pursued mostly for the time being by Pegasus. As such, THY has a higher

average stage length compared to Pegasus, another reason behind Pegasus’s

competitive edge over THY. In addition to these factors, high aircraft utilization, a

good on time record coupled with less congested airports with relatively lower fees

and turns per day should mean higher margin levels for Pegasus, in common with

low-cost carriers generally. However, it is also worth noting that THY has relative

strengths in traffic, revenue and cost management efficiencies over other major

FSC, as shown on page 56, so a definite conclusion between Pegasus and THY

would be difficult given the different business models, in our view.

2010-13 pax CAGR


14%

27%

22%

29%

0%

5%

10%

15%

20%

25%

30%

35%

THY Domestic Pegasus Domestic THY International PegasusInternational

CASK (EUR cents - 2012)


4.2

6.96.3

5.4 5.6 5.4 4.93.7 3.2

2.1

6

9.8

0

2

4

6

8

10

12

Pegasu

s

GO

L

Norw

egia

n

easy

Jet

Jetb

lue

Copa

Spirit

Tig

er

Rya

nair

AirA

sia

TH

Y

Avg

FS

Cs


81

February 11, 2014

Aviation


RESEARCH

CASK ex-fuel (EUR cents - 2012)


2.4

4.3 4.13.8

3.4 3.32.9

2.21.8

1.1

3.7

7.2

0

1

2

3

4

5

6

7

8

Pegasu

s

Norw

egia

n

GO

L

easy

Jet

Jetb

lue

Copa

Spirit

Tig

er

Rya

nair

AirA

sia

TH

Y

Avg

FS

Cs

Pegasus on ASL and CASK


1078 996947

966

7.8

9.8 9.79.9

5.05.7 5.4 5.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

850

900

950

1000

1050

1100

2010 2011 2012 9M13

Average Stage Length (km) CASK (TL kurus)

CASK ex-fuel (TL kurus)

Indexed Domestic RASK Pegasus vs. THY


174 176163

150

100 100 100 100

0

50

100

150

200

2010 2011 2012 9M13

THY Pegasus

THY on ASL and CASK


1461 1549 1759 1852

12.2 14.4 13.814.7

8.9 9.5 8.5 9.2

0

5

10

15

20

0

500

1000

1500

2000

2010 2011 2012 9M13

Average Stage Length (km) CASK (TL kurus)

CASK ex-fuel (TL kurus)


RESEARCH

February 11, 2014

TAV Airports Market Perform (pre. Market Perform)






2,572

Bloomberg/Reuters:

1 mth 3 mth 12mth

3% 35% 92%

9.7

YTD TL Return: 2%

363

Free Float (%): 40

79%


Net Sales (TLmn) 2,343 3,232 4,044 4,382

EBITDA (TLmn) 765 1,071 1,385 1,549 Research Analyst: Baris Ince

EBITDAR (TLmn) 1,099 1,500 1,919 2,096 +90 (212) 384 1141

Net Income (TLmn) 286 366 560 599 [email protected]

EBITDA Margin 32.6% 33.1% 34.3% 35.3%


P/E (x) 20.0 15.6 10.2 9.5 +90 (212) 384 1155-58


EV/Sales (x) 4.5 3.6 2.6 2.1

EPS (TL) 0.79 1.01 1.54 1.65

DPS (TL) 3.51 6.98 9.05 10.37


Stock Market Data

TAVHL.TI / TAVHL.IS


52 Week Range (TL): 9.82 / 17.2





6.00

8.40

10.80

13.20

15.60

18.00

12.1

2

02.1

3

04.1

3

06.1

3

08.1

3

10.1

3

12.1

3

TAVHL BIST-100

The most defensive play seeking opportunities

We re-initiate our coverage of TAV Airports with a Market

Perform recommendation. Our 2014-end target price of

TL18.80 indicates 19% upside potential

TAV Airports stands out as a safe choice in the aviation

sector without the risk of higher fuel costs and resilient

margins thanks to better revenue-cost composition

A potential delay in work on Istanbul’s new airport and

planned capacity expansion at Istanbul Ataturk Airport (IAA)

have recently served as catalysts for the shares and is

already priced in, in our view. A new catalyst could be

prolonged TL weakness against the EUR, which would

support TAV Airports operationally

Seeking new opportunities at home and abroad

Although TAV will receive compensation for any loss of profit arising

from the opening of the new Istanbul airport before 2021, we believe

investors are still focused on how the Company will replace IAA –

which accounts for around half of the consolidated EBITDA.

Meanwhile, the anticipated 30% increase in the capacity of IAA will

also support TAV. The consortium, in which TAV holds a 15% stake

in, took over operations at Zagreb International Airport in December

2013. New terminal tenders are expected to be held in Turkey, in

Bodrum, Dalaman (March 2014) and for airports in Saudi Arabia,

such as Riyadh and Jeddah. NY La Guardia’s terminal tender also

presents an opportunity for new business.

Well positioned to benefit from strong pax figures.

The total number of passengers in airports operated by TAV

increased by 17% YoY in 2013. TAV is likely to continue benefit from

increasing passenger numbers in the regions it operates in

(principally in Turkey) and we conservatively assume that TAV will

post a CAGR of 7% in total passenger numbers between 2013-2016.

Turkey - Equity - Aviation

Re-initiation of Coverage


83

February 11, 2014

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RESEARCH

SUMMARY FINANCIALS The Company in Brief

TAV Airports, the leading airport operator in Turkey,

operates 13 airports: Istanbul Atatürk, Ankara

Esenboga, Izmir Adnan Menderes Antalya Gazipasa

in Turkey, Tbilisi and Batumi in Georgia, Monastir

and Enfidha in Tunisia, Skopje and Ohrid in

Macedonia, Medinah in Saudi Arabia, Riga (only

commercial areas) in Latvia and Zagreb in Croatia.

TAV Airports provides service in all areas of airport

operation such as duty-free, food and beverage,

ground handling, IT, security, and operations

services. The company and its subsidiaries provided

service 84 million passengers in 2013.

Shareholders

Aeroports De Paris 38.0% Tepe Insaat 8.1% Akfen Holding 8.1% Sera Yapi 2.0% Free Float 40.3% Other 3.5%


Net Sales 2,343 3,232 4,044 4,382 38%


Operating Profit 521 876 1,105 1,187 68%

Consolidated EBITDA 765 1,071 1,385 1,549 40%

Consolidated EBITDAR 1,099 1,500 1,919 2,096 36%

Non-operating Income/ Expense -145 -310 -388 -421 114%

Profit (Loss) before Tax 376 565 717 767 50%

Tax -83 -189 -143 -153 128%

Minority Interests 7 10 13 14 50%

Net Income 286 366 560 599 28%

Ratios

EBIT Margin 22.2% 27.1% 27.3% 27.1% 4.9 pp

EBITDA Margin 29.8% 33.1% 34.3% 35.3% 3.3 pp

EBITDAR Margin 46.9% 46.4% 47.5% 47.8% -0.5 pp

Net Income Margin 11.1% 11.3% 13.9% 13.7% 0.2 pp


Current Assets 1,701 2,295 2,576 2,594 35%

Cash and Cash Equivalents 93 230 554 429 147%

Short-Term Trade Receivables 310 487 520 591 57%

Inventories 16 24 26 29 47%

Other Current Assets 1,282 1,555 1,476 1,545 21%

Long Term Assets 3,279 4,151 4,114 5,012 27%

Total Assets 4,981 6,446 6,690 7,606 29%

Short Term Liabilities 1,137 1,556 1,576 1,729 37%

Short-Term Financial Loans 505 599 557 570 19%

Short-Term Trade Payables 100 152 163 185 52%

Other Short-Term Liabilities 532 804 857 974 51%


Long-Term Financial Loans 2,411 2,860 2,657 2,723 19%

Other Long-Term Liabilities 167 209 204 220 25%

Shareholders Equity 1,265 1,822 2,253 2,933 44%

T. Liabilities & Sh. Equity 4,981 6,446 6,690 7,606 29%


84

February 11, 2014

Aviation


RESEARCH


Well positioned to benefit from strong passenger volumes in growing markets

TAV Airports, the leading airport operator in Turkey, operates 13 airports (4 in

Turkey, 2 in Georgia, 2 in Tunisia, 2 in Macedonia, one in Saudi Arabia, one in

Latvia and one in Croatia). TAV Airports provides services in all areas of airport

operations such as duty free, food and beverage, ground handling, IT, security and

operations services. Going forward, we believe the outlook for traffic growth in the

regions where TAV Airports operates remains positive thanks to the

underpenetrated nature of the air traffic market in the high growth regions. The

Turkish aviation industry has demonstrated an outstanding performance on the

back of strong pax growth following the market deregulation in 2003. Between

2007 and 2013, period, total pax numbers in the Turkish aviation market increased

at a CAGR of 13% to reach 150mn. TAV Airports’ pax numbers increased at a

CAGR of 19% between 2007-2013. Outside Turkey, there was eye-catching

growth in passenger numbers in Macedonia (17%) and Georgia (18%) in 2013.

Overall, TAV Airports registered 17% pax growth in 2013 to reach a count of

84mn, with domestic passengers accounting for 43% of total pax.

Seeking new opportunities coupled with synergies with Aeroport de Paris

We expect TAV Airports, together with its main shareholder, Aeroports de Paris, to

seek new business opportunities both in Turkey and abroad. Aeroport de Paris

and TAV Airports now offer a global footprint with a platform of 37 airports under

management representing 200mn pax. The extensive know-how of both

companies in airport management and operations will enhance the

competitiveness of the duo in forthcoming tenders. The consortium, in which TAV

Airports holds a 15% stake, recently took over operations at the relatively small

Zagreb International Airport on December 5,2013. The Consortium will incur capex

until the end of 2016, increasing the airport’s capacity from 2mn to 5mn; the

capacity is eventually projected to increase to 8mn. New terminal tenders are

expected to held in Turkey like Bodrum, Dalaman (in March 2014) and for Saudi

Arabian cities like Riyadh and Jeddah. Dalaman and Bodrum airports served

7.7mn passengers in 2013, indicating 5% YoY growth. We expect TAV Airports to

participate in the tender but we believe the competition will be fierce - as observed

in Istanbul’s third airport tender back in May 2013, when TAV Airports placed the

third best offer. Furthermore, the company has shown an interest in the Indian

GMR’s entire 40% stake in Istanbul’s second largest airport, Sabiha Gokcen

Airport (SAW), but in regard to first right of refusal, the other partner in SAW -

Malaysia Airports - acquired the 40% stake for EUR225mn. We would also note

that La Guardia’s terminal improvement and management tender could prove

another source of new business. On a separate note, TAV Construction (not a

subsidiary but has same shareholder) is the world’s second largest airport

construction company, principally active in the MENA region, which could provide

opportunities for TAV Airports.


85

February 11, 2014

Aviation


RESEARCH

A relatively defensive business in airline sector

We believe TAV Airports has a diversified balanced portfolio both operationally and

regionally. As mentioned before, TAV Airports has a presence in six different

countries where are underpenetrated in terms of air traffic, delivering above

average growth in passenger volumes which reduces country specific risks to

some extent. Furthermore, the company is exposed to both non-cyclical

operations (such as terminal operation and ground handling) as well as highly

cyclical operations (such as duty-free, food and beverage). Thanks to this

composition of operations, oil price fluctuations do not present a major risk for TAV

Airports, in contrast with airlines.

Operational leverage

Once the major investments in airport construction are completed, the majority of

cash cost become fixed as rent expenses with no immediate need for additional

recruitment due to surging passenger volumes. Rental expenses and personnel

expenses constitute 14% and 21% of total revenues, respectively. Therefore, by

the nature of business, growing volumes mean increasing operational leverage;

and we believe this is the main reason behind the improvement in EBITDA (a 50%

CAGR between 2006 and 2012) while revenues recorded an 18% CAGR during

the same period.

Capacity increase at Istanbul Ataturk Airport (IAA) is another plus

IAA is the flagship of TAV Airports, accounting for 36% of overall revenues and

61% of total passengers in 2013. In addition, IAA provides almost half of TAV

Airports’ consolidated EBITDA. Therefore, we attach more importance to IAA

regarding TAV Airports’ profitability. According to our calculations every 1%

increase on top of our 2013-2020E CAGR estimate of 5% in total pax of IAA

increases our target Mcap of TAV Airports by 2%. IAA served 51mn passengers in

2013 (up 15% YoY), just short of its 60-65mn capacity. However, the capacity

constraint is less of concern now as the government plans to increase the capacity

at the airport by 30%. We incorporate the above mentioned capacity

enhancements and forecast that pax numbers at IAA will rise to 73mn by 2020.

Investment Negatives

Lower than expected organic growth

The global economic slowdown has had a negative impact on the entire aviation

industry, including airport operators, through lower air traffic activities. A slowdown

in air traffic could be considered as the major risk for TAV Airports. On the other

hand, as most of TAV Airports’ investments have been completed in previous

years, and given that most of the countries where the company has a presence in

are developing countries, we believe TAV Airports is in a relatively advantageous

position. Although we believe there are strong growth prospects in terms of

passenger numbers and air traffic movement at the airports where TAV Airports

operates, the airline sector does face a number of risks such as terrorist attacks,

wars and natural disasters which could curb demand for air travel at any time,

curtailing the company’s organic growth. Hence, our valuation is obviously highly

sensitive to passenger growth forecasts.


86

February 11, 2014

Aviation


RESEARCH

The difficulty of replacing IAA and its high dependence on the airport

Based on our assumptions, IAA accounts for 45% of our target net asset value.

TAV Airports hold the concession for IAA until 2021; however, IAA will be closed to

scheduled flights when Istanbul’s new airport enters operation. Although TAV

Airports will receive compensation for any loss of profit arising from the opening of

the new Istanbul airport opening before 2021, we believe investors are still

focused on how the Company will replace Istanbul Ataturk Airport. Although the

Aeroport de Paris partnership provides a global footprint when it comes to seeking

opportunities, we believe it could prove extremely difficult to find an asset to

compensate IAA’s profitability, as the tenders mentioned above on page 84 do not

offer the degree of growth offered by IAA, or add value to TAV Airports to any

extent comparable to IAA. High dependence on IAA is also means a high

dependence on THY’s business, since THY accounts for almost 75% of IAA pax

volumes.

Country specific risks

Operating in seven different countries, TAV Airports is vulnerable to country

specific risks such as political, regional and economic risks. For example, the

ongoing civil unrest in Tunisia limits the visibility of its operations there. We would

not rule out potential political tensions between Russia and Georgia, or regional

risks in Syria, Iraq or Iran.

Exposure to the retail business

Since the share of the retail business (duty-free and food & beverage) in total

revenues has been increasing, a deterioration in demand would result in lower

than expected revenues and could leave the company less resilient in the face of

economic downturns.

VALUATION

Sum-of-the-Part (SOTP) Valuation

2014-end target price of TL18.80/share. We value TAV Airports using sum-of

the parts (SOTP) analysis based on target Net Asset Value (NAV). We employed

DCF analysis to value each of the Company’s operations separately. Our valua-

tion is solely based on DCF, as we believe DCF analysis is the most appropriate

means of reflecting TAV Airports’ long-term growth potential as well as TAV Air-

ports’ well designed structure. We only valued TAV Airports’ existing airport opera-

tions, not taking into account any terminal value and assuming that the Company

would neither win any new tenders, nor would it be awarded another term upon

expiry of its current concession agreements. On the other hand, as the services

companies’ operations will not end with the expiry of operating rights at the air-

ports, we did include a terminal value in calculating the value of the services com-

panies. We put HAVAS to our valuation on its transaction value in late 2012. TAV

had paid EUR80mn for 35% of HAVAS at that time.


87

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Peer Group Comparison

We base our fair value estimate for TAV on DCF, mainly in view of the important

differences between the company and its peers, such as i) its growth potential, ii)

its revenue structure and iii) its business structure. However, we did present a

peer group comparison for instructive purposes.

Most of TAV’s European peers totally own the airports they operate, and therefore

a terminal value is calculated when valuing these airports. Conversely, TAV Air-

ports operates its airports under the BOT scheme or operational lease agreement.

As a result of this difference, we have not carried out a peer comparison in our fair

value calculation.

TAV Airports

SOTP Valuation

Concession

Due

Equity Value

(€mn)

Valuation

Method

TAV's stake

(€mn)

Contribution

(€mn)

% share

in total

Airport Operations 2,657 2,105 82%

TAV Istanbul Jan-21 1,168 DCF 100% 1,168 45%

TAV Izmir Jan-32 124 DCF 100% 124 5%

TAV Esenboga May-23 144 DCF 100% 144 6%

TAV Gazipaşa May-34 15 DCF 100% 15 1%

TAV Tunisie May-47 264 DCF 67% 177 7%

TAV Georgia Jan-27 241 DCF 76% 183 7%

TAV Macedonia Mar-30 38 DCF 100% 38 1%

TAV Medina 2037 663 DCF 33% 219 9%

TAV Zagreb 2042 246 DCF 15% 37 1%

Services 675 467 18%

ATU 357 DCF 50% 179 7%

HAVAS 229 Transaction Value 100% 229 9%

BTA 90 DCF 67% 60 2%

TOTAL 2,572

(-) Others (€mn) 187

Target Value for TAV Airports (€mn) 2,385

Current Mcap (€mn) 1,886

2014-end target price per share (TL) 18.80

Current share price (TL) 15.75

Upside potential 19%


Peer Comparison


Airports of Thailand PCL THAILAND 7,470 6.28 5.56 11.8 10.1 20.6 17.1

Beijing Capital International Airport Co Ltd CHINA 3,255 4.12 3.83 7.5 6.9 12.7 10.7

Auckland International Airport Ltd NEW ZEALAND 4,037 12.49 11.84 16.7 15.8 28.6 26.4

Fraport AG Frankfurt Airport Services Worldw ide GERMANY 6,898 3.44 3.29 10.3 9.6 19.6 16.7

Sydney Airport AUSTRALIA 7,673 12.77 12.13 15.9 15.0 44.4 38.7

Mcap Adjusted Average 7.9 7.4 12.7 11.7 26.8 23.2

TAVHL multiples 2,572 2.61 2.09 7.89 6.10 10.2 9.5

Discount/Premium -67% -72% -38% -48% -62% -59%




88

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Recommendation: Market Perform. TAV Airports is Turkey’s leading airport ter-

minal operator. The Company operates Istanbul Ataturk, Ankara Esenboga and

Izmir Adnan Menderes Airport, located in Turkey’s three largest cities. TAV Air-

ports’ business structure ensures high operating leverage, and since the passen-

ger fees are mainly fixed, higher volumes going forward will be the major growth

driver for TAV, also supporting the company’s retail operations. In addition to a

solid long term outlook, we believe the company should benefit from the current

macro environment, as the lion’s share of revenues are based in hard currencies.

Moreover, we believe that the Company is a good proxy to benefit from growth in

number of pax in Turkey without the fuel risk. Our DCF based SOTP analysis sug-

gests a 2014-end target share price of TL18.80 for TAV Airports; offering 19%

upside potential. Therefore, we reinitiate our coverage of TAV Airports with a Mar-

ket Perform recommendation. The Company has outperformed the BIST-100 by

102% in 2013 and by 8% so far in 2014, a trend we would attribute to the compa-

ny’s revenue structure, which is mostly € and $ denominated, and its strong oper-

ational performance along with the mounting expectations of a delay in the third

airports project and planned capacity expansion in its flagship Istanbul Ataturk

Airport.

Risks. Key risks include a slowdown in passenger traffic growth, increasing

political tensions in its regions of operation, failure to replace IAA or overpaying in

acquisitions.

HOW WE STAND ALONGSIDE THE CONSENSUS According to the forecasts compiled by Bloomberg, we are generally in line with

consensus at the top line for 2013E and 2014E; however, our 2014E EBITDA

forecasts is 11% higher than the consensus estimate, probably recent

appreciation of EUR is not in forecasts yet.


TAVHL

(TLmn) 2013 2014 2015 2013 2014 2015 2013 2014 2015

Net Sales 3,306 3,738 4,103 3,232 4,044 4,382 -2% 8% 7%

EBITDA 1,059 1,250 1,396 1,071 1,385 1,549 1% 11% 11%

Net Profit 413 563 652 366 560 599 -11% 0% -8%

EBITDA Margin 32.0% 33.4% 34.0% 33.1% 34.3% 35.3% 1.1% 0.8% 1.3%

Net Income Margin 12.5% 15.1% 15.9% 11.3% 13.9% 13.7% -1.2% -1.2% -2.2%

Target Share Price



17.24 18.80 9%


89

February 11, 2014

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RESEARCH

Sensitivity to FX rates

TAV Airports reports in EUR vs. its share price in TL. Since 67% of total revenues

are in hard currencies, the company is highly exposed to FX volatility through its

businesses while 45% of its costs are in TL. Hence, TL weakness bodes well for

the company operationally, According to the 9M13 dipnotes, a 10% weakening of

EUR against TL and USD would reflect as EUR 9.3mn and EUR9.5mn FX income

on the income statement.

THE COMPANY OVERVIEW TAV Airports operates four airports in Turkey; Istanbul Ataturk Airport (Lease

Agreement), Ankara Esenboga Airport (BOT), Izmir Adnan Menderes Airport

(BOT) and Gazipasa Airport (Concession). All first three Turkish airports are

among Turkey’s five largest airports. In addition, TAV operates two airports in

Tunisia, two airports in Macedonia and two in Georgia. A consortium formed by

TAV Airports Holding, the Saudi Oger Ltd. and Al Rajhi Holding Group had signed

a BTO contract for the Medinah Airport tender, with TAV Airports holding a 33%

stake in the consortium. The consortium will operate Medina Airport for a period of

25 years under the BTO scheme. The Company also has some service

companies in its portfolio, such as ATU, BTA and HAVAS, which create synergies

with its airport operations. Through ATU, TAV has a duty free operations in Riga

International Airport in Latvia. TAV has recently acquired 15% stake in Zagreb

International Airport.

TAV Airports Revenue by currency TAV Airports Expenses by currency

Source: The Company

EURO, 46%

USD, 15%

TL, 33%

Other, 6%

9M13

EURO, 33%

USD, 14%

TL, 45%

Other, 8%

9M13

TAV Airports ownership


38.0%

8.1%8.1%2.0%

40.3%

3.5%

Aeroports De Paris

Tepe Insaat

Akfen Holding

Sera Yapi

Free Float

Other


90

February 11, 2014

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RESEARCH

Business Segments

Airport operations (Aviation) and Services (Retail) are TAV Airports’ two major

business segments.

Airport Operations

TAV Airports’ main business area is the management of airports and the company

currently manages 13 airports. In its three Turkish airports, TAV only operates the

landside (airside is operated by the state-owned DHMI), while in Georgia,

Gazipasa, Macedonia and Tunisia, the contract covers the airside as well.

TAV Airports’ operations in the aviation sector comprise of four airports in

Turkey; Istanbul Ataturk Airport (Lease Agreement), Ankara Esenboga Airport

(BOT), Izmir Adnan Menderes Airport (BOT) and Gazipasa Airport (Concession).

TAV Airports Holding

Source: The Company


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There are two major types of airport operation:

1-Concession/Lease: TAV pays a fixed rent payment in return for the right to

operate Istanbul Ataturk Airport and Gazipasa Airport.

2-BOT Contracts: TAV undertakes the necessary construction/investment to build

the airport in return for a guaranteed passenger number of pax in Ankara and

Izmir.

TAV Airports has BOT+ Concession model as well, briefly combining above two

types, in airports in Macedonia, Saudi Arabia and Croatia

The company aims to expand its non-regulated revenues (services and

commercial revenues) and expand its portfolio by bidding for new concessions in

and outside Turkey.

Service Operations

The Company runs its duty-free operations under the ATU umbrella. ATU is a

50/50 joint venture between TAV and Unifree (a Turkish retailer majority owned by

Heinemann, a retailer involved in duty-free operations in Germany) operating as

the sole operator of duty-free stores at airports operated by the Company

(excluding Monastir Airport, but including Riga Airport which is not operated by

TAV Airports). In addition, TAV Airports holds a 67% stake in BTA, which

manages restaurants and food shops. In Istanbul Ataturk Airport’s international

terminal, BTA manages 146 outlets with a total seating capacity of 12,500 and the

Airport Hotel in Istanbul.

KEY ASSUMPTIONS & FORECASTS

TAV Airports operates the terminals under lease agreements or BOT and BTO

contracts, and therefore all airport operations have a finite term. Although the

Company may well be in a favoured position to extend its contracts at the end of

the contract period, we have not assumed any terminal value for the airport

terminal operations.

TAV Airports also has interests in some services companies such as HAVAS, ATU

and BTA. In our view, these companies do deserve a terminal value, since they

will continue to operate after the airports’ concession period expires.

On the other hand, each airport runs under separate companies which are

focused only on their operations. Moreover, these companies have a different debt

structure and are faced with specific macro-economic risks as a result of their area

of operation. Therefore, we calculated a different WACC for each operation when

valuing the companies.


92

February 11, 2014

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RESEARCH

Istanbul Ataturk Airport

Istanbul Ataturk Airport (IAA), Turkey’s largest airport in terms of passenger traffic,

accounts for more than 61% of TAV Airport’s total passenger traffic. Total

passenger traffic at Istanbul Ataturk Airport rose by 14% YoY in 2013, reaching

51mn (a total of 17mn domestic passengers used IAA, marking 13% YoY growth,

with 34mn international passengers using the airport, up 14% YoY). Istanbul

Ataturk Airport’s car park is also one of Europe’s largest car parks under a single

roof. We are very conservative on pax growth at IAA and we expect IAA to register

a 5% CAGR in pax numbers over the 2013-2021 period.

Revenue Per departure (RPD)

Type Expire Concession Fee (mn) TAV Stake Net Debt(mn)(1)Currency RPD

Guranteed Pax

(K)

Guranteed Pax Start

Year

Istanbul Lease 01-2021 $140 + VAT 100% € 68

International US$ 15.0

Transfer € 2.5

Domestic € 3.0

Ankara BOT 05-2023 - 100% € 83

International € 15 2007

Domestic € 3 2007

Izmir BOT + Lease 12-2032 €29mn starting from 2013 (6) 100% € 58

International € 15 2006

Domestic € 3

Gazipasa Lease 05-2034 $50,000+VAT(5) 100% € 16

International € 5

Domestic TRL 4

Tblisi BOT 11-2027 - 76% -€ 4

International US$ 22

Domestic US$ 6

Batumi BOT 08-2027 - 76% € 0

International US$ 12

Domestic US$ 7

Monastir&Enfidha BOT+Concession 05-2047 %11-26 of Revenues from 2010 to 2047 67% € 345

International € 9

Domestic € 1

Macedonia BOT+Concession 03-2030 %15 of the gross annual turnover (2) 100% € 57

Skopje € 17.5

Ohrid € 16.2

Medina BTO+Concession 2037 54.5%(4) 33% € 116 SAR 80 (3)

Zagreb BOT+Concession 04-2042 €2.0 - €11.5m fixed 15% - € €15 (7)

0.5% (2016) - 61% (2042) variable €4 (Transfer)

1) As of September 30, 2012

2) The concession fee is going to be 15% of gross annual turnover until the number of pax using the tw o airports reaches 1mn, and w hen the number of pax exceeds 1mn.

3) SAR 80 from both departing and arrivign international pax. Pax charge w ill be increase as per cumulative CPI in Saudi Arabia every 3 years.

4) The concession charge w ill be reduced to 27.3% for the f irst 2 years that follow the copletion of the construction.

5) TAV Gazipaşa shall make a yearly rent payent of US$50,000+VAT as a f ized amount, until the end of operation period; as w ell as a share of 65% of the net profit to the DHMI.

6) Cash basis

7) €10, €4, €4 before April 2014 respectively for international, domestic and transfer pax

0.6mn Dom.,

0.75mn Intn'l for

2007 +5% p.a.

1.0mn intn'l for

2006 + 3% p.a.


93

February 11, 2014

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RESEARCH

Ankara Esenboga Airport

Tepe-Akfen signed the BOT contract for Ankara Esenboga Airport in 2004. The

construction was to be completed in a period of 36 months with an operation

period of 15 years and 8 months. The project carried an investment cost of

€250mn. Since the construction was completed a year ahead of schedule, the

operation period increased by one year accordingly. TAV Esenboga started

operations on October 16, 2006 and TAV Airports currently holds a 100% stake in

TAV Esenboga. We project that Ankara Esenboga Airport will record a CAGR of

4% in the 2013-2023 period.

DCF for Ankara Esenboga Airport (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Total Pax (mn) 11.7 12.2 12.7 13.2 13.7 14.3 14.8 15.4 16.1 16.7

Total Revenues (mn) 53.5 56.2 58.9 61.8 64.9 68.1 71.4 75.0 78.7 82.5

EBITDA 30.7 32.1 34.0 36.0 38.0 40.2 42.6 45.0 47.6 50.4

EBITDA Margin 57% 57% 58% 58% 59% 59% 60% 60% 61% 61%

Tax -4.9 -5.1 -5.5 -5.9 -6.3 -6.8 -7.2 -7.7 -8.2 -8.8

Chg in WC 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Capex -1.0 -1.0 -1.1 -1.1 -1.1 -1.1 -1.1 -1.1 -1.1 0.0

FCF 24.8 25.9 27.4 29.0 30.6 32.4 34.2 36.2 38.2 41.6

WACC 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7%

Dicount Factor 1.00 1.08 1.16 1.25 1.35 1.45 1.56 1.68 1.81 1.95

PV of FCF(2014-2023) 24.8 24.1 23.6 23.2 22.8 22.3 21.9 21.5 21.1 21.3

Sum of PV of FCF(2014-2023) 227

Terminal Value 0

Net Debt (as of 9M13) 83

Value of Ankara Esenboga Airport (€ mn) 144

TAV Stake % 100%

TAV Stake (€mn) 144


DCF for Istanbul Ataturk Airport (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Total Pax (mn) 55.9 58.4 61.0 63.8 66.6 69.6 72.7

Total Revenues (mn) 474.6 495.5 517.3 540.1 564.0 588.9 614.9

EBITDAR 359.5 375.3 391.9 409.2 427.2 446.1 465.8

EBITDAR Margin 76% 76% 76% 76% 76% 76% 76%

EBITDA 232.4 253.0 271.3 288.6 306.6 325.5 345.2

EBITDA Margin 49% 51% 52% 53% 54% 55% 56%

Tax -46.4 -50.3 -53.9 -57.4 -61.0 -64.8 -68.7

Chg in WC -0.4 -0.2 -0.2 -0.2 -0.2 -0.2 -0.3

Capex -4.1 -4.2 -4.2 -4.2 -4.3 -4.3 -4.4

FCF 181.6 198.3 212.9 226.7 241.1 256.1 271.8

WACC 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4%

Discount Factor 1.00 1.08 1.18 1.27 1.38 1.50 1.63

PV of FCF(2014-2020) 181.6 182.8 181.1 177.8 174.4 170.9 167.2

Sum of PV of FCF(2014-2020) 1,236

Terminal Value 0


Value of TAV Istanbul 1,168

TAV Stake % 100%




94

February 11, 2014

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RESEARCH

Izmir Adnan Menderes Airport

Following the Group’s restructuring in December 2006 and January 2007, TAV

Izmir became a 100% owned subsidiary of TAV Airports. The project cost

€174mn, and the operating period will end in 2015. In November 2011, TAV Air-

ports won the tender for the leasing of the operating rights of Izmir Adnan Mende-

res Airport’s existing International Terminal, CIP and Domestic Terminal (€250mn

capex for domestic terminal and €610mn concession). The company will build a

new terminal to increase the annual passenger capacity of the terminals to 25mn.

TAV Airports already holds the operating rights of Izmir Adnan Menderes Airport

International Terminal until 2015, and shall maintain these operating rights until

the end of 2032, as the winning party. Izmir Adnan Menderes served 10.2mn pax

in 2013, while the domestic terminal served 2.5mn pax in the same period.

DCF for Izmir Adnan Menderes Airport (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E-2032E

Total Pax (mn) 10.9 11.6 12.4 13.3 14.2 15.1 16.2 307.4

Total Revenues (mn) 66.0 69.5 76.0 81.2 86.8 92.7 99.1 1878.8

EBITDA 32.8 2.1 8.6 13.8 19.4 25.3 31.7 1070.0

EBITDA Margin 50% 3% 11% 17% 22% 27% 32% 57%

EBITDAR 43.0 37.5 44.0 49.2 54.8 60.7 67.1 1494.8

EBITDAR Margin 65% 54% 58% 61% 63% 65% 68% 80%

Tax -4.8 0.0 0.0 0.0 -0.9 -2.1 -3.4 -178.7

Chg in WC 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -1.2

Capex -62.5 -62.5 -62.5 -5.0 -2.0 -2.0 -2.0 -24.0

FCF -34.5 -60.4 -53.9 8.8 16.4 21.2 26.2 866.1

WACC 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%

Discount Factor 1.00 1.09 1.19 1.30 1.42 1.55 1.69

PV of FCF(2014-2032) -34.5 -55.4 -45.3 6.8 11.6 13.7 15.6 270.0

Sum of PV of FCF(2014-2032) 182

Terminal Value 0


Value of Izmir Adnan Menderes Airport (€ mn) 124

TAV Stake % 100%




95

February 11, 2014

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RESEARCH

Gazipasa Airport

Gazipasa Airport, offering short transfer times to holiday resorts located to the east

of Antalya, aims to become a tourism base for the region. In August 2007, TAV

Airports was awarded the tender to operate Antalya Gazipasa Airport for a period

of 25 years. The airport offers significantly shorter transfer times to nearby holiday

resorts east of Antalya when compared to the main airport located closer to the

city of Antalya. The Alanya region, which hosts over 2 million annual visitors, is

only a 30 minute drive from Gazipasa Airport. The Gazipasa airport has a terminal

building area of 2144 square meters and a capacity to handle 0.5m (will be

increased to 1.5m) passengers per year. TAV Airports has extended the airport’s

runway to 2000 metres to enable a wider range of aircraft operations.

Georgian Operations (TAV Georgia)

TAV Airports holds a 76% stake of TAV Georgia, with the remainder of the shares

held by Urban Insaat, a Turkish construction company. Located 20 km west of the

capital, Tbilisi (population of around 4.7mn), Tbilisi Airport is Georgia’s largest and

busiest airport, accounting for an overwhelming 98% of the country’s air traffic.

TAV Georgia won the Tbilisi BOT tender held in September 2005 to build a new

terminal at the airport. TAV Georgia completed the construction of the terminal at

a cost of US$62mn and started operations in February 2007.

TAV Georgia also constructed the Batumi Airport terminal, which started

operations in May 2007. Note that TAV Georgia is responsible for the airside and

ground handling operations, as well as the terminal operations at Tbilisi and

Batumi airports. TAV Georgia will also carry out all terminal and car park

operations in addition to other airport activities, which include duty free, cargo,

ground handling and catering services operations at these airports.

DCF for Gazipasa (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E-2034E

Total Pax (mn) 0.4 0.5 0.6 0.6 0.7 0.8 1.0 1.1 43.9

Total Revenues (mn) 1.2 1.4 1.6 1.9 2.2 2.5 2.9 3.3 138.1

EBITDA 1.0 1.1 1.3 1.5 1.7 2.0 2.3 2.7 110.5

EBITDA Margin 80% 80% 80% 80% 80% 80% 80% 80% 80%

Tax -0.2 -0.2 -0.3 -0.3 -0.3 -0.4 -0.5 -0.5 -21.8

Chg in WC 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Capex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FCF 0.8 0.9 1.0 1.2 1.4 1.6 1.8 2.1 88.7

WACC 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%

Dicount Factor 1.00 1.08 1.17 1.27 1.37 1.48 1.61 1.74 4.86

PV of FCF(2014-2034) 0.8 0.8 0.9 0.9 1.0 1.1 1.1 1.2 18.2

Sum of PV of FCF(2014-2034) 31

Terminal Value 0


Value of Gazipasa (€ mn) 15

TAV Stake % 100%




96

February 11, 2014

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RESEARCH

Monastir and Enfidha Airports - TAV Tunisia

TAV Airports won the BOT tender in Tunisia and will obtain the right to operate

Monastir and Enfidha airports until May 2047. TAV runs its operations in Tunisia

through its wholly-owned subsidiary, TAV Tunisia. Almost all passengers

travelling through the Monastir Airport are international passengers, as the airport

is located a touristic area of Tunisia. Enfidha Airport is located 50-60 km from

Monastir.

According to the BOT agreement, TAV Tunisia will pay concession fees to the

Tunisian Airport Authority over the BOT term and the concession fee rate will be

subject to a linear increase from 2010, reaching 26% by the end of the BOT term.

DCF for TAV Tunisia (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E- 2047E

# of int'l PAX (mn) 3.6 3.8 4.0 4.3 4.5 4.7 5.0 5.3 306.0


EBITDAR 31.8 34.5 42.2 45.5 48.9 52.5 56.3 60.4 3,876

EBITDAR Margin 57% 58% 61% 63% 64% 65% 66% 67% 77%

EBITDA 24.7 26.7 33.0 35.4 38.0 40.6 43.4 46.4 2,767.8

EBITDA Margin 44% 45% 48% 49% 49% 50% 51% 51% 55%

Tax -4.1 -4.3 -4.9 -5.2 -5.4 -5.7 -6.0 -6.3 -332.2

Chg in WC 0.0 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 -1.9

Capex -1.3 -1.4 -1.4 -1.4 -1.4 -1.4 -1.4 -1.4 -41.0

FCF 19.3 21.1 26.6 28.8 31.1 33.5 36.0 38.6 2,392.7

WACC 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4%

DiScount Factor 1.00 1.08 1.18 1.27 1.38 1.50 1.62 1.76

PV of FCF(2014-2047) 19 19 23 23 23 22 22 22 435.9

Sum of PV of FCF(2014-2047) 609

Terminal Value 0


Value of TAV Tunisia (€ mn) 264

TAV Stake % 67%



DCF for TAV Georgia (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E

# of int'l PAX (mn) 1.8 1.9 2.0 2.1 2.3 2.4 2.6 2.7 2.9 3.1 3.3 3.5 3.8 4.0

Total Revenues (€mn) 34.9 36.1 38.1 40.7 43.5 46.4 49.5 52.9 56.4 60.2 64.3 68.7 73.3 78.2

EBITDA 22.6 23.5 25.0 26.8 28.8 30.9 33.1 35.6 38.2 41.0 43.9 47.1 50.6 54.3

EBITDA Margin 65% 65% 66% 66% 66% 67% 67% 67% 68% 68% 68% 69% 69% 69%

Tax -3.5 -3.7 -3.9 -4.2 -4.5 -4.9 -5.2 -5.7 -6.1 -6.6 -7.1 -7.6 -8.2 -8.8

Chg in WC 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Capex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FCF 19.1 19.9 21.1 22.6 24.2 26.0 27.9 29.9 32.0 34.3 36.8 39.5 42.3 45.4

WACC 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6%

Dicount Factor 1.00 1.09 1.18 1.28 1.39 1.51 1.64 1.78 1.94 2.10 2.28 2.48 2.69 2.92

PV of FCF(2014-2027) 19 18 18 18 17 17 17 17 17 16 16 16 16 16

Sum of PV of FCF(2014-2027) 237

Terminal Value 0

Net Debt (as of 9M13) -4

Value of TAV Georgia (€ mn) 241

TAV Stake % 76%




97

February 11, 2014

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RESEARCH

Skopje and Ohrid Airports - TAV Macedonia

TAV Airports operates two airports in Macedonia; Skopje Alexander The Great

Airport and Ohrid St.Paul The Apostle Airport. Macedonia is expected to become

an EU member and we deem the EU Parliament’s decision to lift the visa

requirements for Macedonians in 2009 to have been an important step.

The airports served 1mn passengers in 2013. TAV Airports is planning to boost

passenger traffic in Macadonia with modernization projects which include technical

infrastructure, greatly contributing to the commercial and tourism activities of

Skopje and Macedonia. The St. Paul The Apostle Airport in Ohrid is to be

operated by TAV Airports for a period of 20 Years. TAV Airports targets a

combination of growth in passenger traffic and in the number of airlines using the

airport through a series of modernization initiatives. Note that Ohrid is one of

Macedonia’s prime tourist destinations, attracting 250,000 tourists per year, who

come especially in the spring and summer months. This figure is expected to

increase further in the coming years with the positive impact of the EU accession

process.

DCF for TAV Macedonia (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E- 2030E

# of PAX 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 23.5


EBITDA 6.1 6.4 6.7 7.1 7.5 8.1 8.7 9.4 112.7

EBITDA Margin 27% 27% 26% 26% 26% 26% 26% 26% 26%

EBITDAR 9.4 10.0 10.5 11.2 11.9 12.8 13.7 14.8 177.9

EBITDAR Margin 42% 42% 41% 41% 41% 41% 41% 41% 41%

Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -6.3

Chg in WC 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.2

Capex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FCF 6.1 6.4 6.7 7.1 7.5 8.0 8.6 9.3 106.1

WACC 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8%

Dicount Factor 1.00 1.07 1.14 1.22 1.30 1.39 1.48 1.59

PV of FCF(2014-2030) 6 6 6 6 6 6 6 6 48.1

Sum of PV of FCF(2014-2030) 95

Terminal Value 0


Value of TAV Macedonia (€ mn) 38

TAV Stake % 100%




98

February 11, 2014

Aviation


RESEARCH

Medina Airport

A consortium of TAV Airports, the Al Rajhi Holding Group and the Saudi Oger Ltd.

submitted the highest bid in the tender held by the Civil Aviation General

Directorate (GACA) of the Kingdom of Saudi Arabia for the operation of Medina

International Airport for a period of 25 years. The contract for the operation of

Medina International Airport, as per the Build Transfer Operate model, was signed

on October 29, 2011 between the consortium and the GACA.

Accordingly, the annual pax capacity of Medina Airport, currently 4mn, is to double

to 8mn with the new terminal to be constructed by the first half of 2015 in a total

planned investment of US$1bn. The airport’s new terminal building was

commenced 1H12 and will be completed by 2015. Services shall continue to be

provided through the existing terminal building until the new terminal building is

completed. The service charge per passenger has been determined as 80 SAR

(approximately US$21) for both incoming and outgoing international passengers

throughout the operation period. A total of 54.5% of the annual turnover of the

Medina Airport shall be paid as the concession lease amount to the local

administration throughout the period which the airport operation rights continue,

until the first half of 2037.

DCF for TAV Medina (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022-2037E

# PAX (mn) 4.9 5.2 5.5 5.9 6.3 6.8 7.2 7.7 229.0

Total Revenues (mn) 106.2 125.7 132.5 141.6 151.4 186.1 198.9 212.6 9,161.2

EBITDAR 85.0 100.6 106.0 113.3 121.1 148.9 159.1 170.1 7,328.9

EBITDAR Margin 80% 80% 80% 80% 80% 80% 80% 80% 80%

EBITDA 27.1 66.3 69.9 36.1 38.6 47.5 50.7 54.2 2336.1

EBITDA Margin 26% 53% 53% 26% 26% 26% 26% 26% 26%

Tax 0.0 7.3 8.1 1.4 1.9 3.7 4.3 5.0 373.8

Chg in WC -1.1 -1.3 -1.3 -1.4 -1.5 -1.9 -2.0 -2.1 -91.6

Capex -307.7 -5.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -16.0

FCF -281.7 67.4 75.7 35.1 38.0 48.2 52.0 56.1 2,602.3

WACC 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4%

Dicount Factor 1.00 1.07 1.15 1.24 1.33 1.43 1.54 1.65

PV of FCF(2014-2037) -282 63 66 28 29 34 34 34 774

Sum of PV of FCF(2014-2037) 779

Terminal Value 0

Net Debt (as of 9M13) 116.0

Value of TAV Medina (€ mn) 663

TAV Stake % 33%




99

February 11, 2014

Aviation


RESEARCH

Zagreb Airport

In December 2013, the consortium (in which TAV Airports holds a 15% stake in)

took over operations at the relatively small Zagreb International Airport. The

Consortium will incur capex until the end of 2016 as it increases capacity from

2mn to 5mn pax. The capacity will eventually increase to 8mn.

Valuation of Services Operations

TAV Airports acquired 35% of HAVAS for EUR80mn in 2012 and increased its

stake to 100%. HAVAS is Turkey’s first and oldest ground handling company. The

company serves both scheduled and chartered flights in 23 airports. The

Company provides passenger transport services between some of the airports

and city centres. TAV Airports may offer HAVAS to the public once the profitability

of the entity meets expectations. As of 9M13, HAVAS generated EUR185mn of

revenue (up 15% YoY) and EUR34mn of EBITDA, implying a 19% EBITDA

margin. HAVAS had a net debt position of EUR64mn as of 9M13.

The Company runs its Duty Free operations under the ATU umbrella, which is a

50/50 joint venture between TAV and Unifree (a Turkish retailer majority owned by

Heinemann, a retailer involved in duty-free operations in Germany) operating as

the sole operator of duty-free stores at TAV’s airports.

TAV Airports holds a 67% stake in BTA, which is the food and beverage operator

at Istanbul Ataturk Airport (international and domestic terminals) as well as

Ankara, Izmir, Tbilisi and Batumi, Monastir, Enfidha, Skopje and Ohrid airports.

The Company operates the 131-room Istanbul Airport Hotel. BTA has a total

seating capacity of around 12,500 at 146 locations.

DCF for Zagreb International (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E-2042E

Total Pax (mn) 2.5 2.7 2.8 2.9 3.1 3.2 3.3 3.5 118.8


EBITDAR 23.8 37.4 39.3 41.2 43.1 45.2 47.4 49.6 1935.5

EBITDAR Margin 39% 39% 38% 38% 37% 37% 36% 36% 36%

EBITDA 21.5 35.0 36.7 38.5 40.3 42.2 44.2 46.2 1792.3

EBITDA Margin 35% 36% 36% 35% 35% 34% 34% 34% 33%

Tax -4.8 -7.5 -7.9 -8.2 -8.6 -9.0 -9.5 -9.9 -362.8

Chg in WC 0.0 -0.4 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -2.9

Capex -108.9 -108.9 -108.9 0.0 0.0 0.0 0.0 0.0 0.0

FCF -92.1 -81.7 -80.1 30.2 31.6 33.1 34.6 36.2 1426.6

WACC 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7%

Discount Factor 1.00 1.08 1.16 1.25 1.34 1.45 1.56 1.68

PV of FCF(2014-2042) -92 -76 -69 24 24 23 22 22 369

Sum of PV of FCF(2014-2042) 246

Terminal Value 0

Net Debt 0

Value of Zagreb International (€ mn) 246

TAV Stake % 15%




100

February 11, 2014

Aviation


RESEARCH

ATU

ATU was established as a joint venture between TAV Airports and Unifree. As of

January 2011, it was the sole duty free operator at Istanbul, Izmir, Ankara airports

in Turkey, Tbilisi and Batumi airports in Georgia, Enfidha airport in Tunisia, Skopje

and Ohrid airports in Macedonia and Riga International Airport in Latvia. ATU,

which is an enterprise constituting a good partnership collaboration model

between TAV and Unifree commands large-scale operations, purchasing capacity

and possesses an effective logistics network. ATU commenced operations in Riga

International Airport (Latvia), in January 2011.

BTA

TAV Airports holds a 67% stake in BTA, which is the food and beverage operator

at Istanbul Ataturk Airport (International and domestic terminals), Ankara, Izmir,

Tbilisi and Batumi, Monastir, Enfidha and Skopje Airports. The Company operates

the 131-room Istanbul Airport Hotel. Total seating capacity of BTA is around

13.500 at 145 points.

ATU DCF Summary (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Revenues 571.0 597.3 624.9 653.8 684.0 715.8 749.0 126.3

EBITDA 63.9 68.1 72.5 77.1 82.1 87.3 92.9 15.7

EBITDA Margin 11% 11% 12% 12% 12% 12% 12% 12%

Capex -2.1 -2.1 -2.1 -2.1 -2.1 -2.2 -2.2 -2.2

Chg in WC -1.4 -1.5 -1.6 -1.6 -1.7 -1.8 -1.9 -0.3

Tax -12.6 -13.5 -14.3 -15.3 -16.2 -17.3 -18.4 -3.1

FCF 47.9 51.2 54.6 58.2 62.1 66.2 70.6 10.2

WACC 11% 11% 11% 11% 11% 11% 11% 11%

Discount Factor 1.00 1.11 1.22 1.35 1.49 1.65 1.82 2.02

PV of FCF(2014-2021) 47.9 46.3 44.7 43.1 41.6 40.1 38.7 5.0

Sum of PV of FCF(2014-2021) 307.6

Terminal Grow th 1%

Terminal Value 53.5


Value of ATU (€ mn) 357

TAV Stake % 50%




101

February 11, 2014

Aviation


RESEARCH

THE COMPANY PROFILE

BTA DCF Summary (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Revenues 144.6 153.0 161.9 171.4 181.4 192.0 203.3 75.3

EBITDA 14.5 15.3 16.2 17.1 18.1 19.2 20.3 7.5

EBITDA Margin 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Capex -2.6 -2.6 -2.6 -2.7 -2.7 -2.7 -2.7 -2.8

Chg in WC -0.4 -0.4 -0.4 -0.4 -0.5 -0.5 -0.5 -0.2

Tax -1.8 -1.9 -2.0 -2.1 -2.2 -2.4 -2.5 -0.9

FCF 9.7 10.4 11.2 12.0 12.8 13.7 14.6 3.7

WACC 11% 11% 11% 11% 11% 11% 11% 11%

Dicount Factor 1.00 1.11 1.22 1.35 1.49 1.65 1.82 2.02

PV of FCF(2014-2021) 9.7 9.4 9.1 8.9 8.6 8.3 8.0 1.8

Sum of PV of FCF(2014-2021) 63.9

Terminal Grow th 3%

Terminal Value 24.8

Net Debt (as of 9M13) -1

Value of BTA (€ mn) 90

TAV Stake % 67%



.

TAV Airports Revenue Split by segment


32%

20%26%

7%

14%

9M12

Duty Free

GroundHandling

Aviation

32%

21%26%

7%

14%

9M13

Duty Free

GroundHandling

Aviation

EBITDA breakdown by segment (%)


Istanbul Ataturk

Airport, 52%Other

airports,

29%

ATU, 8%

BTA, 4%

HAVAS, 9%Other, -1%

9M12

Istanbul Ataturk

Airport, 51%

Other airports,

28%

ATU, 7%

BTA, 3%

HAVAS, 11% Other, 0%

9M13


102

February 11, 2014

Aviation


RESEARCH

Opex breakdown by segment (%)


Catering, 52%

Services rendered,

29%

D&A, 8%

Duty Free, 4%

Concession rent, 9% Other, -1%

9M12

Catering, 51%

Services rendered,

28%

D&A, 7%

Duty Free, 3%

Concession rent, 11% Other, 0%

9M13

TAV Airports Passenger Evolution


2330

41 4248

53

72

84

101106

112117

124130

137

0

20

40

60

80

100

120

140

160

2006

2007

2008

2009

2010

2011

2012

2013

2014E

2015E

2016E

2017E

2018E

2019E

2020E

20% CAGR 2006-2013

Revenue & EBITDA Development (EURmn)


402

508

627 640

785

881

1099

1,279

1,3961,473

2977

141 167212

257332

424478

521

7.2%

15.2%

22.5%

26.1% 27.0%29.2%

30.2%

33.1%34.3%

35.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0

200

400

600

800

1000

1200

1400

1600

2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Revenue (TLmn) EBITDA (TLmn) EBITDA margin (rhs)


103

February 11, 2014

Aviation


RESEARCH

Duty Free Spend per Pax (EUR)

Source: The Company

16

17.1

15.7

16.3

16.6 16.5

16.115.9

14.8

15.8

14.714.5

14.915.1

14.6 14.5

13

13.5

14

14.5

15

15.5

16

16.5

17

17.5

2007 2008 2009 2010 2011 2012 9M12 9M13

ATU Average Istanbul

Food & Beverage Spend per Pax (EUR)

Source: The Company

1.8

2.12.0

1.6

1.3 1.3 1.31.2

0.0

0.5

1.0

1.5

2.0

2.5

2007 2008 2009 2010 2011 2012 9M12 9M13

Food & Beverage Spend per Pax (EUR)

ATU revenues (EURmn)

Source: The Company, Garanti Securities, Q413 is our estimate

37

47

56

68

71

4147

57

72

74

38 4253

6573

29 33 41 50 61

0

50

100

150

200

250

300

2009 2010 2011 2012 2013

Q4

Q3

Q2

Q1


104

February 11, 2014

Aviation


RESEARCH

# of flights served ('000)

Source: The Company

0

50

100

150

200

250

300

350

HAVAS TGS HAVAS Europe Total

9M12

9M13

TAV Passenger Figures('000) 2009 2010 2011 2012 2013

Istanbul Ataturk 29,813 32,144 37,395 45,092 51,321

Int'l 18,396 20,343 23,973 29,812 34,097

Domestic 11,417 11,801 13,422 15,280 17,224

Ankara Esenboga 6,084 7,764 8,485 9,273 10,928

Int'l 1,094 1,329 1,405 1,594 1,574

Domestic 4,990 6,435 7,080 7,679 9,354

Izmir Adnan Menderes 1,667 2,127 8,524 9,356 10,209

Int'l 2,398 2,411 2,467

Domestic 6,125 6,945 7,741

Gazipasa 80 363

Int'l 76 243

Domestic 4 120

Medinah 3,548 4,588 4,669

Tunisia 3,781 3,917 2,289 3,321 3,438

Georgia 772 910 1,191 1,388 1,643

Macedonia 636 730 838 914 1,067

TAV Total 42,118 47,593 52,597 71,526 83,638

Int'l 25,685 29,309 32,020 40,757 47,430

Domestic 16,433 18,284 20,577 30,769 36,208

Source: The Company

Disclaimer

Definition of Stock Ratings

OUTPERFORM (OP) The stock's return is expected to exceed the return of the BIST-100 by 2014-end.

MARKET PERFORM (MP) The stock's return is expected to be in line with the BIST-100 by 2014-end.

UNDERPERFORM (UP) The stock's return is expected to fall below the return of the BIST-100 by 2014-end.

RESEARCH

Recommendation History-Turk Hava Yollari

Recommendation History-TAV Havalimanlari

Disclaimer

This document and the information, opinions, estimates and recommendations expressed herein,

have been prepared by Garanti Securities Research Department, to provide its customers with

general information regarding the date of issue of the report and are subject to changes without prior

notice. All opinions and estimates included in this report constitute our judgment as of this date and

are subject to change without notice.

This document and its contents do not constitute an offer, invitation or solicitation to purchase or

subscribe to any securities or other instruments, or to undertake or divest investments. Neither shall

this document nor its contents form the basis of any contract, commitment or decision of any kind.

Investor who have access to this document should be aware that the securities, instruments or

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Therefore, investors should make their own investment decisions considering the said circumstances

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obtained by Garanti Securities Research Department from sources believed to be reliable. However,

Garanti Securities cannot guarantee the accuracy, adequacy, or completeness of such information,

and cannot be responsible for the results of investment decisions made on account of this report.

The market prices of securities or instruments or the results of investments could fluctuate against

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Garanti Securities

Etiler Mah. Tepecik Yolu

Demirkent Sokak No:1

34337 Besiktas, Istanbul / Turkey

Phone: +90 (212) 384-1155

Fax: +90 (212) 352-4240

RESEARCH

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