AnnuAl RepoRt 2013 TURKISH AIRLINES Annu A l Repo R t 2013

AnnuAl RepoRt 2013

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TURKISH AIRLINES HEADQUARTERSAtatürk Hava Limanı Yeşilköy 34149 Istanbul/Turkey

Tel: +90212 463 6363 Fax: +90212 465 2121Reservation: 444 0849

[email protected] (Investor Relations)

In 2013 TurkIsh AIrlInes

Income from Sales

EBITDAR

Total Passengers

Passenger Load Factor

USD 9.8 Billions

USD 1.8 Billions

48.3 Millions

79.0%

19%

18%

24%

1.6 pt

The sales increased by 19.3% over the previous year to USD 9.8 billion. Gross operating profit amounted to USD 657.5 million and net profit reached USD 357 million.

Turkish Airlines registered a steady profit performance for the last seven years and achieved a 17.6% EBITDAR margin.

In 2013 Turkish Airlines carried 28.2 million international and 20.1 million domestic passengers; which results in a total of 48.3 million passengers.

In spite of capacity increase of 21.1%, passenger load factor increased by 1.6 pt to 79.0% in 2013.

Turkish Airlines has been named as the ‘Airline of the Year’ at this year’s CAPA (Center for Asia Pasific Aviation) Aviation Awards for Excellence. The title is given to the carrier that has had the greatest impact on the development of the airline industry, established itself as a leader and is a benchmark for others to follow. Turkish Airlines has established itself as a formidable competitor in a geographic region that boasts many of the world’s leading airlines. With the world’s largest flight network, Turkish Airlines flies to 200 international destinations from its Istanbul hub.

Turkish Airlines has been named as the ‘Airline of the Year’ at this year’s CAPA Aviation Awards for Excellence. The title is given to the carrier that has had the greatest impact on the development of the airline industry, established itself as a leader and is a benchmark for others to follow.

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Turkish Airlines has received the Skytrax “Best Airline in Europe” award for the third year running. As an internationally recognized brand, executing industrial surveys independent of commercial concerns, Skytrax annually presents awards to airline companies, based on their performance. During the 10 month survey period, airline customers from over 160 different nationalities participated in this customer satisfaction survey. By adding ‘Flying Chef’ service for Business Class passengers on its long flights, Turkish Airlines has been also named as the winner in the category, “Best Business Class Catering”.

While expanding our flight network, we also put emphasis on increasing quality. Crowned with Skytrax “Best Airline in Europe” award for the third time successively, we share our accomplishments with all our customers.

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By the end of 2013, Turkish Airlines has flown to 245 destinations, while increasing passenger numbers by 23.6% to 48.3 million. Within the next decade 100 new destinations are planned. Turkish Airlines aims at increasing the number of aircrafts to over 400 by 2020. By the end of 2013, Turkish Airlines introduced 26 new destinations and upgraded the number of flight points to 245 in 105 countries. The Company’s international destinations coverage is greater than any other airline in the world.

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New Destinations opened in 2013LIBREVILLECOLOMBOHOUSTONAQABAKUALA LUMPURFRIEDRICHSHAFENSANTIAGO DE COMPOSTELAMALTASALZBURGEL KASIMMARSEILLECONSTANZATALINNVILNIUSLUXEMBURGKATHMANDUMAZAR-I-SHARIF LAHORKANONDJAMENAÇORLUISPARTA KASTAMONUBİNGÖLŞIRNAKKOCAELİ

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YTurkish Airlines, with its superior service quality, offers a pleasant travel experience to everyone especially those who are brave challengers and passionate explorers. The Company’s new stance is also reflected in its brand communication. The “Widen Your World” motto is an open invitation to explore new horizons. The renewed brand strategy indicates how the Company surpasses being a global brand. Turkish Airlines ensures maximum passenger satisfaction with the Inflight Entertainment System, containing about 400 movies, 1,000 music CD’s, radio and news channels. Furthermore, the “Invest On Board” digital platform, features entrepreneurs from all over the world matched with prominent business leaders. Live TV broadcasting via satellite are all part of the services offered in the skies.

If you look at diversities as a symbol of richness, if you are a determined pursuer of challenges and if you want to learn by experience; then the world is an amazing playground. Believe in yourself and enjoy.

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Turkish Airlines, operating the world’s most comprehensive network of 105 countries; meets the expectations of its passengers by constantly introducing novelties. Its expanded and refurbished private passenger lounge, Turkish Airlines Lounge Istanbul, functions as the gate to the world; presenting a new level in pleasure and comfort. The newly added second floor of the lounge brings greater service choices to the customer. “Lounge Istanbul” was nominated to the international top 10 premium airport lounge list. This newly expanded lounge, which combines both modern and traditional design, aims to be the best.

“Turkish Airlines Lounge Istanbul”, among international top 10 private passenger lounges list, functions as the gate to the world; presenting a new level in pleasure and comfort.

AnnuAl RepoRt 2013

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TURKISH AIRLINES ANNUAL REvIEw

CONTENTS

01 Turkish Airlines Annual Review

02 To Our Shareholders 02 Financial Analysis 06 Industry Developments and the Forecast for 2014 08 Chairman’s Message 10 Board of Directors 13 Our Mission and Vision 14 Our Strategy

18 Turkish Airlines Group 18 Our Subsidiaries 22 2013 Traffic Results 24 Fleet 26 Flight Networks 28 Our Activities 28 Cargo 30 MRO 32 Catering 34 Ground Handling 36 Training 40 Other Services 47 Human Resources 51 Quality and Corporate Social Responsibility 54 Risk Management 58 Organizational Chart 60 Corporate Governance Principles Compliance Report

67 Consolidated Financial Statements 67 Consolidated Financial Statements and Notes as of December 31, 2013

1


Established in 1933, Turkish Airlines’ main fields of activity are all types of domestic and international passenger and cargo air transportation.

As for the shareholding structure of the Company; 50.88% are held publicly and 49.12% by the Prime Ministry, Privatization Directorate. The registered share capital of the Incorporation is TL 2 billion . The Company has 12 subsidiaries; 3 are directly owned and 9 are joint ventures.

Turkish Airlines flies to 43 domestic and 202 international destination, which brings the total number to 245 destinations. Over the previous year the Company has increased 39 million passenger numbers by 23.6% and carried 48.3 million passengers in 2013. The number of passengers increases by 26.1% on the domestic routes and by 21.9% of international routes. According to AEA (Association of European Airlines) data Turkish Airline increased its market share to 12.8% successfully and has taken second place among European carriers as regards to air passenger traffic. Corresponding to a capacity increase of 21.2%, the passenger load factor increased by 1.6 pt to 79.0% in 2013, which contributed to turnout. Cargo and mail transportation rose in parallel to the passenger increase and grew by 20.1% to 565,391 tons.

Turkish Airlines flies to 43 domestic and 202 international airports, which brings the total number to 245 destinations. Over the previous year the Company has increased its 39 million passenger number by 23.6% and carried 48.3 million passengers in 2013.

FINANCIAL ANALYSIS

50.88%

49.12%

Other (Public)

Republic of Turkey, Prime Ministry, Privatization Administration

AnnuAl RepoRt 2013

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FINANCIAL ANALYSIS

summary Balance sheet (millions UsD) 2013 2012 change (%)

total assets 11,901 10,523 13

Total Current Assets 2,125 2,166 -2

Total Non-Current Assets 9,775 8,357 17

total liabilities 11,901 10,523 13

Short Term Liabilities 3,117 2,530 23

Long Term Liabilities 5,521 4,960 11

Total Shareholders’ Equity 3,262 3,032 8

sUmmary income statement (millions UsD) 2013 2012 change (%)

operating revenue (net) 9,826 8,234 19

Gross Profit/(Loss) 1,823 1,681 8

Profit/Loss from Operating Activities 657 648 1

Before Financial Income/Expense Operating Revenue 781 926 -16

Profit Before tax 502 785 -36

net Profit 357 657 -46

Turkish Airline’s total revenue rose by 18.5% to USD 9.8 billion.

In 2013, the total revenue can be divided into 89.2% resulting from passenger reve-nue and 8.7% from cargo revenue. When the past 5 years are taken into considerati-on; passenger revenue increased by 21.1% and cargo revenue by 31.6% average per year. During the same period the com-pound annual growth rate (CAGR) in global passenger and cargo revenues increased by 10.9% and 5.7% respectively; which is remarkably below Turkish Airlines growth rates.

Increase in passenger revenues is bac-ked up by noticeable growth in high yield industrial activities. Compared to previ-ous year; Economy Class revenues rose by 16.0% and Business Class revenues by 29.5% in 2013. The Turkish Airlines flight network extends to a profoundly diversified geography. This fact enables a broad income portfolio for the Company. Europe is the region that has the largest part of the revenue with a 33.5% share. 14% of the total revenue originates from domestic lines; whereas, 22% of sales occurred within Turkey.

STRONG FINANCIAL PERFORMANCE

1%

PROFIT FROM OPERATING ACTIvITIES (billions USD)

657648

19%

OPERATING REvENUE(billions USD)

9.8

8.2

13%

11.9

10.5

4,5525,448

7,0708,234

9,826

TOTAL ASSETS(billions USD)

2013

2012 2013

2013 20132012

2009 2010 2011

2012 2012

OPERATING REvENUE(millons USD)

3

FINANCIAL ANALYSIS

(millions UsD) 2013 2012 2011 2010 2009

Net Profit 357 657 11 185 362

Net Profit Margin 3.6% 8.0% 0.2% 3.4% 8.0%

EBIT 762 687 277 262 530

EBIT Margin 7.8% 8.3% 3.9% 4.8% 11.6%

EBITDAR 1,770 1,483 1,007 802 1,038

EBITDAR Margin 18.0% 18.0% 14.2% 14.7% 22.8%

Turkish Airlines evaluates the cash generation capacity of the Company by utilizing several methods. On the basis of EBITDAR the Company continues to record impressive figures. Between 2009-2013, Turkish Airlines achieved a 17.6% EBITDAR margin, when the long term target was set at 18.0%. In 2013 the Company’s EBITDAR rose by 19.3% over the previous year and reached USD 1.8 billion. IATA’s industrial forecast for operational profit margin was 3.3% on average. Turkish Airlines’ margin is 18%.

SUSTAINABLE PROFITABILITY

22.8%

20132012201120102009

14.7% 14.2%

18.0% 18.0%

aVeraGe eBitDar (2009-2013)17.6%

2.9%ComFoRT CLASS

BREAKDoWN oF PASSENgER REvENuE BY SEAT CLASS (uSD)

79.8%ECoNomY CLASS

17.3%BuSINESS CLASS

Revenues derived from Business Class passenger segment has increased consistently in parallel to Turkish Airlines’ total revenue increase.

The geographically extensive flight network of Turkish Airlines has had a positive diversifying impact on the Company’s revenue generation.

AnnuAl RepoRt 2013

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FINANCIAL ANALYSIS

FINANCIAL ANALYSIS

Turkish Airlines operate on a considerably low unit cost basis, as a result of high utilization levels, employee productivity and effective cost management. In 2013 Personnel Cost per ASK (Available Seat Kilometer) decreased by 4.9%, therefore unit costs remained constant when compared to the previous year.

2 January 2013 Values = indexed at 100

In 2013, THYAO stocks brought 34% higher return compared to BIST 100 Index. The Company’s traded stocks made up 6% of the total traded volume.

PROFIT ORIENTED COST MANAGEMENT

PREFERED COMPANY wITH SOUND FINANCIAL FOUNDATION

180

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140

120

100

80

In addition to strong growth performance and high profitability, Turkish Airlines became one of the most preferred companies, with a sound financial foundation on the Istanbul Stock Exchange.

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2010 2011 2012 2013

CASK Personnel/ASKOther/ASK Fuel/ASK

3.81

7.17

1.75

1.61 1.75 1.431.65 1.36

2.162.95 3.00 2.96

4.00 3.84 3.49 3.63

7.918.46

7.92 7.94

THYAO

BIST 100

5

79.0

77.48,991

11,615

72.6

6,24973.7

5,147

70.94,445

SECURED THE SECOND PLACE AMONG EUROPEAN CARRIERS IN AIR PASSENGER TRAFFIC

INDUSTRY DEvELOPMENTS AND THE FORECAST FOR 2014

INTERNATIoNAL TRANSFER PASSENgERS (thousands)

PASSENgER LoAD FACToR (%)

21%

AvAILABLE SEAT KMs (ASK) (millions)

116,433

96,124

24%

48,268

39,040

23,139 28,215

15,90620,053

TOTAL NUMBER OF PASSENGERS (thousands)

2013 20132012 2012

According to AEA (Association of European Airlines) data Turkish Airline increased the market share to 12.8% successfully and secured the second place among European carriers in air passenger traffic.

International

Domestic

In 2013 total number of passengers increased by 24%

In 2013 total number of capacity increased by 21%

20132013 20122012 20112011 20102010 20092009

AEA

THY

Available Seat* Km Increase1.8%

21.1%

Revenue Passenger* Km Increase2.7%

23.2%

Passenger Load Factor 80.1%

79.0%

Passenger Load Factor Increase

0.7 p.0.4 p.

Revenue Cargo Ton* Km Increase2.1%

23.3%

29% 1.6pt The number of international transfer passenger has increased by 29% in 2013.

In 2013 passenger load factor increased by 1.6 pt.

AnnuAl RepoRt 2013

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In 2013 there were increasing indications that the US economy was coming out of the cri-sis. As the main actor, the FED was leading expansionary policies since 2007 with USD 85 billion in monthly bond purchases in emer-ging markets. This year was marked by FED’s implications in the direction of slowing down and then closing the monetary expansion. Initially invented as a solution for decreasing unemployment and rejuvenating economy; this monetary expansion policy was soon turned into an instrument used for obtaining cheap money in more reliable markets that yielded higher interest rates. Following the FED decision to discontinue monetary expan-sion, easy obtainable credit tended to move out from emerging markets and return to its country of origin. In 2013, emerging markets were affected by by turbulence month after month. During the year attempts were made against the alarming decrease in foreign exc-hange reserves by utilizing instruments such as high interest and high exchange rates.

The Turkish economy, on the other hand ex-perienced a low interest rate at 4.6% in 2013; but subsequently economic and political tensions started to build up. In 2013, Turkish Airlines solidified its reputation as a network carrier. The Company’s profitability and doub-le digit growth performance, which continued for the past 11 years successively, also mar-ked 2013. The12 months’ figures reflect that the Company has achieved higher growth ra-tes than set in its target budget. Both growth in domestic and international lines and an inc-rease in load factor are indicative of a succes-sful year for Turkish Airlines in terms of load factor. Among AEA members Turkish Airline secured the second place in air passenger traffic.

In 2013 Turkish Airlines solidified its reputation as a network carrier. The Company’s profitability and double digit growth performance, which continued for the past 11 years successively, marked 2013 as well.

Our Company’s growth performance over the past 11 years strongly resembles that of air-line companies headquartered in South Ame-rica, Middle East and Far East Asia. On the ot-her hand, the growth matrix (curve) of airline companies, operating in advanced markets that are struggling with stagnation and crisis, is fairly static. The growth trouble of Europe-an and American airlines are closely related to structural problems rather than difficulties faced in the last couple of years. Aging fleets, high labor costs, increased tax rates are the primary issues in cost management for Euro-pean and American airlines. All actors in the European Union (EU) market went through hard times beyond comparison. Consolidation or state aids proved to be a life saver for the industry, where many actors stepped out of the market.

Turkish Airlines gained global market visibility by continuing to grow steadily and opening up to new markets over the past decade. Geo-e-conomic advantage, growth success and ma-nagement decisions to enter new markets resulted in revenue increase and well mana-ged costs. These on return contributed to the network and led to lower unit costs.

Actual results in 2013 and expected results for 2014 along IATA regional forecasts is as follows;

North American airlines target a revenue of USD 5.8 billion in 2013 and targets a USD 8.3 billion revenue in 2014. In order to reach absolute maximum profit and a strong EBIT margin, North American Airlines are expected to perform better than the rest of the industry.

FINANCIAL ANALYSIS

gDP DEvELoPmENT FoRECAST (2012-2032)

ANNuAL RPK DEvELoPmENT FoRECAST (2012-2032)

ASIA PACIFIC

AFRICA

LATIN AMERICA

MIDDLE EAST

CIS COUNTRIES

WORLD

NORTH AMERICA

EUROPE

Source: Boeing Current Market Outlook (2012-2032)

4.5%6.3%

5.7%

6.9%

6.3%

4.5%

5.0%

2.7%

4.2%

4.4%

4.0%

3.8%

3.4%

3.2%

2.5%

1.8%

7

• European airlines anticipate higher profit margins in 2014 compared to 2013. The es-timated net profit is USD 1.7 billion for 2013. This figure is expected to reach USD 3.2 billion in 2014. Recently European Airlines have doubled its absolute profit, but their EBIT margins decreased by 1.3% in 2013. The region is dominated by high costs, tight regulations and excess burden of taxation.

• Asia Pacific airlines predict a USD 3.2 billion profit for 2013. This estimation indicates a decrease when compared to past 3 years’ results. In 2014 expected profit is around USD 4.1 billion with a slight divergence. Asia Pasific Airlines are ruling the global cargo market with 40% market share. 12% growth has been recorded in the Chinese local market due to a shrinkage in the In-dian and Japanese domestic markets.

• South American airlines expect a prof-it of USD 700 million in 2013 and USD 1.5 billion in 2014. Insufficient infrastructure unable to keep pace with an increase in demand is an obstacle against growth.

• Middle East airlines predict USD 1.6 billion profit in 2013 and USD 2.4 billion profit in 2014. Earnings before interest and taxes (EBIT) is predicted to increase from 3.8% to 4.7%. In this region, especially gulf region hubs are expected benefit from oil reve-nues.

• In 2013, African airlines announced a loss of USD 100 million. In 2014, a USD 100 million profit is forecasted. Although the region is underdeveloped due to restrictions to mar-ket access, there is keen competition be-tween regional carriers.

How will we organize our priorities in the upcoming period?Our company took position against increa-singly strengthening European and US based market actors and continued to compete fier-cely with gulf region actors as well. Turkish Airlines headed towards new locations such as South America and Australia. The Com-pany furthermore aims to preserve the com-petitive advantage through introduction of new destinations based on market research. Following the reinforced market leadership over the past decade, Turkish Airlines plans to focus on innovation and branding leadership in the upcoming period. In the near future, the Company will take steps towards sustainable profitability taking the devaluation of Turkish lira in account and continue with innovative products and services.

CHAIRMAN’S MESSAGE

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TuRKISH AvIATIoN PASSENgER gRoWTH (millions)

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AnnuAl RepoRt 2013

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Esteemed stakeholders, valued business partners and employees,In 2013 Turkish Airlines continued its tradi-tional growth as it has in the past 11 years. The year was marked by increased passenger traffic and was crowned with positive financial results. The company managed to satisfy its customers with friendly service and its sta-keholders with successful financial results.

The global aviation industry continues to grow despite several economic crises it has faced. Industry research reveals that international commercial relations, cultural affairs and touristic travels are the major driving forces behind this growth. However, an increase in traffic numbers does not always signify pro-fitability. When operating in an industry whe-re profit margins are very low, companies should pursue a tight monetary policy in or-der to end the financial year with profitability.

Turkish Airlines carried out all growth plans according to its 2023 vision and has consequ-ently achieved a higher growth rate compared to industrial average. The Company is cons-tantly expanding its flight network, increasing market share in all destinations thanks to an appropriate strategy and carefully calculated

rates. Turkish Airlines is distinguishing itself as a company with incre-

asing brand value with the help of strong com-

munications strategies and targets at high profitability.

We have to note that Istanbul owns 66% of the international passenger traffic as a hub. Within 3 hours of flying distance to Tur-key and Istanbul, 41 countries and

78 cities are within reach. Within 4 hours of fl-ying distance, 53 countries and 118 cities; wit-hin 5 hours of flying distance 66 countries and 143 cities are accessible. In order to get our rightful share of passenger traffic we imposed our strategies successfully. Today our global market share is 2%.

In 2012 Turkish Airlines had a total of 219 flight destinations (182 international and 37 domestic lines), whereas in 2013 we had flights to 245 points (202 international, 43 domestic lines) utilizing a fleet of 233 aircrafts. Turkish Airlines, operating the most comprehensive network of 105 contries worldwide, is strongly determined to countries its leadership.

Our fleet size increased from 202 to 233 airc-raft by the end of 2013. 265 new aircraft, which was ordered earlier, will be delivered in time. By the end of 2020 Turkish Airlines fleet will be including 427 aircraft inclusive cargo airp-lanes. With the added aircraft, the average fle-et age, which is currently 6.7 will come down to 5. Here I would like to share with you some fi-gures from the previous year, which you can examine in more detail in the financial report.

Our passenger number in 2012 of 39 million, increased by 23.6% to 48.3 million. The incre-ase in domestic lines is 26.1% and 21.9% in international lines. Thus, Turkish Airlines suc-cessfully increased its market share to 12.8% and secured the second place among Europe-an carriers in air passenger traffic according to AEA (Association of European Airlines) data. In spite of capacity increase by 21.2% , passenger load factor increased by 1.6 pt to 79.0% in 2013, which contributed to succes-sful turnout. Cargo and mail transportation rose in parallel to passenger increase and increased by 20.1% to 565,391 tons. When we take a closer look at the financial indicators, our sales increased by 27% over the previous year and rose to TL 18.8 billion. Our gross pro-fit is TL 1,240 million and net profit is TL 682 million.


According to (AEA) Association of European Airlines data Turkish Airlines successfully increased its market share to 12.8% and secured the second place among European carriers in air passenger traffic.


9

Esteemed shareholders,In short, Turkish Airlines subsidiaries will sig-nificantly contribute to our future growth. Our subsidiaries take us beyond being just an air-line company, carrying passengers and cargo.

In 2013, the HABOM project was inaugura-ted where a major investment with Turkish Technic was made. A 384 thousand square meters hangar at Sabiha Gökçen Airport has been completed for the most part and work has started on the Narrow Body Hangar. In the near future, a Wide Body Hangar will also be put into service.

TGS, Turkish DO&CO contributes significant-ly to the comfort level of passengers who choose Turkish Airlines for their flights. Our catering company operates our CIP lounges as well. In 2013 Turkish DO&CO received gre-at recognition with its new concept as in the past years. TGS, extending its service network to Bodrum and Dalaman, operates in eight airports. We want TGS to become a global actor by entering international markets in the future.

Turkish-Opet maintained market leadership as in the previous year. The company reac-hed the eight position in the Turkish energy industry and achieved sales of USD 2.5 billion. Turkish-Opet operates at all airports in Tur-key.

Our seat manufacturing company Turkish Seat Industries (TSI) took an important step and built the first local economy seat. Owing to their lightweight properties and comfort, our fuel cost decreased and service quality increased. Our first airplane, refurbished with these seats has been put into service on do-mestic flights.

The Turkish Engine Center (TEC) which was established as the largest motor maintenance center in the region; today continues to serve customers both from Turkey and other count-ries in the region.

TCI, manufacturing kitchen and restroom units along international standards, entered the Boeing Company’s approved suppliers list. TCI Cabin Interiors is on the way to becoming an influential player in international markets.

In 2013 the landing field and taxiway of Aydın Çıldır Airport was completed and the flying academy commenced to operation. This pro-ject will enable us to meet the demand for well trained and high class pilots. Turkbine, another subsidiary of Turkish Airlines comp-leted the certification process in 2013 and started sales and marketing activities in its business segment. Esteemed shareholders,Turkish Airlines moves confidently into the future. Our goals are constructed on solid foundation. Every year we reevaluate our vi-sion and goals along Turkey’s vision for 2023; which is the 100th Anniversary of our Republic. During 2014 we plan continued growth for our company.

This year we aim to carry 26.2 million domes-tic and 32.3 international passengers inclu-ding pilgrimage flights and now our target is total of 59.5 million passengers. We plan to reach 141 billion ASK with a total increase of 21%, broken down as follows: 33% domestic lines, 29% South America; 25% Africa, 22% Far East, North America 20%, 16% Europe and 13% Middle East. Passenger load factor is expected to reach 78.8%. In cargo transpor-tation we predict 653 thousand tons which translates to a 23% increase.

BOARD OF DIRECTORS

The total number of aircraft will increase to 265 (201 narrow body, 57 wide body and 7 cargo aircraft) and flight destinations to 259 (16 new routes will be entered into service).

I am strongly of the opinion that the Turkish Airlines family, with more than 36 thousand personnel (including our subsidiaries) will go beyond its financial targets.

While continuing our financial growth; our service quality continued to grow at the same pace. In 2013 we received new Skytrax awards in “Best Airline in Europe”, “Best Airline in South Europe” and “Best Business Class Onboard Catering” categories and preserved our title as the Best of Europe.

I would like to express my sincere thanks to our passengers for their courtesy in preferring Turkish Airlines, our investors for showing trust, our executive staff, our employees and business partners. Their contribution is in-dispensable to our success. I greet your with great respect and hope sincerely that 2014 proves to be another successful year for our Company.

HAmDI TOPçUChairman of the Board and Chairman of the Executive Committee

AnnuAl RepoRt 2013

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Mr. Topçu was born in Çayeli, Rize in 1964. In 1986, he graduated from the Marmara University, receiving a degree in Economics and Administrative Sciences. He is a certified financial advisor. Mr. Topçu retains his positions on the Turkish Football Federation Auditing Committee and as Chairman of the Board of Directors of the Company’s subsidiaries; THY Turkish Technic, THY DO&CO Catering Services, TGS Ground Services, THY Opet Aviation Fuels and HABOM Aviation Maintenance Repair and Modification Center. Hamdi Topçu is married and has four children.

Mr. Şanlı was born in Manisa in 1950. In 1977 he graduated from the Faculty of Law of Istanbul University, and in the same year began to work as an Assistant at the Istanbul University Law School. In 1985 he received his Doctorate of Law for his thesis “International Commercial Arbitration”. He completed his PhD dissertation on International Arbitration at the Institute of Advanced Legal Studies affiliated to London University. In 1987, he became Assistant Associate Professor, in 1990 Associate Professor, and in 1996 full Professor. He is currently the head of the International Private Law Department of the Faculty of Law at Istanbul University. Prof. Şanlı is a Board Member in the Company’s subsidiaries, THY Turkish Technical and HABOM Aviation Maintenance Repair and Modification Center. He has published many books, articles and monographs in the field of international private law, and especially international arbitration. Cemal Şanlı is married and has four children.


BOARD OF DIRECTORS

Mr. Kotil was born in Rize in 1959. In 1983 he graduated from the Aeronautical Engineering Department at Istanbul Technical University (ITU). In 1986, he received his first Master’s degree in the United States from the Aircraft Engineering Department of Michigan University Ann Arbor, followed in 1987 by his second Master’s degree in Mechanical Engineering, and his Doctorate in Mechanical Engineering in 1991 at the same university. From 1991-93 Kotil established and managed the Aviation and Advanced Composite Laboratories of ITU’s Faculty of Aeronautics and Astronautics, where he also served as Assistant Professor and Associate Professor. From 1993-94 he served as Department Faculty Vice President and as Faculty Assistant Dean. Mr. Kotil also served as Head of the Research, Planning and Coordination Department of the Istanbul Metropolitan Municipality. He then served as a guest professor at Illinois University, and then as Department Head at the Research and Engineering Department of AIT Inc. New York. In 2003 he began his career with Turkish Airlines as Vice President of the Technical Department. In 2005 Mr. Kotil was appointed General Manager. And in 2006, he was elected as a member of the IATA Boards of Directors. In 2010, he was appointed as a Board Member of the Association of European Airlines and as Vice President between 2012-2013 and as Chairman in 2014. Mr. Kotil, married with four children, has authored many articles and publications.

Prof. Dr. Cemal Şanlı Vice Chairman of the Board of Directors and Executive Committee

Doç. Dr. Temel KoTİlMember of the Board of Directors and Executive Committee, CEO

HamDİ ToPçuChairman of the Board and Chairman of the Executive Committee

11

Born in Gaziantep in 1961, Mr. Büyükekşi graduated from the Faculty of Architecture at Yıldız Technical University in 1984. He attended Business Administration courses at the Marmara University and Business Administration and English courses in the UK. In addition to being a Board Member of Turkish Airlines, Mr. Büyükekşi is the President of the Turkish Exporters’ Assembly (TİM), a member of the Board of Directors of Türk Eximbank, of the Istanbul Chamber of Industry (ISO), the Istanbul Development Agency, the Istanbul Leather and Leather Products Exporters’ Association (İDMİB), and the Energy Efficiency Association (ENVERDER), and is the General Coordinator of Ziylan Group. Mr. Büyükekşi has been a board member at the Turkish Leather Foundation (TÜRDEV), Organized Industrial Zones and Technology Development Regions (TOBBİS), International Commerce Center Inc. (TOBTIM), and Turkish DO&CO. He was the president of the Turkish Association of Footwear Manufacturers, Chairman of the Istanbul Leather and Leather Products Exporters’ Association (İDMİB), as well as the Founding Chairman of the Turkish Footwear Industry Research Development and Education Foundation (TASEV) from 1997-2008. He is married and has three children.

Born in 1962, Mr. Akpınar graduated from Saint-Michel French High School and the Bosphorus University Department of Management Science. His professional career commenced in 1986 when he became the founder shareholder of Penta Textile. In 1993 he was appointed CEO of KVK Mobil Telefon Hizmetleri A.Ş.. Subsequently, Mr. Akpınar served as the CEO of MV Holding A.Ş. and played an active role in the creation of Fintur Holding BV. Between the years of 2002 and 2006 Mr. Akpınar served as the CEO of Turkcell. He is an independent Board Member of Turkish Airlines and serves as Chairman of the Board at Dost Energy, as Vice Chairman of MV Holding, Chairman of the Board at Portmobil and as a Member of the Board of Kimya Teknik. He remains an entrepreneur and investor in the fields of renewable energy, technology, chemicals and construction. Mr. Akpınar is married and has two children.

Born in Çan, Çanakkale in 1963, Mr. Gerçek graduated from the Public Administration Department of the Ankara University Faculty of Political Sciences in 1985. He received his MA in the USA in 1994. His career began in the position of assistant inspector at the Ministry of Finance Review Committee in the same year. Until 1998 he worked as a finance inspector and finance inspector general. And from 1995-1997 Mr. Gerçek was deputy assistant District Treasurer in Istanbul and has pursued his career as a chartered accountant since 1998. He is an independent Board Member at Turkish Airlines and Member of the Audit Committee at Joint Funds Bank Inc., a Member of the Board of Trustees at Fatih Sultan Mehmet Foundation University, and Auditor at the Participation Banks Association of Turkey.

OUR MISSION AND OUR vISION

meHmeT BüyüKeKŞİ Member of the Board and Corporate Management Committee

mUzAFFER AKPINAR Member of the Board and Financial Audit Committee

İsmaİl GerçeK Member of the Board, Financial Audit and Corporate Management Committee

AnnuAl RepoRt 2013

12

Mehmet Nuri Yazıcı, born in Rize in 1949, gra-duated from the Istanbul University, Academy of Economics and Commercial Sciences in 1975. From 1990 to 1991 he was the Consu-late General of the Republic of Turkey, at the Ministry of Foreign Affairs in Brussels. He also served as Councilor and Advisor to the Chairman at Istanbul Metropolitan Municipa-lity from 1994-2008. Mr. Yazıcı is married and has one child.

Prof. Dr. Mecit Eş, born in 1953 in Samsun; received his degree from the Istanbul University School of Economics in 1974. Having held several offices, he commenced his academic projects and received his Doctorate in 1985. He became Associate Professor in 1990 and Professor in 1986. And having then worked at Dumlupınar University from 1992 and 2012, Mr. Eş continues his academic studies as a Professor of the Academy of Commercial Sciences at Istanbul Commerce University He has published many books and articles, and is married with three children.

BOARD OF DIRECTORS

BOARD OF DIRECTORS

Mr. Ağbal was born in Bayburt in 1968. He graduated from the Public Administration Department of the Istanbul University Faculty of Political Sciences in 1989. In 1998 he re-ceived his MBA from Exeter University in the UK. In 1989 he became Assistant Inspector at the Ministry of Finance, in 1993 Inspector at the Ministry of Finance, and in 1999, became Inspector General. Having served as Vice President of the Financial Review Commit-tee, he was appointed Head of Department at the Inland Revenue in 2003, and served as a Ministerial Advisor in 2004. In 2006 Mr. Ağbal was appointed acting General Mana-ger of Budget and Financial Control at the Ministry of Finance, and Vice President of the Inland Revenue in the same year. In 2009 he became the Undersecretary of Finance. He is also a member of the Council of Higher Education and of the Board of Trustees at Yesevi University. Mr. Ağbal is married with two children.

naCİ ağBal Member of the Board

meHmeT nurİ yazıCı Member of the Board

Prof. Dr. meCİT eŞMember of the Board

13


• to develop the company’s standing as a global airline by expanding the coverage of its long-range flight network.

• to develop the company’s standing by developing its technical maintenance unit into a major regional resource.

• to develop the company’s standing as a service provider in all strategically important aspects of civil aviation, including ground handling services and flight training.

• to defend the company’s standing as the leader of the domestic airline industry.

• to provide an uninterrupted and superior flight service by entering into a collaborative agreement with a global airline alliance that complements its own network so as to advance its international image and marketing abilities.

• to safeguard and improve upon istanbul’s reputation as a regional aviation hub in its capacity as the flag carrier of the republic of turkey in the civil aviation industry, to be a leading european airline and an active global player by virtue of its flight safety and security record, and its product diversity, service quality, and competitive edge.

• to accomplish istanbul a significant (hub) destination.

OUR MISSION OUR vISION

• sustained growth of above the industry average

• a zero accident and crash record

• the most envied service levels worldwide

• Unit costs equal to those of low-cost carriers

• sales and distribution costs of below industry averages

• loyal customers who manage their own reservation, ticketing, and boarding formalities themselves

• Personnel who constantly develop their qualifications with an awareness of the close relationship between benefits for the company and the added value that they contribute

• a sense of entrepreneurship that creates business opportunities for fellow members in the star alliance and takes advantage of the business potential provided by them

• a management team, whose members identify with modern governance principles, and who distinguish themselves by being mindful of the best interests of shareholders and all stakeholders alike

OUR STRATEGY

AnnuAl RepoRt 2013

14

OUR STRATEGY

Turkish Airline keeps track of flight demand for various destinations worldwide. In order to cater to passengers’ needs, the Company manages its flight network accordingly. In 2013 Turkish Airline offered flights to 106 count-ries (including Turkey) and became an airline with the largest flight network as per country number. The Company positioned itself as the largest carrier worldwide by international desti-nation number (202 destinations) in 2013.

Our Company is aware of the fact that the center of aviation industry is shifting towards East. Therefore effort is made to strengthen the flight network in Middle East, Africa and Far East regions. In Africa and Middle East region Turkish Airlines offers the highest number of pairs of arrival and departure. In Far East flights Turkish Airlines flight network is on the third place as per destination number. In order to strengthen flight network, 16 new routes and frequency increase in present routes are planned for 2014. We aim to rise number of direct and transfer passenger to maximum and to keep our operational efficiency at the highest possible level. Our Company managed to sur-pass other airlines in many flight points where high competition prevails and became number one choice for passengers.

while heading towards top we are well aware of our competitive advantages. we are determined to preserve our power and use our strengths effectively.

The main factors behind Turkish Airlines stable growth are satisfaction and trust offered to customers. The Company moves on well aware of this fact. Customer satisfaction is a critical issue at each phase of the service offered. Turkish Airlines provides a variety of choices before and during flight with the help of friendly staff. Specially designed CIP lounges offer homelike comfort before flight. Personalized menu prepared by professional cooks during flight and tea service in traditional Turkish style ‘samovar’ are much appreciated by customers. On-time departure rate is over 85%. Turkish Airline has the highest on time departure performance among top 10 European Airlines. Rate of missing bags, which is an important part of customer satisfaction is decreased and kept at a low level in 2013. Successfully reaching this goal Turkish Airline is the carrier with the lowest rate of lost luggage among top 10 European Airlines. Turkish Airline won CAPA “Airline of the Year Award” thanks to superior customer satisfaction policy. The Company won Skytrax “Best Airline Europe Award” for the third time and a new award in “Best Business Class Catering”category too. Turkish Airline is determined to continue increasing service quality in the future and to enhance products through innovation and maximize customer satisfaction during their travelling experience.

Leader with strong fLight

network

Customer satisfaCtion

oriented management

ComPETITIvE ADvANTAgES


60 miLLions

1.9%

PassenGer tarGet in 2014

GloBal marKet sHare tarGet

15

Turkish Airlines gained high brand awareness thanks to good quality service and extensive flight network. Today the Company strives to heighten the existing level through various pro-jects. Turkish Airlines now invites passengers to widen their world with the newly adopted brand slogan “Widen Your World”. New slogan points to İstanbul’s linking character between two con-tinents. It invites potential customers to fly with Turkish Airlines and introduces the Companys extending flight network to existing passengers who love discoveries and new experiences. In order to increase brand awareness and brand value, Turkish Airlines conducted social media campaigns for flights, granted several sponsor-ships and used celebrity advertising effectively. In consequence of these activities Turkish Air-lines gained strength against traditional airline brands with widespread reputation. Now the Company is a preferred airline globally.

With each passing day Turkish Airline is coming to the forefront among airline carriers. In 2013 global average ASK ratio increased by 4.7%, whereas Turkish Airlines had 21% increase. 0.2 pt increase has been achieved with this ratio in globally offered capacity (ASK) and passenger market share. 2014 goal for capacity increase is 21%. With this goal realized, market share will increase by 0.3 pt and reach 1.9%. Capacity increase is planned along flight network strate-gies. Transfer and local passenger potential is also taken into consideration. Capacity increase targets are; 33% for Turkey, 29% for South America, 25% for Africa, 22% for Far East, 20% for North America, 16% for Europe and 13% for Middle East. 23% increase in passenger number is planned while balancing capacity increase with passenger load factor increase. Thus total number of 60 million passengers is set as tar-get for 2014. In 2013 global passenger market share was 1.5%. It will rise by 0.3 and reach 1.8% in 2014. Top airline carriers plan with 1% capacity increase in 2014. Turkish Airlines plans to grow faster than its competitors in 2014. The Company will continue to advance in top airline carriers list in 2014 like in previous year. In regard to international passengers Turkish Airlines got to 10th place in 2013. The Company owns this success to its strategy designed especially for transfer passengers and will sustain it. Turkish Airlines goal is to increase international transfer passengers in the same pace with total passengers and to attain this objective İstanbul’s adventegous geographical location will be utilized.

Turkish Airlines has a noteworthy cost advanta-ge over its competitors and in order to preserve this strength the Company works on new strategies. To sustain competitive advantage in total unit cost; saving strategies, cost cutting strategies and financial risk management stra-tegies are implemented. Maintaining a young fleet and pursuing an efficient fuel consumption policy are other saving strategies in progress. In order to reduce sales costs various projects are designed to increase sales via direct sales channels. Regional and point target strategies, through which Turkish Airlines takes preceden-ce of its competitors, will also be enhanced. The Company will continue to invest in technology to decrease costs, to increase efficiency and to enhance product experience as in 2013. With respect to personnel efficiency Turkish Airlines aims to preserve its existing strength by making careful plans to support increase and avoid inef-ficiency. The Company plans to increase aircraft efficiency by 2% and thus preserve high aircraft efficiency, which is one of the most important cost advantages presently. Aircraft fuel costs stemming from fluctuations in the oil prices are controlled by using financial instruments. This is an important financial risk management strategy, implemented as part of commodity risk management. Management by process and tracking system projects are indispensible components of general management and help Turkish Airlines to gear along strategic goals in a standardized way.

high Brand awareness

BaLanCed, PLanned and raPid growth

Low unit Cost advantage

OUR STRATEGY

AnnuAl RepoRt 2013

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OUR STRATEGY

INDuSTRIAL RISKS

OUR STRATEGY

Our Company keeps an eye on the fluctua-tions in neighbouring regions and is always on alert for crisis management. Potential risks are incorporated in plans and income, expenses and capacity distribution is alloca-ted accordingly to prevent damages. Turkish Airlines completed its risk plans for 2014 as in previous years and established a structu-re where the Company can react to potential instabilities with the help of dynamic capacity, income management and financial risk ma-nagement when necesserary.

Recently capacity limits in Atatürk Airport and its negative impact on Turkish Airlines’ growth became an issue. With effective flight plan-ning our Company will use the present capa-city in the most efficient way and will include new route to its flight network and continue growth in Atatürk Airport. Turkish Airlines will perform its duty consciously in order to use Atatürk Airport’s available capacity for maxi-mum efficiency. Sabiha Gökçen and Esenbo-ğa based operations will be increased as well. With the new airline the Company intends to use Istanbul’s, which is one of the leading international hubs, geographical advantage more efficiently.

Industrial changes increase market share of low cost carriers and competition with each passing day. Other notable industry changes to consider are; consolidations in Europe and America and strategic alliances formed in Asia and Middle East regions. Turkish Air-lines’ will sustain its strengths and will use its competitive advantages against low cost carriers and airlines growing through conso-lidation. Our Company intends to increase its market share in the industry with low costs, operational efficiency, financial strength, well balanced growth strategy, product quality and brand recognition.

CaPaCity Limits in istanBuL atatürk

airPort

inCreasing ComPetitive

Conditions PriCe oriented

eConomiC and PoLitiCaL

instaBiLities in the neighBouring

regions

Turkish Airlines will sustain its strengths and will use its competitive advantages against low cost carriers and airlines growing through consolidation.

17

OUR SUBSIDIARIES

AnnuAl RepoRt 2013

18

OUR SUBSIDIARIES

Turkish Technic offers maintenance, repair and technical support to Turkish Airlines, as well as to more than 100 domestic and international airlines.

HABOM Aviation Maintenance, Repair and Modification Center; established in Kurtköy Sabiha Gökçen International Airport, aims to become the largest center in the region, providing the services of maintenance, repair and modification.

The leading airline carrier in charter market between Germany and Turkey.

OUR STRATEGY

Turkish HABOm

HABOM A.Ş. (established in 2011 as a wholly-owned subsidiary of Turkish Airlines) and MNG Teknik A.Ş., (acquired by Turkish Airlines in May 2013) merged under one roof in September 2013. The Company provides aviation maintenance and repair services at Atatürk Airport. With HABOM facility and acquired MNG Teknik A.Ş. in Atatürk Airport, the Company aims to become the leading maintenance, repair and modification center in the region.

Turkish Technic

Established in 2006, the Company is a whol-ly-owned subsidiary of Turkish Airlines. With its subsidiary operations and more than 2,000 employees, Turkish Technic conducts its acti-vities with the goal of becoming an important regional air transport technical maintenance base by supplying the full range of mainte-nance, repair, and technical and infrastructure support the aviation industry requires.

Sun Express

Founded in 1989, Sun Express is a joint ventu-re of Turkish Airlines and Lufthansa, in which each holds a 50% stake. Having inaugurated flights in 1990, the Company has served the charter market for many years. In 2001 it be-gan flying the Antalya-Frankfurt route as the first privately owned airline in Turkey to ope-rate regularly scheduled international flights. Including Sun Express Germany, which star-ted operations in 2011 in Frankfurt, the com-pany has a fleet of 62 aircrafts and serves its customers with 2,500 employees.

*Consolidated results (Turkey and Germany)

1,981 2,297 2,773

USD 514 millions USD 53 millions USD 1,183 millions*

Number Of Employees Revenue

19

The Company provides jet fuel storage and supply services at Istanbul Atatürk and other airports in Turkey.

Turkish OPET Aviation Fuels

Turkish Opet Aviation Fuels, established in 2009, is a joint venture of Turkish Airlines and OPET Petrolcülük A.Ş., in which each holds an equal stake. The Company commenced operations on 1 July 2010. Turkish-Opet has the largest jet fuel integrated facility in Turkey. It provides jet fuel supply services in 50 airports in Turkey. The Company continu-ed market leadership with 3 million m3 fuel service in 2013.

TGS provides ground handling services in 8 airports in Turkey, including Atatürk Airport.

Turkish Ground Services

Established in 2009 as a joint venture of Turkish Airlines and HAVAŞ Havaalanları Yer Hizmetleri A.Ş. in which each holds a 50% stake, TGS (Turkish Ground Services) has been in operation since the beginning of 2010. The company provides ground handling services at Istanbul Atatürk, İstanbul Sabiha Gökçen, Ankara Esenboğa, İzmir Adnan Men-deres, Antalya and Adana Airports. In 2013 Bodrum and Dalaman Airports have been added to portfolio and the company served many Turkish and international airlines; Turkish Airlines and Sun Express being in the first place. TGS, employing over 8,000 per-sonnel, has to date served ground services to more than 500 thousand flights to 70 million passengers at high international standards.

OUR SUBSIDIARIES

The Company provides catering services to Turkish Airlines, and to more than 60 other domestic and international airlines.

Turkish DO & CO

Commencing operations in 2007, Turkish DO&CO is a joint venture of Turkish Airlines and DO&CO Restaurants & Catering AG, in which each holds a 50% stake. Headquarte-red at Istanbul Atatürk Airport, the Company provides catering services to domestic and international airlines out of kitchens opera-ting at nine locations in Turkey. These kitc-hens turn out around 170,000 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 catering service quality aboard Turkish Airlines aircraft and received (and continues to receive) many international awards for its performance.

230

USD 2,459 millions

7,834

USD 240 millions

3,431

USD 328 millions

AnnuAl RepoRt 2013

20

The Company provides aircraft engine maintenance, repair, and overhaul services to customers in Turkey and its hinterland.

Turkish Engine Center (TEC)

This Company, established in 2008, is a joint venture of Turkish Airlines and United Technologies, a subsidiary of Pratt&Whitney (49%) and Turkish Airlines (51%). Operating out of a high-tech, environmentally-friend-ly maintenance center with an area of around 25,000 m² at Istanbul Sabiha Gökçen International Airport, TEC has the capacity to perform maintenance on more than 200 aircraft engines a year.

At the Gebze facilities, high quality services for maintenance and repair of nacelles and thrust reversers is provided.

Goodrich Turkish Airlines Technic Service Center

Established in 2010, the Goodrich Turkish Airlines Technical Service Center is a joint venture of Turkish Technic (40%) and TSA-Ri-na Holdings (60%), the latter a subsidiary of Goodrich Corporation. The Goodrich Turkish Airlines Technical Service Center 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 com-panies.

TCI’s present objective is meet Turkish Airlines demand for cabin interior systems and to win a share of international markets in the future.

Turkish Cabin Interior Systems

The Company is formed in 2011, stakes of 30%, 21%, and 49% are held respectively by Turkish Airlines, Turkish Technic and Türk Havacılık ve Uzay Sanayi A.Ş. (TUSAŞ -TAI). TCI’s objective is to undertake the design, manufacture, logistical support, modificati-on, and marketing of aircraft cabin interior systems and components, and to win a share of international markets with the goods and services that it produces. TCI took an impor-tant step by becoming an approved Boeing vendor and delivered the initial products for assembling to Turkish Airlines.

OUR SUBSIDIARIES

OUR SUBSIDIARIES

204 22 72

USD 130 millions USD 8 millions USD 1,333 thousands

Number Of Employees Revenue

21

The Company designs and manufactures airline seats, and makes, modifies, markets, and sell spare parts. Production has started at the end of 2013.

TSI Aviation Seats

The Company was formed as a joint venture with the Assan Hanil Group, which was the leading company in car seats manufacturing in 2011. Stakes are held 50%, 45%, and 5% by Assan Hanil Group, Turkish Airlines, and Tur-kish Tecnic respectively. In 2014, the first set of passenger seats have been assembled for Turkish Airline aircrafts. The Company aims to design and manufacture airline seats, and to make, modify, market, and sell spare parts to Turkish Airlines and other international airline companies in the future.

2013 TRAFFIC RESULTS

The Company is a collaboration that derives its strength from international experience, technically competent personnel and strong brand underpinning.

TURKBINE Gas Turbines

Established in 2011, the Company 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 be-yond the activity scope of existing subsidia-ries, and also for industrial gas turbines used at power plants.

The Company was established in 2012 as a wholly-owned subsidiary of Turkish Airlines.

aydın çıldır airport services

The Company 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. Following the completion of landing field and taxiway of Aydın Çıldır Airport flying academy commenced operation. The company will contribute to education of well-trained pilots for the aviation industry.

25 16

USD 896 thousands USD 1,033 thousands

AnnuAl RepoRt 2013

22

OUR SUBSIDIARIES


total traffic results 2013 2012 2011 2010 2009Revenue Passenger (000) 48,268 39,045 32,648 29,119 25,102Available Seats-Km (millions) 116,433 96,124 81,193 65,100 56,574Revenue Passenger-Km (millions) 91,997 74,410 58,933 47,950 40,130Passenger Load Factor (%) 79.0 77.4 72.6 73.7 70.9Number of Destinations 245 219 196 174 158Number of Landings 377,400 308,384 270,618 245,226 213,953Km’s flown (000) 690,572 542,339 419,113 358,370 311,869Cargo (tons) 546,822 454,293 375,042 302,983 230,709Mail (tons) 18,569 16,570 12,796 10,973 7,351Excess Baggage (tons) 6,231 3,683 4,170 3,629 3,734Available Ton-Km (millions) 17,519 14,288 11,926 9,036 7,795Revenue Ton-Km (millions) 11,571 9,425 7,467 5,894 4,784Overall Load Factor (%) 66.0 66.0 62.6 65.2 61.4

international traffic results 2013 2012 2011 2010 2009Revenue Passenger (000) 28,215 23,139 18,160 15,474 13,410Available Seats-Km (millions) 101.000 84.112 70.029 54.663 47.536Revenue Passenger-Km (millions) 79,696 64,945 50,349 39,943 33,311Passenger Load Factor (%) 78.9 77.2 71.9 73.1 70.1Number of Destinations 202 182 152 132 120Number of Landings 220,037 179,843 149,941 132,384 116,256Km’s flown (000) 592,911 464,772 348,356 292,794 255,556Cargo (tons) 503,021 417,141 340,627 267,630 197,672Mail (tons) 14,827 13,622 9,771 7,002 3,802Excess Baggage (tons) 4,040 2,162 2,291 1,929 2,284Available Ton-Km (millions) 15,757 12,916 10,653 7,845 6,748Revenue Ton-Km (millions) 10,438 8,538 6,654 5,137 4,132Overall Load Factor (%) 66.2 66.1 62.5 65.5 61.2

Domestic traffic results 2013 2012 2011 2010 2009Revenue Passengers (000) 20,053 15,906 14,488 13,645 11,692Available Seats-Km (millions) 15,433 12,012 11,164 10,437 9,038Revenue Passenger-Km (millions) 12,301 9,465 8,584 8,007 6,819Passenger Load Factor (%) 79.7 78.8 76.9 76.7 75.4Number of Destinations 43 37 44 42 38Number of Landings 157,363 128,541 120,677 112,842 97,697Km’s flown (000) 97,660 77,567 70,757 65,576 56,313Cargo (tons) 43,802 37,152 34,415 35,353 33,037Mail (tons) 3,742 2,948 3,025 3,971 3,549Excess Baggage (tons) 2,191 1,521 1,879 1,700 1,450Available Ton-Km (millions) 1,763 1,372 1,273 1,191 1,047Revenue Ton-Km (millions) 1,133 887 813 757 652Overall Load Factor (%) 64.3 64.7 63.9 63.6 62.3

Traffic Results

InternatIonalrevenue

Passengers(000)

28,215InternatIonal

Passenger load Factor

78.9%


79.0% total number oF Passengers (000)

48,268

DOMESTIC REVENUE PASSENGERS

(000)

20,053domestIc


79.7%

23

Total passenger number, which was 39 mil-lion in January-December 2012, increased by 23.6% and reached 48.3 million in 2013. (26.1% in domestic lines, 21.9% in internati-onal lines) International Business/Comfort Class Passengers increased by 23.1% and International Transfer Passengers increased by 29.2%. Pasenger Load Factor increased by 1.6 pt and reached 79.0%. Total Available Seat-Kms, (ASK), which was 96.1 billion in January-December 2012, increased by 21.1% and reached 116.4 billion in 2013. (28.5% in domestic lines, 20.1% in international lines) Revenue Passenger-kms, which was 74.4 bil-lion in January-December 2012, increased by 23.6% and reached 92.0 billion in 2013. (30% in domestic lines, 22.7% in international lines) Number of Landings, which was 308,384 in January-December 2012, increased by 22.4% and reched 377,044 and Number of Destina-tions rose from 219 to 245. Cargo-mail, whi-ch was 470,863 tonnes in January-Decem-ber 2012, increased by 20.1% and reached 565,391 in 2013.

TOTAL NUMBER OF REvENUE PASSENGERS (thousands)

TOTAL PASSENGER DISTRIBUTION

48,268

39,045

32,64829,119

25,102

20132012201120102009

ASK AND RPK DEvELOPMENT (Millions)

20132012201120102009

40,1

30 56,5

74

47,9

50

65,1

00

58,9

33

81,1

93

74,4

10

96,1

24

91,9

97

116,

433

ASKRPK

FLEET

1.5%

56.8%

0.7%

41.0%

Charter

International

Hajj-Umrah

Domestic

AnnuAl RepoRt 2013

24

FLEET

6.7233total nUmBer oF aircraFt

aVeraGe Fleet aGe

Turkish Airlines continues to work on its goal of acquiring the youngest and most modern fleet in Europe. The Company flies to more countries than any other airline in the world, and has the 4th largest flight network. Moreover, Turkish Airlines continues to support its fleet with new aircraft purchases. As of the end of 2013, the number of aircraft in the Turkish Airlines fleet was 233, with an average fleet age of 6.7 years. Turkish Airlines’ fleet, which had consisted of 65 aircraft back in 2004, had grown by 258% to 233 aircraft in 2013.

A330-200 8 A330-300 12 A340-300 7 B777-300ER 15

B737-900 ER 10 B737-800 70 B737-700 14 A320-200 33 A321-200 41 A319-100 14

42 wide Body

182 narrow Body

A310-300F 3 A330-200F 6 9 Cargo


25

Turkish Airlines continues to work on its goal of acquiring the youngest and most modern fleet in Europe. The Company flies to more countries than any other airline in the world, and has the 4th largest flight network. More-over, Turkish Airlines continues to support its fleet with new aircraft purchases. As of the end of 2013, the number of aircraft in the Turkish Airlines fleet was 233, with an average fleet age of 6.7 years. Turkish Airline’s fleet, which had consisted of 65 aircraft back in 2004, had grown by 258% to 233 aircraft in 2013.

While purchasing aircraft Turkish Airlines ta-kes into consideration the following points; changes in passenger traffic, varying custo-mer needs, passenger comfort and safety, high technology equipment, fuel economy and environmental friendliness. Thus the Company takes important steps towards strengthening its brand. As a consequence of long term fleet projection, 20 B777-300ER and 20 A330-300 aircraft have been ordered, whi-ch will meet the demand for long haul aircraft in the coming period. A330-300 aircraft orde-red will be delivered by the end of 2016 and B777-300ER aircraft ordered will be delivered between 2014 and 2017.

In 2013 a purchase order for 117 aircraft has been sent to Airbus Company, which is the largest one-time order ever placed in Turkish Civil Aviation history. The Company ordered 25 A321 CEO, 4 A320 NEO and 88 A321 NEO

to meet narrow-body aircraft demand. Accor-ding to plan ordered aircraft are will be taken into operation between 2015 and 2020.

In addition to 117 aircraft order, a purchase or-der of 95 aircraft has been sent to Boing Com-pany. The order includes 20 B737-800 NG, 65 B737-8 MAX and 10 B737-9 MAX aircraft. According to plan ordered aircraft are will be delivered between 2016 and 2021.

In 2013 major airlines are went through con-solidation or formed strategic alliances un-der cost pressure. Placing a purchase order for 212 aircraft reflects Turkish Airlines’ self confidence and provides assurance to its sta-keholders.

When compared to the existing fleet, 15% fuel economy is expected after delivery of the or-dered narrow and wide body aircraft. In additi-on long haul aircraft will contribute positively to network extension and passenger increase.

The Company updates fleet plans at the end of each year, within the scope of the following strategies: Exploiting opportunities, risk ma-nagement, sustainability, dynamic capacity planning, a broadening of the flight network and increased frequency. During the year, aircraft numbers are revised according to deli-veries and demand and fleet rejuvenation ne-eds. Interim solutions are also implemented, such as using leased aircraft in light of market conditions, which does not increase fleet age or damage the integrity of aircraft.

In 2013 a purchase order for 117 aircraft has been sent to Airbus company, which is the largest one-time order ever placed in Turkish Civil Aviation history.

TOTAL SEAT CAPACITY

DAILY UTILIZATION RATE

42,236

12:40

36,504

12:12

33,007

11:38

28,030

12:02

23,549

11:39

2013

2013

2012

2012

2011

2011

2010

2010

2009

2009

FLIGHT NETwORK

AnnuAl RepoRt 2013

26

FLIGHT NETwORK

In 2013, Turkish Airlines flights to 3 destinations in Africa, two in the Middle East, nine in Europe, five in the Far East and one in the USA commenced. In addition to 20 international routes, Turkish Airlines opened 6 domestic routes and added 26 new destinations to its flight map. North America

South America

Turkish Airlines added 20 new destinations in 9 countries during 2013 to widen the world of their passengers. The Company invites them to discover Aqaba and Al Qassim in Middle East, Friedrichshafen, Salzburg, Tallinn, Vilnius, Santiago de Compostela, Luxemburg, Marsilia and Malta in Europe, Colombo, Lahor, Kathmandu, Kuala Lumpur and Mazar-i Sharif in Asia, Houston in USA, N’djamena, Kano and Libreville in Africa and Constanta in the Balkans. With the new destinations offered, passengers can fly to 245 flight destinations in 105 countries. Our Company connects cities where no inter-national connection was present before, to Turkey and many other international flight points; so that passengers can get anywhere in the world they want to.

6

2

43202245

10526

Domestic Destinations

international Destinations

total nUmBer oF Destinations

total nUmBer oF coUntries

Destinations laUncHeD in 2013

FLEET

Changes in ASK 22.8% Changes in RPK 25.3%Changes in Passenger Number 23.9%Changes in Cargo + Mail 23.3%

Changes in ASK 40.8% Changes in RPK 75.8%Changes in Passenger Number 135.0%Changes in Cargo + Mail 54.5%

27

Africa

Middle East

Turkey

Far East

36

43 33

31

Europe

94

CARGO

1% S. America

5% N. America

8% Africa

12% Far East

15% Middle East

59% Europe

Changes in ASK 28.8%Changes in RPK 31.8%Changes in Passenger Number 27.2%Changes in Cargo + Mail 39.9%




REGIONAL PASSENGER DISTRIBUTION REGIONAL REvENUE DISTRIBUTION

8.1% Africa

10.3% N. America

12.6% Middle East

14.4% Domestic

21.1% Far East

33.5% Europe

AnnuAl RepoRt 2013

28

CARGO

Turkish Cargo, a sub-brand of Turkish Airlines, has achieved consistent growth since 2000, des-pite the global recession, which started in 2008 and has left its traces until today. By increasing the volume from 470,863 (2012) tons to 565,391 tons in 2013; Turkish Cargo has continuously increased its services during that recession time while other airline and cargo carriers cut back on their capacity and traffic. Turkish Cargo recording a growth 21.8% became the rising star in the in-dustry with this achievement. We have shown our recognition and confidence in our brand by developing and modernizing our fleet. We have incorporated 6 new-generation wide-body and long haul Airbus A330-200F and 3 A310-200F cargo aircraft. With A330-200F cargo aircraft Turkish Cargo acquired the necessary long-haul capability for direct cargo transfer and introdu-ced Shanghai and Hong Kong routes. Cargo ca-pacity in present destinations; Frankfurt, Maast-richt, Milan, Madrid, Helsinki, Stockholm, Kiev, Budapest increased. At the same time high qu-ality cargo service started for new destinations; Kuwait, Riyadh, Tehran, Karachi, Ashkhabad, Guangzhou, Astana, Dacca, Bombay, Singapore, Seoul, Bangkok, Islamabad, Akra, Entebbe, La-gos, Khartoum, Johannesburg, Nairobi.

Turkish Airlines strengthened its fleet by inclu-ding new generation, wide body and long-haul Boeing 777 and Airbus A330 passenger aircraft. Using belly cargo capacity of these wide body aircraft, Asia and America being in the first place,

business partners in many other new commer-cial centers were contacted and greater cargo capacity was provided to further flight points in the market.

Turkish Cargo continues its investments without deceleration. The new storage area which was built on 10,500 m² area at Ataturk International Airport is inaugurated in September 2013. Cargo terminal construction with 43,000 m² enclosed area is continuing. The estimated date for inau-guration is September 2014.

Turkish Cargo, has started to use a new softwa-re solution, instead of TACTIC system which has been used for process management of cargo operations since 1990. According to plans ICar-go, which is a new generation integrated solu-tion, that meets passenger & cargo carriers, ground handling agents and airport operators needs in a single suit, containing cargo sales & reservation, terminal operations, mail handling & accounting, cargo revenue accounting and ULD management modules; will go live in 2015.

Turkish Cargo will have 150,000 m² enclosed area in the 3rd airport in Istanbul.

The Company will continue developing cargo services to offer high quality cargo services. Turkish Cargo is strongly committed to increase service quality day by day and to promote İstan-bul to become a logistics center.

By increasing the volume from 470,863 (2012) tons to 565,391 tons in 2013 and recording a growth 21.8% Turkish Cargo became the rising star in the industry with this achievement

9nUmBer oF carGo aircraFt

CARGO+MAIL DEvELOPMENT (TONS)

565,391

470,863

387,838

313,956

238,060

20132012201120102009

FLIGHT NETwORK

29

Sales Based Income Percentage by Cargo Regions (%)

Sales Based Tonnage Percentage by Cargo Regions (%)

EUROPE1

AFRICA

TURKEY

MIDDLE EAST

EUROPE2 FAR EAST

AMERICA

19.6

2.2

22.9

3.4

7.1 37.8

7.0

19.0

2.6

32.9

4.9

7.6 25.8

7.1

MRO

AnnuAl RepoRt 2013

30

MRO

The services that Turkish Technic provides its customers primarily consist of line, station, and component maintenance. In addition to Turkish Airlines aircraft, the company also makes com-ponent pool services available to the fleets of other carriers. The number of Component Pool service customers reached 400 in 2013.

Turkish Technic’s four hangars in Istanbul and Ankara have a total combined enclosed space of 73,500 m², at which it provides maintenance and repair services for airlines and VIP jet operators. Turkish Technic provides maintenance and repa-ir services, through various specialized compo-nent shops, from station maintenance, engines, APU (auxiliary power units) to landing gear. And while it’s most important customer is Turkish Airlines, Turkish Technic also serves more than 600 other companies located on four continents.

Turkish Technic provides line and station main-tenance services for the following aircraft: Boe-ing 737 Classic and Next Generation (NG), Boe-ing 777, Airbus A320 series, Airbus A300, Airbus A310, Airbus A330, Airbus A340, Gulfstream G-IV, Gulfstream 550, Cessna 172, and Diamond

DA42. In addition, it has the ability to conduct a full range of maintenance-repair services on an aircraft including landing gear, avionics compo-nents, hydraulic/pneumatic components, brake systems, tires and rims, and mechanical com-ponents. In brief, Turkish Technic offers all ne-cessary maintenance and repair activities at its own facilities for the aforementioned aircraft.

First local plane seat is manufactured The Company has started to renew seats made by Koito Industries installed on Boeing 737-800 passenger aircraft, which were included during the years 1998 to 2000 to the fleet and were used for the past 14 years. These seats are today be-low Turkish Airlines current standarts in regard to comfort and esthetics. Following the planning, seats manufactured by Turkish Airlines’ subsi-diary TSI have been chosen. Refurbishment has been made in TC-JFI aircraft economy class, bu-siness class and moving curtains. The plane is put into service thereafter.

Turkish Technic’s four hangars in Istanbul and Ankara have a total combined enclosed space of 73,500 m², at which it provides maintenance and repair services for airlines and VIP jet operators. Turkish Technic provides maintenance and repair services, through various specialized component shops, from station maintenance, engines, APU (auxiliary power units) to landing gear. while it’s most important customer is Turkish Airlines, Turkish Technic also serves more than 600 other customers located on four continents.

CARGO

73,500 m²

more than 600 Customers LoCated on 4 Continents

total encloseD sPace

cUstomer nUmBer

First local in-cabin kitchen set (Galley Equipments)Turkish Airline subsidiary TCI (Turkish Cabin Interior) produced in-cabin kitchen sets are ap-proved by Boeing Company. The equipments are assembled in B737-800/900 aircraft, which will be delivered throughout 2014 and 2015. The assembly process was completed in Boeing fa-cilities.

Sharklet modification of A320FAm aircraft Turkish Technic provided sharklet modification for Turkish Airlines A320FAM aircraft for fuel economy. An average decrease by 2.5% fuel

31

consumption is expected varying subject to flight duration. The modification has been made in two A321 aircraft.

Boeing 777 GCS (Internet and TV) modificationModification in B777-300ER aircraft with Panaso-nic GCS-Global Communication Suite, which will enable provision of wireless internet and live TV service for passengers, is completed. Thus Wide-band Internet and Live TV service is provided for passengers in all Boeing 777 aircraft.

Contribution to International Aviation Projects Turkish Airline provides support for SESAR (Sing-le European Sky ATM Research) collaborative project coordinated by EUROCONTROL and where many airlines, aircraft component manufacturers and ANSP’s (Air Navigation Service Provider) take part.

EFB (Electronic Flight Bag) IntegrationIntegration process for EFB (Electronic Flight Bag) system in our aircraft, which is used to transfer cabin crew documents into digital media, has been started. EFB system enables fast access to

any document, means less paper work, simplifies taxi management, provides noteworthy novelties in flight safety and flight economy.

AmO AuthorizationWith the approval of AMO Authorization, our Company completed the transition from Main-tenance Management System to AMO. On 13th of December 2013, AMO approval certificate for our Company has been published. Turkish Air-lines has been authorized to provide continued airworthiness for A310, A319/320/321, A330, A340, B737-400/700/800/900 and B777 types. Thus audits performeby General Directorate for Civil Aviation each year will be transferred to our Company with this approval. Turkish Airlines will publish sertificates after assessment of compa-tibility.

Turkish Technic provided sharklet modification for Turkish Airlines A320FAM aircraft for fuel economy. An average decrease by 2.5% fuel consumption is expected varying subject to flight duration.

CATERING

2.5%FUel consUmPtion

AnnuAl RepoRt 2013

32

MRO

CATERING

Commencing operations in 2007, Turkish DO&-CO is a joint venture of Turkish Airlines and DO&CO Restaurants & Catering AG. It provides catering services to more than 60 domestic and international airlines at nine locations (Istanbul Atatürk, Sabiha Gökcen, Ankara, Antalya, Izmir, Bodrum, Trabzon, Dalaman and Adana) in Tur-key. The company now controls around a 70% share of the in-flight catering market in Turkey.

Our Company has been awarded with “Europe’s Best Airline Company” in 2013 as in the past two years. This year Turkish Airline received “Best Business Class Onboard Catering Award” in long haul flights, thanks to Business Class catering offered to passengers. According to APEX/IFSA rating Turkish Airlines took the first place in “Best Food & Beverage” category.

Since we are aware of our duty as the best ca-terer in the industry, we are never satisfied with our success. So we continue to plan innovations to create trends in catering and surprise our gu-ests. Accordingly we wish our guests to fly again with Turkish Airlines and enjoy every minute of their flight. With this aim in mind our Company decided to renew the catering concept. During this one year lasting process our supplies and service equipment have been renewed. As a re-sult a more up to date and elegant catering with light and ergonomic equipment has come up.

In our new catering concept, both traditional Turkish and world menus are offered to our va-lued guests for the first time. All served food is prepared daily with superior craftsmanship, with the best and freshest product according to inter-national hygiene standarts.

Since they are the most important part of the catering, when renewing the catering concept, all service supplies and equipment were comp-letely made over. New products, prepared by Turkish DO&CO for Business, Comfort and Eco-nomy Class, reflect Turkish culture with their modern and plain design. Ottoman and Seljuk motive interpretations were used in designs to blend culture of east with west. Modern trends and functionality were also taken into considera-tion in the designing phase.

As a part of this concept, on all long-haul flights of Turkish Airlines the “Flying Chefs” serve sin-ce 2010. Today 259 Flying Chef’s serve for cus-tomer satisfaction. In short-haul international flights Flying Chefs started to serve customers in A321 aircraft since October 2012. In 2013 inde-pendent from the aircraft type new destinations have been added and number of Flying Chefs increased to 210.

Turkish DO & CO introduced a new approach and taste to airline catering. The company served to 1 million passengers in Turkish Airlines Interna-tional CIP Lounge “Lounge Istanbul” in 2013. The lounge project was designed, implemented and now is operated by the company.

In 2013 with the addition of the new floor Lounge Istanbul acquired an area of 6,000 m2 along the customer satisfaction oriented policy of Turkish Airlines. The new addition increases the seat capacity of the lounge to a total of 1030 guests. The existing facility, where a wide variety of ca-tering choices are available, includes rest and shower space, children’s playground, library, bil-liards area, prayer room, teleconference section, massage beds, model car race, golf Simulator, stage and performance area. In Turkish Airlines’ private passenger lounge unique tastes of Tur-kish and World dishes are provided with a twist not found in other airline lounges. For instance, it includes Turkish Tea Garden, where Turkish coffe, tea and bagel pastries are offered. The-re is also Vienna’s famous pastry shop, Demel, a local corner where chefs prepare regional Turkish delicacies, another corner guests can sample famous specialties such as Turkish Pide and Börek. Plus, throughout the lounge there are offerings of fruit, salads, appetizers and nuts as part of Turkish hospitality.

Turkish DO & CO introduced a new approach and taste to airline catering. The company served to 1 million passengers in Turkish Airlines International CIP lounge “lounge Istanbul” in 2013. The lounge project was designed, implemented and now is operated by the company.

“Best Business CLass onBoard Catering award”

receiVeD aWarD WitH BUsiness class PassenGers Votes

33

In 2013 Turkish Airlines has opened a new ar-rival lounge, ‘İstanbul Arrival Lounge’, at the İstanbul Atatürk International Airport, as a conti-nuity of lounge services offered by Turkish DO & CO. The lounge is designed to offer a fresh start for the day, to its international passengers after their flight. Offering a wide range of amenities and services, including rich food and beverage options, a wide selection of leading papers and magazines, free Wi-Fi, showers, charging stati-on for electronic devices and ironing services are offered to the guests.

Have fun during your flight…In 2012 we offered 176 movies and 178 short programs during flight. In 2013 we nearly doub-led the movies to 336 and short programs num-ber rose to 318. Our in-cabin programs received industrial “Best Practice” perfection standart ac-cording to Skytrax rating in 2013.

Our guests enjoyed their flight while watching movies for a total of 15,412,426 hours. They lis-tened to music for 2,262,952 hours and played for 1,146,487 hours.

With the live TV application our guests watched 539 international sports activity live and conne-cted to earth via wi-fi internet by using 215,625 devices free of charge.

Our passengers, who preferred to rest in the-ir seats, enjoyed their flight by using their sle-ep goggles and noise cancelling headphones, which were offered in a special bag, which was awarded for its design.

Our specially designed travel kit, which is offered to long-haul passengers travelling in Business Class, has been chosen as the “The Best Busi-ness Unisex Amenity Travel Kit” by TravelPlus.

Design of the special travel kit, offered to our guest, flying with Turkish Airlines to Jeddah and Medina to for Hajj pilgrimage; has also been renewed. Products in the kit have been care-fully reconsidered and new products useful for Hajj pilgrimage have been added. Following this careful selection, the new kit has been chosen as “The Most Innovative Kit” by TravelPlus. This specially designed kit is only offered by our Air-line.

GROUND HANDLING

AnnuAl RepoRt 2013

34

GROUND HANDLING

Founded with an agreement signed on 12 Mar-ch 2009, Turkish Ground Services (TGS) is a joint venture of Turkish Airlines and HAVAŞ (airport ground handling services company), in which each controls a 50% stake.

TGS, becoming operational on 1 January 2010, currently conducts operations at: Istanbul Ata-türk, Ankara Esenboğa, İzmir Adnan Menderes, Antalya, Adana and Istanbul Sabiha Gökçen.

TGS’s basic goals are:• To offer high quality products and services

when compared to industrial standarts,• Having a friendly, positive and problem sol-

ving attitude at all employee levels, for excel-lent service and satisfied customers,

• To keep customer complaints at a minimum• Increase employee satisfaction and efficiency

TGS has the vision of being an industry leader and preferred ground handling company with its service quality, reliability and competition power.

TGS’s mission is to provide ground handling ser-vices with the following goals:

• To expand TGS’s ground handling structure and acquire a global ground handling com-pany identity.

• To enable appointment and management of personnel employed at TGS by managers, who possess training standards in line with national and international regulations.

• To becoming a leader in the provision of any kind of service related to ground handling in-dustry,

• To enable an approach of reliable, high quality and uninterrupted service that will develop the Ground Handling Service image and leverage marketing opportunities;

• To transform TGS Ground Handling Company into an important organization in the national and international arena in the medium term.

TGS provided ground handling services to 24.6% more flights when compared to 2012. Likewise over 68 million passengers were offered ground service in 2013, which is 28% higher than the previous year.

With the help of Airport Manager Project which started in 2013; annual, periodic and momentary planning of ground services will be carried out according to flight plans. The project, which will transfer manual processes into the system; is expected to start operation in 2014.

CATERING

46.0% TGS31.9% çelebi22.0% hAvAş

MARKET SHARE BY FLIGHT NUMBER IN 2013

TGS provided ground handling services to 24.6% more flights when compared to 2012. likewise over 68 million passengers were offered ground service in 2013, which is 28% higher than the previous year.

68 miLLionsPassenGers serVeD

35

All Lounge’s are under control…In all domestic offices where Private Passenger Lounges are present, Lounge Tracking system is installed and activated.

For a more balanced operation…Throughout all flights of our Company efficient load control and related system infrastructure installation is planned.

LOUNGE TRACKING SYSTEM

THYMUS

For efficient business and relationship management…The Company intends to increase communication and interaction with all suppliers. Based upon this synergy, a social intranet/internet media will increase revenues where service is provided and obtained. There will be a tender for a web portal and after the necessary setup procedure; it is intended to go live within the year.

Everything starts with perception…Kiosk systems in all service points, where customers communicate their expectancies and evaluate service quality are planned and installed within 2013. In addition Customer Satisfaction Asessment Devices started pilot studies in Istanbul Hub an other stations are planned.

CUSTOMER PERCEPTION MANAGEMENT

GLOBAL FREIGHT CONTROL SYSTEM

I spot my passenger looking into their eyes…This year in Istanbul Hub boarding system with retina scan is planned for test installation.

BOARDING SYSTEM WITH RETINA SCAN

OUR PROjECTS

TRAINING

AnnuAl RepoRt 2013

36

TRAINING

Turkish Airline Aviation Academy is a recognized aviation academy, by all international bodies that accredit companies providing such training.

Turkish Airline Aviation AcademyThe Turkish Airlines Aviation Academy has of-fered professional aviation training since 1982 under the Turkish Airlines roof, and has become an internationally recognized aviation training center, providing training opportunities in Euro-pe, Africa and Middle East recently.

The Academy offers trainings in more than a hundred categories: technical training, reserva-tion and ticketing sales training, cargo operation sales training, passenger services training, IATA training, management and personel develop-ment training, ground handling training, compu-ter and English training.

The Academy is located on an 8,600 m2 enclosed space, containing 36 classrooms, a conference room with 125 seat capacity, two simulation classes and an examination room. At the Aca-demy simultaneous training can be given to 800 people. Training is given by approximately 46 highly experienced instructors, who are experts in their respective fields. There are 2,000 cour-ses and seminars on average, offered annually by specialist instructors. The center supplies training to around 30,000 people a year. Additio-nally 100,000 people are offered training oppor-tunities by distance learning.

Turkish Airline Aviation Academy is a recognized aviation academy, by all international bodies that accredit companies providing such training. In 2013 the Academy took successful steps towar-ds strengthening its international reputation and training quality.

Our CertificatesIn 2013 the Academy has shown great perfor-mance and became a full member of ICAO Trai-nAir Plus Program in 2012. It is an international network specialized in aviation trainings.

The Turkish Airlines Aviation Academy took another important step at the international level by getting accredation from Edexcel, the leading training accreditation institue of Great Britain.

The Aviation Academy became IATA regional strategic partner and IATA Certified Training Center in 2011. In 2013 it became IATA’s Certi-fied Training School. According to the agreement signed with IATA the Academy can provide trai-ning anywhere in the world in addition to Istan-bul with IATA cooperation. In 2013 an agreement with RMIT University was signed and the Aca-demy obtained authorization to make RELTA (RMIT English Language Test for Aviaion) tests. Another novelty is becoming Aviation Security Training Authorized Institute for providing avia-tion security trainings.

Our Awards The Academy has organized many IATA trainin-gs during 2012 and received “Worldwide Top Re-gional Training Partner” award. Turkish Airlines continued to register its international success in 2013 as well. The Academy started a training partnership DynEd in 2012 to improve employe-es’ (pilots and cabin attendants in the first place) English Level. In 2013 The Academy received an award from DynEd for outstanding performance in sales.

International EventsThe Aviation Academy is proud for hosting many international organizations in 2013. “ICAO NGAP & Europe and Middle East TrainAir Plus Regional Symposium” and ICAEA’s “International Aviation English Forum” have been hosted by the Aca-demy. In adition Academy became the Golden Sponsor in IFTE, Flight Training Expo in 2013.

Developments in Technical TrainingAircraft type trainings courses were previously offered theoretical. In 2013 according to EASA regulations published, applied trainings have been designed and are incorporated in Aca-demy’s portfolio following the EASA approval.

In order to cater extensively for customer de-mand in regard to technical training, new cour-ses were designed to make the course portfolio more flexible. After the approval of these new courses and approval of the Academy’s MTOE (Maintenance Training Organization Exposition) they were added to the capability list.

GROUND HANDLING

46

2,000>

30,000>

eXPerienceD instrUctors

nUmBer oF traininGs

nUmBer oF ParticiPants

37

Our ProjectsThe Academy conducts significant projects and adds strength to our countries’ leadership, cater for industries’ needs and increase training qua-lity. “Basic Training School Project” for training aircraft maintenance technicians, “Peace Eagle Project” for supplying “Turkish Air Forces with necessary training and support, and “Training Platform Project” for integration of all training processes of Aviation Training Directorate via a collective software platform, are continuing.

We, on the route towards being a brandIn 2013 Turkish Airlines Aviation Academy brand value has been strengthened through a wide range of publicity activities. In this context; a professional bilingual (English and Turkish) corporate film has been produced, several ad-vertisements were broadcasted in international channels; information about “Overcoming Flight Phobia Program” has been communicated as guests in TV newscasts. In addition international

aviation organizations were attended and Tur-kish Aviation Academy Magazin Quarterly was published for the ninth time to increase worl-dwide brand recognition.

Our GoalsIn the recent couple of years Turkish Aviation Academy reached many of its goals; acquiring an international identity, getting recognition from local and global authorities, extending target audience in quantity and in quality, imp-lementing innovative approaches in education and reaching a revenue oriented structure. In the coming days the Academy aspires to form a structure that follows global developments clo-sely, provides professional and technical training with cutting edge technology and approaches, and implement social, cultural and psychologic approaches successfully.

At the Turkish Airlines Aviation Academy, trainings are given by approximately 46 highly experienced instructors; there are 2,000 courses and seminars on average annually and around 30,000 people participate a year. Additionally 100,000 people are offered training opportunities by distance learning.

TRAINING

AnnuAl RepoRt 2013

38

TRAINING

Flight Training Center The Flight Training Center has been the respon-sible unit for all flight-related training provided to the Company’s cockpit and cabin personnel. The center provides training services for local and international customers through national and international authorization certification sin-ce 1994.

And with its nineteen years of experience in the field, it supplies training to around 20,000 people each year.

The center set out by providing training services with one simulator at the current facility in 1995. Yet today it is equipped with:

• 10 single-engine Cessna C-172, • 6 single-engine Diamond DA-40,• 8 twin-engine Diamond DA-42,• 2 jet-engine CessnaCitation C-510, a total of

18 training aircraft, • 8 Flight Simulators (FFS), • 2 Cabin Emergency Evacuation Trainers

(CEET), • 1 Flight and Navigation Procedures Trainer

(FNPT II), • 3 Flight Training Devices (FTD), • 2 Door Training Devices (A320 DT, B777 DT), • 1 Real Time Fire Fighting Trainer (RTFFT), • 2 Cabin Services Trainers (CST), • 3 Computer Base Trainer (CBT) class, • 34 classrooms, 1 DitchingPool, 1 RT (Radio-

Telephony) classroom, 1 DLR Exam Center and 1 Conference Room and the below list-ed Authorized Trainings are used to serve to the Company’s personnel and national and international customers in the form of a professional institution.

• TRTO (TypeRating Training Organization) Training Authorizations• Type Orientation Trainings,• Renewal, Refreshment Trainings,• Type Orientation/Type Orientation Control

Pilot and Simulator and Simulator Con-trol Pilot Trainings,

• MCC Basic and Instructor Training (MCC/MCCI), Other Trainings

FTO (Flight Training Organization) Training Aut-horizations

• Modular and Integrated Pilotage Training• FI (A), CRI (A), IRI (A) Flight Instructor

Trainings,• Single-Multi Engine Class Authorization

Training,• MCC Training,• C510 Type Orientation Training,• Other Trainings,

Cabin Training Authorizations,• Type Trainings,• Renewal, Refreshment Trainings,• Ditching Trainings,• CEET, CST Trainings,• Emergency Safety Equipment Trainings,• Passenger Relations and Management,• Other Trainings,

Other Approved Training Authorizations• Dispatcher Trainings• Load Master Trainings,• Basic and Refreshment Safety Trainings,• Hazardous Substances Training, • Provincial Directorate of Public Health

and European Resuscitation Council Ap-proved First Aid Trainings,

• Ministery of National Education Approved Instructor’s Training,

Professional TrainingAlong with the rapid growth of its fleet, in order to meet operational demands and maintain its cockpit and cabin training standards, simulators and training aircraft have been acquired and tra-ining time increased.

The Flight Training Center has been certified by the Turkish Civil Aviation Authority as a Type Rate Training Organization (TRTO) and Flight Training Organization (FTO). All simulators used in training are certified by EASA.

Each personel received in one or more areas co-ckpit training, which includes 29 different areas, with particular attention being given to “conver-sion”, “type”, and “recurrent” training activities. When the first-time recruitment of foreign nati-onal pilots became real with the introduction of

TRAINING

The Flight Training Center has been the responsible unit for all flight-related training provided to the Company’s cockpit and cabin personnel. The center provides training services for local and international customers through national and international authorization certification since 1994.

5,777

782

nUmBer oF cocKPit Personnel WHo receiVeD traininG

nUmBer oF Pilots WHo receiVeD conVersion traininG

39

Turkish Airlines’ B777 fleet, these newcomers were successfully integrated into the company through basic, as well as corporate culture tra-ining.

During 2013 ground training or instructors’ training was provided to 5,777 cockpit person-nel. Conversion training was provided to 782 (396+386) recruited pilots from outside the com-pany who were experienced or inexperienced in types and within the Company type change to 361 personnel during type change. to A total of 1,143 pilots were provided training.

During 2013 the Flight Training Center (FTO) continued to provide training to 141 cadet pilots, using national and international resources and 326 cadet pilots are currently continuing their training.

• Cabin training in 13 different categories, in-cluding basic conversion, first-aid and de-fibrillator training; was provided to 15,586 personnel. 1450 new recruited cabin pers-onel received training in 2013.

• A total of 159,113 hours of cabin training (40,345 hours classroom, 118,768 hours online),

• a total of 115,874 hours cocpit training (25,309 hours classroom, 51,585 online, 38,980 hours simulator) has been provided.

• In the Academy a total of 11,604 hours (2,065 hours ground training and 9,539.8 hours flight training) has been provided. In

the Flight Training Center a total of 286,591 hours training has been provided.

In addition to intercompany training, during 2013 training to the personnel of 30 different compa-nies (13 cockpit, 24 cabin) operating across a broad region in Asian, Caucasian, Middle Eas-tern, North African, and European countries, has been provided.

Our Company’s accelerated growth trend for the past decade, creates opportunies for Flight Tra-ining Center to act cooperatively with business partners. Accordingly the center engaged in aca-demic cooperation and developed business col-laboration models with international simulation centers and other training institutions in the in-dustry and pursued a a steady integration policy with the aviation sector. Academic cooperation with such respected na-tional and international training institutions as Anadolu University, the Turkish Aeronautical Association, Cappadocia Vocational College, Beyaz Lojistik Vocational College, Kırklareli Uni-versity, Maltepe University, the Florida Institute of Technology Aviaton Academy, Lufthansa PTN and CAE OXFORD were formed, business colla-boration models were developed and protocols were signed. In order to sustain the internationally competiti-ve strength of the Flight Training Center, the rea-lization of projects launched with its own resour-ces in 2013, is planned to be actualised in 2014.

During 2013 the Flight Training Organization (FTO) continued to provide training to 141 cadet pilots, using national and international resources and 326 cadet pilots are currently continuing their training.

OTHER SERvICES

AnnuAl RepoRt 2013

40

OTHER SERvICES

AnadoluJet, which had a fleet of 20 aircraft at the end of 2012, increased this number to 27 aircrafts in 2013. Number of aircraft fleet operating from Sabiha Gökçen Airport rose from 3 (2012) to 8.

ANADOLUJET

AnadoluJet is a Turkish Airline brand, which enables economic flights in domestic lines. Ana-dolu Jet continued to increase number of do-mestic passengers and extend its flight network with newly added destinations in 2013 as well. While extending the existing network with new destinations and increase in frequency depth, another domestic plan, which is in accordance with international lines and centering Sabiha Gökçen Airport, has been put into use.

With this perspective, campaigns and publicity activities, which are suitable for an economy air-line, have carried the brand one step further.

In order to reach new passengers in domestic lines and to facilitate a better flight experience, new collaborations for transfer services, car park and car rental have been developed and extended.

FleetAnadoluJet, which had a fleet of 20 aircraft at the end of 2012, increased this number to 27 airc-rafts in 2013. Number of aircraft fleet operating from Sabiha Gökçen Airport rose from 3 (2012) to 8.

In 2013 aircraft operated under the Company roof completed the transition to Wetlease mo-del. Airbus A320’s have been to transferred to

Turkish Airlines and today AnadoluJet fleet inc-ludes only SX wet-lease aircraft.

Apart from this, 2 new aircraft are added to the fleet, to perform Antalya based operations in summer 2013.

GrowthAccording to the Company’s strategy new des-tinations are added to Ankara domestic line and frequency was increased in available flight po-ints. Afterwards a significant growth in Sabiha Gökçen based domestic operations was recor-ded. In 2013 domestic lines increased from 31 to 46. Sabiha Gökçen based flight points rose to 18 by adding 10 new points.

AnadoluJet serving to 5.3 milllion passengers in January-December 2012 period, served to 7.7 million passengers by 44.8% increase in 2013.

Thanks to strategy (increasing aircraft number and number of landings) covering Sabiha Gök-çen based operations, offered capacity increased by 162%. Related to this, passenger number inc-reased by 100% over the previous year. In Esen-boğa based flights capacity increase of 29.6% brought 32.7% passenger increase

TRAINING

Ankara Esenboğa Airportİstanbul Sabiha Gökçen Airport

18 Destinations 28 Destinations2 million PassenGers 5.7 million PassenGers

8 airPlanes162% caPacity increase 30% caPacity increase

19 airPlanes

27

46

7.7

nUmBer oF aircraFt

nUmBer oF Destinations FloWn

total nUmBer oF PassenGers (millions)

41

*Only scheduled + extra flights are taken for AJET flights.

ANADOLUjET TRAFFIC RESULTS 2013 2012 2011 2010 2009

Revenue Passenger (000) 7,701 5,317 5,914 5,337 2,876

Available Seat-Km (millions) 5,960 3,895 5,212 4,611 2,094

Revenue Passenger-Km (millions) 4,837 3,191 3,991 3,664 1,695

Passenger Load Factor (%) 81.2 81.9 76.6 79.5 80.9

Number of Landings 56,549 39,454 47,377 41,149 21,603

TOTAL REvENUE PASSENGER (thousands)

7,701

5,317

5,914

5,337

2,876

20132012201120102009

NUMBER OF LANDING

56,549

39,454

47,377

41,149

21,603

20132012201120102009

AvAılAble SeAt-KM (millions)

5,960

3,895

5,212

4,611

2,094

20132012201120102009

OTHER SERvICES

AnnuAl RepoRt 2013

42

INFORmATION TECHNOLOGIES

As the biggest revolution of our age, technology is one of the primary tools that distinguish corpo-rations from their competitors. Our Company considers technology as a strategic investment area and started to carry out extensive transition projects.

Our Company’s vision in information technologies is to acquire leadership as in other areas with the help of customer oriented, innovative and guiding technologies.

• The mission to attain this goal comprises the following factors:

• Innovations that enable leadership and dis-tinction

• Flexibility in marketing and sales capabilities• Increase customer satisfaction and loyalty

with customer oriented solutions• Sustainability at the maximum level• Cost advantage through services that in-

crease operational productivity• Green technology encompassing efficient

resource management

For this mission, with the help of “Transition with Technology Program” our Company aims to re-new more than 80% of its technological inventory and activate it for first time use.

A Gate for PassengersInformation Technologies one of the most effec-tive way of contacting customers. Technological channels when compared with traditional chan-nels are much more economic. In addition to their cost advantage, they increase customer satisfac-tion with their flexible nature.

Customers having direct access through web and mobile channels to reservation, ticketing, che-ck-in and information transactions, can also im-mediately check in with the help of the kiosks at the airport.

In 2013 payment choices provided over web and mobile channels are increased in variety and thus access to a higher customer volume is enabled. Especially the kiosk number in Istanbul Atatürk Airport has been increased, passenger experience

become quicker and more practical. With mobile tablet based pilot applications, practical kiosk int-roduced an innovative approach in this field.

In our age where technology changes at a great pace, on-line innovations are a necessity. In 2014 with the modernization of the web site and mobile applications; primary goals are to acquire more ergonomic platforms which will enable flexibility in marketing and sales capabilities and increase customer satisfaction.

Revenues and Expenses are Under ControlAviation is one of the primary industries in which planning and optimization has critical importance. Solutions provided through information techno-logies, extends our Company’s capacity regarding revenue increase and cost cutting issues.

Applications, which were implemented during 2013 changed revenue management processes drastically. Thus, optimization methods in prices and seats availability management are used more efficiently. Previously quotas for price levels and passenger classes were made on flight basis. To-day through automation all flight network is taken into consideration to maximize revenue. With the Revenue Management Project, that challenged the old approach completely, past data and mar-ket indicators are used efficiently; price levels and related quotas are calculated automatically, after taking real time demand was taken into conside-ration. This application, enables control over the entire demand in our Company’s (as a network carrier) flight network. Demands are not calcu-lated based on one single flight and capacity for profitable transit passengers is planned more ef-ficiently. In this way upon the same cost structure, higher profit yielding customer segmentation is enabled.

This year our Company completed one of the lar-gest Enterprise Resource Planning projects in our country and increased resource efficiency by imp-lementing new applications for staff and operation planning. The new ERP infrastructure compiles all back office processes, such as budgeting, finan-ce, purchasing and human resources. Processes have been enhanced and thereafter transferred to the new platform with the help of an extensive project staff. After gathering all data in one sui-te, information technology capabilities increased.

with the help of the “Transition with Technology Program” our Company aims to renew more than 80% of its technological inventory and activate it for first time use.

OTHER SERvICES

OTHER SERvICES

400nUmBer oF corPorate aPPlications

43

tance. Our Company has therefore renewed its technological infrastructure used for data mana-gement and reporting. These reports are available to all managers from any level to use during their decision making process.

Technological Infrastructure and VirtualityThe data center of our Company includes about 300 corporate applications. All internal and ex-ternal clients have access to this center. In recent year virtual technology helped to save considerab-ly in infrastructure costs. It also added to business continuity and customer satisfaction, since it pro-vides a base for using resources at the maximum efficiency. With the ongoing modernization in te-chnological infrastructure, both costs and risks in information safety are decreasing.

If we summarize; with the help of technological in-vestments completed the previous year and those that are still are ongoing, applications supporting business processes efficiently increased revenue and the Company’s flexibility in cost management. Important steps such as the digitalization of pro-cesses, increasing of the role mobile device in operations, important improvements in flexibility, efficiency and environmentalism have been taken. Investments will continue in line with this vision and are expected to contribute to profitability. They will also serve for Turkish Airlines’ mission of be-ing at peace with people and nature.

Thus, managers were able to manage company resources more efficiently. Especially develop-ments in reporting and data standards, provided important tools for managers to support them in their decision making processes.

No more Paperwork in AircraftMobile devices offer substantial opportunities to aviation sector where speed and flawless operati-ons are critical. In aviation industry operations are executed in parallel to continuous and intensive activity. Therefore real time and reliable flow of information is from great importance for timing and cost of operational flexibility. All these factors affect on-time departure and arrival, especially in busy airports, such as Istanbul Atatürk Airport, where our Company has its base.

With projects started under “Digital Airline” con-cept, processes and information which were previously on paper in aircraft are transferred to mobile devices. Gradually this application will be extended to the complete fleet. In that way cockpit and cabin personnel will execute operations in a fast and flawless manner via tablet devices. The-re will be a significant cut down in the amount of paper piles which occupy a massive place in the cockpit and it will also contribute to fuel economy. In addition to integration of mobile devices to pro-cesses, this project contains entails a software application. The application will upload flight data, reports and forms to tablet devices. Control ope-

rations will also be realized through mobile appli-cations accessed via tablets.

Likewise, following the transition to digital format, in addition to cost saving, quality of the remaining processes of the operations and customer satis-faction will increase.

Cargo Technology is Renewed Turkish Airlines, flying to more countries than any other airline, views cargo operations as a stra-tegic field, promising great developments. The Company realizes investments in parallel to basic strategy. In 2013 an extensive project, aiming to transfer cargo processes on a centralized and mo-dern technological infrastructure was started. The project will be done with help of leading business partners. The planning of cargo operations, re-servations and management of operation phases will be done via a new generation technological system. Project will both support increasing car-go volume and create new flexibilities for process managers.

Efficient Data management ProcessesToday all business processes are managed by in-formation technologies. Mobil devices and social media are innovations that extend to every aspect of our life. Accumulation of data also increases at a fast pace. From reading this gigantic data ocean, to making estimations for the future and gathe-ring experience from the past have critical impor-

OTHER SERvICES

AnnuAl RepoRt 2013

44

NEW BRAND STRATEGY Turkish Airlines, flying to more countries than any other airline aims to leverage the travel expe-rience offered to a different level. The Company’s increasing fleet, its position as the world’s airline traffic center Istanbul and strength deriving from its incomparably favorable position lead to rich cultural resources. The new brand strategy aims to develop new applications at each phase of the travel, to offer memorable surprises to guests and to bring them together with international in-novation and distinctive services to make them feel special and cherished.

The most important feature that distinguishes Turkish Airlines from its competitors is certain-ly its different approach in service quality. With the aim of increasing customer satisfaction, the Company competes against itself for increasing service quality. Through innovative approaches, Turkish Airlines differentiates itself from its com-petitors. The new catering concept, enriched by samovars and candle light, “Flying Chef” service offered to customers during long haul flights, in cabin entertainment system with 400 movies, 1,000 music CD’s, radio and new channels, “In-vest On Board” digital platform which makes international investors meet important business leaders in the sky, live TV application via satellite communication, CIP Departure and Arrival Loun-ges to offer comfort to passengers, are only a selection out of recently introduced services.

OTHER SERvICES

OTHER SERvICES

The new brand strategy aims to develop new applications at each phase of the travel, to offer memorable surprises to guests and to bring them together with international innovation and distinctive services to make them feel special and cherished.

45

DEVELOPING FLIGHT NETWORK

By the end of 2013 our Company offers flights to 245 domestic and international destinations. As result of a Codeshare agreements, some of which are signed with world’s leading airli-nes of the Star Alliance where Turkish Airlines is also a member, ticket sales to additional 114 international destinations (Scandinavian countries, Russia, USA and Far East included) became possible and those destinations were added to the flight network.

Through interline agreements made in 2013, interline volume increased by 10% over the previous year and reached USD 300 million. This result equals to 4% of our Company’s 2013 sales. For 2014, an increase of 10% in the inter-line volume is planned.

Therefore our guests can fly to 114 cities (Las Vegas, San Francisco, Miami, Sydney, Melbour-ne, Kaliningrad, Porto and Malmö) where Tur-kish Airlines has no flights from Istanbul with the Company’s flight number and code in one THY ticket. They check in to the final destina-tion, without an additional baggage process in a more comfortable, fast and economic way. Codeshare agreements rose from 29 to 37. As a result, offline flight points doubled to 114. In 2014 this number is planned to rise in paral-lel to the Company’s expansion strategies. In the coming period Turkish Airlines plans to add important and strategic flight points (USA, Australia, China and India being in the first pla-ce) with the help of business agreements and collaborations with predominating airlines in the region, to its flight network.

Following the civil aviation negations, Civil Aviation Agreement with 26 African and Latin American Countries was signed in 2013. In pa-rallel to our Company’s long term strategy for Latin America, frequencies in new flight points have been attained. Existing agreements with 17 countries have been revised and additional frequency rights for Turkish carriers have been acquired.

Star AllianceTurkish Airlines became a member of Star Alli-ance in April 2008. The Alliance, formed in 1997, provides its guests an extensive flight network, worldwide access. Star Alliance as the first global Airline Cooperation aims to offer perfect service and increases recognition. Today with 28 mem-ber companies and thanks to international flight network, a total of 21,900 daily flights enable ac-cess to 1,328 airports in 195 countries. The lo-yalty program offers access to more than 1,000 lounges worldwide.

Through Codeshare agreements, conducted by Turkish Airlines with 19 companies from the Alli-ance, new flight points are added and guests are offered a perfect travel experience. In 2013 Star Alliance went through a major reorganization where three strategic committees influential for decision making and management were formed. By taking part in these committees through rep-resentative Turkish Airlines strategic role within the Alliance increased. New opportunities to increase cooperation with Star partners will be pursued in 2014.

HUMAN RESOURCES

Association of European Airlines (AEA)Formed in 1952, Association of European Airlines (AEA) is an Association comprising of 30 Europe-an airline companies. Aim of the Association is to represent member airlines within European Uni-on and other institutions. As of 1 January 2014, our General Manager Associate Professor Temel Kotil was appointed as President for two years. During our General Manager’s AEA presiden-cy, success stories that have contributed to our Company’s growth in the last ten years will be shared with AEA airlines and thus contribute to European Aviation Industry and practices. Within this context, our Company will be hosting AEA Summit, which will be held in October in Istanbul.

AnnuAl RepoRt 2013

46

Members of the Turkish Airlines Miles & Smiles program increased by 22% and reached 3.65 million in 2012. In addition being from various industries 57 program partners (32 being new) were reached.

O&D INCOmE mANAGEmENT SYSTEm

Efficient revenue management enabled a conti-nuous increase in load factor, while Turkish Air-line passenger revenue per km was kept at the same level, despite a 20% increase on average for the last 3 years.

As a result of its extending flight network and inc-reasing transit passengers, thousands of (Origin & Destination) flight types can be taken into cal-culation with the new revenue system, which has been included as of January 2013 in Turkish Airli-nes system. O&D Revenue Management System. It optimizes digitalized user experience with the help of other information systems and helps the company to perform the action, which will bring maximum contribution to the revenue. Sophisti-cated estimation and optimization models enab-les dynamic pricing for each O&D and seat avai-lability can be assessed. In airline travel industry competition is continuously increasing. The new system enables flexibility for Turkish Airline, to produce different revenue management strate-gies for nearly 5,000 O&D market types offered and market dynamics can be followed more ef-ficiently.

Transition to the O&D system, which has a big impact on revenue approach is an important pro-cess for adaptation of the airline and users. Tur-kish Airlines has increased 200 points and even during the transition period the flight network ex-perienced 40% growth. Our Company managed this period with the utmost care and went through a successful transition phase.

OTHER SERvICES

OTHER SERvICES

CUSTOmER CARE

The Call Center is one of the most important marketing and sales channels of Turkish Airlines. Within the organizational structure services are bought from two different companies, Assistt Rehberlik ve Müşteri Hizmetleri A.Ş. and Vodatech Bilişim Proje Danışmanlık Sanayi ve Dış Ticaret Ltd. Şti., at six locations.

The reasons for such outsourcing include raising the level of service, improving service quality, and reducing operational costs. Thus, while giving service, activation speed for the necessary source increase is simultaneously achieved.

In order to return to our customers with the help of professional teams who are experts in their fields, [email protected] address has been closed down. Passenger feedback was taken via feedback form in the company web site. A feedback form was summarized in one page and became plain in style and more functional.

At the call center, teams were formed to offer solutions for customer complaints (during call) and they have started operation as of 15 April 2013 actively. This team replies to guest calls, make necessary analysis and aims to offer instant solution to the customers. In order to have customer satisfaction oriented team work at the points where customers were contacted and to offer instant solutions to our customers who experienced service problems, the Company adopted Customer Service Representative (CRT) project as of May worldwide.

Members of Turkish Airlines Miles & Smiles program increased by 22% and reached 3.65 million in 2012. In addition, 57 program partners (32 being new) from various industries were reached.

3.65 miLLions

57

nUmBer oF miles&smiles ProGram memBers

nUmBer oF miles&smiles ProGram Partners

47

HUMAN RESOURCES

As one of the leading companies in Turkey in regard to human resources and a worldwide airline carrier, Turkish Airlines conducts its hu-man resources activities consistently with this responsibility. Our Company pursues the aim of becoming the best and a five star airline in Europe. In order to acquire this goal and to use human resources more efficiently innovative projects are introduced.

In line with the growth pace of the Company, pilots, cabin personnel and other positions are recruited following an active process. Turkish Airlines is a growing family, where each year newcomers join at any level. Departments as-sess their personnel needs annually and human resources announcements were prepared in preset frequency. Applicants are evaluated by objective criteria at all phases of assessment. As a result they participate in Turkish Airlines, where they are expected to contribute to the Company’s work for reaching its goals. This expansion is supported with projects conducted for employee satisfaction and “Ethics” field.

As of the end of 2013, 3,966 people (1,800 cabin personnel, 993 cockpit personnel, 1,173 ground personnel) were employed at Turkish Airlines. In order to seek out talented individuals who could be co-pilot and cabin personnel candi-dates, career days and similar events were organized.

During the first phase of the Cultural Unity and Common Behavioral Model Project Turkish Airlines’ cultural values have been analyzed. In the second phase of this Project, activities regarding the embracing of those values has commenced.

In order to assess employee satisfaction, a survey was held. Following the survey, an “Employee Satisfaction Workshop” has been organized. Upon the results of this workshop, another activity plan, which will be followed in 2014 has been prepared. Thus, the activities for employee satisfaction in continuation.

Turkish Airlines is distinguished internationally by its success rate and related growth trend. And in parallel to this ongoing process are important developments in human resources management. The Company has taken bold steps towards building a modern infrastructure

HUMAN RESOURCES

NUMBER OF PERSONNEL

18,882

15,85715,73714,206

12,750

20132012201120102009

18,882

AnnuAl RepoRt 2013

48

for human resources management. Compre-hensive projects that will lead to managerial and cultural changes are implemented within the Company. In short, Turkish Airlines’ greatest asset is its human resources, and the Company has transformed the dynamism of its young cadre which counted more than 36 thousand including the subsidiaries into an international success story.

Cabin and Cockpit CrewTurkish Airlines strengthened its position as a market leader in the last decade. In the coming period our Company will focus on innovation and brand leadership. The cabin personnel will be branded under the name of “Sky Stars”. A new policy based on innovative services, new service concepts reaching beyond customer expectations manifesting through the supplies used and the service style will be introduced. Another training program for cabin personnel in business class is also planned where the focus will be taking care of business class guests in the most exquisite way.

In 2013, 1,500 cabin personnel received Sky Stars training. It will be offered to whole cabin personnel during 2014, with an aim of increased professional refinement. . All these activities will contribute to sustain the corporate image. These training sessions will help us to meet our customers varying expectancies and needs. Our Company, flying to 243 different flight points, will be able to reply quickly to customers’ needs. Our prestigious brand will be known for its friendliness worldwide. We will offer Turkish hospitality with sincerity, friendliness and tolerance. We aim to become the first five star carrier among European Airlines. By the end of 2013, our passenger number increased to 48.2. Our cabin personnel, hosting our guests are serving at global hub points, where competition is high. To increase their adaptability especially in high potential local points and to safeguard high quality service, their service level is exami-ned through supervision flights.

In 2013 the Company focused on information management system projects, where deci-sion supporting information is consolidated. In the system regular and real time data was converted to information. Studies to establish DCMS (Digital Cabin Management System) as

a supportive information system started as well. The Purser’s Ipad’s will be installed with MCA (Mobil Cabin Assistant) application and this way management information system will be fed in real time. DCMS will contain another module for passenger information. This module will communicate any in-cabin breakdown to related units. Many other issues, such as Miles&Smiles, connected flights, traveling with children, special needs for handicapped, special meal requests, food and beverage preferences, previous travel history. This information will be viewed on screen in detail and in light of this information personally tailored services will be offered to our guests.

Another parameter installed in the mana-gement information system is flight based performance evaluation data. This data contains criteria, such as; degree of comprehension and adaptation to Company goals for cabin personnel, how defined tasks, which are within their duty and responsibility, are carried out. This information serves to maximize cabin per-sonnel members’ performance to the highest possible level.

Pursers are evaluated according to criteria such as adaptation to corporate culture, sense of corporate belonging and adaptability, by com-petency based performance evaluation. Pursers successful according to these criteria; will be chosen as instructors and will be coached to train new personnel during orientation.

In 2013 “THY Cockpit Team” took its place in our prestigious and strong brand. In this year of success, “THY Cockpit” created value as an essential part of the brand. According to growth strategy of our Company, 624 new cockpit personnel have been recruited in 2013. Cockpit personnel number exceeded 3,000 employees with recruitment of 450 foreign pilots from 42 countries. Cockpit personnel working at Turkish Airlines is regarded as a significant reference and our 380 pilots from European Union countries were guests nearly every day in an international publication as part of “Turkish Airlines’ Success Story”.

As of the end of 2013, 3,966 people (1,800 cabin personnel, 993 cockpit personnel, 1,173 ground personnel) were employed at Turkish Airlines.

HUMAN RESOURCES

OTHER SERvICES

3,966Personnel emPloyeD in 2013

49

International roadshows, international expos and events have been organized for new cockpit personnel recruitment. During these events, our foreign nationality pilots defined being a THY member as a “source of pride and a unique experience”.

Several projects went live with the efficient use of new technologies, proactive flight safety modeling and customer oriented approach:

In hardware and software matters, world standards have been achieved through the Electronic Flight Bag (EFB) project. Increase in flight safety, fuel economy and decrease cockpit workload were areas where considerable suc-cess was recorded.

The ACARS system, used only in a couple of companies worldwide, and in Turkish Airlines in Turkey, was activated in all our aircraft. The sys-tem enables planes to communicate real time with ground and each other in written form. In an incident where a passenger wrote a compla-

int about cabin temperature was transmitted via ACARS system to the cockpit and immediate fe-edback was given to the passengers. This case was reported in the news several times.

The PBN (Performance Based Navigation Pro-ject) enabled our aircraft to acquire RNP appro-ach authorization. As a result, flight safety and access to airports were increased. The autho-rization process for a higher RNPAR approach has already begun. Integrated Pilot Information Management System enables access to cockpit personnel information, which is distributed via one single platform. This project provided a considerable rise in efficiency in many divisions, supported manager decision mechanisms and enabled end users in business units to do analyses without need for any extra training.

An intense briefing was given regarding the procedures during SAFA audit. As a result awareness rose considerably and cockpit based findings rate came out as the best among

QUALITY AND CORPORATE SOCIAL RESPONSIBILITY

Turkish Airlines strengthened its position as a market leader in the last decade. In the coming period our Company will focus on innovation and brand leadership. The cabin personnel will be branded under the name of “Sky Stars”.

AnnuAl RepoRt 2013

50

HUMAN RESOURCES

European flag carriers according to SAFA audits. Instructor’s training sessions were held at the most prestigious TRTO’s abroad. The high success rate of the training resulted in a total of 104 TRI authorization in 2013.

An “Open Door Policy” was implemented with care. All employees were dealt with in a positive manner. Effective communication was monitored during every management process. Cockpit personnel’s sensible approach affected complaint rates considerably. Regarding noise infringements and airmiss there are better findings.

We pay great importance to customer satisfa-ction and lead an approach towards perfection. That way, many projects have been developed for the comfort of our guests. 637 pilots partici-pated in “Personnel Development and Support” program during 2013 to enable a better quality travel for our passengers.

In order to increase customer satisfaction, our guests were given information during all phases of their flights. Sample announcements were prepared for the standardization of all cockpit announcements. The importance of this issue has been discussed on several platforms.

The Crew Lounge, used by our crew before and in between flights was inaugurated with the “World’s Best Lounge for the World’s Best Team” slogan.

According to growth strategy 288 Assistant Pi-lots were appointed to first pilot. This number is higher than the sum of the past 3.5 years and is an important indicator of our pilots’ career path.

In recent year recognition was created cons-ciously regarding foreign language. Cockpit teams’ foreign language competence excelled and all our captain pilots entered foreign langu-age examination of SHGM in Ankara. The result was a 99.5% success.

Efficiency and Quality in Cabin and Cockpit Team PlanningWe aim to make correct team planning by inc-reasing passenger and employee satisfaction to the maximum, to ensure flight safety and to minimize costs.

One step to increase customer satisfaction is; to minimize team related delay time further. The rate of improvement over previous year is 94.3%. Technical competency of cockpit person-nel for flight safety and operation quality carries a big importance. Cockpit personnel, who have special certificates and special technical competence to serve this goal, rose to a level where any commercial and operational demand can be met.

Matching work load of the cabin personnel with the Company’s quality standards carries great importance for customer satisfaction, employee satisfaction and flight safety. When compared to global players our Company as a low “Unit Passenger per Cockpit Personnel” rate. This indicated towards Turkish Airlines high service quality goals.

Cabin and Cockpit Personnel Needs Analysis for 2014-2023Growth and quality based human resources policies are an important part of our Company’s 2023 vision. Annual cabin and cockpit personnel projection until 2023 has been calculated and communicated to responsible units for hiring. Fleet and flight network increase led to new recruitment needs. In 2013 a total of 1,905 cabin personnel joined our family, 987 being cockpit personnel.

HUMAN RESOURCES

Turkish Airlines most valuable asset is human resources. The Company turned out to be an international success story, with the help of its young cadre of 36,000 employees which includes those in the subsidiaries.

51

While growing Turkish Airlines takes special notice of people and their environment. When planning new investments, expanding our fleet and leveraging our technological infrast-ructure, we make our choices of technologies and methods that have the minimum negative environmental impact. We think about the health and safety of our workers and choose equipment and organizations with the lowest risk level.

We commit ourselves to minimizing possible hazards and disturbances.

We take precautions to keep greenhouse gas emissions and noise at the lowest possible level and we pay great attention to human health in all of our operations.

We are growing with our stakeholdersWe strive to create consciousness in all our emp-loyees and stakeholders of workplace health, safety and environment.

We want to leave a habitable world to next generations. With our stakeholders, we try to use our natural resources in the most effective and efficient way,


since we think not only about today, but also about tomorrow and next generations whom we view as an assurance for the future.

We RecycleAs part of recycling management we prefer the use of recyclable materials and support recycling.

Quality PolicyOur Company’s effective quality system carries an important weight in our steady commercial, financial and operational growth and its continu-ing success.

Turkish Airlines Quality SystemWe aim to,Conduct aviation operations according to the strictest safety and security regulations set by national and international civil aviation authori-ties, since our customers are directly a part of these operations,

• Ensure provision of offered services meet at least at the promised level for our guests,

• Reach a level of managerial maturity to pro-vide the best service to customers and to ensure its sustainability,

Turkish Airlines’ effective quality system carries an important weight in the Company’s commercial, financial and operational growth and its continuing success.


AnnuAl RepoRt 2013

52

• Not only meet customer expectations, but also go beyond their expectations with achieved service quality level and keep this level under constant control.

Turkish Airlines consistently monitors the busi-ness processes that lead to service quality, which is subsequently perceived by the customers.

Turkish Airlines went through several hundreds of audits. All these served a purpose as to the achievement of the Company’s goals in regard to Quality Systems.

Third Party and brought in products and services from vendors are reviewed as important as the Company’s products and services, offered to customers.

Any product or service must be equal or better in quality than Turkish Airlines’ products or services offered to the customers.

Turkish Airlines Quality System audits each pro-duct or service obtained from third parties and offered to Turkish Airlines customers directly or indirectly. In 2013 acquired products and services in each operation field were closely inspected and thus Turkish Airlines service standards were guaranteed.

Full marks to our Quality...Turkish Airlines went through many audits for safe and secure operation conditions and implemented management systems by several institutions, national and international civil avi-ation authorities being in the first place. Turkish Airlines succeeded each inspection and acquired operational authorizations and improved mana-gement system certificates, which guaranteed the Company’s sustainable success in the past.

Your Safety is First...SAFA Rate 0.3IATA Operational Safety Audit (IOSA) Certificate is issued by IATA every two years. In 2005 Turkish Airlines obtained the certificate for the first time and it means that the Company is approved as

a safe carrier internationally. Turkish Airlines’ success is based primarily on safe and reliable operations, which meets IOSA requirements.

Safety Assessment of Foreign Aircraft (SAFA) is a program run by European Aviation Safety Agency (EASA). Audits carried out among SAFA members’ results in a SAFA rating. Our Company acquired an improvement by 47% which is above European average and closed the year 2013 with 0.30. Turkish Airlines owes this performance to effective management of national and internatio-nal relations. Additionally in our Safety Assess-ment of Company Aircraft (SACA) program is implemented which follows the same method with the SAFA program. Turkish Airlines pay great attention to safety and security and makes investments accordingly. As a result the rate decreased to 0.30 from 1.16 (2011). Our numbers clearly speak for our success.

management systems are constantly being developed and renewed...Turkish Airlines acquired the ISO 9001 Quality Management System Certificate in 2006. It indicates towards the maturity of the Company’s business processes and reflects the solid base of the management system.

The Quality Management System went through another periodical audit in 2013 and the certifi-cate was re-approved. Our Quality System with continuing improvement systematics is a power-ful managerial tool, which adds value to business processes for Turkish Airlines customers.

Additionally, Turkish Airlines finalized a two year long project in 2013 and obtained certificates for Environment Management Systems (ISO 14001) and Occupational Health and Safety Manage-ment System (OHSAS 18001). Turkish Airlines carries a public responsibility and implements both management systems in its operations. The Company adopted a systematical approach and acts with environmental sensibility, guarantees health and safety of its stakeholders, recognizes and manages risks and predict emergencies in advance and takes the necessary precautions.


HUMAN RESOURCES

safa rate0.3

yoUr saFety is First...

Turkish Airlines’ success is based primarily on safe and reliable operations, which meets IOSA requirements.

53

Fuel management and EnvironmentAlthough advances in technology have made many aspects of our everyday lives increa-singly convenient, they have also posed ever greater risks for the natural, and hence human, environment. The greenhouse gas emissions produced by many advanced industries not only cause pollution, but also play a significant role in climate change.

According to IATA-published figures, it is estima-ted that the total number of people traveling by air between 2009 and 2014 will reach 3.5 billion. Turkish Airlines is taking the necessary steps to do its own part towards minimizing, to the greatest possible degree, the adverse impact that such an increasing number of passengers have on the environment. Its environmental policy calls, while also, and always, giving maximum attention to flight safety and security, feature ongoing efforts to achieve the most appropriate levels of fuel consumption, and hence to leave a cleaner and more livable environment for future generations through the most efficient use of natural resources.

Savings Activities in 2013 Financial value of prevented delays with the help of aircraft availability is 6,223,140 Euro.

• Fuel economy figures within the year are as follows:• Pilotage : 89.6%• Dispatch : 2.1%• Technical : 4.7%• Ground Operations/Jettison : 3.6%• As of yearend, CO2 emission was 81,844

tons less.• Consumed fuel improved for -6% for each

100 ASK over the previous year. In 2012 this value was 23.47 lt/100ASK. Today it is 22.04 and there is a considerable improvement in our efficiency. Initial measurements coming from our aircrafts modified with sharklifts in-dicate to 2.4% more efficient flight. When the modification of all A320 aircraft family with sharklifts is completed, there will be an an-nual 16-20 thousand (16-20 million US dol-lars) tons fuel saving (based on 2013 flight hours). All aircraft of A320 fleet will fly with sharklifts until the end of 2015.

• Within the year 2,614 luggage containers will be replaced by composite alternatives. Thus, an annual USD 3.5 million saving is expect-ed.

RISK MANAGEMENT

81,844 tons

6%

Decrase in carBon emission

Decrease in FUel consUmPtion Per 100 asK

AnnuAl RepoRt 2013

54

RISK MANAGEMENT

Financial Risk managementWithin the framework of its financial risk ma-nagement policies, the Company has defined the following elements of risk as fundamental to the health of its future cash flows and liqu-idity:

• The possibility of the Company being pre-vented from achieving its business objec-tives by changes taking place in its short-, medium-, and long-term cash position, and in its portfolio investments.

• The financial impact of changes in aviation fuel and carbon emission certificate prices.

• The financial impact of changes in the mar-ket value of aircraft financing, of FX-de-nominated debt, and on cash owing to in-terest rates movements.

• The possibility that earnings and expendi-tures may be mismatched owing to differ-ences in the exchange rate of one currency against another.

• The potential for losses in the event that a domestic or foreign financial institu-tion, or its counterparties, default on de-posit, derivative, or other transactions.

To manage such risks, priority is given to ma-king use of natural hedging methods. In situ-ations where this approach proves insufficient or impractical, recourse is made to financial risk hedging in derivative markets through the employment of strategies developed to prote-ct the Company against potential risks arising from possible movements in commodity pri-ces and/or in currency-exchange and interest rates. The effectiveness of existing strategies developed to hedge against such financial risks is constantly monitored by the Turkish Airlines Treasury and Risk Management Com-mission, such that alterations and improve-ments may be effected to account for changes in market conditions.

Cash Flow Risk managementCash flow risk is defined as the potential for medium- and long-term movements (inco-ming and outgoing) in the Company’s portfolio investments and/or cash positions to prevent

the Company from achieving its business ob-jectives. Financial transactions in the aviation industry tend to be of a much longer term na-ture than in many other lines of business. Con-sequently, having a sound cash management policy is one of the Company’s prime issues of concern.

To enable the Company to most effectively manage its medium- and long-term liquidity and financial risks, EUR, USD, and TL cash flow projections are made and updated monthly. For these projections, the Company’s exchan-ge rate and fuel price forecasts for the period ahead are reconsidered and revised monthly so as to ensure that the information on which projections are based is both current and reli-able. The results of cash flow projections are presented to the Turkish Airlines Treasury and Risk Management Commission, thereby pro-viding it with essential information on which to base the Company’s investment and financing decisions. Each month’s actual performance figures are also compared and contrasted with the projections, and the results of these stu-dies analyzed.

Commodity Risk management

Fuel Price Risk ManagementThe Company makes use of swap- and opti-on-based derivative instruments to mitigate the impact of fuel price movements on its avi-ation fuel costs, and to ensure that such costs are at least kept within predetermined limits where they cannot actually be anchored. In order to shield both its profitability and cash flows against volatility that may arise from fuel market movements, changes and poten-tial future prices of past crude oil and jet fuel, as well as price correlations and their own price volatilities are taken into consideration for analytical purposes. Turkish Airlines, with contractual amounts corresponding to around 50% of its annualized jet-fuel consumption figures as projected for the next twenty-four months, and using various instruments for determined price ranges, through two barriers swaps (limited from up) written on crude oil


The Company makes use of swap- and option-based derivative instruments to mitigate the impact of fuel price movements on its aviation fuel costs, and to ensure that such costs are at least kept within predetermined limits where they can actually be anchored.

55

RISK MANAGEMENT

and band derivative instruments with four bar-riers without cost band are used to gradually prevent financial risks. When market prices exceed pre-determined levels and there is an expectation that these price levels will not be in force for long, related transactions are put hold by the Company.

Turkish Airlines closely monitors the recent developments and structural changes in fuel prices and market dynamics. By evaluating the developments in fuel market and taking strategies implemented in aviation industry into account; a risk prevention methodology for fuel is determined. Accordingly several studies for any necessary updates in the future are continued.

When the impact of current changes in Brent type crude oil price is analyzed, estimated oil costs according to different price scenarios are submitted in the graph below.

Carbon Emissions Risk ManagementEffective as of 1 January 2012, the aviation industry was included within the scope of the European Union Emission Trading Scheme (EU-ETS). As a result of this inclusion, Turkish Airlines (like all other airlines flying in or out of European airports) is required to comply with EU ETS regulations.

Under this emission trading scheme, airlines must buy Carbon Credits in the market in situ-ations where they exceed the maximum car-bon emission limit prescribed by the authori-ties to which they are responsible. According to this, Turkish Airlines has developed hedging strategies to protect itself against financial ris-ks that might arise from its having to purchase such credits. The plan is to make use of de-rivative instruments as a means of mitigating this risk.

%50

50%

48%

46%

44%

42%

40%

38%

35%

33%

31%

29%

27%

25%

23%

21%

19%

17%

15%

13%

10%

8% 6% 4% 2%

%40

%60

%30

%20

%10

%0

M+1

M+2

M+3

M+4

M+5

M+6

M+7

M+8

M+9

M+1

0

M+1

1

M+1

2

M+1

3

M+1

4

M+1

5

M+1

6

M+1

7

M+1

8

M+1

9

M+2

0

M+2

1

M+2

2

M+2

3

M+2

4

RISK PREvENTION METHODOLOGY IMPLEMENTATION RISK

TURKISH AIRLINES PETROLEUM MARKET PRICING SCENARIO (AS of 31 DeceMber 2013)

Turkish Airlines Risk Prevention Rate

16.00

14.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00

60 70 80 90 100 110 120 130 140 150

Turkish Airlines Price Market Price

• When the price of a barrel of crude oil is USD 150 the cost to the company is USD 145.• When the price of a barrel of crude oil is USD 120 the cost to the company is USD 118.• When the price of a barrel of crude oil is USD 90 the cost to the company is USD 91.• When the price of a barrel of crude oil is USD 60 the cost to the company is USD 66.

Us$ /Barrel

AnnuAl RepoRt 2013

56

Within this scope, and as one that executes EUA, EUAA, ERU and CER transactions, the Company has obtained certificates to be used within certain periods in 2012 and 2013.

Interest Rate Risk managementUnder the heading of interest rate risk mana-gement activities, the Company keeps regular track of possible changes in its costs arising from interest rate movements by monitoring and analyzing the FX markets, managing its debt structure, and determining its sensitivity to interest rate movements based on analy-ses of the weighted average terms of its debt exposure. In order to better manage interest rate risk, the Company engages in hedging with the aim of locking the interest rates on part of its debt portfolio for the credit period where possible, or at least of ensuring that interest rates remain within a predetermined band where not.

At the same time, the Company manages the interest rate risk arising as a result of the yield-focused assessments of its cash holdin-gs in order to optimize the relationship betwe-en maturity return. Priority is given to cash flow planning.

Exchange Rate Risk management Exchange rate risk is defined as the potenti-al for changes taking place in the Company’s cash flows and revenues on account of mo-vements in exchange rates. The Company se-cures a substantial volume of its earnings in Euros, but also incurs significant expenditure in US dollars and Turkish liras. Such a revenue and expenditure structure exposes the Com-pany to serious risk arising from relative mo-vements in these currencies’ exchange rates, which have been quite volatile of late, and are likely to remain so going forward.

Turkish Airlines sets cash flow planning as a priority. Available cash is managed return oriented. As a result the arising interest rate risk is managed by keeping maturity-return relationship at an optimum level.

RISK MANAGEMENT

RISK MANAGEMENT

57

In order to manage credit risk arising from Turkish Airlines’ making use of derivative transactions, “Derivative Framework Agreement” was signed with national financial institutions and “International Swaps and Derivatives Association” (ISDA) and other required agreements with international financial institutions.

ORGANIZATION CHART

Turkish Airlines’ exchange rate risk manage-ment activities focus on reducing the impact of exchange rate volatility by ensuring that the relative currency mixes of its revenue and expenses items are reasonably proximate. To this end, the particular currency (or currency mix) on the basis of which a contract is to be signed is determined in such a way as to ba-lance the Company’s revenue and expenses streams and avoid the emergence of situati-ons that are disadvantageous to it. Hedging is the primary method of recourse in managing the Company’s exchange rate risk exposure.

On the other hand, the composition of revenue and expenses from a variety of currencies, na-tural risk prevention methods are implemen-ted. Even so our Company is on long position in Euro and on short position in USD and TRY. Financial risks stemming from adverse move-ment in exchange rates are minimized by imp-lementation of derivative transactions. In this context, cash flow of our Company is monthly updated. In prospective cash flow estimations, monthly estimated positions of EUR, USD and TRY are calculated. Following for the next 24 months, monthly EUR sales at a constant and fixed rate and USD and TRY buy is carried out for risk prevention through forward rate agre-ements. With the help of these transactions in USD and TRY a risk prevention by 30% aga-inst the following month’s short position and prevention at a lesser amount for the coming months are expected.

Counterparty Risk managementIn order to limit the impact of the ongoing glo-bal economic on Turkish Airlines, the nature of whose business requires it to interact with many domestic and international financial ins-titutions across a broad range of commercial spheres, a variety of measures are taken to deal with its exposure to the risk of default by one or more of the counterparties with which it has dealings. Accordingly, the Company ad-heres to an approach that involves abiding by

equally-applicable, objective criteria for each counterparty with which there is a deposit or derivative relationship. The underlying aim is to reduce counterparty risk on a long-term ba-sis. The Company enters into agreements with financial institutions to cover the risks arising from derivative contracts.

When entering into deposit and derivative ag-reements, attention is given to the credit risk ratings assigned to financial institutions by international rating agencies. Wherever pos-sible, the Company avoids dealing with any financial institution whose rating is below a predetermined threshold. In the case of those financial institutions that surpass the thres-hold, the Company assigns limits based on risk levels determined according to a spe-cified credit risk assessment methodology, and works with them on that basis. The credit ratings of financial institutions with which the Company has dealings, and their assigned li-mits, are also reviewed periodically. Should it be ascertained that a financial institution’s credit rating has deteriorated, or where credit default spreads (CDS) increase, transactions with the related organization are closely scru-tinized. And should the credit rating fall below specified limits, the Company keeps a much closer watch on its dealings with that concern, and may even unilaterally sever its relations-hips if need be.

To manage the credit risk to which it may be exposed through the use of derivative instru-ments, the Company enters into framework agreements with domestic financial insti-tutions, into ISDA (International Swaps and Derivatives Association) agreements with fo-reign financial institutions, and into other ag-reements and conventions as may be deemed necessary. Issues specifically related to credit risk management are governed by a separate CSA (credit support annex) agreement. Based on such agreements, credit risk is reduced through offsets that take place at regular in-tervals.

AnnuAl RepoRt 2013

58

OrganizatiOn Chart

Senior Vice President of Subsidiaries

Media Relations; Senior Vice President

Line Maintenance; Senior Vice President

Technical; Senior Vice President

Security; Senior Vice President

Quality Assurance; Senior Vice President

Chief Officer (Investment

and Technology)

Chief Officer (Finance)

Chief Officer (Human Resources)

Investment Management; Senior

Vice President

Finance; Senior Vice President

Personnel Management;

Senior Vice President

Corporate Development and Information

Technologies; Senior Vice President

Accounting and Finance Control;


Recruitment Organization and Projects; Senior Vice President

International Relations & Alliances;


General Purchasing; Senior Vice President

Training; Senior Vice President

Social and Administrative

Services; Senior Vice President

Crew Planning; Senior Vice President

risk ManageMent

59

Private Office Director

BOARD OF DIRECTORS

EXECUTIVE COMMITTEE

CEO & President Principal Staff Officer

Inspection Board; Senior Vice President

Flight Training; Senior Vice President

Legal;Senior Vice President

Corporate Security; Senior Vice President

Chief Officer (Marketing)

Chief Officer (Commercial)

Chief Officer (Flight Operations)

Corporate Communication;


Cargo; Senior Vice President

Flight Operations; Senior Vice President

(Chief Pilot)

Production Planning; Senior Vice President

Ground Operations; Senior Vice President

Cabin Crew Managing; Senior Vice President

Revenue Management; Senior

Vice President

Regional Flights; Senior Vice President

Integrated Operations Control; Senior Vice President

Marketing and Sales; Senior Vice

President (1st Region)

Catering; Senior Vice President


President (2nd Region)


President (Domestic)

COrpOrate gOvernanCe prinCiples COMplianCe repOrt

AnnuAl RepoRt 2013

60

CORPORATE GOvERNANCE PRINCIPLES COMPLIANCE REPORT

SECTION I – CORPORATE GOVERNANCE PRINCIPLES COmPLIANCE STATEmENT

Embracing the principles of transparency, jus-tice, responsibility and accountability, as well as perfectly publicizing and representing Tur-key and Turkish Aviation Sector in the interna-tional platform, The Company complies with all the mandatory Corporate Governance Prin-ciples included in the Appendix of the Corpo-rate Government Communiqué n.II-17.1 of the Capital Markets Board (CMB) and pays utmost attention to comply with the non-mandatory principles. With the assent n.29833736-199 441-1915 dated 27 February 2013 of the CMB, The Independent Member of the Board of Di-rectors Muzaffer Akpınar, was exempted from the Article “g” of the principle n.4.3.6 regulating the issue of “not being a Board member of the Company more than six years in the last ten years”. The Company continues to develop the corporate governance approach and - cons-tantly increases its level of compliance to the corporate governance principles.

SECTION II – SHAREHOLDERS

2.1 Investor Relations DepartmentThe Investor Relations Department, which reports directly to the CFO, Mr. Coşkun Kılıç, has been established as a unit to oversee the communication of accurate, consistent and ti-mely information to our national and interna-tional investors, maintaining communication and exchanging information with the Board of Directors and capital market supervisors and participants, as well as monitoring compliance with regulations and Articles of Association for the exercising of shareholders rights, and the compliance of public disclosures with all kinds of regulations.

During the 2013 fiscal year, Investor Relations Department participated 16 investor conferen-ces and road shows with the aim of sharing the financial, operational and strategic deve-lopments about the Company with the inves-tors and analysts, made 12 teleconferences and organized an Investor Webcast meeting.

In these conferences and teleconferences, 431 investors/analysts from 264 corporations and funds were met at the Company Headquarters or at the Investors’ offices.

During the year of 2013 around 2500 informa-tional requests were made to our Company by e-mail.

In addition to the applications made by e-mail, many investors and shareholders were also informed by telephone.

Our Investor Relations personnel and their contact information is given below:

Duygu İnceözInvestor Relations -Manager

Licenses: • Capital Market Activities Advanced Level

License • Corporate Governance Rating Specialist Li-

cense

Tel: +90 212 463 6363 Ext.: 13630E-mail: [email protected]

Özge ŞahinChief of Investor RelationsTel: +90 212 463 6363 Ext.: 11841E-mail: [email protected]

Can AslankanInvestor Relations SpecialistTel: +90 212 463 6363 Ext.: 12195E-mail: [email protected]

mehmet Fatih KorkmazInvestor Relations SpecialistTel: +90 212 463 6363 Ext.: 12187E-mail: [email protected]

2.2 Shareholder’s Right to Obtain InformationWithin the scope of the CMB Communiqué On Principles Regarding Public Disclosure Of Ma-terial Events and Communiqué On Corporate Governance, relevant provisions of the Turkish Commercial Code and Borsa Istanbul (BIST) regulations; our Board of Directors has estab-

lished a Public Disclosure Policy to determine the general principles and procedures regar-ding public disclosure and how to share infor-mation with the shareholders, investors, other participants in the capital market and other relevant stakeholders.

The Board of Directors of our Partnership has formed a Disclosure of Information Policy with the aim of determining the and sharing infor-mation – in which manner, how often, and in which methods – In the course of implemen-ting the Public Disclosure Policy; the aim is to provide all stakeholders including sharehol-ders, investors, employees, and customers with punctual, accurate, complete, compre-hensible, easily accessible information, events and developments that might influence the investment decisions of the investors.

Within this scope, during the fiscal year 2013, 67 Material Disclosures were made by our Company, while no additional information was demanded by CMB and BIST regarding these disclosures. Our Company has used its best efforts to ensure that its material disclosures were communicated to investors, sharehol-ders, institutions and corporations simultane-ously, in due course and in an understandable, accurate and interpretable form.

As per the ‘Regulation Regarding the Websites of Capital Companies’ dated 31 May 2013, of the Ministry of Customs and Trade, the requ-ired content can be accessed through the “In-formation Society Services” link given on the homepage of our Company’s website.

On the other hand, in order to ensure the sha-reholders’ rights to obtain information, an In-vestor Relations website (investor.turkishair-lines.com) is available – accessible also from our Company’s corporate website – where investors and other stakeholders can access all financial and operational data, material disclosures and all announcements regarding the utilization of shareholders’ rights.

In the Articles of Association there is no pro-vision regulating the request for appointing a Special Auditor.

ORGANIZATION CHART

61

2.3 General Assembly meetings An Ordinary General Assembly Meeting was held on 29 March 2013, to review 2013 ac-counts and operations at the VIP Meeting Room of the General Administration Building at Atatürk Airport Yeşilköy-Bakırköy/İstanbul – Company Headquarters’ address. Sharehol-ders representing TL 893,729,919.42 of the Company’s issued capital of TL 1.200.000.000 attended the Ordinary General Assembly Me-eting, where there was no media attendance. As per the Turkish Commercial Code n.6102 and CMB legislation, the General Assembly was convened in physical and electronic envi-ronment.

Invitation to the Ordinary General Assembly Meeting was announced in the Turkish Trade Registry Gazette, Electronic General Assemb-ly System within the Central Registry Agency, Public Disclosure Platform, and Investor Rela-tions website of the Company.

As per Article 437 of the Turkish Commerci-al Code, financial statements, consolidated financial statements, annual activity report of the Board of Directors, audit reports and profit distribution proposal of the Board of Directors were presented for the review of the sha-reholders at the Company’s Headquarters and branches prior to the General Assembly mee-ting in line with the schedules stipulated in the legislation. At the General Assembly Meeting, existing practice endeavors to respond to sha-reholder questions verbally, and to address more comprehensive questions in writing; however since no questions requiring a writ-ten answer were received during this period, verbal explanations were deemed adequate. At the General Assembly, there weren’t any agenda proposals made by shareholders.

General Assembly Meeting Minutes and At-tendance List are publicly shared on the same day via Public Disclosure Platform, and also presented on the Company’s Investor Relati-ons website to inform the shareholders. Ge-neral Assembly Meeting Minutes and other documents regarding previous years are also available on the Company’s Investor Relations website.

Within the framework of our Donation policy accepted by the General Assembly, informati-on about the donations and charities made in this period is discussed as a separate agenda item at the General Assembly. The Donation Policy of our Company is available on our In-vestor Relations website for the information of our shareholders.

2.4 Rights to Vote and minority Rights Voting rights are set out in Article 31 of our Ar-ticles of Association, as follows:

“Each shareholder or proxy attending the ordi-nary or extraordinary Shareholders Assembly Meetings will be vested with one vote for each share, provided that the provisions of Article 6/d of the Articles of Association are reserved.”

Under Clause 5 of Article 14 of our Articles of Association;

The Board member representing Group C sha-res is required to attend the meeting, and his affirmative vote is required for the effective-ness of the resolutions of the Board of Direc-tors regarding the following issues: • Resolutions that will clearly have an ad-

verse effect on the mission of the Incorpo-ration as indicated in Article 3.1 of the Arti-cles of Association;

• Any suggestion to be made to the Share-holders Assembly for any modification of the Articles of Association;

• Increase of the share capital; • Approval of the transfer of registered

shares and registration of the transfer in the Share Register;

• Any transaction, based on each contract, which exceeds 5% of the total assets of the Incorporation as indicated in the latest bal-ance sheet submitted to the Capital Markets Board, and which is directly or indirectly binding for the Incorporation, any resolution which will place the Incorporation under any form of commitment, (provided that in the event that the public share in the Incor-poration has decreased below 20% of the

Incorporation’s share capital, the provisions of this clause will automatically terminate);

• Merger, termination or liquidation of the In-corporation;

• Any resolution on the cancellation of any flight route, or for a remarkable decrease in the number of flights, excluding those routes which do not generate revenue to meet its own operating costs based on ex-clusive market conditions, or through other sources.

• The privileges of the Group C share may only be limited by the High Commission of Privatization, or any other public institution which has assumed such duties.

• No mutually-affiliated relationship exists with any other company. Our Articles of Association do not contain provisions for accumulated voting.

2.5. Dividend Rights The determination and distribution of profits from our Company are set forth in Article 36 of our Articles of Association. There are no privi-leges in dividend participation.

The General Assembly shall determine the time and method of payment of dividends in accordance with the directives of the Capital Markets Board. In this regard, our Company’s dividend distribution policy as formulated by the Board of Directors by taking the strategic targets, growth trend, financial needs and the expectations of the shareholders of the In-corporation into consideration, and under the provisions of the Turkish Commercial Code, Capital Markets Law, other related legislation and its Articles of Association, and this policy is available on the Investor Relations website of the Company.

2.6 Transfer of Shares According to the Article 6 of our Company’s Ar-ticles of Association regarding “Shareholders Nature, the shares held by foreign sharehol-ders may not exceed 40% of the total issued capital of the Incorporation. In calculating the rates of the shares held by foreigner sharehol-ders, the rate of foreign shareholding in the


AnnuAl RepoRt 2013

62

formation, Trade Registry information, contact information and frequently asked questions, are given. On the Investor Relations website, in the “contact” section, investors are directed to the [email protected] e-mail address for any questi-ons and opinions.

3.2 Activity ReportOur Company’s annual and interim activity re-ports contain information listed in the Corpo-rate Governance Principles.

PART IV - STAKEHOLDERS

4.1. Informing the Stakeholders In our announcements to the public of infor-mation regarding our Company, in addition to forecast and material disclosure announce-ments, other information and statements dee-med to be of interest to other beneficiaries are delivered in a timely and clear manner through the appropriate communication channels. In addition to stakeholders and investors, supp-liers, financial institutions and other interes-ted parties may obtain information about our company via press releases, activity reports and our website. Personnel receive informati-on regarding the Company’s general practices and operations through internal announce-ments via the Company intranet site, which is actively used. In addition, the monthly maga-zine Empathy is published for inter-company communication. The internal communication channels of our Company are designed to be open to all stakeholders, with contact infor-mation also announced on the Company’s web site. There is no Company practice that in any way obstructs stakeholders in contacting the Corporate Governance Committee or Audit Committee.

4.2. Stakeholders taking part in managementOur Company organizes meetings with in-ternational and domestic sales agents, Our Company’s sales teams and personnel from different levels. Besides these meetings, our Company also organizes management me-etings regularly each year., The national and international managers of our Company, up-per management and the Board of Directors

participate in these meetings. Opinions are exchanged on relevant matters both at these meetings, by workshops and panels.

In addition, a proposal system is used in our Company. Through this system, employees can propose opinions for improvement and development within the Company, with those proposals deemed appropriate being imple-mented.

4.3. Human Resources PolicyOur Company adheres to the Human Resour-ce Procedure established by our Board of Di-rectors. With sub-units structured along these procedures, all personnel activities are reali-zed within the framework of legislation.

Relations with employees are realized throu-gh the Personnel Relations Directorate. Mr. Ebubekir Baysal, as Chief of Personnel Rela-tions, is responsible for improving communi-cation with employees, as well as for answe-ring questions, solving problems and making announcements of interest to all employees. Questions and complaints, reaching the Dire-ctorate through various means are solved in coordination with the related departments. To date, among notifications made to the Ethics Line Board, which is the application point for our Company’s employees with regards to discrimination and conflict of interest have inc-luded cases of direct or indirect discriminati-on. In order to resolve these applications, the Ethics Committee has decided to listen to the related personnel, in terms of gathering the opinions of relevant departments, thereafter acting upon the results received. Other than this, there were no claims of discrimination and conflict of interests. Up-to-date job desc-riptions of our Company’s staff are published on THY Intranet website.

All employees can access their job description via the intranet page. A Performance Mana-gement System Guideline has been prepared that covers performance criteria. Performance Management Procedure preparations are on-going.

shares held by the shareholder holding Group A shares, which are not open to the public, will be taken into consideration too.

As per the Article 7 of the Articles of Associ-ation regarding “Transfer of Shares”, share transfers are subject to the Turkish Commer-cial Code, Capital Market Legislation and Civil Aviation Legislation.

Issues regarding Shareholder Nature and Transfer of Shares and implementation prin-ciples and justifications are specified in the relevant articles of the Articles of Association, and are also available on the Company’s In-vestor Relations website.

SECTION III – PUBLIC DISCLOSURE AND TRANSPARENCY

3.1 Corporate Website and Its’ Content Our Company’s corporate web address is “www.turkishairlines.com” and Investor Rela-tions web address is “investor.turkishairlines.com” and both websites also have an English version. Information on the Company’s corpo-rate website and the Investor Relations websi-te should be equal and/or consistent with the disclosures pursuant to related articles of le-gislation; they may not contain contradicting or deficient information. The Investor Relations website covers the following subjects listed in the Corporate Governance Principles; current Partnership structure, the updated version of the Company’s Articles of Association, as well as all the amendments that are published on Turkish Trade Registry Gazette, General As-sembly Meetings agenda, proxy form, list of attendants, additional information and mee-ting minutes, Activity Reports, Financial Sta-tements, commercial activity data, Company presentations, Corporate Governance Princip-les Compliance Reports, information on the Board of Directors and Committees, Material Disclosures , Code of Ethics, Policies (Profit Distribution Policy, Public Disclosure Policy, Remuneration Policy, Donation Policy), infor-mation regarding the transactions with the “related parties”, share information, analyst in-



63

In addition, our Company’s personnel are unionized, and as such work under a collec-tive bargaining system. Employee/employer relations are conducted in an effective and results-oriented manner at all levels and on any subject concerning collective bargaining and personnel and representatives appointed by the union in numbers and percentages as specified in the latest legislation and by union directors. Additionally, training services are provided to all our personnel.

4.4. Code of Ethics and Social Responsibility Our Company continues its practices in accor-dance with its flag carrier identity, with the pro-vided service quality and social responsibility, both domestically and internationally. Our Bo-ard of Directors has prepared a Code of Ethics within the framework of Corporate Governan-ce Principles, which is also published on our website. In addition, job descriptions are pre-pared for employees. It is required that they behave along accepted principles in business life, and to be respectful in their words and de-eds with regards to legislation, ethical values, social norms and the environment. An Ethics Line Board has been established to enable the Company’s employees Our Partnership conti-nuous to carry out all its activities in and out-

side the country by taking its responsibilities on the climate, environment and social issues into consideration. Environmental and Social Responsibility Report composed of all tasks carried out regarding these responsibilities is available in English on the Investor Relations website.

Our Company, the main sponsor of the “Euro-league Basketball Championship” which is the biggest basketball organization of Europe, pioneers many social projects for the disab-led with the support of the basketball teams, within the framework of “One Team” project. Moreover, support is given to a number of pro-jects carried out by “Turkish Red Crescent” and “AKUT Search and Rescue Association”. There has been no case against the Company in Tur-key regarding environmental damage. PART V – BOARD OF DIRECTORS

5.1. Structure of the Board of Directors and its Formation The Board of Directors is comprised of nine members elected by the General Assembly. At least eight out of nine Board Members should be elected from among Class A shareholders with the highest vote, and one member should be chosen from among the Class C share sha-

reholders. At least six Board Members, inclu-ding the Board Member representing the Class C share, must be Turkish citizens. The term of office for Board members is 2 (two) years. The General Assembly may terminate the mem-bership of a Board Member before the end of his/her term. Board Members whose term has expired may be reelected.

Three members of the Board of Directors are appointed to the Executive Committee, and the other six are non-executive members. Among the non-executive Board of Directors three are independent members of the Board. Sin-ce the aviation industry has a dynamic nature, were the Board of Directors and President of the Executive Committee the same person, it would create uniformity. Therefore, at our Company the President of the Board of Dire-ctors and Executive Committee is the same person, and the CEO is not the President of the Board of Directors.

Information on the Members of the Board as of 31.12.2013:

name surname officestart date

of the officestatus of

independency committees participated and office

Hamdi Topçu Chairman, Board of Directors 01.01.2010 Non-Independent Executive Committee / Chairman

Prof. Dr. Cemal ŞanlıDeputy Chairman, Board of Directors 01.01.2010 Non-Independent Executive Committee / Deputy Chairman

Doç. Dr. Temel Kotil CEO, Member of the Board 26.04.2005 Non-Independent Executive Committee / Member

Mehmet Büyükekşi Member of the Board 03.03.2004 Non-Independent Corporate Governance Committee / Member

Muzaffer Akpınar Member of the Board 24.04.2007 Independent Financial Audit Committee / Chairman

İsmail Gerçek Member of the Board 08.04.2011 Non-Independent Corporate Governance Committee / Member

Prof. Dr. Mecit Eş Member of the Board 29.03.2013 Independent Financial Audit Committee / Member

Naci Ağbal Member of the Board 10.10.2012 Non-Independent

Mehmet Nuri Yazıcı Member of the Board 10.10.2012 Independent Corporate Governance Committee/ Chairman


AnnuAl RepoRt 2013

64

The résumés of Board Members, their office tenure and duties beyond the Company are presented in the Activity Report and on the Company’s website. Independency Declarati-ons of independent members are announced publicly via the Public Disclosure Platform and are attached to the activity report.

5.2. Activities of the Board of DirectorsThe activities of the Company’s Board of Dire-ctors are specified in Article 14 of the Articles of Association;

The Board of Directors shall meet whenever necessary and at least once a month under all circumstances. The meeting venue will be at Company headquarters. Other venues may be chosen by a Board decision. Matters to be discussed at Board meetings shall be specified on an agenda to be communicated to Board Members prior to the meeting. Invitations to Board meetings shall be made at least three days prior to the actual meeting. Board of Di-rectors meets, with a quorum of at least six members. Decisions of the Board of Directors require the positive votes of at least five mem-bers. Members, who have not attended four consecutive meetings, or six meetings in one year without excuse accepted by the Board of Directors, or for a justified reason are conside-red to have resigned from office.

Issues that will be applicable provided that the members of the Board of Directors represen-ting Group C shares attend the meeting and cast an affirmative vote are specified in this report’s section 2.4 on the “Rights to Vote and Minority Rights”.

During 2013, the Board of Directors met 42 times and passed 228 decisions. Among the discussed matters, there are no related party transactions or transactions of important na-ture, which are not approved by independent board members and that require submission to the General Assembly.

Employer’s Liability Insurance is made by our Company, with an insurance coverage of USD 25 million, that covers the damages the Director is requested to pay as a result of not fulfilling his/her responsibilities with sufficient scrutiny and of the fault, neglect or mistakes he/she made while performing his/her tasks.

5.3. Committees within the Board of Directors, Number, Structure and IndependenceThe following committees have been formed under the organization of the Board of Dire-ctors within the framework of TCC and CMB legislation. Nomination Committee, Early Identification of Risks Committee , and a Re-muneration Committee have not been formed. Instead it was approved for these duties to be transferred to the Corporate Governance Committee. The members of the Financial Audit Committee and Corporate Governance Committee have been determined by the Bo-ard of Directors and publicly announced. The assigned positions, and working principles are set by the Board of Directors.

Turkish Airlines Corporate Governance CommitteePresident: Mehmet Nuri YazıcıMembers: Mehmet Büyükekşi, İsmail Gerçek

The Corporate Management Committee re-ports directly to the Board of Directors. It supports and helps the Board of Directors with practices in the following areas: The Company’s compliance with internationally approved Corporate Management Principles, determining Board of Directors and Senior Managers, evaluation of wages, awards and performances and career planning, as well as investor relations and public disclosure mat-ters. The Corporate Management Committee reviews the system and processes formed and will be formed for performance increasing management practices, evaluates them and gives recommendations.

Turkish Airlines Financial Audit CommitteePresident: Muzaffer Akpınar Member: Prof. Dr. Mecit Eş

The Financial Audit Committee directly reports to the Board of Directors. It supports and as-sists the Board of Directors in the following areas: The compliance of Company practices with national and international codes and le-gislation, improving work processes through audit and coordinating work on information transparency. The Audit Committee is respon-sible for taking all precautions necessary for any kind of internal and external audit to be executed in a sufficient and transparent man-ner; and to carry out the duties, subject to Capital Markets Board legislation. Financial Audit Committee members are selected from among Independent Board Members.

5.4. Risk management and Internal Control mechanism

Risk management mechanism An effective risk management strategy at our Company is critical in taking under control potential risks inherent in the airline industry, which is prone to fierce competition, and to ensuring sustainable growth. In an effort to provide a reasonable degree of security aga-inst possible shocks by minimizing sensitivity to fluctuations, particularly those relating to fuel and carbon emission prices, interest ra-tes cash flow and exchange rates, as well as counterparty risk, the Financial Risk Manage-ment Department devises the Company’s Fi-nancial Risk Management strategy, and works towards the management of actual/potential financial risks the Company is exposed to.

Addressed as a matter of first priority within this framework, hedging in relation to fuel prices, amongst the Financial Risks the Com-pany is exposed to, commenced in June 2009. Within the market experience during those years, number of instruments were increased gradually and hedging is ongoing within the framework of the dynamic strategy.



65

In order to minimize the impact of exchange rate fluctuations, regarded as a major risk element in view of the Company’s field of ac-tivity and to keep the risks that can arise from potential differences between forecasted and actualized income and expenses under cont-rol , a proactive exchange rate policy is imp-lemented based first and foremost on natural risk management for exchange rates, by also taking into account the evaluation of the avai-lable cash portfolio.

In addition to this, the aim of the strategy laun-ched in 2013 June is to minimize the financial risk that can arise as a result of the possible negative fluctuations in FX, by using derivative transactions. In this context, upon determining the EUR, USD and TRY currency positions anti-cipated for each month as a result of the Com-pany’s monthly updated cash flow forecasting study, financial risk prevention is gradually actualized by using forward contracts with the aim of selling EUR at a fixed rate and buying USD and TRY within the next 24 month period for a portion of these currency positions.

In addition, the Company established its liabi-lity in relation to carbon emissions, laid down the strategy to protect against carbon emis-sion risk, and works as necessary within the framework of the Carbon Emission Trading System.

Internal Control mechanism:Within our Company, there is an Audit Board that;• audits, with a systematic and disciplined

approach, the Company’s activities, corpo-rate governance, effectiveness of risk and control processes, and

• provides consultancy and assurance on the issue of efficiency and effectiveness of these processes, and

• presents opinions and suggestions.

In this respect, the Audit Board reports and counsels to the Senior Executive management about the issues listed below and supervises whether the findings and recommendations are fulfilled or not;• conducting the Company’s activities in com-

pliance with the legislation, Partnership’s internal regulations, agreements, specified strategies, policies and targets,

• good governance, effective management of internal control and risk processes,

• effective and efficient utilization of the Com-pany’s resources,

• providing reliable, consistent and updated data,

• continuous improvement of the units and processes,

• improvement of Company services are to the quality that will provide the highest level of customer satisfaction,

• effective communication of the information obtained during audits to the necessary units of the Company,

• coherence and coordination among the units,

• detection of faults, fraud and misconducts that can cause a loss in the income and as-sets of the Corporation and implementation of measures.

5.5. Strategic Targets of the Company The Board of Directors shall approve the stra-tegic targets set out by the management and continuously and effectively monitor these targets, as well as the activities of the Com-pany and its past performance. In doing so, the Board shall strive to ensure compliance with international standards, and wherever neces-sary, take preemptive action to potential prob-lems. The mission of the Company as it appe-ars in Article 3 of the Articles of Association is indicated below:

a) To develop the Company’s standing as a global airline by expanding the coverage of its long-range flight network.

b) To develop the Company’s standing by making its technical maintenance unit a major regional technical maintenance re-source.

c) To develop the Company’s standing as a service provider in all strategically im-portant aspects of civil aviation, including ground handling services and flight trai-ning.

d) To defend the Company’s standing as the leader of the domestic airline industry.

e) To provide uninterrupted, and superi-or-quality flight service by entering into a collaborative agreement with a global air-line alliance that will complement its own network in such a way as to advance the Company’s international image and en-hance its marketing abilities.

f) To defend and improve upon Istanbul’s re-putation as a regional aviation hub.

In its capacity as the flag carrier of the Republic of Turkey in the civil aviation industry, to be a leading European airline and an active global player by virtue of its flight safety and security record, its product diversity, its service quality, and its competitive stance. Our company Vision; a. Continue sustained growth above the in-

dustry average b. A zero accident and crash record c. The most envied service levels worldwide d. Unit costs equal to those of low-cost car-

riers e. Sales and distribution costs below industry

averages f. Loyal customers, who take care of their

own reservation, ticketing, and boarding formalities themselves

g. Personnel who constantly develop their qualifications with the awareness of the close relationship between the benefits for the Company and the added value that they contribute

h. A sense of entrepreneurship that creates business opportunities for fellow mem-bers in the Star Alliance, and takes advan-tage of the business potential provided by them

A management team, whose members iden-tify with modern governance principles and are distinguished by being mindful of the best interests not just of shareholders, but of all stakeholders.

5.6. Financial Rights All kinds of rights, benefits and remuneration and the criteria to determine them, as well as the basics of remuneration are written in the Remuneration Policy of our Company. This policy is publicly disclosed and published on our website. There are no explanations on a personal basis, however there is a distinction between the Board of Directors and Senior Managers. Remuneration of the Board of Dire-ctors is determined by the General Assembly through a separate agenda item. Board Mem-bers may not obtain any loan or debt from the Company.


tÜrK hAvA YollArı ANoNiMortAKlıĞı AND ıtS SUbSıDıArıeSconvenience translation to english ofconsolidated Financial statementsfor the year ended 31 December 2013 with independent auditor’s report(originally issued in turkish)

(Convenience Translation to English of Independent Auditor’s Report Originally Issued in Turkish)Independent Auditor’s Report

To the Board of Directors of Türk Hava Yolları Anonim Ortaklığı;

Introduction

We have audited the accompanying consolidated balance sheet of Türk Hava Yolları Anonim Ortaklığı (“the Company) and its Subsidiaries (collectively referred to as the ‘’Group’’) as at 31 December 2013 and the related consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended and a summary of significant accounting policies and explanatory notes.

Group Management's Responsibility for the Consolidated Financial Statements

The Group’s management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the Turkish Accounting Standards (“TAS”) published by the Public Oversight Accounting and Auditing Standards Authority (“POA”) and for such internal controls as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to error and/or fraud.

Independent Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. Our audit was conducted in accordance with standards on auditing issued by the Capital Markets Board of Turkey. Those standards require that ethical requirements are complied with and that the independent audit is planned and performed to obtain reasonable assurance whether the consolidated financial statements provide a true and fair view of the Group.

An audit involves performing independent audit procedures to obtain independent audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our professional judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to error and/or fraud. In making those risk assessments; the Company’s internal control system is taken into consideration. Our purpose, however, is not to express an opinion on the effectiveness of internal control system, but to design procedures that are appropriate for the circumstances in order to identify the relation between the consolidated financial statements prepared by the Group’s management and its internal control system. An audit includes also evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Group’s management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained during our audit is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the accompanying consolidated financial statements present fairly the financial position of the Group as at 31 December 2013 and its financial performance and cash flows for the year then ended in accordance with TAS (Note 2).

Other Matter

The audit of consolidated financial statements of the Group as at 31 December 2012 was conducted by another auditor. Predecessor auditor expressed an unmodified opinion on independent auditors’ report dated 14 March 2013 for the consolidated financial statements prepared in accordance with financial reporting standards promulgated by Capital Markets Board of Turkey prior to the adjustments and reclassifications as stated in Note 2 and Note 49.

Reports on Independent Auditor’s Responsibilities Arising from Other Regulatory Requirements

In accordance with Article 402 of the Turkish Commercial Code (“TCC”); the Board of Directors submitted to us the necessary explanations and provided required documents within the context of audit, additionally, no significant matter has come to our attention that causes us to believe that the Company’s Group’s bookkeeping activities for the period 1 January – 31 December 2013 is not in compliance with the code and provisions of the Company’s articles of association in relation to financial reporting.

Pursuant to Article 378 of Turkish Commercial Code no. 6102, Board of Directors of publicly traded companies are required to form an expert committee, and to run and to develop the necessary system for the purposes of: early identification of causes that jeopardize the existence, development and continuity of the company; applying the necessary measures and remedies in this regard; and, managing the related risks. According to subparagraph 4, Article 398 of the code, the auditor is required to prepare a separate report explaining whether the Board of Directors has established the system and authorized committee stipulated under Article 378 to identify risks that threaten or may threaten the company and to provide risk management, and, if such a system exists, the report, the principles of which shall be announced by the POA, shall describe the structure of the system and the practices of the committee. This report shall be submitted to the Board of Directors along with the auditor’s report. The Company has not formed the aforesaid committee as a separate committee, instead it has been decided that Corporate Governance Committee fulfil these duties. The Committee submitted the relevant report based on its studies during 2013 for early identification of risks that jeopardize the existence of the company and its development, applying the necessary measures and remedies in this regard, and managing the risks to the Board of Directors. Our audit does not include evaluating the operational efficiency and adequacy of the operations carried out by the management of the Group in order to manage these risks. As of the balance sheet date, POA has not announced the principles of this report yet so no separate report has been drawn up relating to it.

İstanbul, 6 March 2014 Akis Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi

Hatice Nesrin Tuncer, SMMMPartner

ConvenIenCe TranslaTIon To englIsh of ConsolIdaTed fInanCIal sTaTemenTs orIgInally Issued In TurkIsh

TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI and ITs suBsIdIarIesConsolIdaTed BalanCe sheeT as aT 31 deCemBer 2013 (all amounTs are expressed In TurkIsh lIra (Tl) unless oTherwIse sTaTed.)

THY ANNUAL REPORT 2013

70

Corporate GovernanCe prInCIples ComplIanCe report

Audited Audited

ASSETS Notes 31 December

2013 (Restated) (*)

31 December 2012

Current AssetsCash and Cash Equivalents 6 1.338.983.835 1.355.542.536 Financial Investments 7 42.774.034 476.958.794 Trade Receivables

-Trade Receivables From Related Parties 10 382.750 18.975.259 -Trade Receivables From Non-Related Parties 11 1.147.707.413 754.635.214

Other Receivables -Other Receivables from Related Parties 10 4.087.847 8.531 -Other Receivables from Non-Related Parties 13 1.376.697.906 755.052.298

Derivative Financial Instruments 45 64.279.662 74.861.649 Inventories 14 342.324.371 259.199.763 Prepaid Expenses 16 89.366.115 84.553.331 Current Income Tax Assets 41 16.507.184 19.666.261 Other Current Assets 31 112.423.952 62.045.773 TOTAL CURRENT ASSETS 4.535.535.069 3.861.499.409

Non-Current AssetsFinancial Investments 7 2.452.721 2.049.244 Other Receivables

-Other Receivables from Non-Related Parties 13 2.680.608.826 1.584.919.109 Equity Accounted Investees 4 389.674.199 269.069.545 Investment Property 17 76.320.000 57.985.000 Property and Equipment 18 17.162.416.670 12.693.339.589 Intangible Assets

- Other Intangible Assets 19 81.851.159 51.183.767 - Goodwill 20 58.240.802 -

Prepaid Expenses 16 412.242.181 237.886.052 TOTAL NON-CURRENT ASSETS 20.863.806.558 14.896.432.306

TOTAL ASSETS 25.399.341.627 18.757.931.715

(*)Refer to Note 2

The accompanying notes are an integral part of these consolidated financial statements

FINANCIAL STATEMENT

71


TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI and ITs suBsIdIarIesConsolIdaTed BalanCe sheeT as aT 31 deCemBer 2013 (all amounTs are expressed In TurkIsh lIra (Tl) unless oTherwIse sTaTed.)

Audited Audited

LIABILITIES Notes 31 December

2013 (Restated) (*)

31 December 2012

Current Liabilities Short-Term Portion of Long-Term Borrowings 8-21 1.188.220.823 866.011.394 Other Financial Liabilities 9 33.808.413 31.064.076 Trade Payables

-Trade Payables to Related Parties 10 374.606.410 215.000.995 -Trade Payables to Non-Related Parties 11 1.076.575.170 693.789.816

Payables Related to Employee Benefits 12 307.983.476 183.079.678 Other Payables

-Other Payables to Non-Related Parties 13 114.181.687 76.806.199 Derivative Financial Instruments 45 233.949.090 161.636.622 Deferred Income 16 46.629.988 41.819.652 Passenger Flight Liabilites 30 2.562.506.267 1.668.475.819 Short-term Provisions

-Provisions for Employee Benefits 26 64.731.115 41.066.116 -Other Provisions 26 29.819.212 35.516.181

Other Current Liabilities 31 619.744.180 496.430.242 TOTAL CURRENT LIABILITIES 6.652.755.831 4.510.696.790

Non- Current Liabilities Long-Term Borrowings 8-21 10.364.269.509 7.800.982.204 Trade Payables

- Trade Payables to Non- Related Parties 3.549.001 - Other Payables

-Other Payables to Non-Related Parties 13 30.917.704 15.659.634 Deferred Income 16 31.157.986 47.446.433 Long-term Provisions

-Provisions for Employee Benefits 28 249.604.088 234.019.405 Deferred Tax Liability 41 1.104.597.152 744.083.660 TOTAL NON- CURRENT LIABILITIES 11.784.095.440 8.842.191.336

Equity Attributable to Equity Holders of the Parent Share Capital 32 1.380.000.000 1.200.000.000 Inflation Adjustment on Share Capital 32 1.123.808.032 1.123.808.032 Items That Will Never Be Reclassified to Profit or Loss

-Actuarial Losses from Defined Pension Plans 32 ( 6.986.903) ( 26.997.551)Items That Are or May Be Reclassified to Profit or Loss

-Foreign currency translation differences 32 1.653.942.588 570.111.018 -Losses from Hedging 32 ( 101.206.786) ( 45.384.871)

Restricted Profit Reserves 32 59.372.762 39.326.341 Retained Earnings 32 2.170.853.236 1.388.463.563 Net Profit 32 682.707.427 1.155.717.057 TOTAL EQUITY 6.962.490.356 5.405.043.589

TOTAL LIABILITIES AND EQUITY 25.399.341.627 18.757.931.715

(*)Refer to Note 2



TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI and ITs suBsIdIarIesConsolIdaTed sTaTemenT of ProfIT or loss and oTher ComPrehensIve InComefor The year ended 31 deCemBer 2013(all amounTs are exPressed In TurkIsh lIra (Tl) unless oTherwIse sTaTed.)


72

FINANCIAL STATEMENT

Audited Audited

PROFIT OR LOSS Notes 1 January - 31

December 2013

(Restated) (*) 1 January -

31 December 2012

Sales Revenue 33 18.776.784.325 14.762.062.246 Cost of Sales (-) 34 ( 15.304.655.417) ( 11.716.974.068)GROSS PROFIT 3.472.128.908 3.045.088.178 General Administrative Expenses (-) 35 ( 434.976.154) ( 371.529.589)Marketing and Sales Expenses (-) 35 ( 1.947.304.294) ( 1.588.790.893)Other Operating Income 36 230.555.047 170.551.907 Other Operating Expenses (-) 36 ( 80.372.043) ( 115.962.720)OPERATING PROFIT 1.240.031.464 1.139.356.883 Income from Investment Activities 37 131.813.063 488.674.809 Share of Investments’ Profit / Loss Accounted By Using The Equity method 4 108.973.512 5.961.253 OPERATING PROFIT BEFORE FINANCIAL INCOME/EXPENSE 1.480.818.039 1.633.992.945 Financial Income 39 50.145.542 88.516.891 Financial Expenses (-) 39 ( 565.719.326) ( 337.397.405)PROFIT BEFORE TAX FROM CONTINUING OPERATIONS 965.244.255 1.385.112.431 Tax Expense of Continuing Operations ( 282.536.828) ( 229.395.374)Current Tax Expense 41 - ( 32.616.486)Deferred Tax Expense 41 ( 282.536.828) ( 196.778.888)PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS 682.707.427 1.155.717.057

OTHER COMPREHENSIVE INCOMETo Be Reclassified To Profit or Loss 1.028.009.655 ( 227.251.285)Currency Translation Adjustment 1.083.831.570 ( 228.479.860)Gains/ (Losses) of Cash Flow Hedge Reserves ( 65.561.681) 5.980.432 Actuarial Gains/(Losses) from Cash Flow Hedge Reserves of Investment Accounted by Using the Equity Method (4.215.713) (4.444.713)Tax (Expense)/Income of Other Comprehensive Income 13.955.479 ( 307.144)Not To Be Reclassified To Profit or Loss 20.010.648 ( 22.349.824)Actuarial Gains/(Losses) from Defined Pension Plans 25.626.991 ( 26.922.256)Actuarial Gains/(Losses) from Defined Pension Plans of Investments Accounted by Using the Equity Method (613.681) (1.015.024)Tax Expense/(Income) of Other Comprehensive Income ( 5.002.662) 5.587.456 OTHER COMPREHENSIVE INCOME 1.048.020.303 ( 249.601.109)

TOTAL COMPREHENSIVE INCOME 1.730.727.730 906.115.948

Earning Per Share (Kr) 42 0,49 0,84

(*)Refer to Note 2


FINANCIAL STATEMENT

73


TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI and ITs suBsIdIarIesConsolIdaTed sTaTemenT of Changes In equITyfor The year ended 31 deCemBer 2013(all amounTs are expressed In TurkIsh lIra (Tl) unless oTherwIse sTaTed.)

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CoNvENIENCE TrANSLATIoN To ENgLISh oF CoNSoLIdATEd FINANCIAL STATEMENTS orIgINALLy ISSuEd IN TurkISh

TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI ANd ITS SuBSIdIArIESCoNSoLIdATEd STATEMENT oF ChANgES IN EquITyFor ThE yEAr ENdEd 31 dECEMBEr 2012(ALL AMouNTS ArE ExprESSEd IN TurkISh LIrA (TL) uNLESS oThErwISE STATEd.)


74

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FINANCIAL STATEMENT

75


TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI and ITs suBsIdIarIesConsolIdaTed sTaTemenT of Cash flowsfor The year ended 31 deCemBer 2013(all amounTs are expressed In TurkIsh lIra (Tl) unless oTherwIse sTaTed.)

Audited Audited

Notes 31 December 2013 (Restated) (*)

31 December 2012Profit Before Tax 965.244.255 1.385.112.431Adjustments to reconcile cash flow generated from operating activities:

Adjustments for Depreciation and Amortization 18-19 1.240.527.159 1.029.762.920Adjustments for Provision for Employee Benefits 28 34.408.148 60.507.343Adjustments for Provisions, Net 26 18.890.248 37.546.895Adjustments for Interest Income 37-39 (79.271.750) (128.572.218)Gain on Sales of Fixed Assets 37 (1.658.418) (3.321.066)Share of Investments’ (Profit) / Loss Accounted by Using The Equity Method 4 (108.973.512) (5.961.253)Adjustments for Interest Expense 39 263.962.623 221.745.105Change in Manufacturers’ Credit (4.706.888) (1.572.071)Unrealized Foreign Exchange Translation Differences 210.351.868 26.671.522Change in Provision for Doubtful Receivables 46 37.442.673 (2.649.923)Increase in Fair Value of Investment Property 37 ( 7.242.401) (6.333.810)Change in Fair Value of Derivative Instruments 39 44.471.986 (25.503.133)Provision for Impairment 36 - (351.142.323)

Operating profit before working capital changes 2.613.445.991 2.236.290.419 Adjustments for Change in Trade Receivables ( 193.366.224) ( 45.639.594)Adjustments for Change in Other Short and Long Term Receivables ( 2.872.430) ( 397.691.391)Adjustments for Change in Inventories (28.524.263) (21.699.604)Adjustments for Change in Other Receivables Related to Operations (640.438) (8.267.025)Adjustments for Change in Other Non- Current Assets and Prepaid Expenses (113.633.417) 30.294.489Adjustments for Change in Trade Payables 272.248.976 94.891.149Adjustments for Change in Short and Long Term Payables Related to Operations and Deferred Income 28.648.858 63.771.342Adjustments for Change in Short-Term Provisions for Employee Benefits 79.175.438 (97.151.900)Adjustments for Change in Passenger Flight Liabilities 503.722.973 463.637.936

Cash Flows Generated From Operating Activities 3.158.205.464 2.318.435.821 Payment of Retirement Pay Liabilities 28 (28.139.267) (25.874.633)Interest Paid (272.577.511) (226.630.375)Taxes Paid ( 16.507.184) ( 25.029.904)

Net Cash Generated From Operating Activities 2.840.981.502 2.040.900.909 CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds From Sale of Property and Equipment, Intangible Assets and Investment Property 38.199.601 38.384.180Interest Received 36.432.249 172.162.930Purchase of Property and Equipment and Intangible Assets (**) 18-19 (1.092.367.554) (759.657.869)Prepayments For The Purchase of Aircrafts (1.128.522.317) (588.878.369)Change in Financial Investments 513.555.407 (353.211.312)Cash Outflow Arising From Capital Increse in Investments ( 1.721.250) ( 9.603.468)Dividends Received 21.500.000 - Cash Outflow Arising from Acquisition of Subsidiaries ( 45.929.808) -

Net Cash Used In Investing Activities ( 1.658.853.672) ( 1.500.803.908)CASH FLOW FROM FINANCING ACTIVITIES

Repayment of Financial Lease Liabilities ( 1.022.387.330) ( 762.001.461)Decrease in Other Financial Liabilities and Derivative Instruments ( 3.018.238) 27.922.286 Dividends Paid ( 173.280.963) -

Net Cash Used In Financing Activities ( 1.198.686.531) ( 734.079.175)NET DECREASE / IN CASH AND CASH EQUIVALENTS ( 16.558.701) ( 193.982.174)CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 1.355.542.536 1.549.524.710 CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 1.338.983.835 1.355.542.536

(*)Refer to Note 2(**) TL 1,854,263,247 portion of property and equipment and intangible assets purchases in total of TL 2,946,630,801 for the year ended 31 December 2013 was financed through finance leases. (31 December 2012: TL 1,883,990,615 portion of property and equipment and intangible assets purchases in total of TL 2,643,648,484 was financed through finance leases.)


FINANCIAL STATEMENT


TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI ANd ITS SuBSIdIArIESNoTES To ThE CoNSoLIdATEd FINANCIAL STATEMENTSFor ThE yEAr ENdEd 31 dECEMBEr 2013 (ALL AMouNTS ArE ExprESSEd IN TurkISh LIrA (TL) uNLESS oThErwISE STATEd.)


76

1. COMPANY ORGANIZATION AND ITS OPERATIONS

Türk Hava Yolları Anonim Ortaklığı (the “Company” or “THY”) was incorporated in Turkey in 1933. As of 31 December 2013 and 31 December 2012, the shareholders and their respective shareholdings in the Company are as follows:

31 December 2013 31 December 2012 Republic of Turkey Prime Ministry Privatization Administration % 49,12 % 49,12Other (publicly held) % 50,88 % 50,88Total % 100,00 % 100,00

The number of employees working for the Company and its subsidiaries (together the “Group”) as of 31 December 2013 is 23,160. (31 December 2012: 19,109). The average number of employees working for the Group for the year ended 31 December 2013 and 2012 are 21,032 and 18,789 respectively. The Company is registered in İstanbul, Turkey and its head office address is as follows:

Türk Hava Yolları A.O. Genel Yönetim Binası, Atatürk Havalimanı, 34149 Yeşilköy İSTANBUL.

The Company’s stocks are traded on Borsa Istanbul since 1990.

Group management decisions regarding resources to be allocated to departments and examines the results and the activities on the basis of air transport and aircraft technical maintenance services for the purpose of department’s performance evaluation. Each member of the Group companies prepares its financial statements in accordance with accounting policies are obliged to comply. The Group’s main business of topics can be summarized as follows.

Air Transport (“Aviation”)

The Company’s main activity is domestic and international passenger and cargo air transportation.

Technical Maintenance Services (“Technical”)

The main activity of this business is providing repair and maintenance service on civil aviation sector and giving all kinds of technical and infrastructure support related to airline industry.

Subsidiaries and Joint Ventures The table below sets out the consolidated subsidiaries and participation rate of the Group in these joint ventures as of 31 December 2013 and 31 December 2012:

Name of the Company Principal Activity

Participation RateCountry of

Registration31 December 2013 31 December 2012THY Teknik A.Ş. (THY TEKNİK) Aircraft Maintenance Services 100% 100% TurkeyTHY Habom A.Ş. (THY HABOM) (*) Aircraft Maintenance Services 100% - TurkeyHabom Havacılık Bakım Onarım ve Modifikasyon A.Ş. (HABOM) (*) Aircraft Maintenance Services - 100% TurkeyTHY Aydın Çıldır Havalimanı İşletme A.Ş.(THY Aydın Çıldır) Training & Airport Operations 100% 100% Turkey

(*) Refer to Note 3

FINANCIAL STATEMENT

77


TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI and ITs suBsIdIarIesnoTes To The ConsolIdaTed fInanCIal sTaTemenTsfor The year ended 31 deCemBer 2013(all amounTs are expressed In TurkIsh lIra (Tl) unless oTherwIse sTaTed.)

1. COMPANY ORGANIZATION AND ITS OPERATIONS (cont’d)

The table below sets out consolidated joint ventures and indicates the proportion of ownership interest of the Company in these joint ventures as of 31 December 2013 and 31 December 2012:

Company Name

Country of Registration

and OperationsOwnership

Share (*)

Voting Power (*) Principal Activity

Güneş Ekspres Havacılık A.Ş. (Sun Express) (*) Turkey %50 %50 Aircraft TransportationTHY DO&CO İkram Hizmetleri A.Ş. (Turkish DO&CO) Turkey %50 %50 Catering ServicesP&W T.T. Uçak Bakım Merkezi Ltd. Şti. (TEC) (*) Turkey %49 %49 MaintenanceTGS Yer Hizmetleri A.Ş. (TGS) Turkey %50 %50 Ground ServicesTHY OPET Havacılık Yakıtları A.Ş. (THY Opet) (*) Turkey %50 %50 FuelGoodrich Thy Teknik Servis Merkezi Ltd. Şti. (Goodrich) Turkey %40 %40 MaintenanceUçak Koltuk Sanayi ve Ticaret A.Ş (Uçak Koltuk) (*) Turkey %50 %50 Cabin InteriorTCI Kabin İçi Sistemleri San ve Tic. A.Ş. (TCI) (*) Turkey %51 %51 Cabin InteriorTürkbine Teknik Gaz Türbinleri Bakım Onarım A.Ş. (Türkbine Teknik) Turkey %50 %50 Maintenance

(*) Share percentage and voting rights are the same in the year 2013 and 2012.

2. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

2.1 Basis of Presentation

Preperation of Financial Statements

The consolidated financial statements have been prepared in accordance with the communiqué numbered II-14.1 “Communiqué on the Principles of Financial Reporting In Capital Markets” (“the Communiqué”) announced by the Capital Markets Board (“CMB”) on 13 June 2013 which is published on Official Gazette numbered 28676.

The accompanying consolidated financial statements have been presented in accordance with formats announced by CMB on 7 June 2013. A number of changes made at the Group’s previous consolidated financial statements in order to comply with formats announced by CMB on 7 June 2013. (Refer to Note: 49)

Adjustment of Financial Statements in Hyperinflationary Periods

As per the 17 March 2005 dated, 11/367 numbered decree of CMB, companies engaged in Turkey and those of which prepare their financial statements in accordance with the CMB Accounting Standards (including IAS/IFRS exercisers), use of inflationary accounting standards have been discontinued effective from 1 January 2005. Accordingly, “Financial Reporting Standards in Hyperinflationary Economies”, (“IAS 29”) was no longer applied henceforward. Basis of MeasurementsAll financial statements, except for investment property and derivative financial instruments, have been prepared on cost basis principal. Methods used for fair value measurement are given in Note: 2.5.8 and Note: 2.5.14.

FINANCIAL STATEMENT




78

2. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS (cont’d)

2.1 Basis of Presentation (cont’d)

Functional and Reporting Currency

Functional currency

Although the currency of the country in which the Company is domiciled is Turkish Lira (TL), for the purpose of this report the Company’s functional currency is determined as US Dollar. US Dollar is used to a significant extent in, and has a significant impact on, the operations of the Company and reflects the economic substance of the underlying events and circumstances relevant to the Company. Therefore, the Company uses the US Dollar in measuring items in its financial statements and as the reporting currency. All currencies other than the currency selected for measuring items in the financial statements are treated as foreign currencies. Accordingly, transactions and balances not already measured in US Dollar have been premeasured in US Dollar in accordance with the relevant provisions of TAS 21 (the Effects of Changes in Foreign Exchange Rates).

Translation to the presentation currency

The Group’s presentation currency is TL. The US Dollar financial statements of the Group are translated into TL as the following methods under TAS 21 (“The Effects of Foreign Exchange Rates”):

a) Assets and liabilities in the balance sheet are translated into TL at the prevailing US Dollar buying exchange rates of the Central Bank of Turkish Republic;

b) The statement of profit or loss and other comprehensive income is translated into TL by using the monthly average US Dollar exchange rates; and;

c) All differences are recognized as a separate equity item under exchange differences.

Basis of the Consolidation

a. The consolidated financial statements include the accounts of the parent company, THY, its Subsidiaries and its Affiliates on the basis set out in sections (b) below. Financial statements of the subsidiaries and affiliates are adjusted where applicable in order to apply the same accounting policies. All transactions, balances, profit and loss within the Group are eliminated during consolidation.

b. The Group has nine joint ventures (Note: 1). These joint ventures are economical activities that decisions about strategic finance and operating policy are jointly controlled by the consensus of the Group and other participants. The affiliates are controlled by the Group jointly, and are accounted for by using the equity method.

According to the equity method, joint ventures are stated as the cost value adjusted as deducting the impairment in joint venture from the change occurred in the joint venture’s assets after the acquisition date that is calculated by the Group’s share in the consolidated balance sheet. Joint venture’s losses that exceed the Group’s share are not considered (actually, that contains a long term investment which composes the net investment in the joint venture).

FINANCIAL STATEMENT

79




2.1 Basis of Presentation (cont’d)

Business Combinations

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable.

The Group measures goodwill at the acquisition date as:

- the fair value of the consideration transferred; plus- the recognized amount of any non-controlling interests in the acquire; plus- if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquire; less- the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts generally are recognized in profit or loss.

Transactions costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

Additional paragraph for convenience translation to English

Turkish Accounting Standards promulgated by Public Oversight Accounting and Auditing Standards Authority described in Note 2 to the consolidated financial statements differ from International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board with respect to the application of inflation accounting, presentation of the basic financial statements and also for certain disclosure requirements. Accordingly, the accompanying consolidated financial statements are not intended to present the consolidated financial position, consolidated financial performance and consolidated cash flows of the Group in accordance with IFRS.

2.2 Statement of Compliance with TAS

The Company and its subsidiaries registered in Turkey maintain their books of account and prepare their statutory financial statements in accordance with accounting principles in the Turkish Commercial Code and Tax Legislation.

The consolidated financial statements have been prepared in accordance with Turkish Accounting Standards (TAS) announced by Public Oversight Accounting and Auditing Standards Authority (“POA”) with regard to the communiqué numbered II-14.1 “Communiqué on the Principles of Financial Reporting In Capital Markets” (“the Communiqué”) announced by the Capital Markets Board (“CMB”) on 13 June 2013 which is published on Official Gazette numbered 28676. TAS, are comprised of Turkish Accounting Standards, Turkish Financial Reporting Standards (TFRS), appendixes and interpretations.

Board of Directors has approved the condensed consolidated financial statements as of 31 December 2013 and delegated authority for publishing it on 6 March 2014. General assembly and related regulatory bodies have the authority to modify the financial statements.

FINANCIAL STATEMENT




80


2.3. Changes in Accounting Policies

TAS 19 (“Employee Benefits”) has been revised effective from the annual period beginning after 1 January 2013. In accordance with the revised standard, actuarial gain / loss related to employee benefits shall be recognized in other comprehensive income.

The Group used to recognize the actuarial gain/loss related to employee benefits in profit or loss until 31 December 2012. The Group applied the change in accounting policy retrospectively as the standard stated and actuarial gains/losses reported under consolidated profit or loss in prior periods have been represented in Actuarial Losses in Defined Pension Plans under equity. As a result of this change, retained earnings of 31 December 2012 have been increased by TL 4,647,727 and the consolidated net profit for the year, then ended has been increased by TL 22,349,824.

Accordingly, an amount of TL 27,734,275 including TL 19,653,247 from “Cost of Sales”, TL 2,692,225 from “General Administrative Expenses”, TL 4,576,784 from “Sales and Marketing Expenses” and TL 812,019 from “Share of Investments’ Profit/Loss Accounted by Using the Equity Method” and TL 22,349,824 from “Net Profit/Loss for the Current Period” with the deferred tax effect of TL 5,384,451 and also TL 4,647,727 from “Retained Earnings” are disclosed under “Actuarial Losses from Defined Benefit Plans” in the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2012.

In addition, earning per share for the year ended 31 December 2012 has increased by Kr 0.02.

2.4 Changes and Errors in Accounting Estimates

If estimated changes in accounting policies are for only one period, changes are applied on the current year but if the estimated changes effect the following periods, changes are applied both on the current and following years prospectively.

Changes in accounting policies or accounting errors applied retroactively and the financial statements of the previous periods were adjusted.

The significant estimates and assumptions used in preparation of these consolidated financial statements as at 31 December 2013 are same with those used in the preparation of the Group’s consolidated financial statements as at and for the year ended 31 December 2012.

2.5 Summary of Significant Accounting Policies

2.5.1 Revenue

Rendering of services:

Revenue is measured at the fair value of the consideration received or to be received. Passenger fares and cargo revenues are recorded as operating revenue when the transportation service is provided. Tickets sold but not yet used (unflown) are recorded as passenger flight liabilities.

The Group develops estimations using historical statistics and data for unredeemed tickets. Total estimated unredeemed tickets are recognized as operating revenue. Agency commissions to relating to the passenger revenue are recognized as expense when the transportation service is provided.

Aircraft maintenance and infrastructure support services are accrued with regard to invoices prepared subsequent to the services.

FINANCIAL STATEMENT

81




2.5. Summary of Significant Accounting Policies (cont’d)

2.5.1 Revenue (cont’d)

Dividend and interest income:

Interest income is accrued on a timely basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

Dividend income generated from equity investments are recognised as shareholders gain the dividend rights. 2.5.2 Inventories

Inventories are stated at the lower of cost and net realizable value. Cost of inventories is the sum of all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Average cost method is applied in the calculation of cost of inventories. Net realizable value represents the estimated selling price less all estimated costs of completion and costs necessary to make a sale.

2.5.3 Property and Equipment

Tangible assets are carried at cost less accumulated depreciation and any accumulated impairment losses.

Assets under construction that are held for rental or any other administrative or undefined purposes are carried at cost less any impairment loss, if any. Legal fees are also included in cost. Borrowing costs are capitalized for assets that need substantial time to prepare the asset for its intended use or sale. As the similar depreciation method used for other fixed assets, depreciation of such assets begins when they are available for use.

Depreciation is charged so as to write off the cost or valuation of assets, other than land and properties under construction, over their estimated useful lives, using the straight-line method. Expected useful life, residual value and depreciation method are reviewed each year for the possible effects of changes in estimates, and they are recognized prospectively if there are any changes in estimates.

Assets acquired under finance lease are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.

The Group has classified the cost of assets that are acquired directly or through finance leases into the following three parts, by considering the renewal of significant parts of the aircrafts identified during the overhaul maintenance and overhaul of aircraft fuselage and engine; fuselage, overhaul maintenance for the fuselage, engine and overhaul maintenance for the engines. Overhaul maintenance for the fuselage and overhaul engine repair parts are depreciated over the shorter of the remaining period to the next maintenance or the remaining period of the aircraft’s useful life. They are capitalized subsequent to overhaul maintenance for the fuselage and engines and are depreciated over the shorter of the next maintenance period or the remaining period of the aircraft’s useful life.

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.

FINANCIAL STATEMENT




82



2.5.3 Property and Equipment Assets (cont’d)

The useful lives and residual values used for tangible assets are as follows:

Useful Life (Years) Residual Value

- Buildings 25-50 -- Aircrafts and Engines 15-20 10-30%- Cargo Aircraft and Engines 30 10%- Overhaul maintenance for aircrafts’ fuselage 6 -- Overhaul maintenance for engines 3-8 -- Components 7 -- Repairable Spare Parts 3-7 -- Simulators 10-20 10%- Machinery and Equipments 3-15 -- Furniture and Fixtures 3-15 -- Motor Vehicles 4-7 -- Other Equipments 4-15 -- Leasehold improvements Lease period/5 years -

2.5.4 Leasing Transactions

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated balance sheet as a finance lease obligation.

Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases.

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term.

2.5.5 Intangible Assets

Intangible assets include leasehold improvements, rights, information systems and software. Other intangible assets are depreciated over their lease periods and other intangible assets are depreciated over their useful life of 5 years, on a straight-line basis. Slot rights are assessed as intangible assets with infinite useful life, once there are no time restrictions on them time. Goodwill

Goodwill that arises upon acquisition of subsidiaries is presented in intangible assets. For the measurement of goodwill at initial recognition, refer to Note 2.1.

Subsequent Measurement

Goodwill is measured at cost less accumulated impairment losses.

FINANCIAL STATEMENT

83





2.5.6 Impairment on Assets

The carrying amounts of the Group’s assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the assets’ recoverable amounts are estimated. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. Value in use is the present value of estimated future cash flows resulting from continuing use of an asset and from disposal at the end of its useful life. Impairment losses are accounted in profit or loss

An impairment loss recognized in prior periods for an asset is reversed if the subsequent increase in the asset’s recoverable amount is caused by a specific event since the last impairment loss was recognized. Such a reversal amount is recognized as income in the consolidated financial statements and cannot exceed the previously recognized impairment loss and shall not exceed the carrying amount that would have been determined, net of amortization or depreciation, had no impairment loss been recognized for the asset in prior years.

Group determined aircrafts, spare engines and simulators together (“Aircrafts”) as lower-line cash generating unit subject to impairment and impairment calculation was performed for Aircrafts collectively. In the examination of whether net book values of aircrafts, spare engines and simulators exceed their recoverable amounts, the higher value between value in use and sale expenses deducted net selling prices in US Dollars is used for determination of recoverable amounts. Net selling price for the aircrafts is determined according to second hand prices in international price guides.

In the accompanying financial statements, the change in the differences between net book values of these assets and recoverable amounts are recognized as provision income/losses under other operating income/losses.

2.5.7 Borrowing Costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in profit or loss in the period in which they are incurred. 2.5.8 Financial Instruments

Financial assets and liabilities are recognized in the financial statements when the Group is a legal party to these financial instruments.

(a) Financial assets

Financial investments are recognized and derecognized on a trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

Investments are recorded or deleted from records on the date of trading activity based on an agreement providing a requirement for investment instrument delivery in compliance with the duration determined by related market.

Financial assets are classified into the following specified categories: financial assets as “at fair value through profit or loss”, “held-to-maturity investments”, “available-for-sale” financial assets and “loans and receivables”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

FINANCIAL STATEMENT




84


2.5 Summary of Significant Accounting Policies (cont’d)

2.5.8. Financial Instruments (cont’d)

Financial assets at fair value through profit or loss

Financial assets are classified as financial assets at fair value through profit or loss where the Group acquires the financial asset principally for the purpose of selling in the near term, the financial asset is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short term profit taking as well as derivatives that are not designated and effective hedging instruments.

Financial assets at fair value through profit or loss are stated at fair value, with any resultant gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset.

Effective interest method

The effective interest method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or where appropriates a shorter period.

Income is recognized on an effective interest basis for held-to-maturity investments, available-for-sale financial assets and loans and receivables.

Loans and receivables

Trade, loan and other receivables are initially recorded at fair value. At subsequent periods, loans and receivables are measured at amortized cost using the effective interest method.

Impairment of financial assets

Financial assets, other than those at fair value through profit or loss are assessed for indicator of impairment at each balance sheet date.

Financial assets are impaired where there is objective evidence that as a result of one or more events that occurred after the initial recognition of the financial asset the estimated future cash flows of the investment have been impacted.

For financial assets at amortized cost, the amount of the impairment is the difference between the assets carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception trade receivables where the carrying amount is reduced through the use of an allowance account. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously recognize written of fare credited against the allowance account are recognized in profit or loss.

With the exception of available for sale equity instruments, if, in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. In respect of available for sale equity securities, any increase in fair value subsequent to an impairment loss is recognized directly in equity.

FINANCIAL STATEMENT

85






Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits and other short-term highly liquid investments which their maturities are three months or less from date of acquisition and that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. The carrying amount of these assets approximates their fair value.

(b) Financial liabilities

The Group’s financial liabilities and equity instruments are classified in accordance with the contractual arrangements and recognition principles of a financial liability and equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. The significant accounting policies for financial liabilities and equity instruments are described below.

Financial liabilities are classified as either financial liabilities at fair value through profit and loss or other financial liabilities.

Financial liabilities at fair value through profit or loss

Financial liabilities at fair value through profit or loss are initially measured at fair value, and at each reporting period revalued at fair value as of balance sheet date. Changes in fair value are recognized in profit and loss. The net gain or loss recognized in profit or loss incorporates any interest paid on the financial liability. Other financial liabilities

Other financial liabilities, including bank borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Derivative financial instruments and hedge accounting

The Group’s activities expose it primarily to the financial risks of changes in foreign exchange rates and interest rates.

The major source of interest rate risk is finance lease liabilities. The Group’s policy is to convert some financial liabilities with fixed interest rates into financial liabilities with variable interest rates, and some financial liabilities denominated in EUR into financial liabilities denominated in USD. The derivative financial instruments obtained for this purpose are not subject to hedge accounting and profit/loss arising from the changes in the fair values of those instruments is directly accounted in profit or loss. The Group converted some of the floating-rate loans into fixed-rate loans through derivative financial instruments.

Also, the Group began to obtain derivative financial instruments to hedge against jet fuel price risks beginning from 2009. The Group accounts for those transactions as hedging against cash flow risks arising from jet fuel prices.

FINANCIAL STATEMENT




86




Derivative financial instruments and hedge accounting (cont’d)

Use of derivative financial instruments is managed according to the Group policy which is written principles approved by the Board of Directors and compliant with the risk management strategy.

The Group does not use derivative financial instruments for speculative purposes.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, for forecast transactions, any cumulative gain or loss on the hedging instrument recognized in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognized in equity is transferred to profit or loss for the period.

Derivative financial instruments are calculated according to the fair value at contract date and again are calculated in the following reporting period at fair value base. The effective portion of changes in the fair value of derivatives are recognized in equity which are designated as hedging instruments in a hedge of future cash flows. Any ineffective portion of changes in the fair value of the derivatives are recognized in profit or loss.

2.5.9. Foreign Currency Transactions

Transactions in foreign currencies are translated into US Dollar at the rates of exchange ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate ruling at the balance sheet date.

Gains and losses arising on settlement and translation of foreign currency items are included in profit or loss. The closing and average TL - US Dollar exchange rates as at 31 December 2013 and 2012 are as follows:

Closing Rate Average RateYear ended 31 December 2013 2,1343 1,9033Year ended 31 December 2012 1,7826 1,7922Year ended 31 December 2011 1,8899 1,6702

The closing and average US Dollar - Euro exchange rates as at 31 December 2013 and 2012 are as follows:

Closing Rate Average RateYear ended 31 December 2013 1,3759 1,3287Year ended 31 December 2012 1,3193 1,2856Year ended 31 December 2011 1,2938 1,3912

2.5.10. Earnings per Share

Earnings per share are calculated by dividing net profit by weighted average number of shares outstanding in the relevant period. In Turkey, companies are allowed to increase their capital by distributing free shares to shareholders from accumulated profits. In calculation of earnings per share, such free shares are considered as issued shares. Therefore, weighted average number of shares in the calculation of earnings per share is found by applying distribution of free shares retrospectively.

FINANCIAL STATEMENT

87





2.5.11. Events After to the Balance Sheet Date

Events after the balance sheet date are those events, that occur between the balance sheet date and the date when the financial statements are authorized for issues even if they are occurred subsequent to any announcement for net profit or selected financial information is made.

If adjustment is necessary for such events, Group’s financial statements are adjusted according to the new situations.

2.5.12. Provisions, Contingent Liabilities, Contingent Assets

Provisions are recognized when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation.

Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. Onerous Contracts

Present liabilities arising from onerous contracts are calculated and accounted for as provision.

It is assumed that an onerous contract exists if Group has a contract which unavoidable costs to be incurred to settle obligations of the contract exceed the expected economic benefits of the contract.

2.5.13 Segmental Information

There are two operating segments of the Group, air transportation and aircraft technical maintenance operations; these include information for determination of performance evaluation and allocation of resources by the management. The Company management uses the operating profit calculated according to TAS while evaluating the performances of the segments.

2.5.14 Investment Property

Investment properties, which are properties, held to earn rentals and/or for capital appreciation are measured initially at cost, including transaction costs.

Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the balance sheet date.

FINANCIAL STATEMENT




88



2.5.14 Investment Property (cont’d)

Gains or losses arising from changes in the fair values of investment properties are included in the profit or loss in the year in which they arise.

Investment properties are derecognized when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in profit or loss in the year of retirement or disposal.

2.5.15 Taxation and Deferred Tax

Turkish tax legislation does not permit a parent company and its subsidiary to file a consolidated tax return. Therefore, provisions for taxes, as reflected in the accompanying consolidated financial statements, have been calculated on a separate-entity basis.

Income tax expense represents the sum of the current tax and deferred tax expenses.

Current tax

The current tax payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of profit or loss and other comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

Deferred Tax

Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases which is used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and affiliates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

FINANCIAL STATEMENT

89





2.5.15 Taxation and Deferred Tax (cont’d)

Deferred Tax (cont’d)

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the period

Current and deferred tax are recognized as an expense or income in profit or loss, except when they relate to items credited or debited directly to equity, in which case the tax is also recognized directly in equity, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is taken into account in calculating goodwill or determining the excess of the acquirer’s interest in the net fair value of the acquirer’s identifiable assets, liabilities and contingent liabilities over cost.

2.5.16. Government Grants

Government grants are not recognized until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.

Government grants are recognized in profit or loss on a systematic basis over the periods in which the Group recognizes as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets are recognized as deferred revenue in the consolidated statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.

Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognized in profit or loss in the period in which they become receivable.

2.5.17. Employee Benefits / Retirement Pay Provision

Under Turkish law and union agreements, lump sum payments are made to employees retiring or involuntarily leaving the Group. Such payments are considered as being part of defined retirement benefit plan as per International Accounting Standard 19 (revised) “Employee Benefits” (“IAS 19”). The retirement benefit obligation recognized in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognized actuarial gains and losses. Actuarial gains and losses are accounted as other comprehensive income.

FINANCIAL STATEMENT




90



2.5.18. Statement of Cash flows

In statement of cash flows, cash flows are classified according to operating, investment and finance activities.

Cash flows from operating activities reflect cash flows generated from sales of the Group.

Cash flows from investment activities express cash used in investment activities (direct investments and financial investments) and cash flows generated from investment activities of the Group.

Cash flows relating to finance activities express sources of financial activities and payment schedules of the Group.

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments which their maturities are three months or less from date of acquisition and that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

2.5.19. Share Capital and Dividends

Common shares are classified as equity. Dividends on common shares are recognized in equity in the period in which they are approved and declared.

2.5.20. Manufacturers’ Credits

Manufacturers’ credits are received against acquisition or lease of aircraft and engines. The Group records these credits as a reduction to the cost of the owned and amortizes them over the related asset’s remaining economic life. Manufacturers’ credits related to operating leases are recorded as deferred revenue and amortized over the lease term.

2.5.21. Maintenance and Repair Costs

Regular maintenance and repair costs for owned and leased assets are charged to operating expense as incurred. Aircraft and engine overhaul maintenance checks for owned and finance leased aircrafts are capitalized and depreciated over the shorter of the remaining period to the following overhaul maintenance checks or the remaining useful life of the aircraft and delivery maintenance checks of operating leased aircraft are accrued on a periodical basis. The maintenance expenses for the operational leased aircrafts are accrued on a periodical basis. 2.5.22. Frequent Flyer Program

The Group provides a frequent flyer program named “Miles and Smiles” in the form of free travel award to its members on accumulated mileage. Miles earned by flights are recognized as a separately identifiable component of the sales transaction(s). A portion of the fair value of the consideration received in respect of the initial sale shall be allocated to the award credits and the consideration allocated to award credits should be recognized as revenue when awards credits are redeemed.

The Group also sells mileage credits to participating partners in “Shop and Miles” program. A portion of such revenue is deferred and amortized as transportation is provided.

FINANCIAL STATEMENT

91




2.6. Important Accounting Estimates and Assumptions

Preparation of the financial statements requires the amounts of assets and liabilities being reported, explanations of contingent liabilities and assets and the uses of accounting estimates and assumptions which would affect revenue and expense accounts reported during the accounting period. Group makes estimates and assumptions about the future periods. Actual results could differ from those estimations.

Accounting estimates and assumptions which might cause material adjustments on the book values of assets and liabilities in future financial reporting period were given below:

The Determination of Impairment on Long Term Assets:

Basic assumptions and calculation methods of the Group relating to impairment on assets are explained in Note 2.5.6.

Calculation of the Liability for Frequent Flyer Program:

As explained in Note 2.5.22, Group has programs called “Miles and Smiles” and “Shop & Miles” which are applied for its members. In the calculations of the liability related with concerned programs, the rate of use and mile values which are determined by using statistical methods over the historical data were used.

Useful Lives and Salvage Values of Tangible Assets:

Group has allocated depreciation over tangible assets by taking into consideration the useful lives and salvage values which were explained in Note 2.5.3.

Deferred Tax:

Deferred tax assets and liabilities are recorded using substantially enacted tax rates for the effect of temporary differences between book and tax bases of assets and liabilities. There are deferred tax assets resulting from tax loss carry-forwards and deductible temporary differences, all of which could reduce taxable income in the future in the Group. Based on available evidence, both positive and negative, it is determined whether it is probable that all or a portion of the deferred tax assets will be realized.

Corporate Tax Law 32/A and the effects of Resolution issued on “Government Assistance for Investments” by the Council of Ministers:

A new incentive standard that reconstitutes government assistance for investments has been developed with the addition to the clause 32/A of the Corporate Tax Law to be effective from 28 February 2009 with the 9th article of the 5838 numbered Law in order to support investments through taxes on income. The new investment system becomes effective upon the issuance of the Council of Ministers’ resolution “Government Assistance for Investments” No: 2009/15199 on 14 July 2009.

FINANCIAL STATEMENT




92


2.6. Important Accounting Estimates and Assumptions (con’d)

Corporate Tax Law 32/A and the effects of Resolution issued on “Government Assistance for Investments” by the Council of Minister: (cont’d)

Apart from the previous “investment incentive” application, which provides the deduction of certain portion of investment expenditures against corporate tax base, the new support system aims to provide incentive support to companies by deducting “contribution amount”, which is calculated by applying the “contribution rate” prescribed in the Council of Ministers’ resolution over the related investment expenditure, against the corporate tax imposed on the related investment to the extent the amount reaches to the corresponding “contribution amount”.

The Group has obtained an Incentive Certificate dated 28 December 2010 and numbered 99256 from Turkish Treasury. For the related aircraft investment, 20% of investment contribution and 50% of reduction in the corporate tax rate will be used. The contribution amount that will be deducted from the corporate tax calculated over the earnings arising from the related investment, which will be used in the following years for the aircrafts delivered as of 31 December 2013 is TL 1,915,627,447 (31 December 2012: TL 1,761,739,184).

There is no clear guidance in regards to the accounting for government tax incentives on investments in TAS 12 “Income Tax” and TAS 20 “Accounting for Government Grants and Disclosure of Government Assistance”. Since “contribution amount” exemption as explained in the new investment support system depends on the earnings from the related investment and the recovery of the related asset and utilization of contribution amount will be over many years, the Group management considers that the accounting for the related investment contribution will be more appropriate if the grant is classified as profit or loss on a systematic and rational basis over the useful life of the related assets.

2.7. New and Revised Standards and Interpretations

In accounting policies considered in preparation of financial statements as at and for the year ended 31 December 2013, the Group applied all Turkish Accounting Standards, Turkish Financial Reporting Standards and related appendices and interpretations that are effective as of 1 January 2013.

New standards and interpretations not yet adopted as of 31 December 2013

A number of new standards, amendments to standards and interpretations explained below are not yet effective as at 31 December 2013, and have not been applied in preparing these consolidated financial statements of the Group:

- IFRS 9 Financial Instruments could change the classification and measurement of financial assets and becomes effective for annual periods beginning on or after 1 January 2015.

- IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities (Amended): The amendments clarify the meaning of ―currently has a legally enforceable right to set-off and also clarify the application of the IAS 32 offsetting criteria to settlement systems which apply gross settlement mechanisms that are not simultaneous. These amendments are to be retrospectively applied for annual periods beginning on or after 1 January 2014.

The Group does not plan to adopt these standards early and the extent of the impact has not been determined yet.

FINANCIAL STATEMENT

93




2.7. New and Revised Standards and Interpretations (cont’d)

Resolutions promulgated by POA

Until a regulation is implemented in TAS, the POA has promulgated the following resolutions in order to increase the comparability, verifiability, understandability and suitability to requirements of financial statements having to be prepared in accordance with TAS and to facilitate the audit.

• 2013-l Illustrative Financial Statement and User Guide

The POA promulgated “illustrative financial statement and user guide” on 20 May 2013 in order to ensure the uniformity of financial statements and facilitate their audit. The financial statement examples within this framework were published to serve as an example to financial statements to be prepared by companies obliged to apply TAS, excluding financial institutions established to engage in banking, insurance, private pensions or capital market. The Group has made the reclassifications stated in Note: 49 in order to comply with the requirements of this resolution.

• 2013-2 Accounting of Combinations under Common Control

In accordance with the resolution it has been decided that i) combination of entities under common control should be recognized using the pooling of interest method, ii) and thus, goodwill should not be included in the financial statements and iii) while using the pooling of interest method, the financial statements should be prepared as if the combination has taken place as of the beginning of the reporting period in which the common control occurs and should be presented comparatively from the beginning of the reporting period in which the common control occurred. This resolution did not have an impact on the consolidated financial statements of the Group.

• 2013-3 Accounting of Redeemed Share Certificates

Clarification has been provided on the conditions and circumstances where the redeemed share certificates shall be recognized as a financial liability or equity based financial instruments. This resolution did not have an impact on the consolidated financial statements of the Group.

• 2013-4 Accounting of Cross Shareholding Investments

If a subsidiary of a parent entity holds shares of the parent, then this is defined as cross shareholding investment and accounting of this cross investment is assessed based on the type and different recognition principles adopted. With the subject resolution, this topic has been assessed under three main headings as explained below and the recognition principles have been dete1mined for each of them.

i) The subsidiary holding the equity based financial instruments of the parent,ii) The associates or joint ventures holding the equity based financial instruments of the parent,iii) The parent’s equity based financial instruments are held by an entity, which is accounted as an investment within the scope of TAS 38 and TFRS 9 by the parent.

This resolution did not have an impact on the consolidated financial statements of the Group.

FINANCIAL STATEMENT




94


2.8. Determination of Fair Values

Various accounting policies and explanations of the Group necessitate to determinate the fair value of both financial and non-financial assets and liabilities. If applicable, additional information about assumptions used for determination of fair value are presented in notes particular to assets and liabilities.

Evaluation methods in terms of levels are described as follows:

• Level 1: Specific (uncorrected) prices in active markets for identical assets and obligations;• Level 2: Directly (via prices) or indirectly (via producing from prices) variables which are observable for assets and liabilities and apart from

specific prices mentioned in Level 1.• Level 3: Variables which are not related to observable market variable for assets and liabilities (unobservable variables).

3. BUSINESS COMBINATIONS

Acquisition of 100% shares of MNG Teknik Uçak Bakım Hizmetler Anonim Şirketi and merger with Habom

The share purchase agreement for the acquisition of all shares of MNG Teknik Uçak Bakım Hizmetleri Anonim Şirketi (“MNG Teknik”) by Türk Hava Yolları Anonim Ortaklığı was signed between parties on 22 May 2013 having obtained the approval of the Competition Authority.

In the Extraordinary General Assembly Meeting of MNG Teknik dated 29 August 2013, it was decided to merge with Habom which are under common control. This merger was carried out under legal structure of MNG Teknik via transfer of all assets, liabilities, rights and obligations of Habom to MNG Teknik. As a result of the merger, the company’s title was registered as THY HABOM A.Ş. on 13 September 2013.

FINANCIAL STATEMENT

95



3. BUSINESS COMBINATIONS (cont’d)

Acquisition of 100% shares of MNG Teknik Uçak Bakım Hizmetler Anonim Şirketi and merger with Habom (cont’d)

The Group has consolidated operational results of MNG Teknik as at 31 December 2013 with full consolidation method. If the acquisition had occurred on 1 January 2013, it is estimated that consolidated revenue would have been higher by TL 35,618,745 and consolidated net income would have been lower by TL 20,371,752. The acquisition had the following effect on the Group’s assets and liabilities on the acquisition date:

Note Pre- acquisition

value Fair value

adjustmentAcquisition

value Property and equipment 18 101.436.163 - 101.436.163Trade and other receivables 4.476.172 - 4.476.172Other assets 7.131.521 - 7.131.521Cash and cash equivalents 486.236 - 486.236Financial debts (78.827.091) - (78.827.091)Trade and other payables (27.549.448) - (27.549.448)Other payables (13.261.473) - (13.261.473)

Identifable assets and liabilities (6.107.920) - (6.107.920)

Goodwill arising from acquisition 52.523.964Cash consideration paid 46.416.044Cash and cash equivalents acquired (486.236)Net cash outflow arising from acquisition 45.929.808

Pre-acquisition values are calculated in accordance with Turkish Financial Reporting Standards (TFRS) just before the acquisition date.

Fair values of recognized assets and liabilities as well as the cost of the combination at the date of acquisition are provisionally accounted by the Group. The time period for recognition of additional items or adjustments to the fair values of assigned recognized assets, liabilities and contingent liabilities is limited to 12 months from the date of acquisition.

4. INVESTMENTS ACCOUNTED BY USING THE EQUITY METHOD

The joint ventures accounted for using the equity method are as follows:

31 December 2013 31 December 2012Turkish DO&CO 90.923.583 60.907.106THY Opet 74.931.561 66.777.834TGS 83.543.135 64.547.149TEC 76.197.771 8.388.295Sun Express 46.355.553 53.595.748Türkbine Teknik 8.632.676 7.373.945Uçak Koltuk 4.142.150 4.166.036TCI 4.189.363 2.901.708Goodrich 758.407 411.724

389.674.199 269.069.545

FINANCIAL STATEMENT




96

4. INVESTMENTS ACCOUNTED BY USING THE EQUITY METHOD (cont’d)

Financial information for Sun Express as of 31 December 2013 and 31 December 2012 are as follows:

31 December 2013 31 December 2012Total assets 1.065.244.740 647.916.867Total liabilities 912.849.199 631.140.277Shareholders’equity 152.395.541 16.776.590Group’s share in joint venture’s shareholders’ equity 76.197.771 8.388.295

1 January - 1 January - 31 December 2013 31 December 2012Revenue 2.614.606.743 1.735.457.511Profit/ (loss) for the period 113.274.964 (20.526.372)Group’s share in profit/(loss) for the period 56.637.482 (10.263.186)

Financial information for Turkish DO&CO as of 31 December 2013 and 31 December 2012 are as follows:

31 December 2013 31 December 2012Total assets 319.646.734 248.740.873Total liabilities 137.799.569 126.926.662Shareholders’equity 181.847.165 121.814.211Group’s share in joint venture’s shareholders’ equity 90.923.583 60.907.106

1 January - 1 January - 31 December 2013 31 December 2012Revenue 624.133.315 465.279.242Profit for the period 62.730.768 18.091.704Group’s share in profit for the period 31.365.384 9.045.852 Financial information for TEC as of 31 December 2013 and 31 December 2012 are as follows:

31 December 2013 31 December 2012Total assets 309.937.317 225.834.697Total liabilities 215.334.148 116.455.611Shareholders’equity 94.603.169 109.379.086Group’s share in joint venture’s shareholders’ equity 46.355.553 53.595.748

1 January - 1 January - 31 December 2013 31 December 2012Revenue 249.765.163 163.637.539Loss for the period (33.724.557) (34.593.459)Group’s share in loss for the period (16.525.033) (16.950.794)

FINANCIAL STATEMENT

97




Financial information for TGS as of 31 December 2013 and 31 December 2012 are as follows:

31 December 2013 31 December 2012Total assets 247.171.203 191.883.128Total liabilities 80.084.934 62.788.835Shareholders’equity 167.086.269 129.094.293

Group’s share in joint venture’s shareholders’ equity 83.543.135 64.547.149

1 January - 1 January - 31 December 2013 31 December 2012Revenue 455.895.415 331.119.437Profit for the period 37.030.104 12.981.772Group’s share in profit for the period 18.515.052 6.490.886

By the protocol and capital increase dated on 17 September 2009, 50 % of TGS’ capital, which has a nominal value of 6,000,000 TL, was acquired by HAVAŞ for 119,000,000 TL and a share premium at an amount of 113,000,000 TL has arised in the TGS’s capital. Because the share premium is related to the 5-year service contract between the Company and TGS, the Company’s portion (50 %) of the share premium under the shareholders’ equity of TGS was recognized as ‘Deferred Income’ (Note 16) to be amortized during the contract period.

Financial information for THY Opet as of 31 December 2013 and 31 December 2012 are as follows:

31 December 2013 31 December 2012Total assets 700.221.142 578.119.047Total liabilities 550.358.020 444.563.380Shareholders’equity 149.863.122 133.555.667 Group’s share in joint venture’s shareholders’ equity 74.931.561 66.777.834

1 January - 1 January - 31 December 2013 31 December 2012Revenue 4.681.105.071 3.856.846.373Profit for the period 45.310.172 60.380.095Group’s share in profit for the period 22.655.086 30.190.047

Financial information for Uçak Koltuk as of 31 December 2013 and 31 December 2012 are as follows:

31 December 2013 31 December 2012Total assets 14.898.756 9.626.260 Total liabilities 6.614.456 1.294.188 Shareholders’equity 8.284.300 8.332.072

Group’s share in joint venture’s shareholders’ equity 4.142.150 4.166.036

FINANCIAL STATEMENT




98


1 January - 1 January - 31 December 2013 31 December 2012Revenue 183.528 21.602 Loss / (Profit) for the period (1.346.113) 8.195.892 Group’s share in loss /(profit) for the period (673.057) 4.097.946

Financial information for TCI as of 31 December 2013 and 31 December 2012 are as follows:

31 December 2013 31 December 2012Total assets 16.410.105 6.680.844Total liabilities 8.195.668 991.221Shareholders’equity 8.214.437 5.689.623Group’s share in joint venture’s shareholders’ equity 4.189.363 2.901.708

1 January - 1 January - 31 December 2013 31 December 2012Revenue 2.155.586 1.133.385Loss for the period (4.458.424) (6.822.991)Group’s share in loss for the period (2.273.796) (3.479.684)

Financial information for Turkbine Teknik as of 31 December 2013 and 31 December 2012 are as follows:

31 December 2013 31 December 2012Total assets 15.108.091 15.325.079Total liabilities (2.157.261) 577.189Shareholders’equity 17.265.352 14.747.890Group’s share in joint venture’s shareholders’ equity 8.632.676 7.373.945

1 January - 1 January - 31 December 2013 31 December 2012Revenue 1.705.776 1.252.656Loss for the period (363.832) (707.763)Group’s share in loss for the period (181.916) (353.882)

FINANCIAL STATEMENT

99




Financial information for Goodrich as of 31 December 2013 and 31 December 2012 are as follows:

31 December 2013 31 December 2012Total assets 9.064.019 7.284.016Total liabilities 7.168.001 6.254.706Shareholders’equity 1.896.018 1.029.310Group’s share in joint venture’s shareholders’ equity 758.407 411.724

1 January - 1 January - 31 December 2013 31 December 2012Revenue 14.404.840 13.581.638Loss for the period (1.364.225) (3.103.680)Group’s share in loss for the period (545.690) (1.241.472)

Share of investments’ profit/(loss) accounted by using to equity method are as follows:

1 January - 1 January - 31 December 2013 31 December 2012Sun Express 56.637.482 (10.263.186)Turkish DO&CO 31.365.384 9.045.852THY Opet 22.655.086 30.190.047TGS 18.515.052 6.490.886Bosna Hersek Havayolları - (11.574.460)Türkbine Teknik (181.916) (353.882)Goodrich (545.690) (1.241.472)Uçak Koltuk (673.057) 4.097.946TCI (2.273.796) (3.479.684)TEC (16.525.033) (16.950.794)Total 108.973.512 5.961.253

FINANCIAL STATEMENT




100

5. SEGMENTAL REPORTING

The management of the Group investigates the results and operations based on air transportation and aircraft technical maintenance services in order to determine in which resources to be allocated to segments and to evaluate the performances of segments. The detailed information on the sales data of the Group is given in Note 33.

5.1 Total Assets and Liabilities

Total Assets 31 December 2013 31 December 2012Aviation 25.229.616.381 18.576.446.509Technic 1.883.103.317 1.235.350.264Total 27.112.719.698 19.811.796.773Less: Eliminations due to consolidation (1.713.378.071) (1.053.865.058)Total assets in consolidated financial statements 25.399.341.627 18.757.931.715 Total Liabilitites 31 December 2013 31 December 2012Aviation 18.226.396.169 13.204.626.821Technic 614.730.235 309.832.394Total 18.841.126.404 13.514.459.215Less: Eliminations due to consolidation (404.275.133) (161.571.089)Total liabilitites in consolidated financial statements 18.436.851.271 13.352.888.126

5.2 Profit / (Loss) before Tax

Segment Results:

1 January - 31 December 2013 Aviation TechnicInter-segment

elimination TotalSales to External Customers 18.459.362.069 317.422.256 - 18.776.784.325 Inter-Segment Sales 30.469.756 778.177.154 (808.646.910) - Segment Revenue 18.489.831.825 1.095.599.410 (808.646.910) 18.776.784.325Cost of Sales (-) (15.129.787.875) (987.675.780) 812.808.238 (15.304.655.417)Gross Profit 3.360.043.950 107.923.630 4.161.328 3.472.128.908Administrative Expenses (-) (337.878.995) (115.314.855) 18.217.696 (434.976.154)Marketing and Sales Expenses (-) (1.937.967.673) (10.194.727) 858.106 (1.947.304.294)Other Operating Income 227.265.459 23.109.078 (19.819.490) 230.555.047 Other Operating Expenses (-) (65.064.004) (17.024.926) 1.716.887 (80.372.043)Operating Profit/ (Loss) 1.246.398.737 (11.501.800) 5.134.527 1.240.031.464Income from Investment Activities 139.076.819 524.910 7.788.666 131.813.063 Share of Investments’ Profit/Loss Accounted by Using The Equity Method 127.162.420 (18.188.908) - 108.973.512 Operating Profit/Loss before Financial Income/(Expense) 1.512.637.976 (29.165.798) (2.654.139) 1.480.818.039 Financial Income 61.368.752 5.059.839 (16.283.049) 50.145.542 Financial Expense (-) (571.821.258) (9.601.962) 15.703.894 565.719.326 Profit / (Loss) Before Tax From Continuing Operations 1.002.185.470 (33.707.921) (3.233.294) 965.244.255

FINANCIAL STATEMENT

101



5. SEGMENTAL REPORTING (cont’d)

5.2 Profit / (Loss) before Tax (cont’d)


elimination TotalSales to External Customers 14.580.603.989 181.458.257 - 14.762.062.246 Inter-Segment Sales 48.332.280 686.807.235 (735.139.515) - Segment Revenue 14.628.936.269 868.265.492 (735.139.515) 14.762.062.246Cost of Sales (-) (11.725.165.823) (712.824.923) 721.016.678 (11.716.974.068)Gross Profit/ (Loss) 2.903.770.446 155.440.569 (14.122.837) 3.045.088.178Administrative Expenses (-) (296.548.347) (82.315.076) 7.333.834 (371.529.589)Marketing and Sales Expenses (-) (1.580.298.722) (9.306.890) 814.719 (1.588.790.893)Other Operating Income 158.156.894 12.395.013 - 170.551.907 Other Operating Expense (-) (104.480.554) (11.482.166) - (115.962.720)Operating Profit/ (Loss) 1.080.599.717 64.731.450 (5.974.284) 1.139.356.883Income from Investment Activities 488.674.809 - - 488.674.809 Share of Investment Profit/ (Loss) Accounted by Using the Equity Method 26.431.485 (20.470.232) - 5.961.253 Operating Profit/Loss before Financial Income/Expense 1.595.706.011 44.261.218 (5.974.284) 1.633.992.945 Financial Income 88.671.642 (154.751) - 88.516.891 Financial Expense (-) (337.360.329) (37.076) - 337.397.405 Profit / Loss Before Tax From Continuing Operations 1.347.017.324 44.069.391 (5.974.284) 1.385.112.431

Income statement items related to equity accounted investees:

1 January-31 December 2013 Aviation TechnicInter-segment

elimination TotalShare of Investments’ Profit/Loss Accounted by Using The Equity Method 127.162.420 (18.188.908) - 108.973.512

1 January- 30 December 2012 Aviation TechnicInter-segment

elimination TotalShare of Investments’ Profit/Loss Accounted by Using The Equity Method 26.431.485 (20.470.232) - 5.961.253

5.3 Investment Operations


elimination TotalPurchase of property and equipment and intangible fixed assets 2.630.087.903 316.542.898 - 2.946.630.801Current period amortization and depreciation 1.154.356.982 86.170.177 - 1.240.527.159Investments accounted by using the equity method 332.202.531 57.471.668 - 389.674.199


elimination TotalPurchase of property and equipment and intangible fixed assets 2.517.407.045 126.241.439 - 2.643.648.484Current period amortization and depreciation 964.625.827 65.137.093 - 1.029.762.920Investments accounted by using the equity method 206.493.307 62.576.238 - 269.069.545

FINANCIAL STATEMENT




102

6. CASH AND CASH EQUIVALENTS

31 December 2013 31 December 2012Cash 2.231.785 1.836.473Banks – Time deposits 782.265.403 1.121.913.532Banks – Demand deposits 521.069.942 222.290.264Other liquid assets 33.416.705 9.502.267 1.338.983.835 1.355.542.536 Details of the time deposits as of 31 December 2013 are as follows:

Amount Currency Interest Rate Maturity 31 December 2013106.265.000 TL %6,41 - %9 January 2014 106.268.154

36.984.472 EUR %0,82 - %2,54 January 2014 108.762.210

265.442.777 USD %2,14 - %2,91 March 2014 567.235.039

782.265.403 Details of the time deposits as of 31 December 2012 are as follows:

Amount Currency Interest Rate Maturity 31 December 2012813.916.500 TL %7,14 - %9,22 March 2013 825.411.927

125.082.952 EUR %2,81 - %3,27 March 2013 296.501.605

1.121.913.532

FINANCIAL STATEMENT

103



7. FINANCIAL INVESTMENTS

Short-term financial investments are as follows:

31 December 2013 31 December 2012Time deposits with maturity more than 3 months 42.774.034 476.958.794

Time deposits with maturity of more than 3 months:

Amount Currency Interest Rate Maturity 31 December 201320.000.000 USD 2,79% April 2014 42.774.034

Amount Currency Interest Rate Maturity 31 December 2012

41.827.004 USD 3,53% April 2013 75.250.687170.000.000 TRY %6,93-%7,27 April 2013 170.577.49597.844.734 EUR %3,19-%3,20 September 2013 231.130.612

476.958.794

Long-term financial investments are as follows:

31 December 2013 31 December 2012Sita Inc. 1.679.619 1.679.619Star Alliance Gmbh 44.465 44.465Emek İnşaat ve İşletme A.Ş. 26.859 26.859UATP Inc. 16.929 16.929Foreign currency translation reserve 684.849 281.372 2.452.721 2.049.244

Sita Inc., Star Alliance GMBH, Emek İnşaat ve İşletme A.Ş. and UATP Inc. are disclosed at cost since they are not traded in an active market.

Details of the long-term financial investments of the Group at 31 December 2013 are as follows:

Company NameCountry of Registration

and Operations Ownership Share Voting Power Principal Activity

Sita Inc. Netherlands Less than 0.1% Less than 0.1%Information &

Telecommunication Services

Star Alliance Gmbh Germany 5.55% 5.55%Coordination Between Star Alliance Member Airlines

UATP Inc. USA 4% 4%Payment Intermediation Between

the Passenger and the Airlines

Emek İnşaat ve İşletme A.Ş. Turkey 0.3% 0.3% Construction

FINANCIAL STATEMENT




104

8. BORROWINGS

Short term portions of long term borrowings are as follows:

31 December 2013 31 December 2012Finance lease obligations (Note: 21) 1.188.220.823 866.011.394

Long term borrowings are as follows:

31 December 2013 31 December 2012Finance lease obligations (Note: 21) 10.364.269.509 7.800.982.204

9. OTHER FINANCIAL LIABILITIES

Short-term other financial liabilities of the Group are as follows:

31 December 2013 31 December 2012Other financial liabilities 33.808.413 31.064.076

Borrowings to banks account consists of overnight interest-free borrowings obtained for settlement of monthly tax and social security premium payments.

10. RELATED PARTY TRANSACTIONS

Short-term trade receivables from related parties that are accounted by using the equity method are as follows:

31 December 2013 31 December 2012TCI 382.750 447.790 TEC - 12.736.341 Sun Express - 5.791.128

382.750 18.975.259

Other short-term receivables from related parties are as follows:

31 December 2013 31 December 2012TCI 4.087.847 7.959 Türkbine Teknik - 476 Uçak Koltuk Üretimi - 96

4.087.847 8.531

FINANCIAL STATEMENT

105



10. RELATED PARTY TRANSACTIONS (cont’d)

Short-term trade payables to related parties that are accounted by using the equity method are as follows:

31 December 2013 31 December 2012THY Opet 184.980.253 139.538.456 Turkish DO&CO 67.793.993 16.035.217 Sun Express 54.322.677 19.426.776 TGS 33.853.908 27.246.944 TEC 31.294.411 12.462.870 Goodrich 2.361.168 289.812 TCI - 244 Türkbine Teknik - 676

374.606.410 215.000.995

Transactions with related parties for the year ended as of 31 December 2013 are as follows:

Sales

31 December 2013 31 December 2012Sun Express 85.596.025 42.182.656 TGS 28.690.121 32.959.604 TEC 12.334.619 15.621.347 Turkish DO&CO 5.285.615 2.566.491 THY Opet 3.097.997 160.909 TCI 228.038 944.319 Goodrich 148.057 1.890.294 Türkbine Teknik 51.652 360.275 Sun Express Deut. 40.217 70.008 Uçak Koltuk - 29.231 135.472.341 96.785.134

Purchases

31 December 2013 31 December 2012THY Opet 3.943.188.972 3.192.744.391 Turkish DO&CO 538.461.828 385.433.214 Sun Express 435.937.741 73.735.876 TGS 389.830.809 311.898.310 TEC 191.381.580 36.222.756 Star Alliance GMBH 840.053 - Goodrich 323.276 8.149.394 TCI 69.656 - Türkbine Teknik - 146.619 5.500.033.915 4.008.330.560

Transactions between the Group related to Sun Express and related to seat and aircraft rental operations; transactions between the Group and Turkish DO&CO are related to catering services; transactions between the Group and TGS are related to ground services, transactions between the Group and TEC are engine maintenance services and the transactions between the Group and THY Opet is related to the supply of aircraft fuel. Receivables from related parties are not collateralized and maturity of trade receivables is 30 days.

The total amount of salaries and other short term benefits provided for the Chairman and the Members of Board of Directors, General Manager, General Coordinator and Deputy General Managers are TL 8,524,363 (31 December 2012; TL 6,301,658).

FINANCIAL STATEMENT




106

11. TRADE RECEIVABLES AND PAYABLES

Trade receivables from non-related parties as of 31 December 2013 and 2012 are as follows:

31 December 2013 31 December 2012Trade receivables 1.289.341.336 823.016.124Allow once for doubtful receivables (141.633.923) (73.380.910)

1.147.707.413 754.635.214

Provision for doubtful receivables has been determined based on last experiences for uncollectible receivables. Details for credit risk, foreign currency risk and impairment for trade receivables are explained in Note 46.

Trade payables to non-related parties as of 31 December 2013 and 2012 are as follows:

31 December 2013 31 December 2012Trade payables 1.075.555.053 691.657.030Other Trade Payables 1.020.117 2.132.786 1.076.575.170 693.789.816

12. PAYABLES RELATED TO EMPLOYEE BENEFITS

Payables related to employee benefits as of 31 December 2013 and 2012 are as follows:

31 December 2013 31 December 2012 Salary accruals 260.194.780 147.057.807 Social security premiums payable 43.654.175 36.021.871 Labor union agreement accrual (*) 4.134.521 - 307.983.476 183.079.678

(*)The accrual for the Labor Union Agreement consists of increases in salaries according to the agreement of THY HABOM signed on 25 February 2014 and effective from 1 August 2013.

FINANCIAL STATEMENT

107



13. OTHER RECEIVABLES AND PAYABLES

Other short-term receivables from non-related parties as of 31 December 2013 and 2012 are as follows:

31 December 2013 31 December 2012Prepayments made for aircrafts, to be received back in cash (net) 1.111.916.468 475.603.418Receivables from purchasing transactions abroad 119.869.279 98.482.319Restriction on transfer of funds from banks (*) 85.538.901 160.469.134Receivables from training of captain candidates 28.889.363 2.751.021V.A.T Return 17.369.268 11.832.018Receivables from employees 3.304.898 2.511.696Other receivables 9.809.729 3.402.692 1.376.697.906 755.052.298

(*) As of 31 December 2013, the balance of this account is related to bank balances and blocked deposits in Khartum, Akra, Addis Ababa, Taşkent, Sao Paulo, Kazablanka, Dakka and Buenos Aires.

Other long-term receivables from non-related parties as of 31 December 2013 and 2012 are as follows:

31 December 2013 31 December 2012Prepayments made for aircrafts, to be received back in cash (net) 2.120.392.457 1.167.114.676Receivables from investment assistance (Note 2.5.16) 199.642.624 107.714.141Restriction on transfer of funds from banks (*) 185.575.908 176.900.543Receivables from training of captain candidates 102.223.282 44.470.842Interest swap agreement deposits 53.400.186 44.677.053Deposits and guarentees given 15.170.163 26.601.535Income accruals on withholding tax return 2.354.762 15.797.083Receivables from Sita deposit certificates 1.849.444 1.643.236 2.680.608.826 1.584.919.109

(*) As of 31 December 2013 and 2012 this amount stems from the accounts in Iran and Syria. It is obligated by Iran Civil Aviation Authority that until November 2012 parity for the ticket sales should be used according to the exchange rate of IRR (Iranian Exchange Rate) which is published by Iranian Central Bank (CB Level 1) as official parity. After devaluation in Iran, Iranian Central Bank does not allow to use CB Level 1 parity for foreign exchange money transfers since July 2012. The Group has EUR 60 million according to the CB Level 1 due to the sales until November 2012. After negotiations with Iranian Civil Aviation Authority and Iranian Central Bank, it is agreed to use CB Level 1 party for foreign transfer of this amount, however this transfer is not made yet. Parity for the related period is determined as 1EUR=15,966. As of 31 December 2013 and 2012 this balance is shown at this parity at balance sheet.)

Other short-term payables to non-related parties are as follows:

31 December 2013 31 December 2012Taxes and funds payable 81.943.879 41.742.240Deposits and guarantess received 18.117.653 21.881.619Payables to insurance companies 8.602.152 3.290.177Other liabilities 5.518.003 9.892.163 114.181.687 76.806.199

Other long-term payables to non-related parties are as follows:

31 December 2013 31 December 2012 Deposits and guarantees received 30.917.704 15.659.634

FINANCIAL STATEMENT




108

14. INVENTORIES

31 December 2013 31 December 2012Spare parts 288.403.089 230.339.657Other inventories 68.251.673 46.562.105 356.654.762 276.901.762Provision for impairment (-) (14.330.391) (17.701.999) 342.324.371 259.199.763

Movement in change of decrease in value of inventories for the periods ended 31 December 2013 and 2012.

1 January - 1 January - 31 December 2013 31 December 2012Provision at the beginning of the period 17.701.999 17.555.587Foreign currency translation effect 2.739.001 (993.935)(Reversals)/Provision set durring the period (6.110.609) 1.140.347 Provision at the end of the period 14.330.391 17.701.999

15. BIOLOGICAL ASSETS

None (31 December 2012: None). 16. PRE-PAID EXPENSES AND DEFERRED INCOME

Pre-paid expenses and deferred incomes as of 31 December 2013 and 2012 are as follows:

Short-term prepaid expenses

31 December 2013 31 December 2012Prepaid sales commissions 30.382.160 21.096.986Prepaid operating lease expenses 16.133.614 14.191.310Other prepaid expenses 15.591.581 8.844.769Prepaid advertising expenses 13.953.426 4.565.568Advances given for orders 9.283.739 35.473.673Prepaid other rent expenses 4.021.595 381.025 89.366.115 84.553.331

FINANCIAL STATEMENT

109



16. PRE-PAID EXPENSES AND DEFERRED INCOME (cont’d)

Long-term prepaid expenses

31 December 2013 31 December 2012Prepaid maintenance of engine expense 311.691.062 146.478.543Advances given for fixed asset purchases 52.089.326 60.987.232Prepaid aircraft financing expenses 33.770.950 27.830.021Other Prepaid expenses 12.850.445 699.010Prepaid operating lease expenses 1.840.398 1.891.246 412.242.181 237.886.052

Short-term deferred income

31 December 2013 31 December 2012Unearned revenue from share transfer of TGS (Note: 4) 16.961.685 12.870.201Unearned bank protocol income 12.272.118 7.720.681Other advances received 12.095.796 20.187.231Other deferred income 4.258.542 - Charter advances 1.041.847 1.041.539 46.629.988 41.819.652

Long-term deferred income

31 December 2013 31 December 2012Gross manufacturer’s credits 59.077.997 49.342.847Accumulated depreciations of manufacturer’s credit (36.261.496) (25.877.761)Unearned bank protocol income 8.277.860 10.732.856Other advances received 63.625 - Unearned revenue from share transfer of TGS (Note: 4) - 13.248.491 31.157.986 47.446.433

17. INVESTMENT PROPERTY

1 January- 1 January- 31 December 2013 31 December 2012Opening balance 57.985.000 54.720.000Foreign currency translation difference 11.592.599 (3.068.810)Disposal (500.000) - Fair Value gain (Note 37) 7.242.401 6.333.810Closing balance 76.320.000 57.985.000

Valuation was performed by the independent valuation firm, which is authorized by Capital Markets Board with reference to market prices for similar properties.

The Group does not have any rent income from investment property.

Determination of fair value of investment property is within the scope of Level 3 in terms of valuation technique.

FINANCIAL STATEMENT




110

18. P

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FINANCIAL STATEMENT

111



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-

-

-

1.81

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-

-

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1.

815.

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103.

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2.82

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-

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5.79

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.151

.636

)(6

.478

.687

)

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ing

bala

nce

at 3

1 D

ecem

ber 2

012

198.

408.

933

376.

616.

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240.

693.

235

15.6

23.7

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4661

7.66

8.43

037

3.79

5.36

179

.440

.618

679.

208.

519

18.1

89.5

37.9

14

Acc

umul

ated

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reci

atio

n

Open

ing

bala

nce

at 1

Jan

uary

201

264

.597

.647

321.

520.

088

69.2

10.2

913.

291.

791.

980

139.

105.

118

185.

035.

834

65.3

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4.

136.

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986

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ign

curr

ency

tran

slat

ion

diffe

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es(3

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)(4

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0.36

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8)(6

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42.7

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(10.

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104)

(11.

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708)

-

(769

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)

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n ch

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he p

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337.

720

24.3

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.439

.402

848.

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631

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2649

.368

.777

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1.

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275

Dis

posa

ls -

(2

.330

.508

)(5

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(4.9

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187.

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.625

) -

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-

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184

(94.

360.

351)

93.7

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73.5

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659.

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187.

327.

416

145.

803.

610

51.5

69.9

39 -

5.

496.

198.

325

Net

boo

k va

lue

31 D

ecem

ber

2012

124.

814.

112

173.

733.

226

64.7

13.8

9310

.964

.666

.395

430.

341.

014

227.

991.

751

27.8

70.6

7967

9.20

8.51

912

.693

.339

.589

Net

boo

k va

lue

31 D

ecem

ber

2011

129

.847

.406

1

39.6

65.1

73

79.

243.

143

9.5

71.7

18.8

29

476

.161

.347

2

14.6

28.2

20

46.

065.

929

435

.264

.825

1

1.09

2.59

4.87

2

(*

) Due

to th

e im

plem

ente

d ER

P sy

stem

whi

ch w

as p

ract

iced

in 1

Jul

y 20

12, T

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roup

mad

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me

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ges

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lass

ifica

tion

of ta

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le a

nd in

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ible

ass

ets.

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and

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dep

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atio

n am

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sum

mat

ion

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L 6,

478,

687

was

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red

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tang

ible

Ass

ets.

FINANCIAL STATEMENT




112

19. OTHER INTANGIBLE ASSETS

Slot Rights Other Rights Total Cost Opening balance at 1 January 2013 23.069.393 128.876.837 151.946.230Foreign currency translation differences 4.551.501 29.466.538 34.018.039Additions - 29.702.901 29.702.901Disposals - (3.712) (3.712)Transfers - 3.585.018 3.585.018Closing balance at 31 December 2013 27.620.894 191.627.582 219.248.476

Accumulated Depreciation Opening balance at 1 January 2013 - 100.762.463 100.762.463 Foreign currency translation differences - 21.693.450 21.693.450 Amortization charge for the period - 14.945.116 14.945.116 Disposals - (3.712) (3.712)Closing balance at 31 December 2013 - 137.397.317 137.397.317Net book value at 31 December 2013 27.620.894 54.230.265 81.851.159

Slot Rights Other Rights Total

Cost Opening balance at 1 January 2012 24.445.066 113.740.124 138.185.190Foreign currency translation differences (1.375.673) (7.175.696) (8.551.369)Additions - 16.552.664 16.552.664Disposals - (718.942) (718.942)Transfers - 6.478.687 6.478.687Closing balance at 31 December 2012 23.069.393 128.876.837 151.946.230

Accumulated Depreciation Opening balance at 1 January 2012 - 91.222.250 91.222.250Foreign currency translation differences - (5.513.033) (5.513.033)Amortization charge for the period - 8.686.645 8.686.645Disposals - (112.086) (112.086)Transfers - 6.478.687 6.478.687Closing balance at 31 December 2012 - 100.762.463 100.762.463Net book value at 31 December 2012 23.069.393 28.114.374 51.183.767

The Group considers the slot rights as intangible assets having indefinite useful life.

FINANCIAL STATEMENT

113



20. GOODWILL

31 December 2013 CostOpening balance at 1 January 2013 - Additions (Note: 3) 52.523.964 Foreign currency translation differences 5.716.838 Closing balance at 31 December 2013 58.240.802

21. LEASING TRANSACTIONS

Maturities of finance lease obligations are as follows:

31 December 2013 31 December 2012Less than 1 year 1.464.764.110 1.068.307.603Between 1 – 5 years 5.809.555.437 4.291.572.222Over 5 years 5.970.519.946 4.624.307.819 13.244.839.493 9.984.187.644Less: Future interest expenses (1.692.349.161) (1.317.194.046)Principal value of future rentals stated in financial statements 11.552.490.332 8.666.993.598

31 December 2013 31 December 2012Interest Range: Floating rate obligations 5.073.110.037 3.355.700.565Fixed rate obligations 6.479.380.295 5.311.293.033 11.552.490.332 8.666.993.598

As of 31 December 2013, the US Dollars, Euro and JPY denominated lease obligations’ weighted average interest rates are 3.80% (31 December 2012: 4.14%) for the fixed rate obligations and 0.88% (31 December 2012: 0.61%) for the floating rate obligations.

22. SERVICE CONCESSION AGREEMENTS

None (31 December 2012: None).

23. IMPAIRMENT IN ASSETS

None (31 December 2012: None).

24. GOVERNMENT GRANTS AND INCENTIVES

Incentive certificate No: 28.12.2011 / 99256 was obtained from Turkish Treasury for financing the aircrafts planned for the period after 2010. According to this certificate, the Company will use the advantages for reduction of corporate tax, customs duty exemption and support for insurance premium of employers. Please refer to Note: 2.5.16 for the accounting of the related investment contribution

25. BORROWING COSTS

During the year of 2013, there is no capitalized borrowing cost on property and equipment. (31 December 2012: None).

FINANCIAL STATEMENT




114

26. PROVISIONS, CONTINGENT ASSETS AND LIABILITIES

Short-term provisions as of 31 December 2013 and 2012 are as follows:

(a) Short-term provisions for employee benefits

31 December 2013 31 December 2012Provisions for unused vacation 64.731.115 41.066.116

Changes in the provisions during 31 December 2013 and 2012 periods are set out below:

1 January - 1 January - 31 December 2013 31 December 2012

Provision at the beginning of the year 41.066.116 11.914.374Additions from business combination 2.278.037 - Provision for the current period 22.377.281 29.210.389Foreign currency translation differences (990.319) (58.647)Provision at the end of the period 64.731.115 41.066.116

(b) Other short-term provisions:

31 December 2013 31 December 2012Provisions for legal claims 29.819.212 35.516.181

Changes in the provisions for legal claims during 31 December 2013 and 2012 periods are set out below:

1 January - 1 January - 31 December 2013 31 December 2012Provision at the beginning of the year 35.516.181 26.224.798Provision for the current period 3.282.172 15.507.398Provisions released (9.047.242) (7.170.892)Foreign currency translation differences 68.101 954.877 Provision at the end of the period 29.819.212 35.516.181

The Group recognizes provisions for lawsuits against it due to its operations. The law suits against the Group are usually reemployment law suits by former employees or related to damaged luggage or cargo.

FINANCIAL STATEMENT

115



27. COMMITMENTS

a) Guarantees/Pledges/Mortgages (“GPM”) given by the group: Amount of letter of guarantees given as of 31 December 2013 is TL 168,237,282 (31 December 2012: TL 103,501,040).

31 December 2013 31 December 2012

Foreign

currency amount TL

equivalent Foreign

currency amount TL

equivalentA. Total amounts of GPM given on the behalf of its own legal entity 168.237.282 103.501.040

-Collaterals TL - 19.793.631 - 11.882.222 EUR 10.289.903 30.216.299 6.719.618 15.802.526 USD 53.499.485 114.183.950 40.957.707 73.011.209 Other - 4.043.402 - 2.805.083

B. Total amounts of GPM given on the behalf of subsidiaries that are included in full consolidation - - - - C. Total amounts of GPM given in order to guarantee third party debts for routine trade operations - - - - D. Total amounts of other GPM given - - - -

i. Total amount of GPM given on behalf of the Parent - - - - ii. Total amount of GPM given on behalf of other group companies not covered in B and C - - - - iii. Total amount of GPM given on behalf of third parties not covered in C - - - 168.237.282 103.501.040

The other CPMs given by the Company constitute 0% of the Group’s equity as of 31 December 2012 (31 December 2011: 0%).

b) Operational leasing debts: The detail of the Group’s not accrued operational leasing debts related to aircrafts is as follows:

31 December 2013 31 December 2012Less than 1 year 306.818.229 282.339.574Between 1 – 5 years 668.136.183 810.999.803More than 5 years 151.948.537 81.178.443 1.126.902.949 1.174.517.820

To be delivered between the years 2010-2015, the Group signed a contract for 89 aircrafts with a total value of 11.8 billion US Dollars, according to the price lists before the discounts made by the aircraft manufacturing firms. 10 of these aircrafts were delivered in 2010, 29 of these aircrafts were delivered in 2011, 19 of these aircrafts were delivered in 2012 and 18 of these aircrafts were delivered in 2013. To be delivered between the years 2013-2021, the Group signed a contract for 252 aircrafts with a total value of 37.5 billion US Dollars, according to the price lists before the discounts made by the aircraft manufacturing firms. The Group has made an advance payment of 1.529 million US Dollars relevant to these purchases as of 31 December 2013.

c) Other operational leasing debts:

The Group also has operational lease agreements for 15 years related to the land for the aircraft maintenance hangar which is in use and for 23 years related to the land for the aircraft maintenance hangar which is still under construction. The liabilities of the Group related with these lease agreements are as follows:

31 December 2013 31 December 2012Less than 1 year 10.291.602 2.081.088Between 1 – 5 years 50.256.243 16.417.472More than 5 years 118.021.858 49.973.307 178.569.703 68.471.867

FINANCIAL STATEMENT




116

28. EMPLOYEE BENEFITS

Provision for long-term retirement pay liability as of 31 December 2013 and 2012 is comprised of the following:

31 December 2013 31 December 2012Provisions for retirement pay liability 249.604.088 234.019.405

Provision for retirement pay liability is recorded according to following explanations:

Under labor laws effective in Turkey, it is a liability to make legal retirement pay to employees whose employment is terminated in such way to receive retirement pay. In addition, according to Article 60 of Social Security Law numbered 506 which was changed by the laws numbered 2422, dated 6 March 1981 and numbered 4447, dated 25 August 1999, it is also a liability to make legal retirement pay to those who entitled to leave their work by receiving retirement pay. Some transfer provisions related to service conditions prior to retirement are removed from the Law by the changed made on 23 May 2002.

Retirement pay liability is subject to an upper limit of monthly TL 3,438 as of 1 January 2014 (1 January 2013: TL 3,129).

Retirement pay liability is not subject to any kind of funding legally. Provision for retirement pay liability is calculated by estimating the present value of probable liability amount arising due to retirement of employees. IAS 19 (“Employee Benefits”) stipulates the development of company’s liabilities by using actuarial valuation methods under defined benefit plans. In this direction, actuarial assumptions used in calculation of total liabilities are described as follows:

Main assumption is that maximum liability amount increases in accordance with the inflation rate for every service year. So, provisions in the accompanying financial statements as of 31 December 2013 are calculated by estimating present value of contingent liabilities due to retirement of employees. Provisions in the relevant balance sheet dates are calculated with the assumptions of 6.00% annual inflation rate (31 December 2012: 5.00%) and 10.20% discount rate. (31 December 2012: 7.63%). Estimated amount of retirement pay not paid due to voluntary leaves and retained in the Company is also taken into consideration as 2.37% (31 December 2012: 2.40%). Ceiling for retirement pay is revised semi-annually. Ceiling amount of TL 3,438 which is in effect since 1 January 2014 is used in the calculation of Group’s provision for retirement pay liability.

Movement in the provision for retirement pay liability is as follows:

1 January - 1 January - 31 December 2013 31 December 2012Provisions at the beginning of the period 234.019.405 191.632.448Effect of business combination 2.797.612 - Service charge for the period 57.237.528 33.585.087Interest charges 8.967.974 4.802.966Actuarial gain / (loss) (25.626.992) 26.922.256Payments (28.139.267) (25.874.633)Foreign currency translation effect 347.828 2.951.281Provisions at the end of the period 249.604.088 234.019.405

FINANCIAL STATEMENT

117



29. EXPENSES BY NATURE

Expenses by nature for the years ended 31 December 2013 and 2012 are as follows:

1 January - 1 January - 31 December 2013 31 December 2012Fuel expenses 6.574.220.845 5.160.597.731Personnel expenses 3.026.021.360 2.492.920.458Depreciation expenses 1.240.527.159 1.029.762.920Ground services expenses 1.060.201.271 824.244.995Passenger service catering expenses 891.516.771 622.510.934Air traffic control expenses 864.180.730 633.465.331Landing and navigation expenses 663.698.287 494.716.002Commission and incentives Income 632.021.257 530.632.435Maintenance expenses 608.898.333 395.064.193Short term leasing expenses 578.564.737 121.741.196Reservation systems expense 389.415.337 301.657.615Operating lease expenses 283.209.307 312.873.093Advertising and promotion expenses 252.395.319 191.636.103Other expenses 142.334.177 121.221.560Service expenses 123.806.654 119.125.251Other rent expenses 84.729.834 85.640.155Insurance expenses 77.332.407 86.814.456Communication and information expenses 58.033.421 39.822.198Tax expenses 36.685.626 25.796.751Transportation expenses 36.673.174 31.819.818Consultancy expenses 25.412.102 16.581.380Utility expenses 15.650.445 19.869.276Membership fees 11.075.966 12.618.507System use and membership expenses 10.331.346 6.162.192 17.686.935.865 13.677.294.550

30. PASSENGER FLIGHT LIABILITIES

Passenger flight liability is as follows;

31 December 2013 31 December 2012Flight liability generating from ticket sales 2.109.459.830 1.271.723.065Flight liability generating from sales of mileage and frequent flyer programme 453.046.437 396.752.754 2.562.506.267 1.668.475.819

FINANCIAL STATEMENT




118

31. OTHER ASSETS AND LIABILITIES

Details of other current assets as of 31 December 2013 and 2012 are as follows:

31 December 2013 31 December 2012Deferred VAT 102.299.545 57.926.347Personnel and job advances 9.644.840 3.337.806Other current assets 479.567 781.620 112.423.952 62.045.773

Other short-term liabilities as of 31 December 2013 and 2012 are as follows:

31 December 2013 31 December 2012Accruals for maintenance expenses 611.392.419 480.887.247Accruals for other expenses 4.318.568 14.182.943Other liabilities 4.033.193 1.360.052 619.744.180 496.430.242

32. SHAREHOLDERS’ EQUITY

The ownership structure of the Group’s share capital is as follows:

Class % 31 December 2013 % 31 December 2012Republic of Turkey Prime Ministry Privatization Administration (*) A, C 49,12 677.856.000 49,12 589.465.086Other (publicly held) A 50,88 702.144.000 50,88 610.534.914Paid-in capital 1.380.000.000 1.200.000.000Restatement difference 1.123.808.032 1.123.808.032Restated capital 2.503.808.032 2.323.808.032

(*) 1,644 shares belonging to various private shareholders were not taken into consideration when the Group was included to the privatization program in 1984. Subsequently, these shares were registered on behalf of Privatization Administration according to Articles of Association of the Group, approved by the decision of the Turkish Republic High Planning Board on 30 October 1990. As of 31 December 2013, the Group’s issued and paid-in share capital consists of 137.999.999.999 Class A shares and 1 Class C share, all with a par value of Kr 1 each. These shares are issued to the name. The Class C share belongs to the Republic of Turkey Prime Ministry Privatization Administration and has the following privileges:

Articles of Association 7: Positive vote of the board member representing class C share and approval of the Board of Directors are necessary for transfer of shares issued to the name.

Articles of Association 10: The Board of Directors consists of nine members of which one member has to be nominated by the class C shareholder and the rest eight members has to be chosen by an election between class A shareholder’s top rated.

FINANCIAL STATEMENT

119



32. SHAREHOLDERS’ EQUITY (cont’d)

Articles of Association 14: The following decisions of the Board of Directors are subject to the positive vote of the class C Shareholder:

a) As defined in Article 3.1. of the Articles of Association, taking decisions that will negatively affect the Company’s mission,b) Suggesting change in the Articles of Association at General Assembly,c) Increasing share capital, d) Approval of transfer of the shares issued to the name and their registration to the “Share Registry”,e) Making decisions or taking actions which will put the Company under commitment over 5% of its total assets considering the latest annual financial statements prepared for Capital Market Board per agreement (this statement will expire when the Company’s shares held by Turkish State is below 20%),f) Making decisions relating to merges and liquidation,g) Making decisions to cancel flight routes or significantly decrease number of flights except for the ones that cannot recover even its operational expenses subject to the market conditions.

Restricted Profit Reserves

The legal reserves consist of first and second reserves, appropriated in accordance with the Turkish Commercial Code (TCC). The TCC stipulates that the first legal reserve is appropriated out of statutory profits at the rate of 5% per annum, until the total reserve reaches 20% of the company’s paid-in share capital. The second legal reserve is appropriated at the rate of 10% per annum of all cash distributions in excess of 5% of the paid-in share capital. Under the TCC, the legal reserves can only be used to offset losses and are not available for any other usage unless they exceed 50% of paid-in share capital.

Foreign Currency Translation Differences

Method for consolidation purpose is, according to TAS 21, monetary items in statutory financial statements is translated to USD using year-end exchange rates, non-monetary items in balance sheet, income/expenses and cash flow are translated to USD by using the exchange rate of the transaction date (historic rate), and currency translation differences are presented under equity. Translation profit/loss from foreign currency transactions is presented under foreign currency exchange losses item under financial expenses in profit or loss and translation profit/loss from trading operations is presented under foreign exchange losses item in operating expenses. Also, currency translation differences in equities of the Group’s joint venture; Güneş Ekspres Havacılık A.Ş. (Sun Express) which is consolidated by using equity method, is presented under currency translation item. Foreign currency translation differences are the changes due to the foreign exchange rate changes in the shareholders’ equity Sun Express which is subsidiary accounted for equity method.

Distribution of Dividends

Listed companies distribute dividend in accordance with the Communiqué No. II-19.1 issued by the CMB which is effective from February 1, 2014.

Companies distribute dividends in accordance with their dividend payment policies settled and dividend payment decision taken in general assembly and also in conformity with relevant legislations. The communiqué does not constitute a minimum dividend rate. Companies distribute dividend in accordance with the method defined in their dividend policy or articles of associations. In addition, dividend can be distributed by fixed or variable installments and advance dividend can be paid in accordance with profit on financial statements of the company.

At the Company’s Ordinary General Assembly Meeting held on 29 March 2013, it is decided to distribute dividends amounting to TL 173,280,902 as cash and TL 180,000,000 as bonus share. As at 31 December 2013, the payment of cash dividends and distribution of bonus shares were completed.

FINANCIAL STATEMENT




120

32. SHAREHOLDERS’ EQUITY (cont’d)

Distribution of Dividends (cont’d)

The items of shareholders’ equity of the Company in the statutory accounts as of 31 December 2013 are as follows:

Paid-in capital 1.380.000.000Share premium 181.185Legal reserves 75.739.047Extraordinary reserves (*) - Other profit reserves 9Special funds 10.577.516Retained earnings (*) 0Net profit for the period (1.023.653.930)Total shareholders’ equity 442.843.827

(*) Per legal records, there are some amounts of balances subject to dividend distributions, but total of these amounts are negative.

Gains/Losses from Cash Flow Hedges

Hedge gain/losses against cash flow risk arise from the accounting of the changes in the fair values of effective derivative financial instruments designated against financial risks of future cash flows under equity. Total of deferred gain/loss arising from hedging against financial risk are accounted in profit or loss when the effect of the hedged item has effect on profit or loss. 33. REVENUE

Details of gross profit are as follows:

1 January - 1 January - 31 December 2013 31 December 2012Scheduled flights Passenger 16.587.466.680 13.128.871.780Cargo and mail 1.638.176.082 1.288.141.709Total scheduled flights 18.225.642.762 14.417.013.489Unscheduled flights 162.840.851 127.776.312Technical Revenue 317.422.256 188.895.224Other revenue 70.878.456 28.377.221Net sales 18.776.784.325 14.762.062.246Cost of sales (-) (15.304.655.417) (11.716.974.068)Gross profit 3.472.128.908 3.045.088.178

FINANCIAL STATEMENT

121



33. REVENUE (cont’d)

Geographical details of revenue from the scheduled flights are as follows:

1 January - 1 January - 31 December 2013 31 December 2012- Europe 6.103.089.788 4.772.031.464- Far East 3.928.544.390 3.214.994.008- Middle East 2.257.537.309 1.874.211.753- America 1.871.684.644 1.427.284.335- Africa 1.512.471.540 1.081.276.013Total international flights 15.673.327.671 12.369.797.573Domestic flights 2.552.315.091 2.047.215.916Total scheduled flights 18.225.642.762 14.417.013.489

34. COST OF SALES

The details of the cost of sales are as follows:

1 January - 1 January - 31 December 2013 31 December 2012Fuel expenses 6.572.690.533 5.159.187.276Personnel expenses 2.261.315.199 1.847.455.115Depreciation expenses 1.183.623.060 982.774.191Ground services expenses 1.060.201.271 824.244.995Passenger service catering expenses 891.516.771 622.510.934Air traffic control expenses 864.180.730 633.465.331Landing and navigation expenses 663.698.287 494.716.002Maintenance expenses 602.494.058 387.897.396Short term aircraft leasing expenses 578.564.737 121.741.196Operating lease expenses 283.209.307 312.873.093Service expenses 89.263.220 84.198.175Insurance expenses 75.445.618 85.514.580Other rent expenses 50.149.164 43.004.409Transportation expenses 36.673.174 31.819.818Tax expenses 18.787.659 17.157.765Utility expenses 11.008.092 12.430.824Other expenses 61.834.537 55.982.968 15.304.655.417 11.716.974.068

FINANCIAL STATEMENT




122

35. GENERAL ADMINISTRATIVE EXPENSES AND MARKETING AND SALES EXPENSES

General administrative expenses are as follows:


Personnel expenses 266.042.066 225.371.238Depreciation expenses 44.574.203 35.826.796Communication and information expenses 43.193.773 30.053.436Service expenses 22.219.578 28.891.431System usage and membership expenses 10.331.346 6.162.192Consultancy expenses 9.518.180 6.806.424Rent expenses 8.682.388 10.213.003Maintenance expenses 6.404.275 7.166.797Utility expenses 4.642.353 7.438.452Insurance expenses 1.886.789 1.299.876Other general administrative expenses 17.481.203 12.299.944 434.976.154 371.529.589

Marketing and sales expenses are as follows:

1 January - 1 January - 31 December 2013 31 December 2012 Commissions and incentive expenses 632.021.257 530.632.435Personnel expenses 498.664.095 420.094.105Reservation systems expense 389.415.337 301.657.615Advertising and promotion expenses 252.395.319 191.636.103Rent expenses 25.898.282 32.422.743Tax expenses 17.897.967 8.638.986Consultancy expenses 15.893.922 9.774.956Communication and information expenses 14.839.648 9.768.762Depreciation expenses 12.329.896 11.161.933Service expenses 12.323.856 6.035.645Membership fees 11.075.966 12.618.507Fuel expenses 1.530.312 1.410.455Other sales and marketing expenses 63.018.437 52.938.648 1.947.304.294 1.588.790.893

FINANCIAL STATEMENT

123



36. OTHER OPERATING INCOME / EXPENSES

Other operating income consists of the following:


Foreign exchange gains on trade operations, net 76.147.165 - Insurance, indemnities, penalties income 52.395.739 61.303.525Grant credit income related to aircraft, engines and other purchases 17.910.135 16.267.517Provisions released 14.784.893 24.358.091TGS share premium (Note: 4) 11.187.211 14.088.535Non- interest income from banks 9.627.810 8.906.897Late payment interest income 7.420.527 6.352.932Rent income 7.140.139 4.318.765Other operating income 33.941.428 34.955.645

230.555.047 170.551.907

Other operating expenses consist of the following:


Provision expenses 43.162.345 28.869.760Indemnity and penalty expense 5.594.677 4.942.022Foreign exchange losses on trade operations, net - 64.544.740Other operating expenses 31.615.021 17.606.198 80.372.043 115.962.720

37. INCOME AND EXPENSES FROM INVESTMENT ACTIVITIES

Incomes from investment activities are as follows:

31 December 2013 31 December 2012Income from investment assistance 93.786.035 62.319.152Financial investment interest income 29.126.209 65.558.458Gain on sale of fixed assets 1.658.418 3.321.066Fair value gain on investment property 7.242.401 6.333.810Cancellation of provision for impairmet for tangible assets and assets held-for-sale (*) -- 351.142.323 131.813.063 488.674.809

(*)Consist of cancellation of impairment charge recognized in in previous year of 7 A-340 aircrafts which were classified as assets held for sale in 2011 and reclassified to property and equipment in 2012 due to change in sales plan.

FINANCIAL STATEMENT




124

38. EXPENSES CLASSIFIED BY PRINCIPLE OF TYPE

Expenses for the years ended as of 31 December 2013 and 2012 are presented in Note 33 and Note 34 according to their functions.

39. FINANCIAL INCOME/EXPENSES

Financial income consists of the following:

31 December 2013 31 December 2012Interest income 50.145.542 63.013.758Earning from derivative financial instruments - 25.503.133 50.145.542 88.516.891

Finance expenses are as follows:

31 December 2013 31 December 2012

Finance lease interest expense 247.443.605 208.066.460Foreign exchange losses 223.079.056 96.486.559Losses on derivative financial instruments 44.471.986 - Administrative expenses for aircraft financing 26.600.791 14.559.832Discount interest expense related to prepayments for the aircrafts purchases 7.551.044 8.875.679Cost of employee termination benefits interest 8.967.974 4.802.966Other financial expense 7.604.870 4.605.909 565.719.326 337.397.405

40. ANALYSIS OF OTHER COMPREHENSIVE INCOME ITEMS

For the period ended 31 December 2013, the Company’s other comprehensive income which is not to be reclassified to profit or loss is TL 20,010,648 as income (31 December 2012: TL 22,349,824 as expense), other comprehensive income to be reclassified to profit or loss is TL 1,028,009,655 as income (31 December 2012: TL 227,251,285 as expense).

41. TAX ASSETS AND LIABILITIES

Assets related to current tax consists of the following items:

31 December 2013 31 December 2012Prepaid taxes and funds 16.507.184 19.666.261

Tax expense consists of the following items:

1 January - 1 January - 31 December 2013 31 December 2012Current period tax expense - 32.616.486Deferred tax expense 282.536.828 196.778.888Tax expense 282.536.828 229.395.374

FINANCIAL STATEMENT

125



41. TAX ASSETS AND LIABILITIES (cont’d)

Tax effect related to other comprehensive income is as follows:

1 January - 31 December 2013 1 January - 31 December 2012 Amount Tax (expense) Amount Amount Tax (expense) Amount before tax /income after tax before tax /income after taxChanges in Foreign currency translation difference 1.083.831.570 - 1.083.831.570 (228.479.860) - (228.479.860)Change in cash flow hedge reserve (69.777.394) 13.955.479 (55.821.915) 1.535.719 (307.144) 1.228.575Change in actuarial losses from defined pension plans 25.013.310 (5.002.662) 20.010.648 (27.937.280) 5.587.456 (22.349.824)Other comprehensive income 1.039.067.486 8.952.817 1.048.020.303 (254.881.421) 5.280.312 (249.601.109)

There is no taxation effect related to the change in foreign currency translation adjustment that is included in other comprehensive income for the period.

Corporate Tax

The Group is subject to Turkish corporate taxes. Provision is made in the accompanying financial statements for the estimated charge based on the Group’s results for the years and periods. Turkish tax legislation does not permit a parent company and its subsidiary to file a consolidated tax return. Therefore, provisions for taxes, as reflected in the accompanying consolidated financial statements, have been calculated on a separate-entity basis.

Corporate tax is applied on taxable corporate income, which is calculated from the statutory accounting profit by adding back non-deductible expenses, and by deducting dividends received from resident companies, other exempt income and investment incentives utilized. The effective tax rate in 2013 is 20% (2012: 20%).

In Turkey, advance tax returns are filed on a quarterly basis. Advance corporate income tax rate applied in 2013 is 20%. Losses can be carried forward for offset against future taxable income for up to 5 years. However, losses cannot be carried back for offset against profits from previous periods.

Furthermore, there is no procedure for a final and definitive agreement on tax assessments. Companies file their tax returns between 1-25 April following the close of the accounting year to which they relate. Tax authorities may, however, examine such returns and the underlying accounting records and may revise assessments within five years.

Income Withholding Tax

In addition to corporate taxes, companies should also calculate income withholding taxes and funds surcharge on any dividends distributed, except for companies receiving dividends who are Turkish residents and Turkish branches of foreign companies. Income withholding tax is in use since 22 July 2006. Commencing from 22 July 2006, the rate has been changed to 15% from 10% upon the Council of Ministers’ Resolution No: 2006/10731. Undistributed dividends incorporated in share capital are not subject to income withholding tax.

FINANCIAL STATEMENT




126


Deferred Tax

The Group recognizes deferred tax assets and liabilities based upon temporary differences arising between its financial statements as reported for TFRS purposes and its statutory tax financial statements. These differences usually result in the recognition of revenue and expenses in different reporting periods for TFRS and tax purposes and they are given below.

For calculation of deferred tax asset and liabilities, the rate of 20% is used.

In Turkey, the companies cannot declare a consolidated tax return; therefore, subsidiaries that have deferred tax assets position were not netted off against subsidiaries that have deferred tax liabilities position and disclosed separately.

The deferred tax assets / (liabilities) are as follows:

31 December 2013 31 December 2012Fixed assets (1.531.002.251) (919.880.215)Provisions for ticket sales advance (44.871.518) (78.216.603)Accruals for expenses 174.802.486 152.179.387Provisions for employee benefits 50.592.290 46.803.881Income and expense for future periods 26.572.442 17.216.979Long-term lease obligations 10.394.612 12.075.091Allowance for doubtful receivables 10.750.057 5.963.723Provisions for unused vacation 12.462.435 8.213.223Provision for impairment of inventories 2.866.078 3.540.398Accumulated loss 184.051.336 - Other (1.215.119) 8.020.476Deferred tax liabilities (1.104.597.152) (744.083.660)

The changes of deferred tax liability as of 31 December 2013 and 2012 are as follows:


Opening balance at 1 January 744.083.660 574.679.843Deferred tax expense 282.536.828 196.778.888Tax income from hedge reserve gains/losses (13.112.336) 1.196.086Tax expenses of actuarial losses from defined pension plans 5.125.398 (5.384.451)Foreign currency translation adjustment 85.963.602 (23.186.706)Deferred tax liability at the end of the period 1.104.597.152 744.083.660

FINANCIAL STATEMENT

127




1 January - 1 January - Reconciliation of provision for taxes: 31 December 2013 31 December 2012Profit from operations before tax 965.244.255 1.385.112.431

Domestic income tax rate of 20% 193.048.851 277.022.486

Taxation effects on:- income from investment assistance (18.757.207) (12.445.209)- non-deductible expenses 6.792.351 2.406.311- foreign exchange rate translation gain / (loss) 125.045.660 (36.770.976)- equity method (21.794.705) (1.192.251)- other (1.798.122) 375.013Tax charge in profit or loss 282.536.828 229.395.374

42. EARNINGS PER SHARE

Earnings per share disclosed in the consolidated statements of income are determined by dividing the net income by the weighted number of shares that have been outstanding during the period concerned.

In Turkey, companies can increase their share capital by making a pro-rata distribution of shares (“bonus interest”) to existing shareholders from retained earnings. For the purpose of earnings per share computations, such bonus shares are regarded as issued shares. Accordingly, the weighted average number of shares outstanding during the years has been adjusted in respect of bonus shares issued without a corresponding change in resources, by giving them retroactive effect for the period in which they were issued and for each earlier year.

Earnings per share are calculated by dividing net profit by weighted average number of shares outstanding in the relevant period.

Number of total shares and calculation of earnings per share at 31 December 2013 and 2012:


Number of shares outstanding at 1 January (in full) 120.000.000.000 120.000.000.000New bonus shares issued (in full) 18.000.000.000 -Number of shares outstanding at 31 December (in full) 138.000.000.000 138.000.000.000Weighted average number of shares outstanding during the period (in full) 138.000.000.000 138.000.000.000Net profit for period 682.707.427 1.155.717.057Profit per share (Kr) 0,49 0,84

43. EFFECTS OF EXCHANGE RATE CHANGES

Analysis of effects of exchange rate changes as at 31 December 2013 and 2012 is presented in Note 46.

44. REPORTING IN HYPERINFLATIONARY ECONOMIES

The Group has terminated the application of being inflation accounting effective from 1 January 2005 based on the decision of CMB on 17 March 2005.

FINANCIAL STATEMENT




128

45. DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments and liabilities of the Group as of 31 December 2013 and 2012 are as follows:

31 December 2013 31 December 2012Derivative instruments for interest rate cash flow hedge 41.282.298 42.919.379Cross exchange rate swap agreements 12.920.386 22.176.806Derivative instruments for fuel prices cash flow hedge 10.076.978 9.765.464 64.279.662 74.861.649

31 December 2013 31 December 2012Derivative instruments for interest rate cash flow hedge 101.487.620 142.390.259Cross exchange rate swap agreements 113.727.977 19.246.363Derivative instruments for fuel prices cash flow hedge 18.733.493 - 233.949.090 161.636.622

46. NATURE AND LEVEL OF RISKS DERIVING FROM FINANCIAL INSTRUMENTS

(a) Capital risk management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximizing the return to stakeholders through the optimization of the debt and equity balance.

The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 8, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings.

The Board of Directors of the Group periodically reviews the capital structure. During these analyses, the Board assesses the risks associated with each class of capital along with cost of capital. Based on the review of the Board of Directors, the Group aims to balance its overall capital structure through the issue of new debt or the redemption of existing debt.

The overall strategy of the Group does not change compared to 2012.

31 December 2013 31 December 2012Total debts 13.041.029.326 9.606.848.485Less: Cash and cash equivalents and time deposits with maturity of more than three months (1.381.757.869) (1.832.501.330)Net debt 11.659.271.457 7.774.347.155Total shareholders’ equity 6.962.490.356 5.405.043.589Total capital stock 18.621.761.813 13.179.390.744Net debt/total capital stock ratio 0,63 0,59

FINANCIAL STATEMENT

129



46. N

ATU

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AN

D L

EVEL

OF

RIS

KS

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FINANCIAL STATEMENT




130

46. N

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FINANCIAL STATEMENT

131



46. N

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RE

AN

D L

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OF

RIS

KS

DER

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G F

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INA

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FINANCIAL STATEMENT




132

46. N

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due

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389.

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part

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s w

ere

reco

gniz

ed.

FINANCIAL STATEMENT

133



46. NATURE AND LEVEL OF RISKS DERIVING FROM FINANCIAL INSTRUMENTS (cont’d)

(b) Financial Risk Factors (cont’d)

b.2) Impairment

Provisions for doubtful trade receivables consist of provisions for receivables in legal dispute and provisions calculated based on experiences on uncollectible receivables.

Changes in provisions for doubtful receivables for the years ended 31 December 2013 and 2012 are as follows:

1 January - 1 January - 31 December 2013 31 December 2012Opening Balance 73.380.910 79.913.899Charge for the period 39.880.173 13.362.362Collections during the period (5.737.651) (16.012.185)Additions from business combinations 3.300.151 -Currency translation adjustment 31.896.860 (3.883.166)Receivables written-off (1.086.520) -Closing Balance 141.633.923 73.380.910

b.3) Liquidity risk management

The main responsibility of liquidity risk management rests upon Board of Directors. The Board built an appropriate risk management for short, medium and long term funding and liquidity necessities of the Group management. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

The tables below demonstrate the maturity distribution of nonderivative financial liabilities and are prepared based on the earliest date on which the Group can be required to pay. The interests that will be paid on the future liabilities are included in the related maturities. The adjustment column shows the item which causes possible cash flow in the future periods. The item in question is included in the maturity analysis and is not included balance sheet amount of financial liabilities in the balance sheet.

Group manages liquidity risk by keeping under control estimated and actual cash flows and by maintaining adequate funds and borrowing reserves through matching the maturities of financial assets and liabilities.

FINANCIAL STATEMENT




134



b.3) Liquidity risk management (cont’d)

Liquidity risk table:

31 December 2013

Due date on the contract Book value

Total cash outflow according to the contract (I+II+III+IV)

Less than 3 months (I)

3-12 months (II)

1-5 years (III)

More than 5 years (IV)

Non-derivative financial liabilities

Finance lease obligations 11.552.490.332 13.244.839.493 339.918.526 1.124.845.584 5.809.555.437 5.970.519.946Trade payables 1.451.181.580 1.457.603.865 1.454.054.864 - 3.549.001 - Other financial liabilities 33.808.413 33.808.413 33.808.413 - - - Total 13.037.480.325 14.736.251.771 1.827.781.803 1.124.845.584 5.813.104.438 5.970.519.946

31 December 2012




3-12 months (II)

1-5 years (III)


Non-derivative financial liabilitiesFinance lease obligations 8.666.993.598 9.984.187.644 245.252.701 823.054.902 4.291.572.222 4.624.307.819Trade payables 908.790.811 909.471.958 909.471.958 - - - Other financial liabilities 31.064.076 31.064.076 31.064.076 - - - Total 9.606.848.485 10.924.723.678 1.185.788.735 823.054.902 4.291.572.222 4.624.307.819

FINANCIAL STATEMENT

135





b.3) Liquidity risk management (cont’d)

31 December 2013




3-12 months (II)

1-5 years (III)


Derivative financial (liabilities) / assets, net

Derivative cash inflows outflows,net (169.669.428) (141.197.757) (32.313.484) (57.121.495) (65.694.436) 13.931.658Total (169.669.428) (141.197.757) (32.313.484) (57.121.495) (65.694.436) 13.931.658

31 December 2012




3-12 months (II)

1-5 years (III)


Derivative cash inflows outflows,net (86.774.973) (71.960.047) (16.065.497) (9.064.927) (39.600.180) (7.229.443)Total (86.774.973) (71.960.047) (16.065.497) (9.064.927) (39.600.180) (7.229.443)

b.4) Market risk management

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. Market risk exposures of the Group are evaluated using sensitivity analysis. There has been no change to the Group’s exposure to market risks or the manner in which it manages and measures the risk.

FINANCIAL STATEMENT




136



b.4) Market risk management (cont’d)

b.4.1) Foreign currency risk management

Transactions in foreign currencies expose the Group to foreign currency risk. The foreign currency denominated assets and liabilities of monetary and non-monetary items are as follows: 31 December 2013 TL EQUIVALENT TL EURO GBP OTHER 1.Trade Receivables 947.327.630 31.353.397 338.112.213 75.143.932 502.718.088 2a.Monetary Financial Assets 543.803.453 155.675.333 152.223.433 3.096.083 232.808.604 2b.Non Monetary Financial Assets - 3.Other 387.659.539 184.802.343 84.962.534 11.514.608 106.380.054 4.Current Assets (1+2+3) 1.878.790.622 371.831.073 575.298.180 89.754.623 841.906.746 5.Trade Receivables - 6a.Monetary Financial Assets - 6b.Non Monetary Financial Assets - 7.Other 997.534.972 748.349.005 87.482.099 501.032 161.202.836 8.Non Current Assets (5+6+7) 997.534.972 748.349.005 87.482.099 501.032 161.202.836 9.Total Assets (4+8) 2.876.325.594 1.120.180.078 662.780.279 90.255.655 1.003.109.582 10.Trade Payables 969.871.905 452.325.406 317.042.284 21.783.396 178.720.819 11.Financial Liabilities 752.698.394 33.807.762 625.806.345 - 93.084.287 12a.Other Liabilities, Monetary 68.266.019 6.150.112 62.115.743 164 - 12b.Other Liabilities, Non Monetary 12.453.925 11.178.585 1.275.340 - - 13.Current Liabilities (10+11+12) 1.803.290.243 503.461.865 1.006.239.712 21.783.560 271.805.106 14.Trade Payables 3.549.001 3.549.001 - - - 15.Financial Liabilities 6.461.648.607 - 5.107.964.213 - 1.353.684.394 16a.Other Liabilities, Monetary 224.355 224.355 - - - 16b.Other Liabilities, Non Monetary 202.053.957 202.053.957 - - - 17.Non Current Liabilities (14+15+16) 6.667.475.920 205.827.313 5.107.964.213 - 1.353.684.394 18.Total Liabilities (13+17) 8.470.766.163 709.289.178 6.114.203.925 21.783.560 1.625.489.500 19.Net asset / liability position of off-balance sheet derivatives (19a-19b) - - - - - 19a.Off-balance sheet foreign currency derivative assets - - - - 19b.Off-balance sheet foreigncurrency derivative liabilities - - - - - 20.Net foreign currency asset/(liability) position (9-18+19) (5.594.440.569) 410.890.900 (5.451.423.646) 68.472.095 (622.379.918)21.Net foreign currency asset / liability position of monetary items (UFRS 7.B23) (=1+2a+5+6a-10-11-12a-14-15-16a) (6.765.127.198) (309.027.906) (5.622.592.939) 56.456.455 (889.962.808)22.Fair value of foreign currency hedged financial assets - - - - - 23.Hedged foreign currency assets - - - - - 24.Hedged foreign currency liabilities - - - - -

FINANCIAL STATEMENT

137






b.4.1) Foreign currency risk management (cont’d)

31 December 2012 TL EQUIVALENT TL EURO GBP OTHER 1.Trade Receivables 634.402.805 25.181.888 351.122.013 65.978.982 192.119.922 2a.Monetary Financial Assets 1.663.471.138 733.264.141 561.563.227 1.892.829 366.750.941 2b.Non Monetary Financial Assets - - - - - 3.Other 119.057.956 41.727.171 47.948.107 717.425 28.665.253 4.Current Assets (1+2+3) 2.416.931.899 800.173.200 960.633.347 68.589.236 587.536.116 5.Trade Receivables - - - - - 6a.Monetary Financial Assets - - - - - 6b.Non Monetary Financial Assets - - - - - 7.Other 330.950.818 322.569.155 8.381.663 - - 8.Non Current Assets (5+6+7) 330.950.818 322.569.155 8.381.663 - - 9.Total Assets (4+8) 2.747.882.717 1.122.742.355 969.015.010 68.589.236 587.536.116 10.Trade Payables 607.473.920 424.954.742 96.952.598 10.679.777 74.886.803 11.Financial Liabilities 502.511.260 30.961.079 471.550.181 - - 12a.Other Liabilities, Monetary 63.814.374 87.238 63.727.136 - - 12b.Other Liabilities, Non Monetary 33.859.220 33.760.522 98.698 - - 13.Current Liabilities (10+11+12) 1.207.658.774 489.763.581 632.328.613 10.679.777 74.886.803 14.Trade Payables - - - - - 15.Financial Liabilities 4.078.465.791 - 4.078.465.791 - - 16a.Other Liabilities, Monetary - - - - - 16b.Other Liabilities, Non Monetary 186.265.911 186.265.911 - - - 17.Non Current Liabilities (14+15+16) 4.264.731.702 186.265.911 4.078.465.791 - - 18.Total Liabilities (13+17) 5.472.390.476 676.029.492 4.710.794.404 10.679.777 74.886.803 19.Net asset / liability position of off-balance sheet derivatives (19a-19b) - - - - - 19a.Off-balance sheet foreign currency derivative assets - - - - 19b.Off-balance sheet foreigncurrency derivative liabilities - - - - - 20.Net foreign currency asset/(liability) position (9-18+19) (2.724.507.759) 446.712.863 (3.741.779.394) 57.909.459 512.649.313 21.Net foreign currency asset / liability position of monetary items (UFRS 7.B23) (=1+2a+5+6a-10-11-12a-14-15-16a) (2.954.391.402) 302.442.970 (3.798.010.466) 57.192.034 483.984.060 22.Fair value of foreign currency hedged financial assets - - - - - 23.Hedged foreign currency assets - - - - - 24.Hedged foreign currency liabilities - - - - -

FINANCIAL STATEMENT




138





Foreign currency sensitivity

The Group is exposed to foreign exchange risk primarily from EURO, TL and GBP. The following table details the Group’s sensitivity to a 10% increase and decrease in EURO, TL and GBP. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations within the Company where the denomination of the loan is in a currency other than the currency of the lender or the borrower. A positive number indicates an increase in profit or loss.

31 December 2013Profit / (Loss) Before Tax

If foreign currency appreciated 10 %

If foreign currency depreciated 10 %

1- TL net asset / liability 41.089.090 (41.089.090)2- Part of hedged from TL risk (-) - - 3- TL net effect (1+2) 41.089.090 (41.089.090)

4- Euro net asset / liability (545.142.365) 545.142.3655- Part of hedged from Euro risk (-) - - 6- Euro net effect (4+5) (545.142.365) 545.142.365

7- GBP net asset / liability 6.847.210 (6.847.210)8- Part of hedged from GBP risk (-) - - 9- GBP net effect (7+8) 6.847.210 (6.847.210)

10- Other foreign currency net asset / liability (62.237.992) 62.237.99211- Part of hedged other foreign currency risk (-) - - 12- Other foreign currency net effect (10+11) (62.237.992) 62.237.992

TOTAL (3 + 6 + 9 + 12) (559.444.057) 559.444.057

FINANCIAL STATEMENT

139







Foreign currency sensitivity (cont’d)

31 December 2012Profit / (Loss) Before Tax

If foreign currency appreciated 10 %

If foreign currency depreciated 10 %

1- TL net asset / liability 44.671.286 (44.671.286)2- Part of hedged from TL risk (-) - - 3- TL net effect (1+2) 44.671.286 (44.671.286)

4- Euro net asset / liability (374.177.939) 374.177.9395- Part of hedged from Euro risk (-) - - 6- Euro net effect (4+5) (374.177.939) 374.177.939

7- GBP net asset / liability 8.875.509 (8.875.509)8- Part of hedged from GBP risk (-) - - 9- GBP net effect (7+8) 8.875.509 (8.875.509)

10- Other foreign currency net asset / liability 9.030.818 (9.030.818)11- Part of hedged other foreign currency risk (-) - - 12- Other foreign currency net effect (10+11) 9.030.818 (9.030.818)

TOTAL (3 + 6 + 9 + 12) (311.600.326) 311.600.326

b.4.2) Interest rate risk management

Group has been borrowing over fixed and variable interest rates. Considering the interest types of the current borrowings, borrowings with variable interest rates have the majority but in financing of aircrafts performed in the last years, Group tries to create a partial balance between borrowings with fixed and variable interest rates by increasing the weight of the borrowings with fixed interest rate in condition of the suitability of the cost. Due to the fact that the variable interest rates of the Group are dependent on Libor and Euribor, dependency to local risks is low.

Interest Rate Position Table

31 December 2013 31 December 2012Instruments with fixed interest rateFinancial Liabilities 6.479.380.295 5.311.293.033

Financial Instruments with Variable Interest RateFinancial Liabilities 5.073.110.037 3.355.700.565Interest Swap Agreements not subject to Hedge accounting (Net) (101.775.690) (11.666.319)Interest swap agreements subject to Hedge accounting (Net) (32.146.390) (59.464.968)

As indicated in Note 47, the Group fixed the interest rate for TL 534,839,185 of floating–interest-rated financial liabilities via an interest rate swap contract as of 31 December 2013.

FINANCIAL STATEMENT




140




b.4.2) Interest rate risk management (cont’d)

Interest rate sensitivity

The following sensitivity analysis is determined according to the interest rate exposure in the reporting date and possible changes on this rate and it is fixed during all reporting period. Group management checks out possible effects that may arise when Libor and Euribor rates, which are the interest rates of the borrowings with variable interest rates, fluctuate 0.5% and reports these to the top management.

In condition that 0.5% increase in Libor and Euribor interest rate and all other variables being constant:

Current profit before tax of the Group will decrease by TL 25,365,550 (as of 31 December 2012 profit before tax will decrease by TL 16,778,503). In contrast, if Libor and Euribor interest rate decreases 0.5%, net current profit before tax will increase by the same amounts.

Moreover, as a result of the interest rate swap contracts against cash flow risks, in case of a 0,5% increase in the Libor and Euribor interest rates, the shareholders’ equity of the Group will increase by TL 66,930,624 excluding the deferred tax effect. (For the year ended 31 December 2012, the shareholders’ equity of the Group will increase by TL 13,823,126 excluding the deferred tax effect.) In the case of a 0.5% decrease in the Libor and Euribor interest rates, the shareholders’ equity of the Group will decrease by the same amount excluding the deferred tax effect.

b.4.3) Fuel prices sensitivity

As explained in Note 47, Group has entered into forward fuel purchase contracts in order to hedge cash flow risks arising from fuel purchases beginning from 2009. Due to forward fuel purchase contracts subject to hedge accounting, as a result of a 10% increase in fuel prices, the shareholders’ equity of the Group will increase by TL 101,753,630 excluding the deferred tax effect. In case of a 10% decrease in fuel prices, the shareholders’ equity of the Group will decrease by TL 50,999,922 excluding the deferred tax effect.

FINANCIAL STATEMENT

141



47. F

INA

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Fair

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and

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FINANCIAL STATEMENT




142

47. FINANCIAL INSTRUMENTS (cont’d)

Fair Values of Financial Instruments (cont’d)

Fair values of financial assets and liabilities are determined as follows:

• First level: Financial assets and liabilities, are valued with the stock exchange prices in the active market for the assets and liabilities same with each other.

• Second level: Financial assets and liabilities are valued with input obtained while finding the stock exchange price of the relevant asset or liability mentioned in the first level and the direct or indirect observation of price in the market.

• Third level: Financial assets and liabilities are valued by the input that does not reflect an actual data observed in the market while finding the fair value of an asset or liability.

Financial assets and liabilities, which are presented in their fair values, level reclassifications are as follows:

Fair value levelas of the reporting date 31 December Level 1 Level 2 Level 3Financial assets 2013 TL TL TL Financial assets at fair value 54.202.683 - 54.202.683 - through profit or loss Derivative instruments Financial assets subject to 10.076.979 - 10.076.979 - hedge accounting Derivative instruments Total 64.279.662 - 64.279.662 - Financial liabilities Financial liabilities at fair value 201.802.700 - 201.802.700 - through profit or loss Derivative instruments Financial liabilities subject to 32.146.390 - 32.146.390 - hedge accounting Derivative instruments Total 233.949.090 - 233.949.090 -

FINANCIAL STATEMENT

143




Derivative Instruments and Hedging Transactions

In order to hedge important operations and cash flows in the future against financial risks, Group made interest rate swap contracts to convert some of the fixed-rate finance lease liabilities into floating rate and cross-currency swap contracts to convert Euro-denominated finance lease liabilities into US Dollars. The changes in the fair values of those derivative instruments are directly accounted in the income statement for the period.

The floating-rate financial liabilities of the Group are explained in Note 46 b.4.2. Beginning from September 2009, in order to keep interest costs at an affordable level, considering long-term finance lease liabilities; Group made fixed-paid/floating-received interest rate swap contracts to fix interest rates of finance lease liabilities whose maturities are after the second half of 2010 and account for approximately 26% of floating rate USD and Euro denominated liabilities. Effective part of the change in the fair values of those derivative instruments which are subject to hedge accounting for cash flows risks of floating-rate finance lease liabilities are accounted in cash flow hedge fund under the shareholders’ equity.

In 2010, in order to control risk arising from fluctuations in price of fuel which is approximately 37% of cost of sales to lessen the effects of fluctuations in oil prices on fuel expenses, the Group began hedging transactions for approximately 20% of annual jet fuel consumption. For this purpose, the Group made forward fuel purchase contracts settled on cash basis. In accordance with the Company’s BOD resolution issued on 21 January 2011, hedging rate which corresponds to 20% of the currently applied monthly consumption rate will be applied as 50% after 12 months and this rate will be gradually increased by 2,5% in each month. In addition, the Company started to use zero cost 4 way collars in 2011 instead of forward fuel purchase contracts to hedge cash flow risk of fuel prices. The effective portion of fair value hedge of derivative instruments that are subject to cash flow hedge accounting due to future fuel purchases is recognized under hedge accounting fund in equity. Group’s derivative instruments arisen from transactions stated above and their balances as of 31 December 2013 and 31 December 2012 are as follows:

31 December 2013Positive

fair valueNegative

fair value Total

Fixed-paid/floating received interest rate swap contracts for hedging against cash flow risks of interest rate - (32.146.390) (32.146.390)Forward fuel purchase contracts for hedging against cash flow risk of fuel prices - (18.733.493) (18.733.493)4 way collar contracts for hedging against cash flow risk of fuel prices 10.076.979 - 10.076.979 Fair values of derivative instruments for hedging purposes 10.076.979 (50.879.883) (40.802.904)

Cross-currency swap contracts not subject to hedge accounting 17.161.052 (35.014.730) (17.853.678)Interest rate swap contracts not subject to hedge accounting 37.041.631 (138.817.321) (101.775.690)Forward currency contracts not for hedging purposes - (9.237.156) (9.237.156)Fair values of derivative instruments not for hedging purposes 54.202.683 (183.069.207) (128.866.524)Total 64.279.662 (233.949.090) (169.669.428)

FINANCIAL STATEMENT




144


Derivative Instruments and Hedging Transactions (cont’d)

31 December 2012Positive

fair valueNegative

fair value Total

Fixed-paid/floating received interest rate swap contracts for hedging against cash flow risks of interest rate - (59.464.968) (59.464.968)Forward fuel purchase contracts for hedging against cash flow risk of fuel prices - - - 4 way collar contracts for hedging against cash flow risk of fuel prices 9.765.473 - 9.765.473 Fair values of derivative instruments for hedging purposes 9.765.473 (59.464.968) (49.699.495)Cross-currency swap contracts not subject to hedge accounting 20.161.677 (35.253.615) (15.091.938)Interest rate swap contracts not subject to hedge accounting 41.005.786 (52.672.105) (11.666.319)Forward currency contracts not for hedging purposes 3.928.713 (14.245.934) (10.317.221)Fair values of derivative instruments not for hedging purposes 65.096.176 (102.171.654) (37.075.478)Total 74.861.649 (161.636.622) (86.774.973)

Hedging against

fuel risk

Hedging against

interest risk

Hedging against

curreny risk TotalIncrease/(decrease) in fair values of derivative instruments for hedging purposes (10.076.979) 36.362.100 87.181.132 113.466.253 The amount of financial expenses inside hedge funds - (1.560.278) - (1.560.278)Reclassified amount for ineffecient part in the risk elimination of fair value of hedging gains of fuel hedging derivative instrument to financial revenues - - - - Foreign currency translation differences (274.009) 11.282.667 2.347.322 13.355.980 Total (10.350.988) 46.084.489 89.528.454 125.261.955 Deferred tax 2.070.198 (8.219.675) (17.905.692) (24.055.169)Hedge fund as of 31 December 2013 (8.280.790) 37.864.814 71.622.762 101.206.786

Hedging against

fuel risk

Hedging against

interest risk

Hedging against

curreny risk TotalIncrease/(decrease) in fair values of derivative instruments for hedging purposes 9.765.473 (59.464.968) - (49.699.495)The amount of financial expenses inside hedge funds - (1.255.299) - (1.255.299)Reclassified amount for ineffecient part in the risk elimination of fair value of hedging gains of fuel hedging derivative instrument to financial revenues 5.679.985 - - 5.679.985 Foreign currency translation differences (1.567.896) (9.888.384) - (11.456.280)Total 13.877.562 (70.608.651) - (56.731.089)Deferred tax (2.775.512) 14.121.730 - 11.346.218 Hedge fund as of 31 December 2013 11.102.050 (56.486.921) - (45.384.871)

FINANCIAL STATEMENT

145



48. EVENTS AFTER THE BALANCE SHEET DATE

None.

49. OTHER ISSUES AFFECTING FINANCIAL STATEMENTS MATERIALLY OR NECESSARY TO MAKE FINANCIAL STATEMENTS SOUND, INTERPRETABLE AND UNDERSTANDABLE

Consolidated financial statements of the Group have been prepared comparatively with the prior period in order to give information about financial position and performance. In order to maintain consistency, with current year consolidated financial statements, comparative information is reclassified and significant changes are disclosed if necessary. In the current year, the Group has made several reclassifications in the prior year consolidated financial statements in order to maintain consistency, with current year consolidated financial statements.

Based on the decision taken on 7 June 2013 by the CMB at its meeting numbered 20/670, a new illustrative financial statement and guidance to it has been issued effective from the interim periods ended after 31 March 2013, which is applicable for the companies that are subject to Communiqué on the Principles of Financial Reporting in Capital Markets. Based on these new illustrative financial statements, a number of changes made at the Group’s consolidated financial statements.

As a result of preparation of the condensed interim consolidated financial statements in accordance with the communiqué numbered II-14.1 “Communiqué on the Principles of Financial Reporting In Capital Markets” (“the Communiqué”) announced by the Capital Markets Board (“CMB”) on 13 June 2013 which is published on Official Gazette numbered 28676, significant classifications in the prior year consolidated financial statements have been indicated in following paragraphs as a summary on the basis of consolidated financial statements and items.

Reclassifications in Balance Sheet as of 31 December 2012:

- Trade Receivables/Payables From/To Related Parties” which were disclosed under “ Trade Receivables/Trade Payables” are disclosed under “Receivables and Payables from/to Related Parties” separately by TL 18,975,259 and TL 215,000,995, respectively.TL 758,427,363 and TL 697,323,279 are disclosed to “Trade Receivables/Payables From/To None-Related Parties” which is under “Trade Receivables/Trade Payables”.

- “Other Receivables from Related Parties” which was disclosed under “Other Receivables” is disclosed under other receivables as “Receivables from Related Parties” with the amount of TL 8,531.

- “Fair Value of Derivative Instruments” item which was disclosed under “Financial Investments and Other Financial Obligations” is disclosed separately under “Derivative Financial Instruments” as TL 74, 861, 649, and TL 161,636,622, respectively.

- “Prepaid Sales Commissions, Prepaid Operating Lease Expenses, Prepaid Insurance Expenses, Advances Given and Other Prepaid Expenses” items which were disclosed under Other Current Assets are disclosed under “Prepaid Expenses” by TL 136,483,380, separately. Among these expenses, the amount of TL 15,291,272 related to “Captain Candidates” is reclassified to “Long-Term Other Receivables”.

- “Prepaid Operating Lease Expenses, Prepaid Aircraft Financing Expenses, Engine Maintenance Reserve, Payments for Purchases of Fixed Assets and Prepaid Expenses” which were disclosed under Other Non-Current Assets are disclosed under “Prepaid Expenses” amounting to TL 237,886,052.

FINANCIAL STATEMENT




146

49. OTHER ISSUES AFFECTING FINANCIAL STATEMENTS MATERIALLY OR NECESSARY TO MAKE FINANCIAL STATEMENTS SOUND, INTERPRETABLE AND UNDERSTANDABLE (cont’d)

Reclassifications in Balance Sheet as of 31 December 2012: (cont’d)

- “Prepaid Taxes and Funds” amounting to TL 2,206,083 which was disclosed under Other Current Assets is reclassified and disclosed under “Current Income Tax Assets”. In addition, “Taxes and Funds Payable amounting to TL 17,460,178 that was disclosed under “Short-term Other Liabilities “as of 31 December 2012 is disclosed under “Prepaid Taxes and Funds” by the Group and therefore “Taxes Related to Current Assets” is presented as TL 19,666,261.

- “Financial Lease Obligations” item which was disclosed under “Financial Liabilities” is disclosed under “Short-term Portion of Long-term Borrowings” amounting to TL 866,011,394.

- The term “Employee Benefits” was revised as “Provision for Employee Benefit Obligations”. “Social Security Premiums Payable” which

was disclosed under “Short-Term Other Liabilities” is disclosed under “Payables related to Employee Benefit Obligations” by TL 36,021,871, separately. In addition, Provisions for Unused Vacation Liabilities amounting to TL 41,066,116 which was disclosed under “Employee Benefits” is disclosed as “Short-term Provisions for Employee Benefits” under “Short -term Provisions”.

- “Rent Advances and Other Advances” item which was disclosed under Short-Term Other Liabilities and “Unearned Revenue Accruals and Unearned Revenue from Share Transfer of TGS” was also disclosed under “Short-Term Liabilities” is disclosed under “Deferred Income on Current Liabilities” with TL of 21,228,770 and TL 20,590,882, respectively.

- An amount of TL 47,446,433 including “Gross Grant Loans”, “Accumulated Depreciation of Grant Loans”, “Unearned Revenue relating to Share Transfer of TGS” and “Bank Protocol Income relating to Future Months” is presented under “Long-Term Deferred Income” as a separate financial statement item.

Reclassifications in the Statement of Profit or Loss and Other Comprehensive Income for the Year Ended 31 December 2012

Classifications in Statement of Profit and Loss and Other Comprehensive Income, previous name “Statement of Comprehensive Income”, are summarized in the following paragraphs;

- “Discount Income” amounting to TL 5,681,632 related to “Trade Operations” and “Receivables from Training of Captain Candidates” and “Late Payment Interest Income” amounting to TL 671,300 that was disclosed under “Financial Income” in previous periods are reclassified to “Other Operating Income”.

- “Discount Interest expense” amounting TL 8,250,296 and “Foreign Exchange Expense” amounting to TL 64,544,740 arising from commercial operations that were disclosed under “Financial Income” in previous periods are reclassified to “Other Operating Expenses”.

- “Interest Income”, amounting to TL 69,558,458 that was earned from “Long-Term Financial Investments” is reclassified to “Income from Investment Activities” from “Financial Income”. Furthermore, “Gain on Sale of Fixed Assets” amounting to TL 3,321,066, “Gain on Changes in Fair Value of Investment Property” amounting to TL 6,333,810 and “Income from Government Grants and Incentives” amounting to TL 62,319,152 which were disclosed under “Other Operating Income” are reclassified to “Income from Investment Activities” and the provision cancellation for impairment value of “Assets Held for Sale” and “Tangible Assets” amounting to TL 351,142,323 is reclassified to “Investment Income”.

FINANCIAL STATEMENT

147



49. OTHER ISSUES AFFECTING FINANCIAL STATEMENTS MATERIALLY OR NECESSARY TO MAKE FINANCIAL STATEMENTS SOUND, INTERPRETABLE AND UNDERSTANDABLE (cont’d)

Reclassifications in the Statement of Profit or Loss and Other Comprehensive Income for the Year Ended 31 December 2012 (cont’d)

As there is a change in the presentation and classification of the Group’s financial statement items, due to the implemented ERP system which was practiced in 2012, prior financial statements are reclassified for maintaining comparability. Significant reclassifications in the financial statements include:

- Maintenance accrual, amounting to TL 934,729 which was disclosed under “Other Current Assets” as at 31 December 2012 is reclassified to “Other Receivables”.

- Income accruals related to withholding returns, amounting to TL 15.797.083 which was disclosed under “Other Non-Current Assets” as at 31 December 2012 is reclassified to “Other Long-Term Receivables”.

- Payables to insurance companies, amounting to TL 40,430,926 which was disclosed under “Other Payables” as at 31 December 2012 is

net-off with prepaid insurance expenses which was disclosed under “Prepaid Expenses”.

- Reverse-balance, amounting to TL 3,792,149 which was disclosed under “Prepaid Expenses” as at 31 December 2012 is net-off with trade receivables.

- Payable to insurance companies, amounting to TL 3,533,463 which was disclosed under “Trade Payables” as at 31 December 2012 is reclassified to “Short-term Trade Payables”.

- Other airlines’ seat rent expenses, amounting to TL 184,489,880 which was disclosed under “Cost of Sales” for the year ended 31 December 2012 is net-off with “Sales Revenue”.

- Maintenance returns from leasing companies, amounting to TL 12,760,680 which was disclosed under “Other Operating Income” for the year ended 31 December 2012 is net-off with “Cost of Sales”.

- Discount interest income in advance related to aircraft purchasing, amounting to TL 1,708,364 which was disclosed under “Financial Income” for the year ended 31 December 2012 is net-off with “Financial Expenses”.

- Interest cost for the retirement pay liability, amounting to TL 2,840,806 which was disclosed under “Financial Expenses” for the year ended 31 December 2012 is reclassified to “Cost of Sales”.

- According to eliminations within the Group, an amount of TL 37,548,308 including personnel expense amounting to TL 30,110,741, service expense amounting to TL 4,248,310, maintenance expense amounting to TL 2,854,637 and other cost of sales amounting to TL 334,620 which were disclosed under “Cost of Sales” for the year ended 31 December 2012 are net-off with “Sales Revenue” and the amount of TL 107,949 which was disclosed under “Cost of Sales” is net-off with “Other Operating Income”.

AnnuAl RepoRt 2013

TUR

KIS

H A

IRLIN

ES An

nu

Al RepoRt 2013

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