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Introduction

The purpose of this paper is to examine, evaluate, and underline the financial and market position of Turkish Airlines, which is a major service sector company in the relevant industry. This research has highlighted the financial conditions of the company by using the most recent data available from the annual report of Turkish Airlines, textbooks, and academic journals in order to come up with the future trends, apposite benchmark, cross-sectional industrial analysis, horizontal and vertical analysis, and SWOT analysis of the business. To support the project report, this paper has also presented an industry analysis, activity analysis, scrutiny of the liquidity position, solvency, and debt management analysis, and profitability analysis for Turkish Airlines, which would offer readers an in-depth perception of the business, and assist the relevant stakeholders in making the investment decisions.

Background of Turkish Airlines

The Ministry of National Defense established Turkish Airlines in 1933 and it is the national flag carrier of Turkey; the Privatization Administration owned 49.12% share and publicly traded more than 50.8% share; at present, it is the fourth-largest carrier in the world (Turkish Airline, 2016). This company provides services in 119 countries with 298 destinations all over the world; in 2016, it had 334 aircraft and it intends to increase this number by 164 within the next 6 years (Turkish Airline, 2016). According to the annual report 2016 of Turkish Airlines, this company has been passing a challenging period because the fuel price increased by 20%, and boosted overall competition in the global industry; thus, its total revenues decreased by 6.9% in 2016 and it has experienced a significant loss, for instance, net profit and EBIT decreased by 107% and 116% respectively. However, figure 1 gives more information on this aspect.

Figure 1: Main financial highlights (Turkish Airline, 2016, p.5).

The total number of the passenger was 39.045 thousand in 2012 and this figure increased by 23714 thousand within the last four years; however, figure 2 gives more information in this regard.

Figure 2: Total traffic (Turkish Airlines, 2016, p.18).

Table 1 provides more information about this airline-

Table 1: Profile of Turkish Airlines. (Turkish Airlines, 2016).

Profile of Turkish Airlines
Destinations	It operates to 51 domestic destinations and 247 international destinations
Main hub	Istanbul Atatürk Airport
Market share	It holds more than 67% share of the national market
Number of employees	It has more than 24,124 human resources who are confident about future development. According to the annual report, it has 52% male and 48% female staff; however, they are divided into three groups, such as 19% people are cockpit crew, 41% staff are cabin crew, and 40% employees are ground staff (Turkish Airlines, 2016, p.39)
Competitors	Main competitors are Deutsche Lufthansa AG, Pegasus Airlines, Qatar Airlines, Etihad Airways, and Emirates Group

In order to get a better overview of the company, it is necessary to evaluate the return on assets (ROA) and return on equity (ROE) of the firm, so that a clear glimpse of its present performance can be assessed. It is essential to note that ROA demonstrates the percentage of income a business generates with respect to the corporate reserves and is usually characterized as the net income divided by the total-assets; as a result, net- income is obtained from the financial statements of the business and is calculated from the profit following the taxes and duties. The corporate assets must consist of funds and cash equivalent things, like resources, machineries, stocks, receivables, properties, as well as the actual worth for the intellectual properties (like copyrights, patents, and others); moreover, goodwill is included in the list, since the additional wealth rewarded to the business on top of its real book-value should also be taken into account. Since assets are likely to fluctuate in due course, most businesses use an average of the total corporate possessions; as a result, the return on total assets for one-quarter must be calculated from the net income for the period, divided by the average-assets during that period; consequently, even though return on assets is a ratio, it is typically represented as a percentage. Table 2 provides calculations for ROA-

Table 2: ROA of Turkish Airlines.

	2012	2013	2014	2015	2016
Total Assets ($m)	10,523	11,902	13,746	16,383	18,491
Total Owners Equity ($m)	3,033	3,262	3,950	4,842	5,087
Total Liabilities (in million USD)	7490	8640	9796	11,541	13404
Return on total assets (ROA) = Profit after tax + Interest / total assets	657/ 10,523= 0.062434667 =6.24%	357/ 11,902= 0.029994959 = 2.99%	845/ 13,746= 0.061472= 6.14%	1,069/ 16,383= 0.065250565= 6.52%	(77)/18,491= -0.00416418 = -.42%

It is arguable that an elevated percentage of return on assets represents that the company is profitable, and is getting stronger with time but for capital-intensive companies, it is truly tough to attain a higher percentage of the ratio. It is noticeable from the table above that Turkish Airlines had a comparatively strong ROA in 2012, 2015, and 2014, although it had dropped a bit in 2013 (Morningstar 2017). However, in 2016, for some unknown reasons, the company had failed to perform up to the mark, and as a result, there was a huge unexpected fall in the ratio. Such an unforeseen drop can be seen as potentially dangerous because the profit after tax has declined significantly during the period, indicating that the companys capacity to monetize its assets has declined all of a sudden.

The ratio of return on equity is an indication of the productivity of the business, which determines how much money the corporation has engendered with the equity of the shareholders; as a result, return on equity is not just an evaluation of the money-spinning capacity of the firm but is also the quantification of its efficiency level. An escalating ROE indicates that the firm is expanding its aptitude to engender income without having to exhaust all the capital resources; in addition, this also suggests that the firms administration is organizing the capital from the shareholders brilliantly; as a result, an elevated ROE is a good signal for the business, whilst a decreasing ROE is typically a setback. Table 3 shows the calculation of ROE-

Table 3: ROE of Turkish Airlines (Turkish Airlines 2014, p. 6 and Turkish Airlines 2016, p. 7).

	2012	2013	2014	2015	2016
Net Profits from Operations ($m)	657	357	845	1,069	( 77)
Total Owners Equity (in million USD)	3,033	3,262	3,950	4,842	5,087
5 Return on Equity (ROE) = Net Income / Total stockholders equity	657/3033 = 0.216617211= 21.67%	357/3262 = 0.10944206 = 10.94%	845/ 3950 = 0.213924051 = 21.39%	1,069 / 4,842 = 0.220776539 = 22.08%	-77/ 5,087 = -0.015136623 = 1.51%

Trend Analysis and Relevant Charts

It is notable from the above calculations that the return on equity was quite lucrative in 2012, 2014, and 2015 for Turkish Airlines, although it had dropped by half in 2013. However, in 2016, just like the abrupt and unexpected fall in the percentage of the return on assets, the percentage of the return on equity had also dropped to a great extent for some unanticipated reasons. This type of surprising plunge in the two most imperative ratios is not just alarming for the internal trading environment of the firm but is also an issue of fear for the investors of the company. However, table 4 shows operating cash flows-

Table 4: Operating cash flows (Morningstar 2017).

	2012	2013	2014	2015	2016
Operating Cash Flows	2,041	2,841	2,644	4,042	1,941
Total Sales	11,070	9,826	8,234	10,522	9,792
Net Profits from Operations	657	357	845	1,069	(77)

Net-profit from operations is a measurement of earnings, which does not include the expenses or tax-benefits of debt funding; it is suggested that this calculation merely considers the earnings before interest, and is a vital evaluation in the scrutiny of a company, as it allows an apparent sight of the functional efficiency (an observation not obscured by the businesss ascendancy). It can be comprehended from the table above that the net profit from operations of Turkish Airlines has fluctuated to a great extent throughout the last five years. For this Turkish market player, the net profit from operations was 657 in 2012, but it dropped to 357 in 2013 before rising to 845 in 2014 again (Morningstar 2017). Subsequently, the company performed wonderfully in 2015, for which its net profit from operations rose to 1,069, but then all of a sudden, it plunged to 77 in 2016, which indicates abrupt poor corporate performance.

Retained Earnings (RE)

Retained earning is chiefly the income that a business has generated, minus the dividends rewarded to the shareholders; it is necessary to argue that when the retained earnings are high, this would indicate that the business is economically strong; on the other hand, firms that have made fewer profits and more losses suffer from a negative balance (or accumulated deficit). Table 5 shows the calculation of retained earnings

Table 5: Retained earnings (Turkish Airlines 2014, p. 6 and Turkish Airlines 2016, p. 7).

	2011	2012	2013	2014	2015
Retained earnings of the previous year	889	903	1357	1714	2,559
Net income of the previous year	14	657	357	845	1,069
	2012	2013	2014	2015	2016
Dividends paid		(93)
Issuance of bonus shares		(99)
Retained Earnings (RE) = Beginning RE + Net Income Dividends	(889 + 14) = 903	(903 + 657) (99 + 93) = 1357	1357 + 357 = 1714	1714 + 845 = 2,559	2,559 + 1,069 = 3,628

It can be seen from the table above that the retained earnings of the company have improved significantly in 2015. This is a very positive indication because the retained earnings of Turkish Airlines have been increasing gradually throughout the last five years. To be precise, the retained earnings were 903 in 2011, 1357 in 2012, 1714 in 2013, 2559 in 2014, and 3628 in 2015.

Debt Ratio

Businesses that have an elevated debt ratio are reasonably weak because this indicates that they possess a large amount of debt in comparison to their assets; in addition, such a situation suggests that the firm has been troubled by huge burdens, whilst the finances invested on interests are huge, putting a negative impact over the cash flow of the corporation. Table 6 shows the calculation of debt ratio-

Table 6: Debt ratio (Turkish Airlines 2014, p. 6 and Turkish Airlines 2016, p. 8).

	2012	2013	2014	2015	2016
Total Liabilities (in million USD)	7490	8640	9796	11,541	13404
Total Assets (in million USD)	10,523	11,902	13,746	16,383	18,491
Debt Ratio = Debt-to-assets ratio = Total debt / Total assets	7490 / 10,523 = 0.711774209 = 71.17%	8640 / 11,902 = 0.725928415 = 72.59%	9796 / 13,746 = 0.712643678 = 71.26%	11,541 / 16,383 = 0.70444973 = 70.44%	13404 / 18,491 = 0.72489319 = 72.48%

It can be seen from the above calculations that the debt ratio has sharply risen in 2016, which can be detrimental towards the reputation of the business. In such situations, the investors usually become reluctant to keep their trust on the business, which can be a stressful scenario for the future growth of the firm.

Earnings per Share (EPS)

It is essential to note that the earnings per share of the company have reduced significantly in 2016, which means that now the shareholders will be discouraged to buy the companys shares because EPS shows the profitability of a corporation. As a result, the company must identify the root cause behind the drop in the earnings per share and employ its highest effort in improving this in order to gain back the confidence of the shareholders in the upcoming years. Table 7 shows the calculation of EPS of Turkish Airlines-

Table 7: EPS of Turkish Airlines (Turkish Airlines 2016, p.7).

	2012	2013	2014	2015	2016
Net Income ($ million)	657	357	845	1,069	(77)
Dividends on Preferred Stock
Weighted average Outstanding shares	1380 million	1380 million	1380 million	1380 million	1380 million
Earnings Per Share (EPS) = (Net Income Dividends on Preferred Stock) / Average Outstanding Shares	657 / 1380 = = 0.4760869 = 0.48	357 / 1380 = 0.258695 = 0.26	845 / 1380 = 0.6123188 = 0.61	1,069 / 1380 = 0.7746376 = 0.77	(77) / 1380 = 0.0557971 = (0.06)

Market Capitalization

Market capitalization is an indication of the market value of a firms outstanding shares; it is notable from the table above that the market values of the Turkish Airlines were 7,512 TRY in 2012, 8,887 TRY in 2013, 13,289 TRY in 2014, 10,198 TRY in 2015, and 6,914 TRY in 2016. This means that the market values of the firms outstanding shares were the highest in 2014 and 2015 respectively, but were lower in 2012 and 2013. However, it became the lowest in 2015, which means the market values of the company are plummeting this can cause a real panic amongst the stakeholders of Turkish Airlines.

SWOT Analysis of Turkish Airlines

Strengths

Brand image: Long experience and most valued brand awareness of Turkish Airlines is the main competitive advantages of this company since it provides high-quality flying experience; in addition, as the National Flag Carrier of Turkey, it has the capacity to hold its leading position in the domestic market (Myre 2015);
Loyalty: The customer satisfaction rate of this company is too high; therefore, it has a large loyal customer base both in domestic and international destinations, for instance,
Flight network: According to the annual report 2016 of Turkish Airlines, it successfully operates almost 119 countries and 298 destinations; furthermore, it has a large fleet size;
Strategy: Outstanding promotional and marketing strategies play a significant role to increase market share in the European market (Sahin 2015); as a result, it becomes one of the largest companies in the aviation industry;
Training: It has more than 24,124 employees who are skilled, high-qualified, trained, and experienced person; however, Turkish Airlines had already taken many initiatives to increase team spirit to get better performance from them;

Weaknesses

Operating costs: According to the financial report of this company, it is one of the main challenges to control operating expenses while it adversely affects the overall financial performance; moreover, it pays a comparatively high payment to their staff and board members; here, table 8 demonstrates data for three years-

Table 8: Total operating expenses of Turkish Airlines (Turkish Airlines (2016, p.4).

Variables	2016 ($)	2015 ($)	2014 ($)
Cost of sales	8,656 millions	8,420 millions	9,068 millions
Marketing	1171 millions	1148 millions	1126 millions
Total operating expenses	1,572 millions	1,451 millions	1445 millions

Pricing strategies: Turkish Airlines seek price more than other major competitors for which are of market share low cost domestic and international companies is increasing (Myre 2015);
Route: As it uses Ataturk Airport for most of the flights, passengers of the opposite side may prefer service of other companies;
Other operating weaknesses include a low focus on the issues related to corporate social responsibility, restricted cold beverages, increase customer hassle rate due to poor online service, unusual financial risks for merger and acquisition, dependence on technology, and so on.

Opportunities

Market leader: International traffic is rising faster (Santos, and Creighton 2014); thus, it has the opportunity to advance reputation as a global air carrier and to be the market leader in the aviation industry;
Affiliates and Subsidiaries: It has two directly owned and nine jointly owned subsidiaries, which assist to widen the service of the Turkish aircraft industry;
Open the third airport at Istanbul: It has the opportunity to turn it into a significant flight hub;
Demand: As demand is increasing, it has scope to start the journey to new destinations in Europe and Asia; however, the high population of this country is also an important issue for this company;
Unique offers: Turkish Airlines has the capacity to provide quick and quality service with high satisfaction of the passengers and other clients (Santos, and Creighton 2014);
Other factors: it has scope to generate more revenues due to the development of the national tourism sector; however, other potential factors include an adaptation of modern governance principles, no visa requirement in the different geographical zone, sound economic condition for further business expansion, and so on;

Threats

Competitors: The market share of international low-cost airlines is rapidly increasing; therefore, these companies enter destinations of Turkey due to a liberal business environment and capture a significant part of the domestic market share.
Recession: At the time of the global financial crisis, the tourism revenues of Turkish Airlines have decreased and operating costs have increased, which directly affected the performance of the company; as a result, it needs to observe the financial condition of the countries where it is operating to design strategy.
Other: Many other external factors may create a hassle for this company, such as pricing structure and promotional strategy of the competitors, the Swine Flu virus, and risk of terror attacks, the chance to lose domestic market share, the volatility of fuel price, natural crisis, boost ticket costs, and so on.

Comparative Cross-sectional and Aviation Industry Analysis

The aviation industry has been suffering from insufficient profitability for the last several decades, but rather than reducing the capacity, the industry players are continuously investing for further capacity expansion and such a difficult scenario has identified by plotting ROCE and WACC of publicly listed 69 aviation companies who jointly own 70% of global aviation market (Wojahn 2012, p. 3). This has been illustrated in figure 3:

Figure 3: Aviation companies profitability, (Wojahn 2012, p. 3).

The above figure demonstrates that irreconcilable difficulties of the aviation industry for thirty years (1981 to 2010) that the industry generated expected profit in 1994 and next five years the industry was capable to generate profit at the level of cost of capital and the rest years except 2000 aviation companies were unsuccessful to generating cost of capital. The most conflicting nature of the aviation industry that the companies continuously increase their capacity although the existing capacities are unutilized, for instance during the recession of 2009 the industry increased its capacity globally up to 1%; thus it would be questioned why the investors allocate for the expansion of such industry or why the aviation operators utilize big resource for insufficient return from this market.

The major reason for investment for continuous expansion without sufficient return is that the ownership, operation, and control of the publicly listed companies are different from each others while the managers make investment decisions for the greater interest of the shareholders of concerned companies. Another reason of this dilemma is that unutilized overcapacity of the aviation industry derives comparatively less barrier of entry, but very high obstruction for exit due to the irreconcilability huge fixed cost, if an unprofitable aviation company wants to cut capacity due to deteriorating economic condition, it would adversely impact on the remaining operation. There is less mobility among the aviation industry, even if an aviation company turned into bankrupt, the capacity would not be forced to reducing and the bankrupt companies continue their operation just like other operators in the industry (Wojahn, 2012, p. 2).

Due to such deregulation of the industry and the aggressive interactions among the customers and firms has identified the requirement of some adjustment of the business model within the industry where the full-service carriers (FSC) are under serious threats new orientation of the players (Vidovi, `timac, and Vince 2013, p. 87); this has been illustrated in figure 4:

Figure 4: Aviation industry model (Vidovi, `timac, and Vince 2013, p. 88).

Low-cost carrier (LCC) has revolutionized and liberalized the aviation industry during the seventies in the European market and now globalize with Ultra Low-cost carrier (ULCC) for a significantly lower price that generated further shock for the Full Service Network Carrier (FSNC) (Vidovi, `timac, and Vince 2013, p. 69). Due to half of the price charging from passengers than the FSNC, lower operating cost and different strategies than traditional airlines, the LCC are exploring their operation routes, and segments like chartering, long-haul, and even cargo sector where merger, acquisition, alliance provided them additional scope to explore.

Horizontal Analysis Tables of the Financial Statements

Horizontal -Comparative Balance Sheet

The horizontal comparative balance sheet has been provided in table 9:

Horizontal -Comparative Income Statement

The horizontal comparative income statement has been provided in table 10:

Table 10: Horizontal comparative income statement (Turkish Airlines 2016).

	2016 ($ million)	2015 ($ million)	Amount	Percent
Sales revenue	9,792	10,522	(730)	-6.94%
Cost of Sales	( 8,656)	( 8,420)	(236)	2.80%
Gross Profit	1,136	2,102	(966)	-45.96%
Operating Costs
General Administrative Expenses	(315)	(272)	-43	15.81%
Marketing and Sales Expenses	(1,171)	(1,148)	-23	2.00%
Other Operating Expenses	(86)	(31)	-55	177.42%
Other Operating Income	145	244	-99	-40.57%
Total Operating Expenses
Operating (Loss) / Profit	(130)	1,076	-1,206	-112.08%
Financial Income	300	532	-232	-43.61%
Financial Expenses	(229)	(201)	-28	13.93%
(Loss) / Profit Before Tax	(59)	1,407	-1,466	-104.2%
Income Tax	(18)	(338)	320	94.67%
Net Income	(77)	1,069	-1,146	-107.2%

Vertical Analysis Tables of the Financial Statements

The balance sheet as been provided in table 11:

Table 11: Balance sheet (Turkish Airlines 2016, p.8).

	Amount 2016 ($ million)	Percent
Assets
Current Assets
Cash And Cash Equivalents	1,466	7.93%
Financial Investments	349	1.89%
Trade Receivables	379	2.05%
Other Receivables from Related & Non Re	846	4.58%
Derivative Financial Instruments	197	1.07%
Inventories, Prepaid Expenses & Others	364	1.97%
Non-Current Assets
Property Plant and Equipment	13,476	72.88%
Goodwill	12	0.06%
prepaid expense	518	2.80%
Other Receivables	763	4.13%
Intangible & Other Assets	121	0.65%
Total Assets	18,491	100.0%

Current Liabilities
Trade Payables to Related & Non-Related Parties	616	3.33%
Short term Borrowings & Current Long Term Debt	2,421	13.09%
Other Current Liabilities	1,430	7.73%
Total Current Liabilities	4,497	24.32%
Long Term Borrowings	7,822	42.30%
Total Non Current Liabilities	8,907	48.17%
Total Liabilities	13404	72.49%
Total Equity	5,087	27.51%
Total Liabilities and Equity	18,491	100.00%

Vertical Analysis Comparative Income Statement

Table 12 contains the vertical comparative income statement:

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