Our speakers for today are Professor Murat Şeker, the Chairman of the Board of Directors and the Executive Committee, Metin Gülşen, Member of the Board and the Executive Committee, as well as the Chief Financial Officer, and Mehmet Fatih Korkmaz, Head of Investor Relations. Gentlemen, over to you. The floor is yours.
Thank you very much. Good afternoon, everyone, and thank you for joining us today. The third quarter of this year began with cautious optimism following the peace agreement in the Middle East. However, tensions resurfaced after the agreement broke down, and rising fuel prices subsequently created a more challenging operating environment. As a result, we navigated under a delicate balance between capacity growth, uncertain demand, and cost pressure. In the third quarter, our total passenger capacity rose by 3.2% annually. We carried 28.5 million passengers, and our passenger load factor increased by 1.5 percentage points year over year, reaching 87%. This strong performance was sustained throughout the quarter, with each month delivering annually higher passenger traffic and load factors. On the cargo side, the positive momentum seen since the beginning of the year continued, with total volume carried growing by 7.4% year on year.
During the July-September period, passenger revenues increased by more than 15% compared to the same period last year. Passenger yields strengthened sequentially and surged by almost 10% year on year, reflecting robust demand across our network. Performance was particularly strong in Asia, where revenue grew by around 30%, exceeding $2 billion. Cargo revenues remained strong, driven by volume growth and 35% increase in yields, supported by a shift from sea to air freight. Accordingly, total revenues rose by more than 19%, reaching $8.3 billion. On the cost side, fuel expenses rose by 59% year on year, from $1.6 billion to $2.6 billion, primarily reflecting 54% higher market prices. In addition, higher-than-expected domestic inflation and the resulting salary adjustments for the second half of the year placed further pressure on costs. As a result, EBITDAR recorded as $2.1 billion, with a margin of 25.4%.
Against this backdrop, we managed our capacity selectively in line with prevailing revenue opportunities across our global network. Demand remained particularly strong in Asia and Europe, supporting our focus on markets with attractive growth and revenue potential. This strategy allowed us to respond to changing regional demand dynamics successfully, as indicated by more than 14% increase in unit revenues. Apart from capacity and revenue management measures, we intensified productivity efforts, including fuel consumption optimization, indirect spending replanning, and supplier negotiations. In the first nine months of the year, along with hedging, our efficiency initiatives contributed [$450] million in cost reduction and $1.9 billion in additional revenue. We are also taking further measures to improve our cost structure with early retirement programs and centralization of certain activities.
Additionally, change to flight crew remuneration will take effect in 2027, aligning compensation more closely with actual flight production translating into further cost efficiencies. Despite the current operating environment, we remain dedicated to enhancing passenger service quality and strengthening its position among the world's leading airlines. In the third quarter, we received the APEX World Class Award for the sixth consecutive year, alongside best-in-class distinctions in sustainability and food and beverage. At the Skytrax World Airline Awards, we received eight awards, including Best Airline in Europe for the 11th time and Best Business Class in Europe. These recognitions reflect our commitment to delivering high-quality passenger experience throughout our network, particularly in the premium segment. We are also pleased to become Liverpool's main club partner for five years, beginning with the 2027 and 2028 season.
We look forward to building on this partnership, which will further strengthen our international brand presence and enable us to engage with a broader global audience. Our hub at Istanbul Airport is central to our global reach and long-term growth targets. The airport's fourth runway entered service in September. It is expected to reduce taxi time, particularly for our eastbound flights to domestic market and Asia, contributing to fuel and time savings. Its east-west orientation will also provide greater operational flexibility in adverse weather conditions, supporting more efficient flight operations. All these developments demonstrate how our investments in infrastructure and network expansion are translated into tangible benefits. We also remain committed to selective investments that support our long-term growth.
In September, we finalized our order of 100 Boeing 737 MAX aircraft, with options for an additional 50 aircraft, building on our order for up to 75 Boeing 787 Dreamliners announced last year. Last month, we also signed an agreement with CFM International on the supply of LEAP engines for our new 737 MAX aircraft, as well as long-term maintenance and service support for our wider fleet. Beyond fleet renewal, we are progressing with major investments in our operational infrastructure. The second phase expansion of SMARTIST Cargo Terminal is expected to become operational in 2028, doubling our annual cargo handling capacity to 4.5 million tons. Meanwhile, our collaboration with Rolls-Royce to establish an engine maintenance center at Istanbul Airport is expected to become operational in 2028. On the network side, China remains a strategically important market for both Türkiye and Turkish Airlines.
This month, we plan to launch our Chengdu route, building on the expansion of air traffic rights between Türkiye and China. Following the allocation of additional slots and the resulting frequency increases in 2026, passenger numbers to and from China increased by more than 60% in the first nine months of the year. Tourism trends also align with Türkiye's efforts to attract more visitors from China. Tourist arrivals from the country rose by around 35% year-on-year in the first eight months of 2026, according to Türkiye's Ministry of Culture and Tourism. Looking ahead, forward bookings for the fourth quarter remain healthy, providing a positive starting point for the final months of the year. However, materially elevated jet fuel costs will continue to pose a major risk to our profitability and could warrant a more measured approach to capacity growth.
Geopolitical developments and volatility in energy markets are therefore key factors shaping our near-term outlook. At the same time, our strong balance sheet, diversified network, and structural advantages provide us with the resilience to navigate these headwinds while continuing to differentiate ourselves within the industry. We remain confident in our long-term strategy and our ability to create sustainable value while maintaining financial discipline. I will now hand the call over to our CFO, Metin Bey, to elaborate on our results and provide additional insights.
Thank you, Murat Bey, and good afternoon, everyone. As Professor Şeker outlined earlier, renewed tensions in the Middle East, elevated fuel prices, and evolving flight restrictions weighed on the operating environment during the third quarter. While these conditions led us to reduce frequencies in certain markets, we added services to destinations with stronger demand. Through this selective allocation, we increased passenger capacity by around 3% year-on-year. Despite busy summer season, our on-time departure performance was also improved by nearly 7 percentage points in the third quarter compared with the same period of last year. During the July-September period, transfer traffic expanded by 4%. Demand from Europe to Asia to Türkiye remains supportive, contributing positively to overall traffic results. As a result, passenger numbers reached a quarterly high, 28.5 million. Moving on to regional performance, Asia continued to be a key contributor to growth during the third quarter.
Capacity across the region increased by 18% year-on-year, and load factor recorded as 88%. Our results in Australia and Philippines were particularly strong. In Australia, revenues rose by 20% on broadly unchanged capacity. In the Philippines, we achieved a 6 percentage point improvement in load factor without adding capacity, while yields increased by 16%. Sri Lanka and the Maldives also performed ahead of plan. Capacity was 26% above budget in Sri Lanka and 14% above budget in the Maldives. In Africa, we refined our schedule by pausing underperforming routes and concentrating capacity. This included suspension of Hurghada services and selected African markets through the end of 2027. At the same time, frequencies to Cape Town and Johannesburg were increased by three weekly flights each for the winter schedule, while Mauritius was expanded to 10 weekly flights. For our European operations, schedule adjustments were concentrated in thin routes.
Services to Billund and Leipzig were suspended alongside selective cancellations on weaker routes. Meanwhile, connecting traffic to Far East remained supportive, increasing by 20% year-on-year. Similar trends were observed in Southern Europe, where passenger flows to Far East grew by 22%. In the Americas, capacity declined by 6% year-on-year, while load factor increased by 3.4 percentage points to 89.8%. Softer connected traffic from Africa to the Middle East prompted frequency adjustments, allowing us to direct capacity towards stronger routes such as Boston, Sao Paulo, Panama, and Santiago. We further strengthened our presence in Canada through added capacities to Montreal, Toronto, and Vancouver. Revenue growth in the third quarter reflected contributions from both passenger and cargo operations. Passenger revenues increased by 15% year-on-year due to the higher traffic volumes, yield improvement, and stronger load factors. Our cargo segment sustained the momentum of recent quarters.
Cargo revenues rose by more than 45% annually, supported by constrained industry capacity, expanding e-commerce flows, and additional demand for air freight amidst elevated ocean shipping costs. Alongside this revenue growth, Turkish Cargo ranked third globally with a market share of 6.9% based on freight tonne kilometers for the first nine months of 2026. On the AJet side, we continued to strengthen the commercial performance during the third quarter, aided by healthy demand, network optimization, and an enhanced ancillary product portfolio. AJet's 13% annual capacity increase was mostly backed by the expansion of its international network. Unit revenues increased by 15%. At the same time, international load factor improved by 2.3 percentage points to approximately 87%. Ancillary revenues grew by more than 45% annually, accounting for 14% of total revenues. This performance highlights the growing contribution of high-margin ancillary products to AJet's revenue mix.
Despite capacity remaining 9% below our plan, passenger revenues were 2% above our expectations. Unit revenue exceeded our budget by 12%, supported by 1 percentage point higher load factor. Within the international network, Central and South Asia overperformed with capacity 25% higher and passenger numbers was up 24%. During the quarter, we secured traffic rights of five additional weekly frequencies on each of the Ankara-Almaty, Ankara-Astana routes, providing scope to further develop our presence in Central Asia. In the Middle East, services from Sabiha Gökçen to Dubai resumed with seven weekly flights. Moving on to our financial results, revenue growth in the third quarter was supported by sustained passenger demand and higher traffic volumes, alongside a material contribution from cargo operations. While elevated fuel prices and personnel expenses continued to weigh on profitability, their impact was partly offset by revenue growth and disciplined management of controllable operating expenses.
Taking these factors into account, profit from main operations amounted to $930 million, while EBITDAR increased to $2.1 billion, with a margin of 25%. Net income, including contributions from our investment portfolio, reached approximately $1.3 billion for the quarter. Our unit cost performance in the third quarter remained under pressure from fuel and mainly personnel expenses, with total CASK increasing by 21% year-on-year. Fuel costs were affected by sharp rise in the market prices, with hedging providing only partial relief. Personnel expenses following the mid-year inflation adjustment added to overall cost burden. The reported increase in other expenses, particularly IT and rental costs, was largely attributable to differences in accounting classification between periods. In this environment, we continue to pursue efficiency improvements and closely manage the expenditures across the organization.
The operational efficiency program launched at the beginning of the year, which also covers our subsidiaries and joint ventures, has already delivered $260 million in the first nine months. In parallel, projects under development will improve our cost base through centralization, as Murat Bey mentioned, support decisions on flight routing, maintenance schedules, and disruption management. These operational initiatives are expected to begin generating benefits progressively during 2027 and 2028, with a combined annual contribution of $300 million-$350 million. Free cash flow generation in the first nine months of the year decreased by around $1.4 billion compared to the same period of last year. The decline mainly reflected a $1 billion increase in CapEx, with $400 million of lower operating cash flow due to higher fuel prices. Liquidity amounted to $10.2 billion at quarter end.
Meanwhile, net debt increased to $9.7 billion, mainly due to aircraft deliveries with leverage of 2.2 x. Looking ahead, despite healthy passenger demand, the fourth quarter expected to be more challenging as geopolitical uncertainty and high fuel prices continue to weigh on the operating environment, leading us to take a measured approach to capacity growth. Accordingly, we expect passenger capacity to increase by 1%-3% year-on-year, accompanied by total revenue growth of mid-teens. While revenue growth is expected to remain robust, exceptional levels of energy costs and higher ex-fuel unit expenses are likely to constrain margin conversion. Based on current jet fuel market prices, fuel CASK is projected to be by more than 80%. We also anticipate mid-to-high single-digit increase in ex-fuel unit costs. Overall, we expect an EBITDAR margin of 5%-10% for the quarter.
With this, we conclude our presentation and will now move to the Q&A session.
Thank you very much, speakers. Thank you for your presentations. We will now start the Q&A session, question and answer session. Just a reminder, only written questions will be accepted, no audio questions. If you would like to submit your questions, please do it right now. Click the Q&A button at the bottom of the Zoom screen and submit your question. With that, back to you, speakers, for those written questions.
Hello, everyone. This is Fatih, Head of Investor Relations. It was indeed a very tough quarter. I would like to thank Murat Bey and Metin Bey for their participation, and we will now continue with the Q&A session. With that, I would like to ask Murat Bey about the main highlight about the impact of the conflict in the Middle East on our third quarter results.
Sure. Thank you very much, Fatih. Overall, as we went through a little bit in the presentation, the capacity, despite all the challenges, was up by about 3%. We were also able to increase the load factor with a mild, almost flattish change in the aircraft utilization. This led us to mitigate a big portion of the risks that the cost pressure came from the fuel price increase. The total impact of the fuel price increase on our balance, on our income statement, was about $1 billion. Through smartly allocating the capacity where the yield performance was, we were able to hold it strongly. It mitigated this $1 billion cost pressure by about more than $800 million-$900 million of this impact was mitigated by the yield improvement and the load factor increases. The net impact of the fuel price increase on our income statement was a limited, mildly about $100 million-$150 million levels.
Thank you, Murat Bey. Also, operationally, could you update us on the status of the operations to and from Middle East?
During the war, we stopped operations in 11 countries and 22 routes in the Middle East region. As a result, Middle East capacity declined by close to 30% year-on-year in the first nine months. However, currently, starting from May, then in June and July months, we started to resume operations in a big portion of the destinations in the region. Overall, in 10 of those 11 countries and 14 routes out of the 22 routes, we have resumed operations. Currently, the suspended destinations are all in Iran, and in Basra and Kirkuk in Iraq, and Aqaba are currently still suspended. There are overall eight routes we have suspended. After the recent attacks in Saudi Arabia, we paused operations to Riyadh and Dammam, but it is for a short period. We probably will resume those operations in the second half of November.
The main problem for the second and third quarter was obviously capacity deployment, capacity adjustment between regions. How did you allocate capacity in the third quarter in response to the geopolitical developments?
Our first priority was the capacity discipline. We did monitor each destination carefully, whether we were able to cover our contribution one and contribution, then contribution two margins. During the third quarter, we reallocated available capacity considering all these geopolitical developments, the fuel price volatility, and how strong the market demand and competition level was. As demand weakened on Americas to Middle East or vice versa, the corridor, we reduced services to and from Americas, North and South, by 17 weekly frequencies. At the same time, we did not stop operation, but we reallocated this capacity to increase the frequencies in Far East, Central and South Asia, and Africa regions by overall about 40-45 frequencies where the demand remained strong. Overall, we reduced capacity across Americas by about 6%.
As I said, in the Far East and Central Asia and Central and South Asia, overall, we increased capacity by about 10%-15% levels. Compared to our original budget, overall, I can say, compared to our budget, we are in this Far East and Central Asia routes, we are 10%-15% higher in terms of capacity.
Murat Bey, given one of our analysts ask about, given your historically strong capacity growth, how should we think about the apparent shift toward prioritizing yield over growth? Against that backdrop, what is your full-year capacity growth target for 2026?
This should be viewed not as a move away from growth, but as a more disciplined approach to growth. As I just answered in the previous question, overall, we did not cut huge amount of capacity. We reallocated it. We are trying to adjust our capacity with the market demand and with great emphasis placed on the yield and profitability of the route. Based on this analysis, we are taking the capacity from the destinations where contribution margin was negative to a more profitable ones. For example, again, as I just said, in Americas, there are certain destinations where we cut frequencies, but despite of cutting frequency, we were able to increase revenue, like in Los Angeles, like in Chicago.
In certain regions, in the Far East particularly, where we were able to put additional capacity, on the top of that, we were able to increase the load factors and the overall revenue and profitability. This was just a merely reallocation of smart capacity smartly, where the cost pressure was able to be reflected on the prices and revenues. Overall, there was a part of the question. Overall, we expect to finish the year with about 3.5%-4% capacity growth, which is still about like a 5% below our budgeted capacity growth, but still a valuable growth is planned for this year.
Thank you, Murat Bey. One of the factors that our analyst and investor noticed here that the improvement in load factors, as well as yields in the third quarter, and they are wondering about the sustainability of it coming into fourth quarter. Are you seeing any signs of softening in terms of demand?
Overall, load factor and unit revenue growth are expected to continue in the fourth quarter too. However, the increase is going to be less than the amount we observed in third quarter. In the third quarter, we had a record amount of load factor, about 78% levels. On the fourth quarter, we won't be able to see year-over-year such an increase, but still we are expecting a mild positive change on the load factor. On the capacity wide, on the third quarter, we had about 3%. Last quarter, fourth quarter of this year, we are still expecting about 1.5%-2% capacity growth going forward into the fourth quarter of this year. Part of this change is mainly the seasonality. After the summer season is over, we are getting into the low season, especially October and November.
Then in December, we will see some picking up of the demand due to the Christmas travel season. This is something we were anticipating. Yet our yield, it's still on the low to mid-teen level, going to be increasing in the last quarter of this year.
How are the regional unit revenue trends progressing as we enter winter, given the persistently elevated fuel price environment?
Exactly. The Brent has really surprised us. We were anticipating that the jet and Brent to decrease much more significantly compared to where it is now. $1,600 per ton on the jet fuel was not something we were planning, and this had an impact on our bottom line, definitely. When you compare where we are with the IATA figures in the third quarter, excluding Middle East region, IATA, we saw about 2%-3% growth in demand. That's more or less how much we grew globally. Europe to Asia traffic was up by 12%, and transatlantic traffic was down by almost one percentage point by IATA numbers, and we were almost on par with these changes.
In the last quarter, in the fourth quarter, we are expecting overall about like, as I said, 1.5%-2% capacity growth by low teens, or like a close to 10% levels improvement in the unit revenues, and holding up to our load factors. There are certain axes that keep the strong momentum, and we believe it will keep its pace in the last quarter. Central North Europe to Far East and vice versa, and our also domestic to Europe routes are also have been progressing strongly in the fourth quarter.
Turkish Airlines reduced planned capacity materially since the beginning of the year relative to initial guidance of 10%. How these reductions have been implemented, and have they primarily come through lower aircraft utilization, changes to the fleet plan, network adjustment, or a combination of these?
Definitely was a combination of those. Yes, the aircrafts were utilized by about 8%-9% below the budget, but they were almost on par with the same level of utilization as of last year. On the top of that, we were very keen to decrease the utilization of old generation aircrafts, which both moderated our capacity growth and then supported the fuel and cost efficiency.
Also, the network management, as I just answered again in the earlier questions, we reallocated the capacity very smartly. Net- on- net, as righteously we were aiming for 10%-ish capacity growth, we probably will end up by about 4% growth. This was to reduce the capacity allocation in destinations where we were not even be able to cover our contribution margin. We were very careful in adjusting our capacity and deploying the capacity to routes where we were able to make significant gains.
Murat Bey, we just had U.S. elections. Obviously, sentiment towards the war might change a little bit. What is the management scenario planning for a potential de-escalation of the conflict? Specifically, how quickly could you ramp up capacity in Middle East?
I think the big picture here is the speed we showed in adjusting our capacity as the war started very suddenly. I believe we will be able to show the same performance if we see a very strong and clean path of recovery from this war period. Of course, the de-escalation, we will be patient in seeing some strong signs of that de-escalation, because in like June, around June, July, we were increasing our hopes that the war would be over. The Brent came down significantly. We were increasing the frequencies, starting with the Middle East region. However, it did not turn out to be the case. We have the ability to adjust our capacity quickly, but we are not going to rush to do those drastic planning changes. Our base case scenario is Brent is going to improve downward to hopefully 1,000. Sorry, not Brent.
Jet will improve to $1,000 per ton level. As we see those, we will slowly increase our capacity, starting from the Middle East region, and those certain frequencies that we have cut, we have stopped operation. If the normalization happens, like kind of to give a sense to it, $100 per ton reduction in jet fuel for a whole year will approximately improve our profitability by about $750 - $800. If it goes down to the level where it was last year, sorry, this year, to $750 per ton, then the impact on the profitability will be about $2 billion. So, under this de-escalation scenario, we'll see a significant potential in improving our bottom line. Usually, we also get how quickly yields would come down if the tension in the region de-escalates.
We don't believe that the yields will come down very significantly. Of course, it will be led by the level of competition, but the costs that we have incurred as the whole industry are not going to be able to go away very quickly, because it's on the top of the Brent and fuel cost, the inflation it had created is going to take a little longer to mitigate.
Thank you, Murat Bey. Cargo revenues increased substantially in both the second quarter and third quarter, obviously alongside or due to disruptions in the Gulf. Looking into the fourth quarter, is that tailwind continuing? At the same time, we got an online question from Maria. She is asking, "What is the outlook for 2027 as well?" Do you have any idea at the moment?
Sure. The positive and supportive environment on cargo is very likely to continue into Q4, although we expect some moderation from the exceptionally strong performance we saw in the Q2 and Q3. The underlying supply and demand balance remains still favorable for air cargo business. The elevated fuel prices continue to put pressure on less efficient cargo operations, while the aging global freighters fleet is limiting the capacity growth. This sort of contributes to our strong bottom line. On the demand side, we see that the trade flows remain resilient. For example, the AI-related investment, particularly on the semiconductors, servers, data center equipments, are providing additional support for air cargo business. Against this backdrop, Turkish Cargo is going to continue to perform strongly in the last quarter too. We are seeing that the unit rates are slightly above the industry average.
That is mainly due to the vast network that we are operating with our passenger network and with our freighters, the capacity to reach to destinations and the huge connectivity is providing us some yield advantage in the air cargo business, and we expect this to continue. In the third quarter, the amount of cargo carried was up by about 7%, and the yields were up by about 29%. We have seen an all-time high load factor in our air cargo business. As I said, the yield on the year-on-year, the growth is going to decrease a little bit, but we still are expecting to finish the year with more than 25%-30% growth in overall revenue, and the yield, unit revenue in cargo to be up by about 20% by the end of this year.
Thank you.
Sorry, the second part of the question was 2027 outlook. It is definitely very challenging to put out an exact number. We are still working on it. I might say, because of the capacity growth we could not put in this year, in 2026, we will be able to put that capacity in production in 2027. Overall, the ASK-wide, the growth is likely to be somewhere between 5% and 6% growth in 2027.
Thank you, Murat Bey. Also, we are moving forward, I believe, tougher questions. Can you provide an update on the impact of jet fuel prices, and what are your assumptions for the full-year outlook? Do you have any idea about the pass-through rate on the ticket prices?
If we had this conversation yesterday, I might be saying something different. Today, something more different. It is really rather difficult. There are multiple factors. It is not just the war itself, but also the refineries being affected by the drone attacks is affecting the overall jet capacity. Brent is one element of uncertainty, but jet production is another complete level of uncertainty, because we have not only seen an increase in Brent, but also we have seen a significant jump in the crack spread as well. There are multiple layers of uncertainties. However, our base case scenario going forward is that there will be improvement, I mean, reduction in the jet fuel price going into 2027. Of course, we will be quite careful in making the budget. We have to rely on certain scenarios, at least until we have significant clarity going into 2027.
Our base case scenario is jet will be somewhere or averagely around $1,000 levels, but we also will be prepared where it can be around $1,200 levels as well. This year, compared to our budget, we had about close to $4 billion increase in fuel costs. We could mitigate this risk in a small portion through our hedge strategy, but the much bigger portion of this price increase was compensated by our operational performance. As we have went through the presentation, the cargo yield, the passenger RASK was up by 10%-14% levels, which allowed us in the first nine months to compensate almost 90%, 95% of the jet fuel price increase. The gap was actually, then why did our operational profit level came down?
On the top of the jet price, the global inflation it created, as we all know, in September, both the ECB and Fed had to increase their interest rates. The average inflation in both regions was up by at least a percentage point, and this led to, and in Turkey also, inflation because of the war and then cost of fuel was significantly above our projections. This additional burden led by the global inflation put additional pressure. But the answer to the question, how much of the fuel price we were able to compensate was, I could say, clearly at least 90%-95% of the cost pressure we were able to mitigate by our operational performance.
Regarding hedging, what is your current positions, ratio current positions, and have recent fuel price developments led you to reconsider your hedging strategy?
Currently, our hedge ratio is around 50%. We still heavily hedge on the crude Brent. At these escalated price levels, we have paused on our hedging, but once it come down, we will resume our operation. As I said, 50% of the 2026 consumption was hedged. For the 2027, it is still limited about like 15%-20% levels. This leads to around close to $250 million-$300 million hedge gains on our consumption. It is limited. Our break-even level is around $72. About the change in the strategy, we have revisited our strategy, and we will be including to a new additional products in our strategy to hedge on diesel, to hedge on crack spread, to get products that are much strongly correlated with the jet fuel. We have this strategy in place.
Because of the high costs, we have not done any investment in these products yet, but we will in the coming months once we see a bit more normalization in diesel and then crack spread prices.
Thank you, Murat Bey. What are the main drivers behind the recent acceleration in non-fuel unit cost, and how much is the increase temporary?
I actually kind of answered this question in the earlier one. Ex-fuel CASK was in the third quarter, actually over the nine months, was about close to 9% levels, ex-fuel CASK increase. When you break this down, roughly 40% of this increase was led by the below-budgeted ASK growth. As I said earlier, again, we were aiming about 8%-9% ASK growth, but now projecting about 3%-4%. So that capacity-related effect is responsible for about the 40% of this ex-fuel cost increase. The remaining 60% is led by the other underlying cost increases and exchange rate effects. Inflation is the single biggest item that beyond our budget and projections that led to this growth. The salary increases in Turkey inflation, the first half year inflation was about close to 18%, which was about 7%-8% higher than our budget.
In dollar terms, that put additional pressure on the all personnel-related expenses. It is not just Turkish Airlines staff, but also our ground handling, our aircraft maintenance, our catering expenses were also affected by this factor. One additional factor was there were some end-of-lease maintenance requirements which ended up costing more than we anticipated, and that was an additional small portion of this increase.
Muhammet Çakmak, Hanzade and number of other analysts and investors asking us about the trajectory of labor costs going into 4Q and especially for 2027, considering the recent increases. What are the incremental impact do you expect with the recent flight crew salary adjustments?
The first part, personnel expenses in the last quarter, not CASK but total expense, it will be probably a few percentage points below third quarter increase. In terms of CASK, personal CASK, also maybe 1 or 2 percentage points below the third quarter is what we are expecting. The main, actually, factor behind this high increase is, again, as I just answered in the earlier question, the inflation, because of the impact of the war, because of the inflation it generated, inflation ended up being higher than we anticipated, and that put further pressure on our personnel expenses. The measures we took against this is we went to a hiring freeze, not just for Turkish Airlines, but almost all of our subsidiaries. We tried to limit recruitment and tried to limit the increase in personnel expenses.
Some of the steps we took, like encouraging early retirement, adjusting the work hours and overtime compensation scheme, and then the remuneration of the flying crews cost measurement schedule, they will take those. The impact of these measures will be seen in 2027 and onward. We are expecting to see somewhere around like a $300 million improvement in cost base with these adjustments, but they will take into action starting from 2027. In addition to the hiring freeze, we are readjusting the capacity. Certain organizational changes we are taking place. Centralization of certain activities we are taking place. I will be more elaborate on this hopefully in our year-end results because these are still the actions we are taking as we speak. This is what's happening for this year.
Going into 2027, we are expecting the inflation and Turkish lira depreciation to be parallel to each other. That's why in dollar terms, in CASK in particular, we don't expect a significant deviation from that projection. This year, that's exactly what we were expecting, but because of the war, our expectations could not be met. Going into 2027, we will continue to be very, very careful in hiring, growing the personnel. We will be very aggressive in adjusting our organization structure and to mitigate any risk, any cost pressure that comes from the personnel side.
Thank you, Murat Bey. Hanzade and Maria also asking us about cost-saving initiatives, efficiency projects. What has been achieved and what has to expect and timing of those initiatives going forward?
Again, related to the question we answered, the improvement that we introduced on the flying crews, flying cabin and cockpits remuneration will be seen in 2027. The early retirement program, we already took that into action, but the impact to this year will be limited. In addition, we introduced several operational improvements to increase our operational performance. Our fuel consumption, we did some improvements there. Overall, with certain cost-cutting initiatives, we had about $250 million improvements in the first nine months.
Overall for the whole year, we are expecting somewhere around $300 million improvement in the cost-saving initiatives that we have taken for this year. Some of this will continue into 2027 and 2028 and on actually, on the following years as well. These initiatives' impact on the cost-cutting side to 2027, we are expecting that to be an additional $300 million-$350 million area.
Thank you, Murat Bey. Considering the numbers that you mentioned regarding capacity, revenue, cost trends, how should we think about the fourth quarter financial outlook in terms of profitability and margins?
The margin of this quarter on the fourth quarter will be tight because the third quarter, compared to the third quarter, due to the seasonality, the revenue-generating capacity will be relatively limited, even though we will keep the momentum to grow. We will put about 2%-3% capacity growth. The total revenue will grow with about 10%-11% levels. The EBITDAR margin will be around 6%-10% levels. Ex-fuel CASK might increase. Still, there is a lot of uncertainty there, but it might increase by mid to high single digits.
Murat Bey, how does your fleet delivery pipeline look like for 2026 to 2028? To what extent are the manufacturer's supply constraints affecting your planned growth?
Currently, from both OEMs, we are seeing around 12 months delivery delays. In a year like this, it seems supportive. We don't want to grow too much anyway. However, we don't see it as an overall full benefit because we would like to utilize more of the new generation fuel-efficient aircrafts compared to our aging and old aircrafts. There is also, while the supply constraints are incidentally supporting our capacity discipline in the short term, the planning uncertainty and delayed fleet renewal is outweighing the advantages. By this year, we are expecting overall about 30 entries to TK fleet and about 11 exits from TK, so about a net of a 20 growth. On the AJet side, 50 entries and close to 30 exits, and again, somewhere around 20 net growth.
Going into the future, in 2027, we are going to be increasing the fleet to somewhere around 600 aircraft, and we plan to finish this year with around 560, 565 levels. So about another 90 growth, 90 aircraft growth. We will have about another eight wide-body, which is quite important to note for 2027. In 2028, another 20, 25 aircraft growth will come to the fleet.
Thank you, Murat Bey. What is the latest capital expenditure and net debt guidance for this year end?
Total gross CapEx, previously we were saying it would be somewhere between $4.5 billion and $5 billion. Now, we are seeing that this year's gross CapEx will be around $5.5 billion-$6 billion, but net CapEx is still slightly below $4 billion. Leverage is going to be increasing this year. As you would remember, our long-term target is 2x to 2.5 x. But this year, net debt to EBITDAR, we expect somewhere between 3x and 3.5 x levels.
Thank you, Murat Bey. We have also a couple of online questions, additional questions. What is the expected level of pre-delivery payment outflows in 2027? We expect that it will be comparable to this year's level. Regarding the mechanics of fuel expense increases for the quarter, it is mainly related to consumption and jet fuel price increases. Capacity rose by around 3%, so jet fuel consumption also rose by 3%. There were around 1.5 percentage point of efficiency, and compared with around 60% increase in jet fuel expenses, the fuel expense rose by around 59%. Also, we record around $70 million of hedging gain in the quarter, bringing the total to $180 million for the first nine months.
With that, we also have a couple of additional questions about investment income. That seems to have driven net income beat for the quarter. Is this just purely from higher domestic rates than expected? Please do go ahead.
This high interest and high inflation environment, one probably positive side benefit of that was the, as we were delaying and deferring actually, purposefully deferring a portion of our investment decisions, we were able to utilize that cash with interest income. Moreover, for our long-term investment projects, since the beginning of this year, we were able to get long-term financing from international markets, including China, Middle East, and big global banks. We were able to get long-term financing to finance our investment projects. But because of the war, for 2026, we decided to wait until we have a little bit more visibility going into 2027. We were then, as a result of holding onto that cash, we were able to benefit from the high interest environment, and that interest income or investment income turned out to be higher than we were expecting.
Yes, this is an interim period. As the interest rates globally will come down in the coming years, this interest revenue, this investment income is going to normalize down to where it was before the war.
Thank you, Murat Bey. These questions cover almost all of the items that we have been asked. We also have two more questions. First one is from Loris. Have you seen increased competition from other Middle Eastern or Asian carriers on Europe-Asia traffic?
Definitely. Actually, that competition is exactly where it was before the Middle Eastern carriers were affected by the war. In Europe- Asia, also Europe to Africa traffic, we see the competition level, or in other words, the amount of capacity provided in these axes are what it was before the war. Yet we were able to gain some market in these main axes, and it helped us to hold on to our strong yield increase. The second one was about AJet. What are your next growth initiatives to keep profitability intact? AJet, one structural issue with AJet is their fleet is old, and because of the GTF engine issue, they have some grounded aircraft. It is renewing. They are renewing the fleet at a strong speed. Actually, this year, in 2026, more than 80%, more than close to actually 90% of their fleet is renewed.
It's new generation, it's fuel efficient. It is going to bring them a better cost structure, and their network is still expanding. Still a significant portion of their operation is in the domestic market, and the stage length is relatively shorter. As they expand their international operations, stage length increases, the yield improves, and their profitability is going to improve in the coming years. Once, of course, we have a bit more reasonable cost structure, mainly on the fuel side.
Thank you, Murat Bey. Thank you, Metin Bey. Also, I would like to thank our participants for their time. Hopefully with you on the next quarter. With this, we conclude our call.
Thank you very much, speakers, for today's presentations and all the questions that you answered. I'm sure everyone is greatly appreciative. Ladies and gentlemen, that now concludes today's conference call. We thank you for your participation, and you may now disconnect.