Financial - Turkish Airlines

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(Convenience Translation of Report and Financial Statements Originally Issued in Turkish)TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI AND ITS SUBSIDIARIESNotes to the Audited Consolidated Financial StatementsFor the Year Ended 31 December 2012(All amounts are expressed in Turkish Lira (TL) unless otherwise stated.)Derivative Instruments and Hedging TransactionsIn order to hedge important operations and cash flows in the future against financial risks, Group made interest rateswap contracts to convert some of the fixed-rate finance lease liabilities into floating rate and cross-currency swapcontracts to convert Euro-denominated finance lease liabilities into US Dollars. The changes in the fair values of thosederivative instruments are directly accounted in the income statement for the period.The floating-rate financial liabilities of the Group are explained in Note 38 (b.3.2). Beginning from September 2009, inorder 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 afterthe 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 forcash 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 tolessen the effects of fluctuations in oil prices on fuel expenses, the Group began hedging transactions for approximately20% of annual jet fuel consumption. For this purpose, the Group made forward fuel purchase contracts settled on cashbasis. In accordance with the Company’s BOD resolution issued on 21 January 2011, hedging rate which correspondsto 20% of the currently applied monthly consumption rate will be applied as 50% after 12 months and this rate will begradually increased by 2,5% in each month. In addition, the Company started to use zero cost 4 way collars in 2011instead of forward fuel purchase contracts to hedge cash flow risk of fuel prices. The effective portion of fair value hedgeof derivative instruments that are subject to cash flow hedge accounting due to future fuel purchases is recognizedunder hedge accounting fund in equity.74 TÜRK HAVA YOLLARI ANNUAL REPORT 2012
(Convenience Translation of Report and Financial Statements Originally Issued in Turkish)TÜRK HAVA YOLLARI ANONİM ORTAKLIĞI AND ITS SUBSIDIARIESNotes to the Audited Consolidated Financial StatementsFor the Year Ended 31 December 2012(All amounts are expressed in Turkish Lira (TL) unless otherwise stated.)Group’s derivative instruments arisen from transactions stated above and their balances as of 31 December 2012 and 31December 2011 are as follows:31 December 2012Positivefair valueNegativefair valueTotalFixed-paid/floating received interest rate swapcontracts for hedging against cash flow risksof interest rate - (59.464.968) (59.464.968)Forward fuel purchase contracts for hedgingagainst cash flow risk of fuel prices - - -4 way collar contracts for hedging againstcash flow risk of fuel prices 9.765.473 - 9.765.473Fair values of derivative instruments forhedging purposes 9.765.473 (59.464.968) (49.699.495)Cross-currency swap contracts not accountedfor hedge accounting 20.161.677 (35.253.615) (15.091.938)Interest rate swap contracts not accounted forhedge accounting 41.005.786 (52.672.105) (11.666.319)Forward currency contracts not for hedgingpurposes 3.928.713 (14.245.934) (10.317.221)Fair values of derivative instruments not forhedging purposes 65.096.176 (102.171.654) (37.075.478)Total 74.861.649 (161.636.622) (86.774.973)31 December 2011Positivefair valueNegativefair valueTotalFixed-paid/floating received interest rate swapcontracts for hedging against cash flow risksof interest rate - (62.888.643) (62.888.643)Forward fuel purchase contracts for hedgingagainst cash flow risk of fuel prices 6.796.870 - 6.796.8704 way collar contracts for hedging againstcash flow risk of fuel prices - (7.864.632) (7.864.632)Fair values of derivative instruments forhedging purposes 6.796.870 (70.753.275) (63.956.405)Cross-currency swap contracts not accountedfor hedge accounting 43.169.453 (61.992.542) (18.823.089)Interest rate swap contracts not accounted forhedge accounting 20.717.103 (20.776.714) (59.611)Forward currency contracts not for hedgingpurposes 9.683.151 (1.348.551) 8.334.600Fair values of derivative instruments not forhedging purposes 73.569.707 (84.117.807) (10.548.100)Total 80.366.577 (154.871.082) (74.504.505)75
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