This document analyzes the Economic Value Added (EVA) of Turkish Airlines as a performance measure. It first provides background on EVA and its advantages over traditional measures. It then calculates Turkish Airlines' EVA for Q1-Q3 and finds it to be negative, largely due to high net fixed assets from leased aircraft. Adjusting the calculation to exclude these assets results in a positive EVA. The document concludes that while EVA has limitations as a performance measure for airlines due to their lack of fuel price control, Turkish Airlines' positive market value added and return on equity suggest its financial performance is improving.
4. Capital invested in the business might be reduced by selling under-utilized assets; this strategy will simultaneously improve operating performance through a higher asset turnover ratio, as well as a reduced capital charge against those earnings because of a reduced debt or equity capital investment.
5. Redeploying the capital invested to projects and activities that have higher operating performance than the current projects or investments are exhibiting. And fourth, if the business is not highly leveraged, change the capital structure by substituting lower cost debt for higher cost equity. Although this last strategy will decrease net income because of the higher interest cost, it will improve the EVA of the business because the total cost of debt and equity is reduced, and EVA measures the value created after all costs of capital (debt and equity) have been taken into account.
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7. Net Fixed Assets of Turkish Airlines are quiet high. 3.733.114.960 out of 4.730.079.226 is the value of aircrafts acquired by leasing. Actually this value is the key reason, why Turkish Airlines’ has a EVA negative value. In the airline industry, although you long term lease an aircraft, it will be count as a fixed asset. Actually, this value should be subtracted by calculating EVA, when we consider companies with high net fixed assets especially airline companies. If doing so EVA will increase to a positive 101 Million TL.
8. Due to the increase in fuel prices EBIT for 2010 Q1-Q3 was lower than expected. Therefore airline financial analyst exclude fuel costs, when comparing similar network sized airlines. To show the effect of fuel costs on EVA, EBIT will be recalculated by adding the Fuel Cost proportion back. By calculating EVA with the new EBIT shows around 676 Million TL. Therefore it could be said that EVA could not be properly used a performance indicator for an airline as increase in fuel prices is the airlines primary expenditure and managers do not have an influence on the fuel prices. This approach is only valid if the airline does not hedge fuel. Succesful hedge agreements would increase EVA if the relative cost in the “hedged year” is lower than hedging price.
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