Turkey is in the midst of a currency crisis as the lira continues to devalue. On 7 August the Turkish currency took a nosedive, falling 30% against the dollar.

As the lira weakens and the US dollar strengthens, Turkish carriers are looking at increasingly onerous liabilities, much of which are paid in dollars.

With some exceptions, loans, lease payments, fuel, maintenance and equipment are typically denominated in dollars, which means that if an airline has a high portion of revenues in lira, carriers could be facing foreign exchange risk.

About 37% of the Turkish fleet is on lease; payments are usually required in dollars. Adding fuel to the fire, the cost of fuel has risen nearly 40%, with the barrel price of Brent Crude Oil around $71 today as opposed to about $50 a year ago.

Turkish Airlines, which has a large share of international traffic and operates a hub-and-spoke model, has recently reported that for the first half of the year lira accounted for only 14% of its revenues. That is down from around 20% last year. This means that Turkish appears to have limited foreign exchange risk. On the other hand, domestic carrier Pegasus shows 38% of its first-half revenues earned in local currency.

Not to mention, the country has a lot of equipment funding on the way. Turkish carriers will take delivery of 63 aircraft over the next 12 months, according to Flight Fleets Analyzer. That is equal to nearly $9 billion at list prices.

Bank credit committees are less likely to take on Turkish credits given the economic instability. It is, therefore, likely that lessors will step in to plug the gap, as they can price greater risk with higher lease rates, protecting their downside with deposits and maintenance reserves.

A recent example of lessors increasing their presence in a similar situation was during Brazil's economic downturn, when carriers also faced foreign exchange issues due to a currency mismatch. In addition to cutting capacity and postponing deliveries, Brazilian carriers sought to fund deliveries with sale-and-leasebacks (SLB).

SLBs offer an alternative to purchasng aircraft in the event that funding cannot be raised because the banks are unwilling to increase their emerging markets exposure.

But even the SLB answer is not perfect, as the lease payments will almost certainly remain in dollars, which means that SLBs are more of temporary band-aid than a long term solution.

Source: Cirium Dashboard