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23rd November, 2013
CAPA
In CAPAs report on Turkish Airlines 3Q2013 results, we
highlighted that RASKgrowth failed to beat CASK growth for the
first time this year and suggestedmanagement would want to
demonstrate this was not the start of a new trend. Theairline has
now provided some reassurance on this.
Beyond this issue, CEO Temel Kotil used the recent Turkish
Airlines investor day toreiterate his strategy of using the
carriers Istanbul hub to attract global connectingtraffic flows,
leading to growth ahead of the market, albeit with an increased
focuson frequencies rather than new destinations in future. This
strategy has similaritieswith those of the Gulf carriers, but is
also underpinned by the significant Turkishhome market.
The Turkish market includes strong competition in the shape of
LCC Pegasus, but thereturn to profitability of SunExpress, jointly
owned by Turkish Airlines (THY) and
Lufthansa, provides THY with another option for facing this
competitive threat.
See related reports:
Turkish Airlines' 2012 operating profit almost triples; 2013
more doubtful, with 20% seat
growth[http://centreforaviation.com/analysis/turkish-airlines-2012-operating-profit-almost-triples-2013-more-doubtful-with-20-seat-growth-101536]Turkish
Airlines: quarterly operating profit falls in 3Q2013, but cargo
activity
strengthens[http://centreforaviation.com/analysis/turkish-airlines-quarterly-operating-profit-falls-in-3q2013-but-cargo-activity-strengthens-138792]
Global economic centre of gravity moves towards IstanbulAt its
investor day on 18-Nov-2013, Turkish Airlines (THY) gave a
presentation summarising the growth opportunity inTurkish Aviation
and THYs plans to capitalise on that growth. It also summarised its
financial performance in recent yearsand for the first nine months
of 2013. CAPA has considered its financial performance in some
detail in previous reports andso this report will focus on the
former topics relating to THYs growth plans.
An important driver of THYs growth is the geographic positioning
of its Istanbul hub, which allows it to capture globalconnecting
traffic flows. According to a chart presented by THY, sourced to
Airbus, the global economic centre of gravityhas been moving
eastwards from a position in the mid Atlantic in 1971 to central
North Africa in 2011 and will be in theeastern Mediterranean by
2031. This places Istanbul closer to the economic centre of the
world than any major hub inNorth America, Europe or Asia.
Global economic centre of gravity: 1971 to 2031
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Source: Turkish Airlines from Airbus Global Market Forecast
(2012-2031)
Turkey is the worlds number six tourist destinationIn addition
to the growth of transfer traffic, Turkeys aviation market growth
has been driven by the strength of its touristappeal and the strong
growth of its economy. This has stimulated growth in both inbound
and outbound point-to-pointtraffic.
Turkey was the number six tourism destination in the world in
2012 and the compound average growth rate from 2005 to2012 of 8.4%
per annum in visitors to Turkey was the fasted growth rate of any
country in the top 10 (source: UNWTO).
Top tourism destinations in the world by country: 2012
Source: Turkish Airlines from UNWTO
Strong growth in Turkish aviation marketsAccording to DHMI data
presented by THY, international passenger numbers in Turkey have
grown at a compound averagegrowth rate (CAGR) of 11.9% per annum
from 2003 to 2013E and domestic passenger numbers at 23.3% per
annum.
Turkish aviation market by number of passengers (million),
domestic vs international and Turkish Airlinesvs others: 2003 to
2013E
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Source: Turkish Airlines from DHMI (DHMI double counts domestic
passenger numbers and the above numbers have been adjusted for
that)
Istanbul has seen biggest increase in connectivity since
2009According to MasterCard Worldwide Insights 2Q2013 report on
Global Destination Cities, among the worlds leadingdestination
cities, Istanbul saw the greatest increase in air travel
connectivity from 2009 to 2013. Its connectivity indexgauges the
breadth of a citys international connectivity in air travel in
terms of established flights linking the city withothers in the
rest of the world, as well as the strength of each connection in
terms of flight frequencies.
Dubai, home to Emirates, saw the second highest improvement in
connectivity. Among the top 10 most improvedconnectivity cities,
all but Dubai and Moscow are located in Asia.
Air Travel connectivity changes: 2009-2013
Source: Turkish Airlines from MasterCard Worldwide Insights
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Home market differentiates THY from Gulf airlinesAs CAPA has
examined in previous reports, THYs transfer strategy bears some
similarities with those of Emirates, QatarAirways and Etihad. The
three Gulf carriers hubs are further to the east and to the south
than Istanbul. From there, thethree all fly non-stop to Australian
cities, the only significant omission from THYs non-stop schedule
currently.
However, the geographic location of its Istanbul hub means that,
compared with the three Gulf carriers, it is closer toEurope, North
America, Latin America, North and West Africa (and western parts of
Central Africa). THYs expansion andfuture ambitions depend to a
large extent on it continuing to grow its share of transfer traffic
flows, but, helping tounderpin this, its home market is a feature
that differentiates it from the Gulf carriers.
The United Arab Emirates
[http://centreforaviation.com/profiles/countries/united-arab-emirates]
and Qatar already enjoy among thehighest levels of penetration of
air travel of any country in the world, both having well over 10
times the number of airlineseats per head compared with Turkey.
They also have a significantly higher level of economic wealth per
head. Turkey isalready a major destination for tourists and
continued economic growth should continue to drive growth in the
point-to-point market.
See related reports:
Turkish Airlines: narrowing the strategic Gulf: Part 1
[http://centreforaviation.com/analysis/turkish-airlines-narrowing-the-strategic-gulf-part-1-112352]Turkish
Airlines: narrowing the strategic Gulf: Part 2
[http://centreforaviation.com/analysis/turkish-airlines-narrowing-the-strategic-gulf-part-2-112353]
THYs strong traffic growth is driven by transfer passengersFrom
2003 to 2012, THYs passenger numbers have grown at a compound
average annual rate of 14.8% per annum asthey increased from 10.4
million to 39 million. International growth has driven average
distances upwards and averagegrowth in ASKs and RPKs has exceeded
that of passenger numbers, at 16.6% and 18.5% respectively over the
sameperiod.
THYs focus on connecting traffic is reflected in the increase in
international-to-international transfer passengers from 1.1million
in 2005 to 9 million in 2012, with a CAGR at 34.4% per annum.
Passenger load factor increased from 63.6% in 2003to 77.4% in
2012.
Turkish Airlines number of weekly flights versus number of
destinations: 2004 to 2014E
Note: figures inside the spheres indicate total THY fleet size
Source: Turkish Airlines
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This growth has taken THY to number one in the world by number
of countries served and by number of internationaldestinations from
a single hub. It is also the worlds number four carrier by total
number of destinations.
Turkish Airlines ranking by countries and destinations
served
Source: Turkish Airlines
Turkish's RASK is stable in spite of rapid growthIn spite of the
rapid growth in capacity over many years, THYs unit revenues (RASK)
have remained broadly stable since2010 and have grown since 2003.
At the same time, it has managed to keep unit costs (CASK) under
control. For furtheranalysis of THYs financial performance, see the
two reports referenced near the start of this report.
Turkish Airlines revenue per available seat kilometre (RASK,
USc): 2003 to 2012 and 9M2013
Source: Turkish Airlines
Turkish Airlines cost per available seat kilometre (CASK, USc):
2007 to 2012 and 9M2013
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Source: Turkish Airlines
Negative RASK-CASK spread in 3Q2013 should not be the start of a
new trendThrough its investor day presentation and subsequently,
THY has shed a little more light on why a sharp upwardmovement in
CASK was not accompanied by an equivalent rise in RASK in 3Q2013
(an issue highlighted by CAPA in our14-Nov-2013 report: Turkish
Airlines: quarterly operating profit falls in 3Q2013, but cargo
activity
strengthens[http://centreforaviation.com/analysis/turkish-airlines-quarterly-operating-profit-falls-in-3q2013-but-cargo-activity-strengthens-138792]
)
At the investor day CEO Temel Kotil said that THY had switched
from a leg-based revenue management system to onebased on pricing
connecting trips on an O&D basis at the end of 2Q.
This will have benefits for the carrier: As Turkish Airlines
flight network expands, a new revenue management system isrequired
to value each seat on the network more precisely. The new system,
OnD based Revenue Management, maximizesthe total revenue of the
network said Mr Kotil. However, there were transition problems,
which also affected advancebookings.
Growth in CASK year-on-year was inflated by a number of elements
(apart from currency movements) in 3Q2013.
These included the expansion of THYs maintenance business, which
added to labour costs without a related increase inASKs; new wet
leases and owned aircraft adding to ownership costs; higher
navigation and ground handling prices;increased catering prices
reflecting a new catering concept; and a switch of some maintenance
costs from 3Q2012 to4Q2012, which should normalise with the 4Q2013
and FY2013 results.
Fleet growth plan is being acceleratedAt 30-Sep-2013, THYs fleet
of 231 aircraft consisted of 40 widebodies (average age 6.6 years),
182 narrowbodies(average age 6.4 years) and nine cargo aircraft
(9.9 years). The average age across the entire fleet was 6.6 years.
Of the231 aircraft, 79 were on operating leases, 133 on finance
leases and 19 were owned outright.
Turkish Airlines fleet as at 30-Sep-2013
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Source: Turkish Airlines
Recent orders mean that THY has a major delivery programme over
the next decade (and there are possibly more,long-haul, orders to
come). In Oct-2013, THY had a total of 267 aircraft on order, of
which 40 for widebodies and 227 fornarrowbodies. This weighting
towards narrowbodies, both in the existing fleet and in the
outstanding orders, reflects thegeographical location of
Istanbul.
This means that more than 40% of worldwide international traffic
is within narrowbody range of Istanbul and THY serves168 out of its
197 international destinations with its Boeing 737 and A320 family
aircraft. This narrowbody focus sets itapart from the Gulf
carriers, whose fleets are much more weighted towards twin aisle
aircraft (see Turkish Airlines:narrowing the strategic Gulf: Part 1
[http://centreforaviation.com/analysis/turkish-airlines-narrowing-the-strategic-gulf-part-1-112352]
).
Turkish Airlines fleet deliveries planned as of Oct-2013
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Source: Turkish Airlines
The most recent THY fleet plan will take its total number of
aircraft to 267 at the end of 2014 and 436 in 2021. This is alittle
higher than the Jun-2013 fleet plan, which envisaged 237 aircraft
in 2014 and 423 in 2021. The additional aircraftcome from the
exercise of options.
Turkish Airlines fleet plan to 2021E
Source: Turkish Airlines
Network development to focus on frequenciesBetween now and 2021,
the additional aircraft will be used to expand capacity mainly
through increased frequencies, withgrowth in destinations slowing
relative to recent years (although THY also plans 37 new points on
its network). Thisreflects a maturing of the network. Across its
network, THY currently serves 74% of destinations with at least a
dailyfrequency.
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By region and in percentage terms, the biggest capacity increase
over the period to 2021 will be to the Far East, with anincrease of
92% and four additional destinations. America will see a 65%
increase in capacity, Middle East 58%, Africa56% and Europe 41%.
Africa will see the greatest number of new destinations (a further
13), while Europe will see theaddition of 10 destinations. The
percentage of destinations served at least daily will increase in
all regions.
Turkish Airlines' future network development
Source: Turkish Airlines
Second Istanbul hub at Sabiha Gokcen; third airport plannedIn
addition to its main hub at Istanbul Ataturk Airport, from where it
serves 222 destinations, THY also operates fromIstanbuls second
airport at Sabiha Gokcen.
Catchment area Istanbul Ataturk (red) and Istanbul Sabiha Gokcen
(yellow)
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Source: Turkish Airlines
In 2013, THY has a total of 14 aircraft, including seven
aircraft of THYs lower cost subsidiary AnadoluJet, at Sabiha
Gokcen(SAW). It operates 19 domestic and 11 international routes
from the airport and doubled its passenger numbers in the firstnine
months of 2013 to 2.6 million, with a 77% load factor.
The use of SAW has allowed THY to continue its growth in
passenger numbers and connectivity, while avoiding thecapacity
bottleneck at Ataturk. Moreover, SAW offers an additional catchment
area on the Asian side of the Bosphorus andhas lower airport
charges than IST.
In 2014, THY plans to increase the number of aircraft at SAW to
24, including nine AnadoluJet aircraft. The number ofdomestic
routes is planned to fall to nine, while the number of
international destinations will increase to 27.
Turkish Airlines destinations from Istanbul Sabiha Gokcen
Airport: 2013 and 2014
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Source: Turkish Airlines
Istanbul Ataturk is currently operating close to its capacity
limits, but THY says that its capacity could increase by 30%with a
number of measures.
First, changes in tower management can increase the number of
aircraft movements from 58 to 80 per hour, an increase of43%. In
addition, the number of aircraft parking positions will increase
from 102 to 145 in 2014. Third, a planned newinternational terminal
could bring a 50% increase in boarding gates to 63. Fourth, THY
points to management measuresthat could improve passenger flows,
such as easy-pass boarding passes, the privatisation of passport
control and theelimination of security control at the terminal
entrance. Finally, THY argues that an optimised wave structure
would alsomake a contribution to enhanced capacity.
Nevertheless, a new airport at Istanbul is required and
construction on this project is expected to start by the first
quarterof 2014, with operations commencing in 2019.
See related report: Turkeys aviation market: healthy growth to
continue at one of the worlds oldestcross-roads
[http://centreforaviation.com/analysis/turkeys-aviation-market-healthy-growth-to-continue-at-one-of-the-worlds-oldest-cross-roads-133780]
Location of planned third airport for Istanbul
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Source: Turkish Airlines
SunExpress returns to profitTurkish Airlines has a number of
subsidiaries and joint ventures within the group, including
SunExpress, its 50-50 jointventure with Lufthansa. Loss-making in
2010, 2011 and 2012, SunExpress returned to profit for the first
nine months of2013 thanks to a strong 3Q.
Turkish Airlines subsidiaries, joint ventures and affiliates
Note: Material entities with more than USD10 mm revenues in FY
2012(2) Full company revenues, not just the portion attributable to
THYSource: Turkish Airlines
In 3Q2013, SunExpress made a net profit of TRY146 million
(EUR53.6 million), bringing the nine month result to TRY122million
(EUR44.8 million), compared with a loss of TRY11 million (EUR4.04
million) in the first nine months of 2012. The 3Qresult was easily
its best quarterly result for at least five years, emphasising the
importance of the peak summer season tothis leisure-focused
LCC.
Neither THY nor Lufthansa reports much operational data on
SunExpress and so it is difficult to analyse the causes of
thisturnaround in profitability.
Our previous analysis of SunExpress suggested that it was very
competitive on price, but that its costs were too high for
itsrevenues. A restructuring programme was initiated in 2012 and
this seems to have made a positive impact.
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See related report: SunExpress: does it have a strategic value
to Lufthansa & Turkish Airlines to outweigh itslosses?
[http://centreforaviation.com/analysis/sunexpress-does-it-have-a-strategic-value-to-lufthansa--turkish-airlines-to-outweigh-its-losses-117289]
If SunExpress return to profitability can be repeated on a
sustainable basis, and THY now expects that it can, then THYmay
find growing uses for this low-cost carrier on its short-haul
point-to-point routes. In a market that includes ultra-LCCPegasus
as a competitor, this option could be useful. Indeed, the majority
of the operations of THYs short-haul subsidiaryAnadoluJet, which
mainly operates in the domestic market, are outsourced to
SunExpress already.
SunExpress annual net result (TRY million): 2008 to 2012
Source: CAPA Centre for Aviation, Turkish Airlines
SunExpress quarterly net result (TRY million): 1Q2008 to
3Q2013
Source: CAPA Centre for Aviation, Turkish Airlines
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