CAPA Turkish airlines SWOT analysis

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

Turkish Airlines reiterates growth opportunities and a more profitable out... http://centreforaviation.com/analysis/turkish-airlines-reiterates-growth-o...

1 of 13 11/24/2013 3:02 PM

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


2 of 13 11/24/2013 3:02 PM

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


3 of 13 11/24/2013 3:02 PM

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


4 of 13 11/24/2013 3:02 PM

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


Turkish Airlines cost per available seat kilometre (CASK, USc): 2007 to 2012 and 9M2013


5 of 13 11/24/2013 3:02 PM


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


6 of 13 11/24/2013 3:02 PM


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


7 of 13 11/24/2013 3:02 PM


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


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.


8 of 13 11/24/2013 3:02 PM

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


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)


9 of 13 11/24/2013 3:02 PM


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


10 of 13 11/24/2013 3:02 PM


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


11 of 13 11/24/2013 3:02 PM


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.


12 of 13 11/24/2013 3:02 PM

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

2013 CAPA Centre for Aviation :: Contact Us :: Terms & Conditions :: Privacy Policy :: Glossary :: Feedback :: All times are in AEST (GMT+11)


13 of 13 11/24/2013 3:02 PM

Date post:	13-Sep-2015
Category:	Documents
Upload:	d3lict
View:	81 times
Download:	4 times

CAPA Turkish airlines SWOT analysis

Documents