Turkey's Crowded Skies

The Eurasian republic has yet to iron out its EU membership, but trade and tourism are surging, and engine- and plane-makers are benefiting

From Izmir to Istanbul, air traffic in Turkey is surging. Wedged among Europe, the Middle East, and the former Soviet republics, the nation of 72 million people is quickly becoming a hub of global trade and tourism. All told, Turkish commercial aviation has grown by more than 25% annually since 2003—the fastest rate in the world, outpacing even China and India.

That's resulting is booming business for makers of aircraft and jet engines. Turkey already is home to 20 passenger and cargo airlines, including its leading international carrier, Turkish Airlines, and a growing crop of discounters, such as Pegasus, Sky Airlines, and Sun Express, a joint venture of Turkish Airlines and Germany's Lufthansa.

Plane maker Airbus figures that these and other Turkish carriers will buy more than 260 airplanes over the next 20 years at a price tag of $24 billion. Rival Boeing (BA) also predicts strong growth, but doesn't break out a projection for Turkey alone. The aircraft maker recently scored an order for three next-generation 737s from Sky Airlines, worth $226 million at list prices. "Turkey will see average growth higher than the region, especially in the next few years," says Boeing's Brussels-based commercial aircraft sales rep, Jean Thouin.

Riding a Boom Cycle

The flourishing aviation sector also is paying off for leasing and jet-engine giant General Electric (GE), which now ranks Turkey as its third fastest-growing market in the world, after China and India. GE has leased 55 aircraft to Turkish Airlines and other carriers and is selling scads of engines, mostly through its CFM joint venture with France's Snecma. "We're in a boom cycle," says Kursat Ozkan, GE's regional manager for Southwest Asia.

Credit all this to surging trade, especially with Western Europe. Turkey sends more than half of its $80 billion in annual exports to Europe and receives about half its $120 billion in imports from there. Europeans also will make up half of the 20 million tourists expected to visit Turkey this year.

The country's growing importance in air travel was underscored on Dec. 4 when jet-engine maker Pratt & Whitney (UTX) announced plans with Turkish Airlines to open a regional maintenance hub there. The engine overhaul facility, to be located at Istanbul's No. 2 airport, Sabiha Gokcen, is expected to service 200 engines per year from carriers throughout the region.

Too Many Carriers

The bulk of Turkish aviation is short-haul flights, so the country's airlines buy mostly Boeing 737-class single-aisle planes and competing A320-class models from Airbus. The bias towards what GE's Ozkan calls "short and thin, vs. long and thick" flights is a key difference between Turkish carriers and Mideastern rivals such as Emirates, whose fleet is heavy on intercontinental jumbo jets (see BusinessWeek.com, 3/16/06, "An Airline with a Deafening Roar").

One implication is that it's relatively inexpensive to set up an airline in Turkey using leased short-haul aircraft from GE or rival International Lease Finance (AIG). Indeed, some observers worry that the country now has too many carriers, which could lead to a wave of consolidation in the future. "The small airlines are usually undercapitalized," cautions GE's Ozkan.

That doesn't worry Turkish industrialist Ali Sabanci, who bought charter operator Pegasus in 2005 and converted it into a low-cost carrier. The prospect of consolidation is one reason he went into the business in the first place. "Our vision is that there will be three or four airlines in Turkey," says Sabanci, who intends Pegasus to be one of the survivors.

Membership Woes

Despite strong growth, carriers like Pegasus still have to pay close attention to costs, especially with fuel prices on the rise. Sabanci, for instance, removed ovens from his aircraft and started selling food on board instead of giving it away. The move not only saved money and fuel but also helped him cut turnaround time for aircraft by one-third, to just 30 minutes.

Though Turkey's negotiations with the European Union over prospective membership are in a rough patch, the economy continues to bubble along at a projected growth rate of 6.1% this year, according to the Organization for Economic Cooperation and Development (OECD). As long as that trend holds up, Turkish aviation is likely to get even more significant.