Turkish Air CEO Builds a Business on Layovers as Tourism Plungesby
Flag carrier managing a slump in demand for travel to Turkey
CEO Temel Kotil downplays impact of a lost tourism season
Temel Kotil is leaning over his seat, imploring a passenger behind him to take a glass of juice: "It’s fresh, try it," he says as a flight attendant displays three different varieties on a tray.
The man in the second row, unaware that he’s talking to the head of Turkish Airlines, has other concerns. The flight is 52 minutes late out of New York, and he’s got a connection to make to Odessa. The Airbus A330 is full of people making their way to Ukraine for business, Croatia for holiday or on to Africa and the Middle East via Istanbul. Kotil is keen to reassure them.
"No problem," Kotil, a 56-year-old University of Michigan alum, says of the delayed departure, gesturing to the pilot cabin. "We’ll make up for it."
As Turkey suffers its deepest tourism decline on record, its flagship carrier is building a business less dependent on demand for holidays to its home market. During the flight, Kotil downplayed concerns of losses from a spate of terrorist attacks and political disputes that have kept Europeans away.
"The number of passengers is solid," Kotil said, unfazed by a net loss of 1.24 billion liras ($432 million) in the first three months of the year, his worst quarter since taking the helm in 2005. "Local visits have dropped down, but we’ve been able to substitute transit passengers."
Passers-through now comprise about 60 percent of the 83-year-old carrier’s revenue, "so that means we’ve been able to find passengers from the global networks," Kotil said. “Our global market share depends on transit.”
Turkish Airlines’s push to capture more transfer traffic puts it into more direct competition with rivals in the Persian Gulf, where Emirates, Etihad Airways and Qatar Airways have built massive long-haul fleets that funnel passengers through their hubs, which are conveniently positioned at the crossroads of global flight paths. Emirates has become the world’s biggest airline by international traffic, and commands the world’s biggest fleet of long-haul airlines, including 80 Airbus A380s in operation and another 64 to come.
While a business increasingly dominated by people who aren’t actually traveling to Turkey may put some pressure on yields, Kotil, an aeronautical engineer by training, said he has no plans to revise guidance. The company still expects to post record revenue of $12.2 billion this year and increase capacity 20 percent in the second half.
Garanti Securities, an Istanbul-based brokerage, isn’t so sure that’s a good idea. Its analysts on Wednesday cut their earnings estimates and recommendations for Turkish aviation companies including Turkish Airlines, citing concerns over demand, currency swings and the risk of "irrational price wars” from extended capacity.
Turkish Airlines shares have dropped by more than a third in the past 12 months, closing at 5.81 liras on Wednesday, valuing the company at about $2.8 billion. In March, management set aside 500 million liras for buybacks over three years, saying the market price didn’t reflect performance.
Passenger numbers rose 7.8 percent through May to 25 million, despite a decline in tourist arrivals of as much as 28 percent year-on-year. The number of destinations served increased to 289, the most of any airline worldwide, and available seat kilometers rose 16.1 percent to 67.8 billion.
Kotil said the plunge in tourist arrivals from Russia since Turkey downed a Russian fighter jet near the Syrian border last year, sparking a bitter feud between presidents Vladimir Putin and Recep Tayyip Erdogan, has had a minimal impact.
"On the shorter-distance tourism, from Russia, for example, we are not a player because it’s charter aircraft," he said.
He also waved off concern about an imminent price war.
"We will never go into a price war, it is irrational," he said. "For Turkish, life is much easier. You know why? Because we have so many destinations. You can cut your prices to one location, I can go somewhere else. I can share."
The company has already financed most of the $3 billion it needs for aircraft received this year, and probably won’t sell bonds this year or next.
"Financing in 2017 will most likely be traditional," Kotil said, noting a preference for 12-year bank loans. "It became cheap enough, good enough that we can do it that way."
The company may cut frequencies later in the year to keep yields up, "but for now, and in the next three months, we are pushing it as much as utilization allows," he said. "But I can’t comment on the fourth quarter. We have to see the next three months."
The removal of visa requirements for Turkish citizens to Europe, part of a tenuous agreement between the Turkish government and the European Union to stem the flow of Syrian refugees, would be a boon for business.
"If there are no visas, airlines, including Turkish Airlines, they will benefit very heavily," he said. "We need to find a better way to track people who are traveling. Visas are old fashioned."
When the plane landed in Istanbul just 14 minutes behind schedule, Kotil checked in with the man headed to Odessa.
"You see, we’re good," he said. "We have plenty of time."