Turkish Airlines - location is key

(Corrects ninth paragraph to state that Pegasus is controlled by Şevket Sabancı)

Turkish budget airline Pegasus has never had it so good, thanks to a decision by President Recep Tayyip Erdoğan to re-locate main rival and national carrier Turkish Airlines to a new mega-airport outside Istanbul.

Turks are flooding into Sabiha Gökçen airport, where Pegasus bases itself on the Asian side of the city. The airport, once a military base, boasts better public transport connections and shorter transfer times than the sprawling new Istanbul Airport, opened last year at a cost of $12 billion. Travellers have reported spending as long as 1.5 hours getting from arriving planes to the exit door at the new airport.

The startling divergence in fortunes of the two companies is underscored in their third-quarter financial earnings. Profits at Pegasus have more than doubled in the first nine months of the year to 1.31 billion liras, while net income at Turkish Airlines fell by 37 percent to 2.6 billion liras despite a 15 percent increase in tourists arriving to the country. Pegasus has 64 aircraft compared with Turkish Airlines’ fleet of 347.

Istanbul Airport is the biggest of Erdoğan’s so-called mega-projects, which also include new highways, tunnels, bridges and football stadiums. The structures, built at a cost of tens of billions of dollars, are meant to underscore Turkey’s emergence as a leading regional and global power under Erdoğan’s leadership. Many of them were constructed with foreign-currency-denominated loans from the country’s banks and then guaranteed by the Treasury. Istanbul Airport's project loans also have an implicit Treasury guarantee through the General Directorate of State Airports Authority, a state-owned enterprise.

Turkish Airlines, which is overseen by Erdoğan via his chairmanship of the country’s sovereign wealth fund, moved its headquarters to Istanbul Airport at the start of April. While Turkish Airlines was forced to meet higher operating costs associated with the move, Pegasus has reversed a 214 million liras loss that it posted in the first quarter and increased sales by more than 50 percent.

Operational expenses at Turkish Airlines climbed by 9.2 percent annually to $9.5 billion in the first nine months of the year. Among rising costs was a 20 percent increase in fuel consumption during the quarter, partly due to increased taxiing times at Istanbul Airport. The government says the airport will be the world’s largest once all construction phases are complete. Ground services costs at the national carrier climbed by 12 percent.

It is no surprise then that the stock price of Pegasus, Turkish Airlines’ biggest domestic rival, has surged this year. The shares were trading at 28 liras apiece at the start of April. Now they exchange hands for 75 liras. Shares in Turkish Airlines have risen by 8.9 percent to 14.08 liras since the first quarter.

While Pegasus has benefitted greatly from its location at Sabiha Gökçen, differences in management at the two companies may be a significant factor in their diverging performances.

Pegasus is controlled by Şevket Sabancı, a member of the Sabancı family, which owns Turkey’s second-largest industrial group. Mehmet Nane, who has a proven track record in turning around companies at Sabancı, including supermarket chain CarrefourSA, has been the chief executive officer at Pegasus since 2016

The boss of Turkish Airlines is Ilker Aycı, who worked as an adviser to Erdoğan at the Istanbul Municipality when Erdoğan was city mayor between 1994 and 1998. Aycı moved on to become CEO of several state-run insurance companies between 2005 and 2011. He led the Prime Ministry Investment Support and Promotion Agency of Turkey from 2013 to 2015. Aycı became a board member at Turkish Airlines in 2014 and its CEO in April 2015.

Nane is looking at Sabiha Gökçen as a springboard for further growth as the airport expands its facilities and transport infrastructure. A metro connection linking the airport to the Istanbul transport system will be completed next year, along with a new terminal. A second runway will also be built in 2020. Malaysia Airlines announced this week that it would start the first ever long-haul flights from Sabiha Gökçen, a further vote of confidence in its growth story. 

Meanwhile, Turkish Airlines may continue to suffer from the decision to make Istanbul Airport the hub for its operations. Despite its impressive interior architecture and a vast array of shops and food halls, passengers are currently forced to walk long distances when traveling in and out of the airport, which creates difficulties for the sick, elderly and disabled. Food, beverages and parking costs are high and a subway that is supposed to carry arriving passengers from the facility, located 40 km northwest of Istanbul’s central Taksim Square, into the city will not be completed until at least 2021.

The future of Istanbul Airport as a viable business has been thrown further into doubt by uncertainty over its future ownership.

IGA, the operator of Istanbul Airport, is seeking to refinance as much as 5 billion euros ($5.6 billion) in the loans it used to build the facility, Reuters reported this month.

The company aims to lower the cost of repayment of the borrowing and mandated Dome Group of London to find investors to take part in the deal, Reuters cited IGA as saying. IGA is owned by Turkish construction companies Kalyon, Limak, Cengiz and Mapa. All enjoy close relations with the Erdoğan government.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.