Turkish Airlines (THY) grew rapidly in the period 2006-2010, with passenger numbers up by 16 per cent year on year, while maintaining a 76 per cent load factor throughout. The airline expanded both its Airbus and Boeing fleets, reaching 174 aircraft in 2011 with an average age of only 6.2 years. THY takes advantage of its strategic location in Istanbul, in order to feed traffic to and from Asia, Middle East, Europe and the US, with three quarters of its traffic being transit.
A different picture in 2011
Nonetheless, this year’s financial results cast a shadow over the company’s growth strategy. THY reported a USD 342 million net loss in the first half of 2011, compared to USD 152 million in the corresponding period last year. With fuel costs up by more than 30 per cent and higher USD denominated lease payments from a fleet that is 87 per cent leased, operating expenses and short term liabilities have increased substantially. This is primarily the result of a weakening Turkish Lira that now stands at a 2 year low against the US Dollar. Furthermore a 30 per cent increase in capacity, as part of the airlines strategy to expand its network and frequencies across Southeast Asia, Russia and the Americas, was not followed by a corresponding increase in demand and load factors. Revenue per passenger kilometer (RPK) grew only by 19 per cent and passenger load factors were negative throughout the year.
What the future holds
THY’s current losses may not reflect the last of the airline's worries just yet. With further tension across the Middle East and an upward trend in fuel prices, the senior management team faces even more challenges.
Nonetheless, the company’s growth and long-term profitability can be sustained, as part of a well planned strategy. The airline has an increasingly diversified route network and now focuses both on the high growth regions of APAC and Middle East, as well as the relatively flat, yet still very important European market. In this respect, THY joined the Arab Air Carriers Organisation (AACO) in June 2011, with the aim of developing and strengthening cooperation across the region. In addition, while being already part of Star Alliance, THY expanded its codeshare agreements with Asiana Airlines and US Airways.
We view these partnerships as positive, showing signs of a company that no longer depends simply on organic growth, while operating in an increasingly competitive market dominated by the likes of Emirates and consolidated European carriers. With cash today standing at almost USD 500 million and many potential acquisition targets in Eastern Europe and the Balkans, THY may also choose to fund growth through M&A.
Although there are justified worries following disappointing results during the first half of the year, these highlight the need for better currency and fuel hedging policies rather than redesigning THY's growth strategy.