THY is caught in a perfect storm of rapid growth and home market collapse

Dino D'Amore
By Dino D'Amore May 11, 2016 20:19

THY is caught in a perfect storm of rapid growth and home market collapse

Turkish Airlines (THY) has reported its biggest loss since the turn of the century in first quarter (Q1) of 2016 as direct traffic to Turkey collapsed. THY posted a loss of 1.24 billion liras ($421 million) for Q1, from a 373 million liras profit for Q1 2015. Shares fell close to ten percent on the news. THY also took a $306 million write-down of foreign currency debt involving mainly yen-denominated bank loans.

Turkey has of late been overwhelmed by the Syrian civil war, which has seen bombings by Islamic State and Kurdish militants, significant military tensions with Russia and a mass migration of refugees through the country. Foreign arrivals have fallen for eight straight months through to March, the worst decline on record for Turkey. The decline in direct traffic to the country was caused by Russian sanctions and group cancellations from Japan and China, said THY. The slump in Russian travellers is at the core of the decline in numbers for Turkish tourism but much of this traffic was held by Aeroflot not THY.

“The political and economic instabilities over its operating environment and increasing perceived global and regional risks in Turkey and Europe have negative impact on aviation demand and placed additional pressure on yields on a seasonally low quarter. On the other hand, low fuel prices imply increased market capacity and increased competition also reflecting on ticket prices and total revenue. As a result of such factors, Turkish Airlines recorded 214 million US$ [operating] loss from its main operations in the first quarter of 2016 (17 million USD profit in Q12015),” the airline commented in a statement.

THY’s problem is that it is few years behind the likes of Emirates. THY does not yet have enough transfer traffic to offset any home market weakness. We can argue that THY is on course to manage this before the decade is out, however. Transfer traffic is up 22% year on year for Q1 and as this increases so the reliance on the local economy diminishes. Today though THY has a serious problem. The carrier’s load factor for Q1 dropped to 74% from 76.9% in the year-ago period. This was caused by due to fleet expansion, since passenger traffic was up just over 10% in Q1. THY costs increased by 9.5% for Q1 2016 year on year, which again is largely due to fleet growth.

The airline’s capacity rose 19 percent measuring in available seat km during the period, which is despite the competitive environment and the geopolitical instabilities effecting direct traffic into Turkey and Europe. “Having one of the largest networks in the world and its ability to reach secondary cities, Turkish Airlines have been able to actively manage its capacity to position more capacity on higher network contributor routes and hence recorded 10 percent increase in passenger numbers despite the lower direct traffic, increasing transfer passenger count by 22 percent. Turkish Airlines carried 14.2 million passengers on its 108 thousand flights with a load factor of 74 percent in the first quarter of 2016,” the airline stated.

THY is continuing to increase its summer capacity by 14% covering the market gap left by foreign airlines pulling out of the market. To that end one must question if this increase should not now not be scaled back. The airline is supremely confident it can achieve its goals:

“Within its long term growth strategy Turkish Airlines aims to realize its potential rising from Istanbul’s geographical advantage as a natural aviation hub implying a fleet size of 500 aircraft and over 3 percent global market share. In this context, Turkish Airlines is taking delivery of 43 aircraft in 2016 and will have reached a market share of 2.1% by the end of the year becoming the 10th largest airline in the world,” the airline stated.

It really is now up to THY to dynamically manage its fleet to get through this period without further losses. THY has been adept at building a brand, financing and ordering aircraft and managing growth. Now it is time to see if THY really is in the big league. Can the airline fleet manage its way out of trouble as airlines in the Americas have been able to? The industry is watching.

Dino D'Amore
By Dino D'Amore May 11, 2016 20:19