Best of 2012: Turkish Airlines interview

Temel Kotil, the CEO of Turkish Airlines, on why the national carrier is bullish about the aviation industry despite the downturn
Turkish Airlines and Atatürk International Airport can compete with the very best global players in a decades time, CEO Temel Kotil says
By Massoud A. Derhally
Mon 29 Oct 2012 10:05 AM

Mustafa Kemal Atatürk, who led a nationalist revolution and founded the secular republic of Turkey, was a visionary. He thought outside the proverbial box and modernised his country. “The future lies in the skies,” he said in 1931.

Temel Kotil, the CEO of Turkish Airlines since 2005, is fulfilling the founding father’s vision in tandem with the economic liberalisation of the country that has taken place since prime minister Reçep Tayyip Erdogan came to power in 2002.

In ten years’ time, a confident Kotil says, the airline and Turkey’s Atatürk International Airport will compete with “anybody in this world.”

That’s quite ambitious for a carrier founded in 1933 with a fleet of only five planes. The airline industry is under pressure, struggling with high fuel costs and with demand being hit by the recession. American Airlines is bankrupt, while Australia’s beleaguered Qantas has left the oneworld alliance and teamed up with Emirates. To top it all off, IATA this month projected a loss of $1.2bn for European carriers in 2012, despite raising its global  outlook. None of this, however, seems to deter Turkish Airlines.

“Demographically we are in the best place,” Kotil, an American-trained mechanical engineer says, pointing to a map in his office next to the airport. He proceeds to explain how the airline is methodically exploiting Istanbul’s position as a hub that links Europe with the Middle East, Asia and Africa.

“In three to four hours... all Europe is reachable from Istanbul,” explains Kotil.

As part of its expansion strategy, the carrier is maximising the use of its short- to medium -range narrow-body jets that make up about 80 percent of the fleet, pushing aircraft like Boeing’s 737, the manufacturer’s bestselling jetliner, to its longest range of seven hours. That means Turkish Airlines (Türk Hava Yollari, or THY, in Turkish) can use its aircraft more efficiently.

“For us, an aircraft is a tool, every single aircraft is designed for a certain market,” says Kotil. “We are using narrow-body aircraft very efficiently. From Istanbul with the narrow-body, we put a system together,” he explains.

“The system I am putting together is like producing a small company every year - that’s the increment we are adding. So we are not in a position right now, we are not desperate right now, it’s more important to do our homework,” Kotil says in response to a question about taking a stake in Aer Lingus.

Today ,Turkish Airlines is the third-largest airline in Europe by passenger traffic and has 1,000 flights a day - a number it seeks to double over the next ten years. The carrier currently flies to about 203 destinations and has a fleet of 200 aircraft, mostly made up of narrow-body jets, and it’s likely to make new plane orders within the next eighteen months, says Kotil.

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The carrier’s board has yet to make a decision on the purchase of six Airbus A380s or Boeing’s competing 747-8 jumbo planes, Kotil says, adding that the future fleet may include wide body long-haul aircraft like Boeing’s 787 Dreamliner and Airbus’ competing A350.

“In ten years time, we will link everywhere to Istanbul,” Kotil says. “We are competing against ourselves. It’s about giving the passenger the best option to travel. Our vision is to have a system together that if someone wants to go somewhere they will check Turkish Airlines first and other airlines later because we have a strong network.”

The carrier is focusing on the African continent, which it sees as a key growth market and  where it is applying the use of its narrow -body planes as well as putting in place the stepping stones for future expansion.

THY is currently using its 737-900 to fly to Kinshasa in the Congo.

“I need just 100 passengers from Kinshasa to Istanbul to make a profit,” Kotil explains, adding, “Other airlines need 200. So Istanbul will be the capital of the airline business.”

THY also has a presence in Mogadishu, the capital of war-torn Somalia.

“It looks maybe strange but Somalia is an underserved country,” Kotil says. “We love it, we’re making good profit from Mogadishu.”

Kotil visited the country and met with the president and prime minister and asked them to improve the infrastructure of the airport. THY and the Turkish government helped and the carrier now flies three times a week to the African country.

“We worked very hard to start this service. Africa is the future, after 100 years Africa will be the most important continent on earth,” says Kotil. “We need to fly to every major city in Africa. Airlines in Africa are also coming out. After five to ten years Africa will have nice small airlines to mid-sized airlines.”

Sub-Saharan African economies are expected to grow five percent this year following similar growth rates  last year and 2010, according to the International Monetary Fund. The region’s economies are expected to accelerate to 5.7 percent next year.

“African economies are growing and passengers coming via Istanbul is growing and we’re offering much cheaper tickets than European airlines are,” Kotil says. “In the near future, we will become the most important player in Africa.”

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The company, which is a member of the Star Alliance global network, has invested heavily in marketing to boost its image abroad, entering into sponsorship deals with Manchester United and Barcelona, two of Europe’s largest football clubs, and NBA players like Kobe Bryant and golf superstar Tiger Woods.

A glance at the company’s numbers shows the carrier’s overall strategy. Expansion during the 2008 global credit crisis and the current recession in Europe, plus doubling frequency or adding on routes where other carriers are cutting back is paying off.

In the first five months of 2012, THY, which is 49 percent owned by the government, had 3.9 percent of global market share ranking it the eighth largest carrier in the world.

The number of international transit passengers has grown by more than 40 percent between 2005 and 2010. In the first seven months of this year alone the number of passengers has increased 47 percent from the same period a year earlier.

“The results achieved so far in terms of improvement of load factors, passenger growth, any airline metric you take, with one exception that’s the pricing, they are delivering very good results,” analyst Cenk Orcan at HSBC in Istanbul says. “The fleet expansion so far is paying off. The process is still continuing, the chances that Turkish Airlines will have succeeded has increased because they have taken delivery of bigger planes in the initial phase of expansion that they announced in 2009. It was a fast implementation.”

Though the economic environment is not optimal, the airline industry is still dynamic on the demand side and is growing by five percent globally and in emerging countries it’s at least twice as much. In Turkey, the pace is even higher at about eleven percent and it’s expected to grow in double-digit figures over the next five years on the assumption there is no major global setback, Orcan says.

Management targets and strategy seem very aggressive, but there is very strong domestic demand that is supporting the growth.

“It’s not like most of the GCC and MENA based airlines,” Orcan says. “In Turkey due to the population size and growing demand for air travel there is very strong support from the domestic base, second is Turkey’s geographic location.”

The stock price of THY has more than doubled since the beginning of the year, rising by more than 70 percent. Any concerns that may have existed over expansion and too much leverage have largely dissipated.

“As long as demand is strong, I am bullish in terms of the fundamentals [of the company],” says analyst Alper Özdemir at Oyak Securities. “Expansion is not only buying aircraft and putting aircraft into your fleet, you have to manage that expansion, and manage the operations successfully — that’s the major challenge.”

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THY carried 18 million passengers in the first six months of the year, about 20 percent more from the same period a year earlier. Its passenger load factor in the period was 75.2 percent. The carrier posted a net profit of 193.1 million lira ($105m) in the second quarter compared with a $94.77m loss in the same period a year earlier.

“This airline deserves to go to 2,000 flights per day,” Kotil says. “With good branding, service, prices, you attract the passengers. If we reach 2,000 we will be one of the largest in Europe.”

Just like Turkey, THY weathered the 2008-2009 global financial crisis relatively well. In 2008, when fuel prices went up to nearly $150 a barrel, other airlines cut their service. THY did the opposite and was the sixth most profitable airline that year.

“When Iberia cut its service from Barcelona we doubled it,” Kotil says. “The worst thing for us is to stop growing.” THY is forecast to grow about fifteen percent this year after recording about 23 percent growth the year before and carrying 32.6 million passengers.

“Big economies overheat and smaller economies like Turkey are emerging,” says Kotil. “There is excess capacity. Demand is not diminishing, the demand is there.”

Turkey’s economy — which has had a robust decade of economic growth after experiencing its own financial crisis in 2000-2001 — has provided a boon for THY’s expansion. One could argue the growth of the airline has been in tandem with the expansion of Turkey’s economy.

“Turkey’s economy has done great in the past decade and as the flag carrier of that economy, which is opening its borders in terms of international trade and tourism, the main beneficiary has been Turkish Airlines,” says Orcan.

“Added to this was a change in mindset at Turkish Airlines, don’t stay local or regional be a global player,” he adds. “Management is more courageous than in the past because they are backed up by the government.”

The country’s economy — the sixteenth largest in the world — grew 9.2 percent in 2010 and 8.5 percent in 2011, according to official government figures. Tourism generated $23bn last year.

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In the first eight months of the year, 22 companies went public on the Istanbul Stock Exchange raising $265m. That’s in addition to the Turkish market recording a sales volume of more than $20bn in corporate bond issuances so far this year as investors seek higher returns and companies look for more efficient forms of financing. Turkey’s bourse, which has 398 listed companies, may have as many as eighteen additional initial public offerings (IPOs) by the end of this year, which could increase the amount of liquidity added to the market to $500m, Ibrahim Turhan, chairman and CEO of the bourse said in an interview with Arabian Business last month.

“You put a seed under the soil with enough water and sunshine it flourishes,” Kotil said when asked about the airline’s future. “The system we put together has started to flourish.”

Turkish Airlines eyes multi-billion-dollar sukuk to finance jets Turkish Airlines, Europe’s third largest airline by passenger traffic, is considering issuing an Islamic bond, or sukuk, to finance the purchase of aircraft as the carrier expands its fleet two-fold over the coming ten years, the operator’s CEO Temel Kotil says.

“It could be within a one-year period,” Kotil says, when asked if the airline would seek to finance its plane purchases with sukuk and when it may issue the bonds. “We didn’t make a decision yet — we’re checking the market to see who is cheaper. When you order these kinds of machines, its multi-billion, of course.”

Global sukuk issuance rose to about $85bn last year, over 90 percent higher than the previous year, according to Kuwait Finance House research. Sovereign issuance was the main catalyst for the Sharia-compliant sukuk market last year, accounting for $59bn, while issues by companies reached $19bn. About $109bn in sukuk was issued in the first nine months of 2012, up 69 percent from the same period a year earlier.

Turkey, which is rated BB by Standard & Poor’s and Ba1 by Moody’s Investors Service, successfully issued its first ever sovereign $1.5bn sukuk in September. About 58 percent of the bond was sold to investors in the Middle East, thirteen percent to Europe, twelve percent to Asia, nine percent to Turkey and eight percent to US investors.

The carrier’s expansion during recession years has paid off, analysts says.

“If you look at the numbers you will see that the demand is very strong for Turkish Airlines unlike other European peers,” analyst Alper Özdemir at Oyak Securities in Istanbul says.

THY operates 1,000 flights a day and aims to double that over the next ten years. The airline, which has a fleet of 200 aircraft, mostly made up of narrow body jets, is likely to make new plane orders within the next eighteen months, Kotil says, adding that the carrier would be considering wide body, long-haul aircraft like Boeing’s 787 Dreamliner and Airbus’ competing A350 in its future plans.

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