Massive capacity expansion is planned for Istanbul airports, with competing private interests

It is interesting to compare this impressive rate of airport development in Istanbul so far, part of a raft of infrastructure projects that includes a new bridge across the Bosphorus, with that of laboured airport developments globally.

These include:

• the new Sydney airport, which has been on the drawing board for over half a century and even now won't be completed until around 2025; and
• London, where a demand for just one extra runway as a minimum has gone unheeded for a similar length of time and where the belated completion schedule is similar, assuming, that is, that the next government agrees to build it. Otherwise it is back to the drawing board there.

See related reports:

• Sydney second airport: nearing reality after 40 years of obfuscation? Perhaps a solution in 2014
• London's Heathrow and Gatwick airports commence the next phase of Davies Commission runway battle

It is not strictly accurate though to compare these two places with Istanbul. Sydney sits at one end of the world and point to point traffic is more important than hub traffic, while domestic seat capacity is twice that of international. London, while it retains preeminence on North Atlantic routes, is more representative of 'old world' connectivity, its main airport a scattered five terminal hub that developed randomly and offers transfers really just by way of its sheer size and number of daily air services.

Istanbul is quite different. At the heart of Turkish Airlines' (THY) impressive and fast growing network (it claims to operate to more countries than any other airline) Ataturk Airport has been central to THY's campaign to take on and beat the Gulf airlines and hubs at their own game and become the world's #1 international and intercontinental hub location.

TAV will keep investing in its flagship Istanbul airport despite time running out on its concession, with USD136 million of investment

It was early in Jun-2014 that TAV Airports was revealed to be in talks to build a new international terminal at Ataturk Airport, which had been earmarked at least to remain open but to operate in a reduced capacity after 2018. The terminal would boost capacity by 10 million annual passengers. TAV's concession agreement will expire in 2021, but it will keep investing in what is the company's flagship airport.

(Others in Turkey are Ankara (+18.3% growth in 2013), Izmir (+9.1% growth in 2013) and Antalya (with Fraport and 8% growth in 2013 to 27 million passengers)). The intention is to increase capacity to an annual 65 to 70 million passengers before that date, to compete with the New Istanbul Airport. The new terminal investment will be worth approximately EUR100 million (USD136 million).

Environmental and other concerns raise their head, with many political and technical hurdles still to be crossed

The new terminal at Ataturk became a quite reasonable ambition after the timeline for the new airport was pushed back amid concerns about financing and legal wrangling over its environmental impact.

Those concerns began in Feb-2014 when the Istanbul Administrative Court ordered the suspension of the construction of the new airport after an environmental organisation filed a lawsuit to the Istanbul Fourth Administrative Court, requesting the annulment by the Councils of State the Environmental Impact Analysis (CED), which played a crucial role in the 'go-ahead' decision of the Environment and Urban Planning Ministry to hold a tender for the construction of the airport.

But government and commerce quickly rallied to challenge the suspension decision. The Transportation, Maritime Affairs and Communications Minister Lutfi Elvan said the court decision would not interfere with the construction of the airport. Turkish Airlines chairman Hamdi Topcu said the decision to postpone construction was not the right decision, while Turkish Environment Minister Idris Gulluce said the court decision was based upon a "factual error".

But the environmental lobby found support from the Economic Policy Research Foundation (TEPAV), which stated the New Istanbul Airport is not included in Turkey's 10th development plan and that funding for the airport would place a strain on the economy. While the project would "revive the construction sector," it said, it also "has the potential to do grave harm to the area's ecosystem".

A month later the Limak-Cengiz-Kolin-Mapa-Kalyon OGG consortium, which out of an original 16 interested parties was awarded the tender to construct the airport on a 25-year BOT basis, submitted a new 1347-page environmental impact report. If approved it would invalidate the decision to halt construction. The conclusion of the new CED in an ecological evaluation report was that the project needs to be assessed in detail or it could lead to a large-scale loss of habitat and biomass in the region.

What seems an innocuous environmental issue could actually become a serious one in the current climate. It should not be forgotten that Turkey's recent riots (May and Jun-2013) were initially prompted by environmental concerns over development of a central Istanbul park including the destruction of a number of trees, before later encompassing many other issues. The new airport project is accused of ensuring the destruction of up to three million trees.

The question of location has also been raised, as it often is long after plans have been approved. For example the Republican People's Party (CHP) Mayoral candidate Mustafa Sarıgül expressed his support for the third airport project, but objected to the location. Mr Sarıgül believes it should be constructed in the western district of Silivri, over 60km west of downtown and four times as distant as Ataturk, as had been planned initially by Istanbul Mayor Kadir Topbaş, rather than in northern Istanbul where the city's forests are located.

Another issue arising, in Apr-2014, was whether or not the State Treasury could include the airport project in its insurance. The State Treasury will guarantee a return on the costs of companies assuming mega-projects worth up to TRY3 billion (EUR1 billion) in build-operate-transfer tenders, due to a new regulation published in the Official Gazette in Apr-2014. According to the new arrangement, the Turkish state will reimburse 85% of loans to the companies involved in project tenders if the agreement is cancelled due to company-related faults.

Additionally, the Treasury will reimburse the total amount of loans if the tender is annulled for any other cause. The provision also foresees that those particular projects will not be subject to the TRY6 billion (EUR2 billion) ceiling. This will effectively mean that the consortiums that won the tenders for large projects such as the third airport could be included among projects, thus retroactively benefiting from the new regulation.

However, this position was quickly challenged by the Treasury Undersecretary who said the new airport would not enjoy Treasury guarantees because the Treasury has no authority to provide financial guarantees for State Economic Enterprises (KIT). As the new airport project was initiated by the State Airports Management General Directorate (DHMİ), which is a KİT therefore the Treasury cannot guarantee any liabilities resulting from the project. He also stressed that guarantees by the Treasury are provided only for general budget public institutions which do not have the authority to borrow independently.

So on three different counts - environmental concerns, location and investor/contractor insurance - what appeared to be an admirably prompt response to the perceived urgent need for a third airport suddenly appeared to be in danger. It is hardly surprising that TAV should seek to demonstrate that the wrong decision was taken on the choice of developer and that it has the experience to rise to the challenge of satisfying the overall capacity need, not only to the end of its concession contract in 2021 but also beyond that date.

TAV would presumably wish to be considered for the next concession period at Ataturk. The latest indications from TAV are that if the new airport is not ready by the end of TAV's concession period for Ataturk, then TAV will do whatever is necessary to sustain the growth of civil aviation in Turkey, including extending the operations of what it still regarded as Turkey's major hub airport at Ataturk.

Nevertheless the new airport project has rallied and Turkey's Prime Minister Erdogan on 7-Jun-2014 laid the first stone, announcing that "Istanbul is marking a historic day. Turkey is marking a historic day. The biggest airport of the world and six continents is going to rise here," reiterating that the airport is expected to open on 29-Oct-2017 and be fully operational the following year.

The airport will be developed at a consideration of EUR22.1 billion plus VAT by the successful consortium and will have a design capacity for 100 million passengers per annum once fully operational.

The government has declared that the airport will emphasise "passenger service" over "self-service". Flexibility is also a design priority, allowing the airport to adapt to security policies and changing requirements.

The following three phases will increase capacity to 150 million passengers per annum by 2028. Terminal 1 at the airport alone will cover more than 1 million sq ft.

A 150 million ppa airport is very, very big

A question that is increasingly being raised is whether that ultimate capacity of 150 million ppa is operationally sustainable. As of 2014 the world's busiest airport, Atlanta, handles less than 95 million ppa. 150 million is in a different and unknown league, comparable to the difference between driving a car at 90 miles per hour and 100 mph as many drivers can testify.

The only other airport under construction to the same scale is Dubai's Al Maktoum, or Dubai World Central, which is planned ultimately to handle 160 million ppa and 12 million tonnes of cargo. But Al Maktoum is being opened slowly and incrementally, starting with cargo flights in 2010. At the time of writing around 15 passenger carriers are operating there but in the case of five of them it is only while one of Dubai International Airport's runways is being repaired. The mainstay of services is provided by two LCCs, Wizz Air and Jazeera, supported by Gulf Air. Emirates has not yet moved any passenger operations there. The authorities in the UAE are sufficiently financed to employ such a long term approach; it is much less likely that the private Turkish ones would be.

See related report: Dubai International Airport: The world's biggest in 1Q2014, but runway works reduce full year 2014

Many analysts are quick to point out that 150 million ppa may well prove to be too big, requiring as it does up to eight runways (momentarily six are planned for in Istanbul) and consequential problems affecting air traffic control, environmental control, passenger ground handling flows and surface access and egress amongst many others.

Then there is the question of whether or not airlines can be encouraged - or if necessary coerced - into moving to a new facility when they are well established at an existing one, perhaps sharing facilities with alliance partners or with other, more local agreements in place. This is an argument currently being used against Gatwick Airport's proposal to be the location of any extra runway in London, at least in part so it can act as an alternative hub airport to Heathrow Airport.

The example of Quito Airport in Ecuador is often brought out in this respect. The capital's new airport was finished and ready to go in 2011, but sat idle for months because airlines resisted the move and local officials did not like the access roads. Also Berlin, where Tegel Airport should have been long closed by now but lengthy delays to the opening of Brandenburg International Airport (BBI) meant that it was a good thing it was kept open; otherwise the very fast growing demand for air travel into and out of Berlin could not be catered for. Airlines, some of which are suing the BBI development company, are bound to remain suspicious of BBI long after it eventually opens, whenever that will be.

Once again TAV's awareness of future issues yet to arise and the extra value that could be added to Ataturk Airport by a comparatively modest increase in capacity is probably valuable in all the circumstances. While the concept of a 'two airport hub' city is scorned in many quarters, it may eventually turn out that such an eventuality is preferable to a single giant hub that grinds to a halt.

Ataturk Airport is bulging at the seams

The problem right now with Ataturk Airport, where to its credit TAV has invested over USD750 million during its tenure despite having paid out a record breaking (for the area) USD4 billion for the concession in 2005, is that it is bulging at the seams and would have urgently required additional capacity irrespective of the emergence of the third airport proposal.

Situated on the European side of the city and handling 51 million passengers in 2013, its formal capacity is only around 30 million ppa, a figure that was inadequate as long ago as 2010 and despite the imminent completion of the Istanbul-Ankara high speed rail line, which is expected to reduce domestic air demand on that route (and some connecting passenger traffic) considerably.

Operationally, the airport is dominated by THY, with over 75% of international seat capacity and 55% of movements while local (i.e. Turkish) carriers account for 86.5% of seats offered. Capacity remains Europe-dominated with only 4.6% allocated to each of Asia and North America and 6.3% to Africa despite THY's claims to global domination and a recent declaration to increase its African routes considerably.

There is very little by way of LCC incursion. Over 94% of seats are offered by full service carriers and only 5.3% by LCCs. The biggest alliance presence is that of Star Alliance, with 79% of seats.

Istanbul Ataturk Airport capacity, seats by week - system - by all carriers

Source: CAPA - Centre for Aviation and OAG

Istanbul Ataturk Airport international capacity, seats by region: 02-Jun-2014 to 08-Jun-2014

Source: CAPA - Centre for Aviation and OAG

It is interesting to contrast Ataturk with its rival Dubai International on regional seat distribution. There is considerably less emphasis on Europe in Dubai, the aggregate west and east Europe seat ratio there totalling 25.3% compared with 55.4% in the case of Istanbul, even allowing for the fact there is a fully functioning second airport in Istanbul already at Sabiha Gökçen (below).

Again this indicates that Dubai still retains its characteristic of being the premier global intercontinental hub supporting traffic in all directions.

Dubai International Airport international capacity, seats by region: 02-Jun-2014 to 08-Jun-2014

Source: CAPA - Centre for Aviation and OAG

Sabiha Gökçen prospers partly by drawing passengers from the European side of Istanbul

So what of Sabiha Gökçen Airport; what contribution is it making now and what will it do in the future?

Sabiha Gökçen was owned and operated by a consortium of local conglomerate and investor Limak Holdings, India's GMR Infrastructure and Malaysia Airport Holdings Berhad (MAHB) from 2007 until Dec-2013; MAHB then acquired GMR's 40% equity stake. MAHB invests widely across the airport business, in Malaysia and abroad. Limak's only other airport investment is a majority stake in the concession to operate Pristina Airport in Kosovo (with Aeroports de Lyon providing operational experience and input).

Sabiha Gökçen is located 35 km south east of central Istanbul, placing it on the Asian side of the bi-continental city. It epitomises the previous attempt to solve Istanbul's capacity issues, having been built in 2003 because Ataturk Airport was not large enough to meet either domestic or international passenger demands.

The airport's international terminal capacity was a mere three million ppa and domestic terminal capacity only 0.5 million ppa. But after Jun-2007, when the consortium took control with a brief to upgrade as well as maintain the airport, the immediate focus was on upgrading existing buildings and adding a new terminal, which opened in 2009, to handle 25 million ppa under one roof.

Already the airport is on course to exceed what appeared until quite recently to be adequate capacity. Following what were years of exceptional growth by any measure, in 2013 it handled 18.6 million passengers (+27%) and in the first four months of 2014 passenger numbers at Sabiha Gökçen have grown by an average of over 39% per month, compared to just +11.5% at Ataturk.

If it carries on at that rate it will handle almost 26 million passengers this year. The original intention was to handle 25 million by 2023.

In total there are now 21 passenger airlines operating at Sabiha Gökçen, led by Pegasus, the country's leading LCC, which has over two thirds of seat capacity, although THY has almost 25%.

Almost 90% of capacity is on local (Turkish) airlines and almost 75% on low-cost carriers. There is little airline alliance penetration, only 25% of seats are on alliance carriers, and almost exclusively Star Alliance (of which THY is a member). Business Class seats account for only 3% of the total, and First Class 0%.

Istanbul Sabiha Gökçen Airport capacity, seats, by carrier: 09-June-2014 to 15-Jun-2014

Source: CAPA - Centre for Aviation and OAG

All this identifies Sabiha Gökçen as a low-cost airport even if that was not the original intention, despite THY designating it as a second Istanbul base, and despite the insistence of management that it is a full service airport.

Sabiha Gökçen is well connected by surface transport links, including the E80 Trans European Motorway which passes close by en route to central Istanbul and plans to extend the Istanbul Metro to it and under consideration.

There is a quandary here. The population of Istanbul is growing more rapidly on the Asian (eastern) side where Sabiha Gökçen is located. Traffic is growing more quickly at Sabiha Gökçen than at Ataturk, admittedly from a lower base. Moreover, Sabiha Gökçen claims to have attracted 30% of its passengers from the European side of the city-region.

But in Istanbul the plan is to build the new airport in the north, on the European side of the Bosphorus.

An unstructured airport scenario is emerging for Istanbul

So there appear to be three independent scenarios for each of the airports, each creating numerous questions:

• In the case of the new airport, when (and still if, as construction has not yet commenced) it is completed, and if airlines can be persuaded to move there (one would expect ROI demands to ensure that charges are higher than at the other two airports), it could, in time, render the other two airports operationally redundant. If it fails to do so it could be a white elephant;
• For Ataturk Airport, much depends on who decides to bid to operate it after the current concession agreement runs out and under what terms. How are we (and they) to interpret the 'reduced capacity' intended for it? Is that a moveable feast, depending on the progress made by Sabiha Gökçen and whether or not the new airport attracts traffic as intended? What sort of airport would it be? Presumably THY, still partially state-owned, will come under pressure to relocate its operations at both existing airports to the new one. If it is forced to seek out mainly LCC traffic after 2018 what will be the role of the new terminal, will it be constructed with that eventuality in mind and how will Ataturk compete with Sabiha Gökçen to win back LCCs that have gravitated eastwards?
• As for Sabiha Gökçen, the reverse applies. Will it be able to retain the LCCs it has attracted from Ataturk and persuade more full service and network carriers to come on board? Recent events suggest that it might. Air Malta for example has just completed a switch from Ataturk that was arranged on the basis Sabiha Gökçen Airport "serves a growing and largely untapped catchment area within the Asian side of Istanbul and other cities to the south" and that the airport "will provide that airline with more operational flexibility". The airport has also attracted the likes of Air Arabia, airBaltic, easyJet, flydubai, germanwings, Jazeera Airways, Jetairfly, nasair and Transavia.com. But if it does succeed in these objectives, how can it continue to cope with the level of growth it has incurred in the last few years without heavy financial input on previously unenvisaged additional infrastructure?

Of course much also depends on whether or not Turkey can continue to grow its air transport services at the rate it has achieved during the past few years. That growth has been at more than twice the rate of national economic growth, indicating the degree of importance that transfer traffic now assumes (+30% annually in that period). Being positioned outside the Euro zone has certainly helped economically, and the country has a rapidly growing, youthful, middle class that has embraced air travel.

Turkish Airlines is confident about the future, despite a temporary glitch in the finances

THY and the other Turkish airlines certainly seem to think that rate can continue. In 2013 sales enjoyed another year of growth of over 20%. However, there was a fall in operating margin in 2013/2014 and an uncertain outlook into 2014 shows that converting this growth into sustained profit growth will be less than straightforward.

Revenues for FY2013 were EUR7,424 million (+27%) on passenger growth of 23.6% to 48.3 million. Operating profit grew by 9% to EUR4,889.7 million but the carrier was unable to contain unit costs sufficiently to drive profits further upwards. Currency losses and higher interest charges resulting from increased borrowing led to a fall in the net result in 2013 (EUR269.7 million).

See related report: Turkish Airlines suffers bigger 1Q losses but continues to focus on "profit, profit, profit"

The airline continues to grow as it aims to have the largest airline network in the world by 2023 with 450 aircraft and 120 million passengers (from 48 million in 2013). By the end of 2014 the fleet size is planned to reach to 267, including 204 narrowbody, 54 widebody and nine cargo aircraft. With 16 new route additions, destinations served will reach 259.

While THY seeks to emulate the three big Gulf carriers in its ability to offer global travel via its Istanbul hub(s), tourism is a more important aspect of its operations than it is in the Gulf. Turkey expects to report more tourism growth in 2014 after another record year in 2013, when international arrivals increased 9.8% to 34.9 million. Russian visitors drove much of the growth, with numbers increasing nearly 19% to 4.2 million.

THY is considering wet leasing four A380s from another carrier for services to Asia Pacific; these could perhaps come from Japanese carrier Skymark, which has been seeking to finance its A380 deliveries, due in Aug-2014. Other airlines with A380s for delivery that might be candidates include Qantas and Air Austral.

In the longer term, feasibility studies continue on acquiring by lease or purchase either the Airbus A380 or Boeing 747-8. THY is also leasing five A330-200 aircraft from Brazil's TAM Airlines for an eight-year period. The first of the aircraft was delivered on 01-Apr-2014. The airline has placed orders for 60 A321neos and has firmed up options for five additional Boeing 777-300ER aircraft.

The Turkish Government is reported to have no plans to privatise its 49% stake in THY despite employing consultants to investigate the possibility. Turkish is, though, looking to acquire a controlling stake in an African carrier, having decided that Africa is the region into which it wished most to expand.

Pegasus Airlines is the fastest growing airline in Turkey and in Europe

Of the other airlines, Pegasus is the most significant. Turkey's first low-cost carrier and the fastest growing airline both in the country and in Europe, floated on the Istanbul Stock Exchange in Oct-2013 (34% equity) and placed an order for 100 new Airbus aircraft during the year. Pegasus has the youngest fleet of aircraft in Turkey, with its B737-800s having an average age of less than four years. Pegasus has become one of Europe's more profitable airlines with costs that are in the ultra low-cost category, but the carrier, like THY, took a hit from a weakening Turkish lira to record a fall in net profit in 3Q2013, a wake-up call that even the most robust business models can be challenged by events.

For the full year 2013 Pegasus made an operating profit of EUR101.9 million (+28%) and a net profit of EU36.2 million (-27.4%) on turnover of EUR947.8 million (+25%) and on a load factor of 80.2%.

See related reports:

• Pegasus Airlines must not let worsening quarterly profitability become a new trend
• Pegasus Airlines: time for Turkey's leading LCC to reassert its cask cutting credentials

So for the main airlines the future looks generally promising, foreign exchange rates being the most significant issue of the moment.

So the outlook for a mighty battle between Istanbul's airports gains credibility

As for the airport operators, if we take TAV as the example, group profitability is also good. In 1Q2014 TAV Airports made EBITDA of EUR67 million (+27%) and net profit of EUR20 million (+28%) on revenue of EUR190 million (+2%) giving it an EBITDA margin of 35.26%; not earth shattering but comfortable. Passenger numbers grew by 16% to 20.3 million. At least the Ataturk Airport remains in good hands, whatever its future turns out to be.

According to the state airport authority DHMI, the total passenger traffic in Turkey is poised to double in the next 10 years. TAV CEO Sani Sener commented: "We have come a long way in fourteen years and we have a long way to go in the years coming ahead."

If that means at Ataturk as well as the other airports in the group portfolio then the stage is being set for an almighty battle for market share between three airports.