Istanbul New Airport: Enabling a new global aviation connectivity era for Turkey

Summary

• The first phase of Istanbul's new USD36 billion airport is on track to open at the end of Oct-2018. In capacity terms, it will be the biggest airport in Europe.
• With regard to transfer traffic, it will be in competition with the 'MEB3' airports from Day 1: it has some advantages over them.
• Growth in the O&D segment is dependent on the Turkish economy, which is rocky, but the construction of an airport city alongside should help.
• Atatürk Airport's future appears limited, but Sabiha Gökçen Airport should be able to ride out the storm as the most 'stable' operating environment during the transition, and Pegasus Airlines is committed to it.
• Both Turkish Airlines and Pegasus Airlines seem set to benefit from the new facilities.
• ORAT procedures are in place for the world's biggest ever changeover between airports.

The new airport and an 'airport city' were agreed at the same time
The new airport's history dates back to as recently as 2012, when the Ministry of Transport and Communication announced that plans for a four stage, USD36 billion new airport in Istanbul would be put out to tender before the end of that year.
At the same time, plans to develop an airport city complex on the 690ha land plot surrounding the facility were announced. The airport is located in Arnavutköy, a district in the northern part of the city's European side, 35km from downtown.
The main Atatürk Airport is located southeast of the suburb of Küçükçekmece. Sabiha Gökçen Airport, which serves the Asian side of the city predominantly, is to the southeast of Sultanbeyli (see map below in LL cases).
TAV (Airports Holding) regards Sabiha Gökçen as the investment option
Phase I of the new airport comprises three runways and three taxiways, with a 90 million passenger per annum capacity, rising to 150 million passengers per annum once the new facility is fully operational in 2028.
The airport is being built on a build-operate-transfer model over 25 years and İGA-İstanbul New Airport is a consortium of five Turkish firms which does not include TAV Airports, the operator of Atatürk Airport, which has since turned its attention towards the possibility of acquiring a stake in the Sabiha Gökçen International Airport on the eastern (Asian) side of the city.
TAV has recently denied any intention of acquiring equity in İGA, although it cannot be pleased about seeing an end to its investment at Atatürk, which will eventually close to commercial flights.

Relation of Arnavutköy district to Istanbul's European and Asia sides

Source: Google Maps

After Istanbul New Airport has opened, IGA will add two runways, a second terminal, and auxiliary support facilities over several phases in order to increase capacity to 120 million passengers per annum by 2022, at which stage the airport would be the busiest in Europe by some margin - if it can attract enough services to fill that capacity. A new satellite terminal and the additional runway are expected to be commissioned in the airport's fourth phase of development in order to reach an ultimate capacity of 200 million passengers per annum (ppa). These are big numbers indeed, and a reasonable question must be: can the new airport achieve these targets? Between them, Atatürk and Sabiha Gökçen hosted 95.1 million passengers in 2017, with a similar growth rate (5.5% - 5.8%). But Sabiha Gökçen will remain open and its owners have no intention of throwing in the towel to the heavyweight new airport.

Ownership Chart for Istanbul New Airport - Equity of Partners in İGA

Source: CAPA - Centre for Aviation

Istanbul Ataturk Airport Annual System Seats Capacity

Source: CAPA - Centre for Aviation and OAG

A key target is to attract more transfer traffic away from the Gulf
There are two ways the airport can do that. Firstly, by attracting more transfer traffic away from competing airports; principally those supporting the so-called 'Middle East Big Three' (ME3) - Dubai International, Abu Dhabi International, and Doha Hamad. This comes at an interesting time, as (perhaps unlikely) rumours abound about a wavering Etihad possibly merging into the Emirates Airline camp.
The new airport will be in a much stronger position to do that than the severely capacity-constrained Atatürk, where the annual capacity increase dipped from 11.3% in 2015 to 1.2% in 2017. It is creaking at the seams.
Assuming that Turkish Airlines puts in similar seating capacity levels at the new airport as it does at Atatürk, that would at least give the new airport a fighting start in Istanbul's renewed battle with the ME3, even if not a clear advantage.
The table below right indicates the ratio of capacity each of the home-based airlines has at the airports in question.
In the main, it is beneficial for an airport to have a strong home-based airline because connecting schedules are more easily arranged and maintained that way. Also for the airport to have a strong alliance presence, and Atatürk scores well in that category as the table below demonstrates.
An extra runway gives it an operational advantage
When it opens with three runways the new airport will have one more than Doha, Abu Dhabi airports and Dubai International (where one is frequently closed for maintenance), thus once again aiding the planning and initiation of connecting flights and enabling more capacity to be added by foreign airlines.
The 90 million ppa opening capacity is also a benefit, putting it on the same level as Dubai International (which cannot realistically expand much further, whence the creation of the Al Maktoum/Dubai World Central). That projected figure is 40 million more than Doha and 25 million more than the extended Abu Dhabi airport.
There are well documented and well recognised problems afflicting Middle East airports in general, such as the use of airspace and how much of it is apportioned to the military.
Other factors impacting on how strongly the new airport can challenge the ME3 in the passenger transfer arena include:

• Physical organisation by terminal and allocation of airlines by type (alliance; unaligned etc.)
• Ease of transfer
• Utility of facilities
• Factors such as the way the airport is managed; application of signage, availability of multi-lingual staff etc.
  But human factors will come into play.

Comprehensive ORAT procedures sought to avoid Heathrow-like PR disasters
That is why Operational Readiness and Airport Transfer (ORAT) procedures were ongoing for some time and three trials involving 9000 people and 10 actual flight arrivals and departures took place in the run-up to the opening day. The ORAT project has involved consultants from Copenhagen and Incheon Airports (two separate and distinct cultures), involving staff who all have aviation experience in fields such as airports, airlines and handling.
Such trials are essential. It may be a dim and distant memory now but despite claims that systems had been "tested to destruction", when London Heathrow Airport's Terminal 5 opened in Mar-2008 it was chaotic, particularly in the arena of baggage handling, where uncollected bags built up into mountains. Later it became apparent that the design of the ceiling lighting system meant it was almost impossible to change the bulbs without abseiling between them.
Heathrow T5 was also one of the first terminals - and this was 10 years ago - where it became apparent (or at least, claimed) that computer operations (again mainly in baggage handling) had become too quick for the human operators to keep up with. A decade on, with all the talk of digitisation, biometrics, algorithms and artificial intelligence, it is more vital than ever to ensure coordination between machines and human operators. Presumably the operator, İGA, will be taking the Heathrow experience fully into account in these preparations.
Ditto Turkish Airlines (THY), which will again be the main operator. At Heathrow, lack of communication between the then operator, BAA, and British Airways, for which the terminal was designed, was considered a contributing factor to the problems.
While transfer traffic will be an essential feature of the new airport, as at Atatürk, the other way in which the new airport can achieve targets is by developing both outward and inward business traffic and (mainly inward) tourism.
Both are dependent on the size of the home market, the state of the economy and on the security of the state.
Turkey is a big country, with a population of more than 80 million, and can thus call on a much larger home-based market than, say, the UAE (less than 10 million in population). A World Bank report in 2014 found that the middle class in Turkey had doubled in size during the previous decade.

Airport	% capacity of home-based airline (seats)	Name of home-based airline
Istanbul Atatürk	82.3	Turkish Airlines THY
Dubai Int	66.3	Emirates
Doha Hamad	89.9	Qatar Airways
Abu Dhabi Int	83.5	Etihad

Airport	% capacity of alliance airline (seats)	Main alliance
Istanbul Atatürk	87.0	Star (THY) (83.6%)
Dubai Int	8.9	SkyTeam (3.8%)
Doha Hamad	92.0	Oneworld (Qatar Airways) (91.0)%
Abu Dhabi Int	4.9	Oneworld (1.7%)

The Turkish economy is rocky: high indebtedness in dollars as the exchange rate tumbles
The Turkish GDP is growing economically, but there are persistent underlying imbalances in the economy. In particular, Turkey's large current account deficit means it must rely on external investment inflows to finance growth, leaving the economy vulnerable to destabilising shifts in investor confidence.
Other negative trends include rising unemployment and inflation, which increased in 2017, given the Turkish lira's continuing depreciation against the dollar, which has heightened in 2018; 40% of the country's privately companies owe money in dollars. Although government debt remains low, at approximately 30% of GDP, bank and corporate borrowing have almost tripled as a percentage of GDP during the past decade, outpacing emerging-market peers and prompting investor concerns about long term sustainability.
While the spat with the US over the detention of an American pastor prompted the lira to nosedive, the vulnerability of President Recep Erdoğan's economic policies to sanctions and to dollar-dominated debt is worrying.
On the bright side, after Turkey experienced a severe financial crisis in 2001, Ankara adopted financial and fiscal reforms as part of an IMF programme. The reforms strengthened the country's economic fundamentals and ushered in an era of strong growth. An aggressive privatisation programme also reduced state involvement in basic industry, banking, transport, power generation, and communication. Global economic conditions and tighter fiscal policy caused GDP to contract in 2009, but Turkey's then-well regulated financial markets and banking system helped the country weather the global financial crisis.
Also as a major European tourism destination, the country does benefit, as do its airlines, from the hard currency delivered by inbound sales, helping compensate to some extent the falls in the local currency.
Getting the security right has to be a primary objective
s for security: despite an attempted military coup and many terror attacks at coastal resorts and Ankara, as well as in Istanbul - including one on Istanbul Atatürk Airport (landside) - along with Egypt and Tunisia, Turkey is back in the good books of tourists, as particularly Spain is finding out to its cost this year. But it can all change again, very quickly.
And there are caveats. The opposition Republican People's Party deputy chairman Aykut Erdoğdu said recently that there were irregularities in the construction of the new airport and questioned the level of security and safety at the airport. Mr Erdoğdu said that "technical shortcomings" could greatly increase operating costs.
Tourism is on the up and Istanbul is one of the world's most popular cities to visit
As the chart below shows, tourism collapsed in 2016 after the instability, with a reduction in visitor numbers of more than 30%, but recovered dramatically in 2017 (+27.8%) and that level of increase is holding steady in 2018.

Turkey Annual Tourism: Visitor Arrivals, 2014 - 2018

Source: CAPA - Centre for Aviation and Turkey Ministry of Culture and Tourism

There is no dominant source country. The highest number of visitors is from Russia (14.5%), followed by Germany (11.1%). Despite the appeal of the coastal resorts, much of the tourism is channelled through Istanbul, which was the World's 11th most visited city in 2017, with 9.24 million tourists.
The final part of the equation is estimating what effect the new airport will have on the two existing airports, and vice versa. Atatürk is unlikely to benefit from a 'Bangkok factor' It has already been made clear that Atatürk Airport will close to commercial traffic, but it will continue to operate for at least five years according to government sources, and aircraft maintenance, repair, overhaul, catering and business jet operations will continue beyond that.
There is a slight potential for a 'Bangkok' scenario to emerge. Don Mueang Airport, the equivalent of Atatürk, closed when the Suvarnabhumi Airport opened in 2006. Its future prospects were undecided, but included all of those envisaged now for Atatürk, and more.
Subsequently, the government realised that Suvarnabhumi had finally opened nearly at full capacity; it belatedly reopened Don Mueang, mainly to LCC traffic, which doesn't connect - at least formally - and a second terminal was determined for Suvarnabhumi. In the interim Don Mueang has tended to grow faster, not unexpectedly, than Suvarnabhumi.
However, it is not a true comparison, because with a 90 million ppa capacity the New Istanbul Airport will open at broadly half its capacity.
As such it offers a substantially greater opportunity for Turkey to grow its hub role in long haul and long-to-short haul operations than has been possible in the capacity constrained Atatürk.
Sabiha Gökçen: some loss of THY traffic but it has a solid alternative base
The position regarding Sabiha Gökçen is more complex. It has its own distinct catchment area and was built because of Atatürk's inadequacies, just like the new airport.
It is an award-winning airport where its consortium owners have invested in a new (second) runway, scheduled to open in 2019, which will double hourly movements. It will remain a thorn in the side of the new airport if only because that airport is situated further away from the Asian side of the city than is Atatürk.
It has also built up a strong complement of airlines.
The ultra-LCC Pegasus, a major force in Turkish aviation with an order book of almost 80 aircraft, has said that it is considering operating some services from Istanbul New Airport, but Sabiha Gökçen will remain its main base. Pegasus Airlines is the leading airline at Sabiha Gökçen, with 63% of seats in the seasonal peak week of 03-Sep-2018. THY is number two, with a 32% share, and uses the airport as an overspill base in view of Atatürk's constraints.
(We examine Pegasus in detail in the following analysis in this Airline Leader report: "Pegasus Airlines SWOT: Turkey's ultra-LCC is set for further growth")

Istanbul Sabiha Gökçen Airport System Seats*

Rank	Airline	Share of Seats
1	Pegasus Airlines	63.2%
2	Turkish Airlines	32.2%
3	Qatar Airways	1.0%
4	SunExpress	0.6%
5	flynas	0.5%
6	flydubai	0.5%
7	Emirates Airline	0.4%
8	Air Arabia	0.3%
9	Air Arabia Maroc	0.3%
10	Gulf & Caribbean Air	0.3%
11	Nile Air	0.2%
12	Wataniya Airways	0.2%
13	Azerbaijan Airlines AZAL	0.2%
14	Iraqi Airways	0.0%

Source: CAPA - Centre for Aviation and OAG
Note: *Week commencing 3-Sep-2018

In addition, THY seems likely to retain at least some presence at Sabiha Gökçen, which will give it options as the new airport builds up and as Atatürk is phased out. Qatar Airways and Emirates have a small presence at both of the existing Istanbul airports. They may foresee a strategic advantage in increasing services at Sabiha Gökçen, rather than at THY's new hub.
The opening of the new airport should allow Sabiha Gökçen to focus on its main role as a low cost point-to-point base - so there is some parallel with the Bangkok situation.
(We examine this airport in detail in the following analysis in this Airline Leader report: "Sabiha Gokcen growth to continue")

Istanbul's premier trading location

Source: Google Maps

The new airport should be positive for both of Turkey's leading airlines
The opening of Istanbul New Airport will give Turkish Airlines a new hub with vast expansion potential. THY has developed into a major force in global aviation by using its Istanbul hub to target intercontinental connecting traffic, particularly between East and West, in a way not entirely unlike the approach of the three Gulf super-connnectors. All its operations will be transferred to the new airport from 31-Dec-2018.
For THY, the large Turkish domestic market is an additional advantage, which also feeds into its international network. In 1H2018, 42% of THY's passengers were transfer traffic (31% international to international and 11% domestic to international). Clearly, such a strategy, and the rapid growth that has accompanied it, can only continue with sufficient airport capacity. Subject to a smooth transfer of operations, the new airport should provide this.
For Pegasus, if Turkish Airlines reduces its presence at Sabiha Gökçen after the opening of the new airport, this should help to reinforce the already clear distinct differences in the market segments occupied by Turkey's two leading airlines. Head to head competition between them at Sabiha Gökçen has sometimes led to damaging price wars and, although Pegasus has a significant unit cost advantage, this has dented its margins.
Both airlines follow a similar profit cycle, which suggests that their different propositions complement one another more than compete with one another. The new airport, once it is fully up and running, should help to maintain this balance.
Racing towards the opening date, but human casualties spell bad press
The speed at which the first phase has been built matches that of other mega new airport projects in China and Mexico. Between Sep-2017 and May-2018 the airport went from 64.5% complete to 88.5% complete. The entire project, from concept to first phase opening, will have taken only six years - one-tenth of the time it has taken to make a decision on a single runway in London.
But can speed equate to dangerous haste? Shortly before the opening there were employee protests and strikes about work-related deaths and accidents at the airport construction site, as well as highlighting living and working conditions.
The Airport City occupies a more attractive position globally than those at Dubai and elsewhere in the region
Another important cog in the new airport's wheel will be the creation of the airport city, located near the airport within the boundaries of the expropriation area. It will cover a 10 million square metre area and feature hotels, offices, shopping centres, social facilities, hospitals, schools and exhibition facilities.
It is becoming almost a requirement now for an airport city to be built alongside new airports of this scale, and Dubai's Al Maktoum/World Central is a conspicuous example of the type - although the timing of the future development of that airport is less clear.
Assuming all issues are resolved, the New Istanbul Airport has serious prospects of making a real difference to aviation in the region - and well beyond. As was the case with the Gulf carriers, aircraft technology was a liberating force, as long haul operations made global one-stop operations possible.
As noted in the Turkish Airlines SWOT later in this edition, Istanbul is slightly off the equatorial axis that the Gulf states enjoy, making it (only slightly) less accessible with current aircraft, but that is only a relatively small handicap. And as new longer range aircraft appear, even that handicap will evaporate.
With much greater access - and frequency - to European points than the ME3, along with a tailored fleet mix and large orders for 787s and A350s, Turkish Airlines should be able to capitalise effectively on the new springboard presented by the Istanbul New Airport.