Pegasus Airlines SWOT: ultra-low costs and profitability for Türkiye's number two
In 1H2024 Pegasus Airlines achieved ASK growth of 19%, with passenger numbers up by 22%. This led the Turkish ultra-low cost airline to revise its full-year 2024 ASK growth guidance range from 10%-12% to 12%-14%.
Pegasus reported the highest EBIT margin among European airlines in 2023 - a sign of the success of its model.
A rising challenge in 2024 is the renewed competitive threat posed by Turkish Airlines' low cost subsidiary AJet, the number two operator at Istanbul Sabiha Gökçen Airport, which is Pegasus' main hub.
In this report, CAPA - Centre for Aviation considers Pegasus Airlines' strengths, weaknesses, opportunities and threats.
- Strengths: ultra-low costs, leading LCC in Türkiye, Sabiha Gökçen base, young fleet, high aircraft utilisation, high EBIT margin.
- Weaknesses: distant number two to Turkish Airlines, low load factor versus other leading LCCs.
- Opportunities: Airbus neo orders, ancillary revenue growth, more geographically balanced network.
- Threats: AJet, Türkiye's economic/geopolitical context, fuel price fluctuations, external events, green transition.
PEGASUS' STRENGTHS
1. Pegasus has ultra-low unit costs
Alongside Wizz Air and Ryanair, Pegasus is one of only three ultra-LCCs in Europe. It has one of the lowest unit costs of any European airline company.
According to CAPA - Centre for Aviation calculations for calendar 2Q2024, its cost per passenger is only 1% higher than Ryanair's, in spite of Pegasus' average trip length being 26% higher.
Pegasus' available seat kilometre (CASK) was the lowest of the three in the quarter.
Perhaps more significantly, Pegasus' full-year 2023 CASK was only 47% that of its biggest local rival, Turkish Airlines.
2. Pegasus is the leading LCC in Türkiye
Pegasus is Türkiye's biggest low cost airline by some margin.
According to data from OAG and CAPA - Centre for Aviation, Pegasus has 40.9% of all LCC seats in Türkiye in the week commencing 12-Aug-2024, with 45.9% of domestic LCC seats and 38.7% of international LCC seats.
According to data from Pegasus and Türkiye's General Directorate of State Airports Authority, the airline's share of passenger numbers in Türkiye in 2023 was 33.7%, up from 33.4% in 2022.
Its domestic share in 2023 was 26.4% and its international share was 40.4%.
3. Its Sabiha Gökçen base is a low cost airport
Pegasus' main hub is at Istanbul Sabiha Gökçen Airport, where it is the leading airline, with 66.3% of seats in the week of 12-Aug-2024.
Turkish Airlines' low cost subsidiary AJet is number two, with 27.8% of seats, while Turkish Airlines itself is third, with 1.3% (almost a duopoly).
Sabiha Gökçen's airport charges are substantially lower than those at Istanbul Airport, which is the main hub for Turkish Airlines.
According to data from Air Transport Research Society, Sabiha Gökçen's combined landing/terminal charges for a Boeing 737-800 and for an Airbus A320 are only 22% of those at Istanbul Airport.
The vast majority of seats - 96.9% - at Sabiha Gökçen are operated by LCCs in the week of 12-Aug-2024.
Istanbul Sabiha Gökçen Airport and Istanbul Ataturk Airport: combined Landing/Terminal Charges (USD) for 2023
4. Pegasus has a young fleet
According to the CAPA - Centre for Aviation Fleet Database, the average age of Pegasus' fleet of 110 aircraft is 4.5 years at 12-Aug-2024.
This compares favourably with 9.3 years for Turkish Airlines' mainline fleet, and 13.3 years for AJet (the low cost subsidiary of Turkish Airlines).
Pegasus' average fleet age is also lower than those of Europe's other ultra-LCCs (9.9 years for Ryanair, and 4.8 years for Wizz Air).
Pegasus has been replacing its Boeing 737-800s (of which it now has only nine left, average age 10.2 years) with A320neo family aircraft.
It has orders for a further 61 Airbus A321neos for delivery until 2029, which will keep the overall average fleet age low.
5. Pegasus' aircraft utilisation is high and growing
In 2017 Pegasus achieved an average daily aircraft utilisation of 12.6 hours per day, up from 12.3 hours in 2016.
This compares favourably with Turkish Airlines' overall utilisation of 11.7 hours, and its narrowbody medium haul utilisation of 10.4 hours, which is more comparable.
It is also much better than Ryanair's 9.4 hours, and is a little better than Wizz Air's 12.4 hours (year to Mar-2024 for both).
6. Pegasus had the highest EBIT margin among European airline groups in 2023
CAPA - Centre for Aviation analysed the ranked 16 leading European airline groups and airlines by operating margin (pre-exceptional operating profit, or EBIT, as a percentage of revenue) for 2023 in the recent report, European airline margins 2023: ultra LCCs Pegasus and Ryanair at the top.
(Note that: 2023 includes financial year ends ranging from Sep-2023 to Mar-2024).
Pegasus Airlines topped the ranking, with an operating margin of 18.3%. It held onto the top spot that it occupied in 2022, in spite of a 5.4ppt decline in its margin.
PEGASUS' WEAKNESSES
1. Pegasus is a distant number two to Turkish Airlines in Türkiye
Pegasus is Türkiye's number two airline and its leading LCC.
However, its 20% share of scheduled seat numbers in Türkiye in 2024 is well under half the 51% scheduled for Turkish Airlines.
2. Pegasus' load factor is low by comparison with other leading LCCs
In 2023 Pegasus' load factor increased by 1.1ppts, to 84.8%.
This was higher than the global airline industry average of 82.3%, and Turkish Airlines' 82.6%.
However, it was below the levels recorded by other leading LCCs in Europe, such as Ryanair (94%), Wizz Air (90.1%), and easyJet (89%).
Pegasus' load factor was lower on international routes (82.8%) than on domestic routes (87.7%) in 2023.
Load factor is a commercial focus for Pegasus, which achieved a 6.2ppt improvement in 1H2024, to 87.3%.
PEGASUS' OPPORTUNITIES
1. Pegasus' Airbus neo orders should further improve its cost efficiency
Pegasus' current fleet of 110 aircraft consists of nine Boeing 737-800s, 6 Airbus A320-200s, and 94 A320neo family aircraft (46 A320-200neos and 49 A321neos).
As noted above, it has a further 61 A321neos on order. By 2029 its entire fleet will be A320neo family aircraft and 77% of its seats will be in the larger A321neo.
This will maintain a low average fleet age and improve the fuel efficiency of the fleet.
It will also further help to lower unit cost through increased aircraft size (average seat count will be 228 at the end of 2029, from 191 at the end of 2021).
2. There is further potential to grow ancillary revenue
In 2023, 30% of Pegasus' revenue came from ancillary sales. This was up from 26% in 2022, and a big improvement on the 14% share achieved 10 years earlier, in 2013.
However, this is lower than the levels reported by the other ultra-LCCs in Europe. For Ryanair, 32% of revenues came from ancillaries last year, and Wizz Air's ancillary share was 45%.
On a per passenger basis, ancillary revenue was EUR25.4 in 2023. The airline is targeting mid to high single digit growth in ancillary revenue per passenger in 2024 (but only achieved 3% growth in 1H2024).
3. Pegasus could add greater geographical balance to its network
In the week of 12-Aug-2024, 73 of 134 Pegasus' international destinations and 79% of its seat capacity are routes to/from Europe.
Its main hub at Sabiha Gökçen provides an opportunity to develop a more geographically balanced network, with more destinations in the Middle East, North Africa and central Asia.
Pegasus' local competitor, Turkish Airlines, is fond of pointing out that around half of the world population is within narrowbody range of Istanbul.
The airline is primarily a point-to-point operator, but a geographically more balanced network could also allow it to capture a fair proportion of transfer traffic.
Pegasus Airlines, international departing seats by region, week of 12-Aug-2024
PEGASUS' THREATS
1. Turkish Airlines' low cost subsidiary AJet is now more visible
Turkish Airlines' LCC unit, previously called Anadolujet, used to operate under its parent airline's code, with a fleet that was part of the parent's.
However, this low cost operation is now a separately incorporated subsidiary company with the new name AJet, its own fleet, and its own flight code (VF).
It is undergoing a fleet renewal programme to improve its cost efficiency, and expanding its international network.
This reflects Turkish Airlines' decision to give AJet greater focus, and to make it a stronger competitor in the low cost segment.
AJet's biggest airport base is Sabiha Gökçen, where it is number two to Pegasus.
In the week of 19-Aug-2024, AJet is scheduled to have 27.8% of seats at Sabiha Gökçen, while Pegasus' share is scheduled to be 66.6%. Turkish Airlines has 1.2%, giving the Turkish Airlines Group a seat share of 29.0%.
Compared with the equivalent week of 2019, Pegasus has increased its share (from 62.8%) and Turkish Airlines Group's share has fallen a little (from 30.9%).
However, Pegasus' share is lower than it was in the equivalent week of 2012 (when it was 70.7%), while Turkish Airlines Group's share is almost double the 14.4% it held at that time.
The fresh focus of AJet and its significant share of seats at Sabiha Gökçen could provide a renewed competitive threat to Pegasus at its largest airport.
Istanbul Sabiha Gökçen Airport: seat share of Pegasus Airlines and Turkish Airlines, Aug-2012 to Aug-2024*
2. Pegasus is exposed to Türkiye's economic/geopolitical context
Airlines operating in Türkiye are often exposed to geopolitical and economic risks to a greater degree than elsewhere in Europe.
Currency crises, terrorism, and political controversies are among the issues that periodically affect the country.
3. Pegasus' costs are exposed to fluctuations in jet fuel prices
Jet fuel prices have mainly been on a declining path over the past 12 months, but are subject to sometimes sharp and often unpredictable moves both up and down.
Rising jet fuel prices will place an additional burden on Pegasus' cost base. According to its 1H2024 results presentation in Aug-2024, it has hedged 46% of its 2024 fuel requirements, leaving it exposed for 54%.
For 2025, it has hedged only 21% of its jet fuel needs.
4. Airlines are vulnerable to external events
As with all airlines, Pegasus is vulnerable to the risk of possible accidents, in addition to strikes and other events that could disrupt its service and adversely affect its reputation and demand for its services.
In addition to geopolitical risk (already mentioned), these could include natural phenomena, such as earthquakes and volcanic ash disruption.
5. The green transition is an existential threat to all airlines
The transition to net zero carbon emissions, a global commitment by the world's airlines, is a necessary condition for aviation's continued long term existence.
The development of new propulsion technology will be needed to guarantee this - something that is largely out of the control of Pegasus or any airline.
The interim need to operate with sustainable aviation fuels is also largely out of any airline's control.
Conclusion: Pegasus looks set for continued profitable growth
Pegasus increased its passenger numbers at a compound average rate of 14.1% pa between 2008 and 2023, outpacing the Türkiye market rate of 2.9% pa over the same 15-year period.
Pegasus has a significant cost advantage over Turkish Airlines, but the national flag carrier has a significant market share advantage over the LCC. The continued success of both suggests that neither has a strong competitive advantage over the other.
Instead, they both occupy different market segments, in which they each have a unit cost advantage over other competitors, although AJet's new focus could alter this balance.
Pegasus looks set to continue to build on its position as Türkiye's leading low cost airline and to achieve profitable growth.