Pegasus Airlines' waiting game. Take a margin hit now to keep market share, pending fuel price rises

Pegasus Airlines is playing a waiting game. The Turkish LCC's 2015 operating profit and margin contracted for the second year running, bucking the trend of the majority of European listed airlines. For most, lower fuel prices more than offset downward pressure on unit revenue, and margins expanded in 2015.

At Pegasus, changes to its cost structure prevented it from lowering its unit cost to offset falling yield and load factor in 2015, in spite of lower fuel. Although there are market-related pressures on pricing, including geopolitical concerns, Pegasus also acknowledges that its own capacity growth contributed to falling yield.

Nevertheless, Pegasus will accelerate its capacity growth in 2016. Its argument is that the low fuel price environment is stimulating competitor growth, and that it is important for Pegasus to retain its position. Then it will be able to benefit from any shake-out in the market if and when fuel prices rise, to the detriment of weaker players that are currently propped up by low fuel. Such longer-term thinking is commendable, but Pegasus must nevertheless refocus on non-fuel costs.