With its eyes set on LOT and TAP, Turkish Airlines aims to become Europe’s most European airline


Turkish Airlines has steadily expanded its network in Europe over the past decade but now it intends to take its expansionistic conduct a step further with acquisitions in some of the continent's medium-sized airlines. It is in negotiations with LOT Polish Airlines to purchase a shareholding and it has shown preliminary interest to participate in the planned privatisation of TAP Portugal. Turkish has already one of largest networks in Europe and its new strategy to complement its strong organic expansion with mergers and acquisitions spells more bad news for Europe's legacy airlines that have not been able to match Turkish Airlines' high growth in recent years. Turkish Airlines has openly stated it aims to be the world's largest carrier.

The Istanbul Ataturk-based airline has consistently outpaced the traffic growth of its European full service counterparts since 2003 and has posted growth rates well above the average of the Association of European Airlines (AEA) members.

  • Turkish Airlines has consistently outpaced the traffic growth of its European counterparts since 2003, with significant growth rates in passenger numbers and revenue passenger kilometers (RPKs).
  • The airline aims to be the world's largest carrier and has a strong focus on expanding its network in Europe.
  • Turkish Airlines has a large domestic market and benefits from the strong growth of the Turkish economy.
  • The carrier has a dense hub-and-spoke network in Europe, with Istanbul serving as a strategic location for East-West and North-South traffic flows.
  • Turkish Airlines is actively seeking acquisitions in medium-sized European airlines, with negotiations underway for a shareholding in LOT Polish Airlines and preliminary interest in participating in the privatisation of TAP Portugal.
  • The airline's growth strategy includes expanding its fleet, increasing international passenger numbers, and targeting new destinations in Europe, Africa, and South America.

Turkish carried just 10.4 million passengers aboard 65 aircraft in 2003 and this rose to 32.6 million passengers with a 179 strong fleet in 2011. The first three months of 2012 showed a similar pattern, with Turkish Airlines reporting a striking 18.9% jump in passenger numbers year-on-year and an equally remarkable 28.9% rise in RPKs on a 19.2% hike in ASKs.

The carrier's passenger traffic performance in 1Q2012, which is typically the weakest quarter of European airlines, overtakes by several multiples the growth rates posted by other European network carriers such as Lufthansa and British Airways as well as Europe's LCCs. Ryanair, Europe's largest budget airline, reported a year-on-year decrease of earned seats flown with 6% in Jan-2012, 2% in Feb-2012 and 4% in Mar-2012 as it grounded 80 Boeing 737-800s for the winter season while easyJet posted a year-on-year fall in seats flown of 0.4% in Jan-2012 and a growth of 3.7% in Feb-2012 and 4.4% in Mar-2012.

Turkish Airlines worldwide traffic growth vs AEA average growth: 2008 to 1Q2012

Turkish Airlines intra-European traffic growth vs AEA average growth: 2008 to 1Q2012

For 2012 Turkish Airlines targets to realise a system-wide 17% increase in passengers to 38.2 million compared to 2011. An increasingly large part of the carrier's traffic comes from Europe, which it serves with a streamlined fleet of A320 family aircraft and Boeing 737s. At the end of Mar-2012 Turkish operated 137 narrowbody aircraft and it has a further 43 new single-aisle aircraft lined up for delivery by end 2015, and this is excluding leases. It recently extended the lease terms of four narrowbodies and leased six used narrowbodies to support its faster than planned growth.

Turkish Airlines Mar-2012 fleet and fleet plan: 2010 to 2015

Turkish Airlines has the second largest network in Europe

Europe is at the core of Turkish Airlines' strategy to build a dense hub-and-spoke network using the strategic location of Istanbul, on the crossroads of Europe and Asia and close to Africa. CEO Temel Kotil has consistently argued that on a geographic-mathematical basis Istanbul is better located to facilitate East-West and North-South traffic flows than the hubs in the Arabian Gulf such as Dubai, Doha and Abu Dhabi. Turkish might be European, but its strategy is closer to that of the Middle East network carriers.

A notable exception - and a welcome one too - to the Middle East network carriers is that Turkish Airlines benefits also from a large domestic market (Turkey's population was nearly 75 million in 2011, according to the official Turkish Statistics Institute) and the Turkish economy has been growing very strongly in the past decade. GDP is expected to develop in 2012 with 2.2%, according to the International Monetary Fund's (IMF) most recent forecast. This is slower than in the past years, but it is still better than most countries in the European Union.

Despite the liberalisation of the internal aviation market, Turkish Airlines still has a 59% of domestic weekly seat capacity and its main competitor Pegasus Airlines has a 25% share.

See related article: Pegasus Airlines bets on liberalisation in Turkey's international market with 100-aircraft order

Turkey international capacity share by carrier (% of seats): 28-May-2012 to 03-Jun-2012

Turkish Airlines' growth on domestic routes has been slowing down in recent years, and in 1Q2012 was 8% to 3.4 million passengers. Conversely, international enplanements rose year-on-year with 29% in the first three months of the year to 4.5 million. Since 2010, the airline has carried more passengers on its international routes than on domestic routes. This trend will continue as Turkish expands its global footprint and builds its successful Istanbul hub.

Turkish Airlines domestic passengers (in mill): 2006 to 1Q2012

Turkish Airlines international passengers (in mill): 2006 to 1Q2012

At the end of 1Q2012, the airline operated to 40 domestic destinations and 151 international gateways of which 76 are in Europe, including Russia and the Commonwealth of Independent States (CIS). Since then THY has opened more routes from Istanbul Ataturk Airport into Europe including a 737-900ER service to Manchester on 01-Apr-2012, flights to Bremen on 26-Apr-2012 and a four-times weekly to Bilbao and a four-times weekly to Leipzig 28-May-2012. Thrice weekly Aalborg-Billund flights and a four times weekly service to Edinburgh are scheduled to begin on 16-Jul-2012. Edinburgh is the carrier's fourth destination in the UK. Turkish has already confirmed it will also launch flights to a further five European cities this year: Riga, Vilnius and Tallinn (the route will operate as Istanbul-Vilnius-Riga-Istanbul and Istanbul-Riga-Tallinn-Istanbul), Marseille and Romania's Constanta. The latter two destinations are based on aircraft availability and upon obtaining the necessary authorisations.

With 80 international destinations Turkish Airlines has the second densest network in Europe of all of Europe's network carriers. Only Lufthansa operates to more airports in Europe. According to Innovata network data for the week of 03-Jun-2012, Lufthansa flies to 118 international airports in Europe (plus 19 domestic airports), Air France to 70 international airports in Europe (plus 33 domestic airports), British Airways to 75 international airports in Europe (plus eight domestic airports), KLM to 64 international airports in Europe (and one domestic airport) and Iberia to 38 international airports in Europe (and 35 domestic airports).

Europe is Turkish Airlines' main international market

Europe is the carrier's largest international market and represents 56.7% of international passengers (which compares to 15.6% for Middle East, 14.5% for the Far East, 8.4% for Africa and 4.8% for the Americas) and 29% of its passenger revenue in 1Q2012.

It deploys some 340,000 weekly seats on routes to Europe each week equating to 58% of its international seats capacity. One third of European capacity is on routes to Central and Eastern Europe. Turkish Airlines is rapidly expanding in Eastern Europe, specifically in the CIS and it presently operates to six destinations in the Ukraine. This market holds vast potential and is yet to be anywhere near having sufficient service; it is for Turkish's taking.

Turkish Airlines international capacity share by region (% of seats): 28-May-2012 to 03-Jun-2012

All but two of its 10 largest routes in seat capacity are to Europe. The route with highest weekly frequency (62 flights to/from) is Istanbul to London Heathrow, followed by Baku, Paris CDG, Brussels, Vienna, Ercan, Milan Malpensa, Dusseldorf, Amsterdam and Frankfurt which are all served with 56 weekly frequencies.

Turkish Airlines 10 largest international routes (seats per week): 28-May-2012 to 03-Jun-2012

Growth by acquisitions will be new to Turkish

But the carrier's ambitions are now moving beyond organic growth and Turkish is decisively focused on taking part in Europe's consolidations process. As all large network airlines in Europe are tied up in a merged entity, Turkish Airlines is looking at smaller or medium-sized airlines and there are plenty of those currently looking for a larger and healthy shareholder. Many cash strapped European governments are seeking to divest their flag carriers, either by choice (such as LOT Polish Airlines) or as part of a bail-out package funded by the IMF and the European Union. Portugal and Ireland had to commit to selling their stake in TAP Portugal and Aer Lingus, respectively, while the IMF publicly criticised the Latvian Government for using public funds to bail out airBaltic last year without prior consent of the IMF.

See related article: airBaltic's restructuring plan is in full swing, but competition from Estonian Air is rising

Since Turkish Airlines is keen on investing in European airlines and since there are lots of airlines for sale, it is not surprising Turkish's name surfaces in most - if not all - of these potential sell-offs including CSA Czech Airlines, Slovenia's Adria Airways, airBaltic, Serbia's JAT Airways and LOT. New on the list is TAP Portugal. LOT, Adria and TAP are fellow Star Alliance members.

See related article: Poland's LOT and Turkish Airlines highlight Eastern European flag carriers investor/ seller shortfall LOT

So far, however, Turkish has been involved only in Bosnia and Herzegovina's national carrier B&H Airlines, in which it purchased a 49% stake in Dec-2008 with the Government keeping the remaining 51% stake. Turkish has reportedly sought to acquire the Government's remaining stake in early 2011, however, this has not amounted to anything and Turkish appears to pulling out with its seconded management returning to Istanbul. B&H faces a very uncertain future and this summer season is operating on just three routes - Sarajevo to Istanbul, Zurich and Copenhagen - with two ATR 72s (the sole A319 has been stored at Istanbul Airport).

B&H might very well follow the fate of Cirrus Airlines, Czech Connect Airlines, Malev, Spanair, Cimber Sterling, City Airline, Skyways and Spain's Mint Airways. The latter ceased operations 22-May-2012.

Double score: LOT in Central Europe and TAP in South Europe

The Turkish board has given management approval to engage in negotiations to understand LOT's privatisation process, and discussions are ongoing. Dr Kotil has told CAPA that LOT's location and network are important to Turkish and he believes Turkish's Istanbul hub and LOT's much smaller hub at Warsaw Chopin Airport could produce good synergies, with Warsaw operating as a mini-hub for Eastern and Northern Europe using LOT's mainly Embraer fleet. The Polish flag carrier also operates five 737s and four 767-300ERs and has eight 787-8s on order. Turkish has no regional aircraft in its fleet and is not a 787 customer for the time being.

During the CAPA Airlines in Transition Conference in Istanbul in Apr-2012, Dr Kotil did not deny rumours that Turkish Airlines has shown preliminary interest in participating in TAP's planned privatisation. Turkish could tap into TAP's large Brazilian network and would benefit from TAP's African network, while it would keep the carrier in Star Alliance. Lufthansa Group CEP Christoph Franz recently stated it is considering a bid for TAP to strengthen its position in South America and protect its partnership with a key member of the Star Alliance.

The chance that TAP might end up in the competing oneworld alliance is real. International Airlines Group (IAG) has repeatedly expressed its desire to buy the Portuguese state-owned carrier although IAG CEO Willie Walsh recently indicated the group's interest in TAP is waning. "Our interest in TAP largely related to the network that it had in Brazil. But things are developing, the merger of LAN and TAM. Our acquisition of slots through the acquisition of bmi at Heathrow gives us opportunities that look more interesting to us. So our interest in TAP is significantly less today than it would have been 12 months ago," Mr Walsh said during the presentation of IAG's 1Q2012 results to analysts.

Mr Walsh's remarks, however, may be a negotiating tactic. When Mr Walsh previously spoke of interest in TAP he knew bmi was a likely deal. Even with added Heathrow slots, IAG could use as many as it could get, and if it is able to pursue expansion through a non-Heathrow entity like TAP, that would preserve the limited slots added from bmi for use elsewhere. IAG has flagged interest in expanding its Asian and African networks. Additionally, while it was assumed TAM would join LAN in the oneworld alliance rather than have LAN join TAM in Star, another option - and possibly viable - is for TAM to remain independent. If that scenario unfolds, IAG would not be guaranteed a partnership with TAM. Additionally, even if TAM joined oneworld, IAG would still compete with it unless it was able to secure a joint venture, which would seem challenging as a LAN-TAM-IAG JV would have a disproportionately higher sharer of traffic.

TAP remains a possible fit for IAG, but what has changed is lack of interest in TAP from others, which Mr Walsh may wish to exploit to secure a better price for TAP. Of interest in TAP, Mr Walsh said he "can't see Air France, KLM doing anything in relation to TAP. I can't see Lufthansa doing anything. And quite honestly I can't see LAN or TAM, LATAM doing anything. So I think the interest in TAP will be very weak and that you should include us in that list".

See related article: IAG first quarter operating loss doubles on shabby Iberia performance and pilot strikes

But Turkish, which intends to eventually be the world's largest airline, sees clear benefits in a tie-up with TAP. The Portuguese carrier would bring an attractive network extension but also a well established and reputed MRO activity in Portugal and Brazil. TAP Maintenance & Engineering and TAP Maintenance & Engineering Brazil would be a good fit with Turkish Technic. Turkish Airlines is closely following Lufthansa and Air France-KLM's strategy and is expanding as an aviation group rather than just an airline.

Also the airlines' fleets are complementary, with TAP operating an all Airbus fleet of A320 family aircraft and A330/A340s, which THY operates as well.

TAP would bring Latin America to Turkish Airlines

Turkish presently flies to just one destination in South America, Sao Paulo Guarulhos International Airport although it plans to add a second in Jun-2012 when its Istanbul-Sao Paulo service is extended to Buenos Aires.

TAP Portugal flies to 11 airports in South America of which all but Sao Paolo Guarulhos would be new to destinations THY. TAP now serves Caracas in Venezulea and 10 airports in Brazil, giving it by far the largest Brazilian network among European carriers. These 10 destinations include Belo Horizonte Tancredo Neves International Airport, Brasilia International Airport, Fortaleza Pinto Martins Airport, Natal Augusto Severo Airport, Porto Alegre Salgado Filho Airport, Recife Guararapes International Airport, Rio De Janeiro-Galeão International Airport, Salvador Airport Luis E Magalhaes and Sao Paulo Campinas Viracopos Airport (although according to the GDS inventory display, TAP Portugal is cancelling its thrice weekly Lisbon-Sao Paulo Viracopos (Campinas) service on 28-Oct-2012).

Turkish is rapidly expanding in Africa where it now serves 20 gateways, while TAP operates to 11 airports on the continent. The networks overlap on only four destinations in Africa, and TAP thus would bring seven new airports to THY's Africa network.

TAP Portugal and Turkish Airlines Africa networks: 30-May-2012

TAP Portugal

Turkish Airlines

Accra Kotoka Airport

Accra Kotoka Airport

Addis Ababa Bole Airport

Alexandria Borg el Arab Airport

Algiers Houari Boumediene Airport

Algiers Houari Boumediene Airport

Bamako Airport

Benghazi Benina International Airport

Bissau Osvaldo Vieira Airport

Cairo International Airport

Cape Town International Airport

Casablanca Mohammed V Airport

Casablanca Mohammed V Airport

Dakar Yoff Airport

Dakar Yoff Airport

Dar Es Salaam International Airport

Entebbe Airport

Johannesburg Oliver R Tambo International Airport

Khartoum International Airport

Kigali International Airport

Lagos Murtala Muhammed Airport

Luanda 4 de Fevereiro Airport

Maputo International Airport

Marrakech Menara Airport

Misurata Airport,

Mogadishu International Airport,

Nairobi Jomo Kenyatta International Airport,

Praia Francisco Mendes Airport

Sal Amilcar Cabral International Airport

Sao Tome Island Airport

Sao Vicente San Pedro Airport

Tripoli International Airport

Tunis Carthage Airport

The desire by Turkish Airlines to participate in Europe's consolation process is understandable. The carrier has steadily grown on its merits and is now Europe's third largest network airline in passenger numbers, and if it wants to keep up with the likes of Air France-KLM Group, Lufthansa Group and IAG it needs to build a larger group of its own. Market itself is the not the end objective; there are strategic and compelling elements to support this aspiration, and Turkish is posting profits. If Turkish would acquire two airlines at once, one in Central Europe and one in South Europe, there would be an immediate enlargement effect and the carrier would be a major step closer to its goal of operating the largest network in the world by 2023. In the current week, it is 15th largest by seats and 17th largest by ASKs.

However, consolidation in Europe so far has proven to be a difficult task. Owing to ownership limitations and bilateral agreements, large scale synergies have not been realised as they have been with mergers in the US. Hubs and flags have not been sacrificed. While Turkish might be able to acquire some airlines at a discounted price given the dismal European environment and outlook, the longer-term cost might well outweigh the network benefits depending how much Turkish is able to influence turnaround plans. Turkish Airlines is not an EU airline and full ownership and control of an EU airline is thus not possible without losing traffic rights.

The carrier also has to attend to some pressing closer-to-home issues with employee members of the Hava-Is union calling in sick on 29-May-2012 in protest of a draft law that would make it illegal for aviation workers to strike. That forced Turkish to cancel 104 domestic and international flights. As Turkish Airlines grows also the power of the unions increases - a problem that is too familiar to Europe's legacy carriers. Management and union representatives at Turkish are negotiating a new collective bargaining agreement and unions are getting restive, threatening wider industrial action.

The Turkish Government owns 49% of Turkish Airlines, which is listed on the Istanbul Stock Exchange, and the proposal to outlaw strikes in civil aviation is not a coincidence. While banning the possibility to strike is helpful to ensure operational connectivity, Turkish Airlines has to work out the problems with its employees because an unhappy and unmotivated workforce is detrimental to an airline which prides itself on a friendly service and aims to become one of world's largest airlines. As is the case elsewhere, long-term objectives are stymied by staff not moving at the same speed or in the same direction.

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