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Pegasus Airlines & Turkish Airlines: Turkey's aviation booms, Istanbul Sabiha Gokcen Airport gains

Turkey is home to two of Europe's fastest growing airlines. Turkish Airlines increased ASKs by 16% in 2014 and LCC Pegasus Airlines grew by 20%. From a standing start as a scheduled carrier ten years ago, Pegasus' share of seats in Turkey reached 19% in 2014. Turkish remained the country's largest airline, but its market share of just under 54% in 2014 was unchanged from 2010. The main battlegrounds between the two are on international routes to/from Europe and in the domestic market, where Pegasus has grown particularly rapidly.

Until 2013, Turkish Airlines more or less left Pegasus alone at its home base of Istanbul Sabiha Gokcen, where the LCC is the number one airline. Since then, however, Turkish has outgrown its rival at Istanbul's number two airport. Turkish now overlaps on city pairs that cover 97% of Pegasus seat capacity from Sabiha Gokcen.

It is no coincidence that Pegasus' unit revenue and operating profit margin have dipped since this onslaught. Neither has Turkish emerged unscathed. Both plan further rapid growth this year, but appear to be holding a truce in the price war.

Turkish is still the leader in fast-growing Turkey, but Pegasus has grown faster

Turkey's biggest LCC Pegasus Airlines only started scheduled operations in 2005, but had attained a double digit share of all seats in/to/from Turkey by 2010, when its share was 13%. According to data from OAG Schedules Analyser, Turkish Airlines had 53.5% in 2010. Since then, both have grown strongly, but Pegasus has grown faster, increasing its total number of seats by 1.5 times from 2010 to 2014, while Turkish increased its capacity by 80%, in line with the total market.

As a result of its faster growth, Pegasus enjoyed an increase in seat market share, adding 6ppts to reach 19% in 2014. Turkish had a share of 53.6% in 2014, no real change from 2010 (source: OAG Schedules Analyser).

Turkey to all destinations: seat capacity by airline 2010 to 2014

With the top two gaining or maintaining market share over this period, the losers have been most of the smaller players, including SunExpress, which is 50% owned by Turkish Airlines and 50% by Lufthansa. The seat share of the SunExpress Group, which includes its SunExpress Germany subsidiary, fell from 4% in 2010 to 3% in 2014, in spite of an increase in absolute terms of 22% in its seat capacity over this period.

Among the other smaller players, AtlasGlobal (formerly AtlasJet) maintained a share of 3%, a figure matched by Onur Air (source: OAG Schedules Analyser.

Turkey to all destinations: share of seat capacity by airline 2010 to 2014

Turkey to Europe: both Pegasus and Turkish have outgrown the market

Pegasus has only a handful of destinations in Africa (2) and Asia Pacific (2) and only eight in the Middle East. The vast majority of its network is to international destinations in Europe (46 destinations) and in the domestic market (30), and these markets are its main battleground with Turkish.

On international routes to/from Europe, both Turkish and Pegasus have driven strong growth in the market, which saw an increase in seat capacity of 54% from 2010 to 2014, according to data from OAG Schedules Analyser. Pegasus grew its share from 11% in 2010 to almost 15% of seats in 2014, while Turkish grew its share of seats in this market to from 37% to 44%.

Turkey to Europe international destinations: seat capacity by airline 2010 to 2014

Again, while Pegasus has maintained a slightly higher growth rate (increasing seat capacity by 96% compared with 82% for Turkish from 2010 to 2014), there has been room in this market segment to accommodate strong growth from both of Turkey's leading airlines. Smaller players have lost market share, for example SunExpress Group had 8% of seats to Europe in 2010, but only 6% in 2014 (although this rebounded from 5% in 2013), and Lufthansa/Germanwings' combined share fell from 4% to 3% over this period.

The increased penetration of Turkish Airlines into secondary German cities in particular contributed to the ending of Lufthansa's codeshares with its alliance partner in 2013.

See related report: Lufthansa ends codesharing with Turkish Airlines. A full rift would mean new strategies for each

Turkey to Europe international destinations: share of seat capacity by airline 2010 to 2014

Domestic Turkey: Pegasus has grown faster than the market, while Turkish has grown more slowly

In the domestic market, which accounted for 38% of the overall Turkey market by number of seats in 2014 (source: OAG), Pegasus has had the greatest impact. While Turkish increased its domestic seat capacity by 62% from 2010 to 2015, Pegasus grew by 164% in the domestic market over the same period, while the total number of seats in the market doubled.

Turkey domestic market: seat capacity by airline 2010 to 2014

According to data from OAG Schedules Analyser, Pegasus' share of domestic seats grew from 22% in 2010 to 30% in 2014. Over the same period, Turkish Airlines saw its share of domestic seats fall from 71% to 58%.

Both airlines enjoyed rapid growth, but this loss of share by Turkish was simply a function of its growing less rapidly than Pegasus. Moreover, its domestic seat share was stable from 2012 as smaller players, with the exception of Onur Air and AtlasGlobal, became almost insignificant.

Turkey domestic market: share of seat capacity by airline 2010 to 2014

Sabiha Gokcen Airport: fast-growing Pegasus still number one, but Turkish's aggressive growth has gained share since 2012

This story of Pegasus outpacing the larger Turkish Airlines in terms of capacity growth and market share gains has been turned on its head at the smaller airline's main base of Istanbul Sabiha Gokcen (SAW).

Faced with capacity constraint at its own main hub at Istanbul Ataturk (IST), Turkish moved aggressively into the uncongested Sabiha Gokcen in 2013. It had long held a presence in Istanbul's second airport, but had cut its seat numbers there by a quarter from 2010 to 2012, during which time its capacity share at the airport had dropped from 24% to 14%. Over this two year period, Pegasus had increased its share of seats at SAW from 57% to 73%.

Istanbul Sabiha Gokcen Airport: seat capacity by airline 2010 to 2014

Then Turkish Airlines began its onslaught on Pegasus' backyard. In 2013, Turkish more than doubled its seat capacity at SAW. In 2014, it added more than half again, so that its 2014 capacity at the airport was 3.5 times its 2012 capacity. For its part, Pegasus continued to grow at the airport, but increased the number of seats at SAW by 'only' two thirds from 2012 to 2014. This resulted in Pegasus' seat share falling from 73% in 2012 to 66% in 2014, while Turkish grew its share from 14% to 26%.

The combined share of all other airlines at SAW fell from 18% in 2010 to 7% in 2014, but the growth of individual LCCs such as Germanwings, Transavia, Wizz Air, Flynas and Air Arabia is likely to increase the competitive pressures at SAW.

Istanbul Sabiha Gokcen Airport: share of seat capacity by airline 2010 to 2014

Turkish now has 35 routes at Sabiha Gokcen, of which 29 are Pegasus routes

Using OAG data for the week of 6-Apr-2015, our analysis shows that Turkish now operates on 35 airport pairs from SAW. Of these, 29 are also operated by Pegasus, which has a total of 83 routes from the airport. Turkish started 12 of its 35 routes in the past two years (since Apr-2013) and plans to launch three more this summer, according to data from OAG. Two of the three new routes are also operated by Pegasus (Cologne/Bonn and the seasonal Bahrain route), while the third, Dammam, is not.

Pegasus also plans new routes from SAW this summer. It has already commenced fights to two airports that Turkish also serves from SAW, namely Milan Malpensa and Lyon, as well as two not served by Turkish (Kuaisi and Turkmenbashi). It will also launch three further routes in May-2015: Sabiha Gokcen to London Gatwick, which is also served by Turkish from SAW, and to Nice and Oslo, both of which Turkish serves from Ataturk.

Turkish has targeted many of Pegasus' biggest routes, but deploys less capacity

Although Pegasus remains the largest airline at SAW by some distance, it seems that Turkish has been very effective in targeting many of its rival's most important routes.

OAG data for the week of 6-Apr-2015 reveal that Turkish now flies on all of Pegasus' top ten routes by number of seats and on 19 of its top 25 routes from SAW on an airport pair basis (21 out of 25 on a city pair basis). Only five of the city pair routes on which Turkish and Pegasus both fly from SAW are in the bottom half of Pegasus' 83 routes from the airport, when ranked by seats. Turkish overlaps with Pegasus on every one of its top ten domestic routes.

However, although Turkish's route selection from SAW appears to concentrate on Pegasus' biggest routes, it only deploys half the number of seats that Pegasus has on the airport pair routes operated by both airlines from SAW. This is enough to make a dent in Pegasus' market position on these routes, but IST remains the main base for Turkish in the country's largest city.

Turkish also serves all its 35 Sabiha Gokcen destination airports from Ataturk

All 35 of the airports that Turkish serves from SAW are also in its network of destinations from IST. The three new routes to be launched by Turkish from SAW this summer are also in its IST network.

Turkish Airlines' routes from SAW are all short/medium haul routes to destinations in Turkey, Europe and the Middle East and many of them replicate its biggest routes from IST in terms of seat capacity. It operates nine of its top ten and 18 of its top 20 IST airport pair routes from both airports. However, it deploys far less capacity on these routes from SAW than it does from IST. On average, its seat capacity to these destinations from SAW is only one third of its capacity to the same destinations from IST (source for data: OAG, week of 6-Apr-2015).

The data analysed above suggest that Turkish Airlines has used Sabiha Gokcen in two ways. First, as overspill from the capacity constrained Ataturk Airport, focusing on short/medium haul point to point traffic at SAW, while allowing IST to continue to act as a connecting point into its long haul network. Second, the aggressive growth in the deployment of capacity by Turkish at SAW in the past two years has been a competitive weapon against Pegasus.

Pegasus faces Turkish on routes covering 97% of its seats from Sabiha Gokcen

What kind of impact has this had on Pegasus? According to OAG data for the week of 6-Apr-2015, SAW accounts for 88% of the airline's seats and we calculate that it faces city pair competition with Turkish on 91% of its routes accounting for 97% of its seat capacity from the airport (including five cities served by both from Istanbul but where the airport at one or both ends of the route is different, namely (Berlin, Brussels, London, Paris and Moscow). Much of this activity by Turkish only started in the past couple of years and now covers a very large part of its network.

Pegasus Airlines at Istanbul Sabiha Gokcen: degree of overlap by Turkish Airlines (week of 6-Apr-2015)

 

No. of routes

% of Pegasus routes from SAW

Pegasus seat capacity on these routes

% of Pegasus seat capacity from SAW

Total Pegasus destinations from SAW

82

100%

422,136

100%

Destinations also operated by THY from SAW

29

35%

276,570

66%

Operated by THY from IST

41

50%

111,051

26%

Other city pair overlaps*

5

6%

20,772

5%

Total % of Pegasus network from SAW overlapped by THY

75

91%

408,393

97%

Pegasus has seen pressure on unit revenue and margin since 2012

Since 2012, the year before Turkish commenced its onslaught at SAW, Pegasus' operating margin has come under pressure. Although it increased its margin slightly from 11.1% in 2012 to 11.6% in 2013, this measure of profitability fell to 8.0% in 2014. (Pegasus' operating profit, before other operating income/expense fell by 11% to TRY247 million in 2014, although its net profit increased by 63% to TRY143 million due to non-operating items such as foreign exchange movements and tax credits).

Although Pegasus' TRY-reported unit revenue, RASK, increased by 6% in 2014, this was less than the 11% increase in unit cost, CASK. In spite of this reported RASK increase, this suggests that competitive pricing pressure prevented Pegasus from raising its unit revenue enough to fully offset the increase in unit cost.

Pegasus Airlines operating profit (TRY million) and operating margin (% of revenue) 2010 to 2014

This price pressure is more clearly visible when foreign exchange impacts are taken into account. Although Pegasus reports its statutory accounts in TRY, only 41% of its 2014 revenue was received in its home currency, while 54% of its revenue was in so-called hard currency (EUR and USD). Pegasus' functional currency is the EUR, in which the majority of its international routes are priced.

Translated into EUR, its RASK fell by 8% in 2014 and started falling in 2013, after climbing for two years before that. This drop in EUR-denominated RASK from 2013 coincided with the aggressive growth of Turkish Airlines at SAW.

Pegasus Airlines index of revenue per available seat kilometre (RASK) in both TRY and EUR (indexed to 100 in 2010) 2010 to 2014

Turkish margins and unit revenue also under pressure, but slightly less

For Turkish Airlines, SAW accounts for only 12% of its seat capacity (week of 6-Apr-2015, source: OAG). Its absolute level of operating profit has been broadly stable since 2012 in the region of USD600 million, but, with strong revenue growth, this means that its operating margin has fallen (see chart below).

Its functional currency is USD, the currency in which it now also reports its financial statements. (Turkish reported operating profit of USD603 million in 2014, up 4% from 2013, while its net profit grew by 137% to USD845 million mainly due to foreign exchange gains on the value of debt).

Turkish Airlines operating profit (USD million) and operating margin (% of revenue) 2006 to 2014

In USD terms, Turkish felt a RASK reduction of 3.1% in 2014, after drops of 1.5% in each of the two previous years. This is a lesser RASK reduction than that suffered by Pegasus and owes much to other factors in addition to the increased competition at SAW (such as the weakening of TRY versus USD and strong capacity growth in its long haul markets).

Turkish Airlines index of revenue per available seat kilometre (RASK) in USD (indexed to 100 in 2010) 2010 to 2014

The battle at Istanbul Sabiha Gokcen looks like lasting

The core of Turkish Airlines' strategy remains the use of its hub at Istanbul Ataturk to attract connecting traffic flows onto its long haul network. Its more aggressive use of Istanbul Sabiha Gokcen, the main home of LCC Pegasus Airlines, was forced on it by the capacity constraints at Ataturk and its wish to continue with double digit growth.

A new Istanbul airport, to replace Ataturk, is planned to be open by the end of this decade. It will eventually have capacity for 150 million passengers and will give Turkish plenty of space for growth.

Nevertheless, Turkey's biggest airline has no intention of leaving Sabiha Gokcen to its LCC rival. Turkish CEO Temel Kotil said in Nov-2014 that his airline would have 100 aircraft at SAW and 300 at the new airport. It seems that SAW has given Turkish Airlines an opportunity to segment the short/medium haul market into point to point leisure traffic and to serve this separately from its core market at Ataturk, also increasing the efficiency of its major hub in the process.

More immediately, in 2015, Pegasus plans ASK growth of 18%-20% and Turkish Airlines plans ASK growth of 15% (and schedules data from OAG indicate even higher growth from Turkish at SAW). Turkish Airlines management has said that it does not want a price war and Pegasus management recently said (on a conference call with analysts after its FY2014 results in Mar-2015) that unit revenues were stable so far this year.

However, it must be at least open to question whether Pegasus can maintain its guidance of stable yield and load factor for FY2015. It has a significantly lower unit cost than Turkish Airlines, but, when it comes to a fight, Turkish can use the rest of its network to help it in a price war, whereas Pegasus is reliant on Sabiha Gokcen. Since both have suffered from falling unit revenue and operating profit margin recently, it is both of their interests to avoid such a war.

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