Exploring the Growth Strategies of Turkish & Pegasus Airlines

When most of the 1.520 delegates for the IATA AGM flew via Istanbul a week ago, they entered and departed Turkey via the two main gateways: the new Istanbul Airport or the older Istanbul Sabiha Gökcen. The former is the hub of Turkish Airlines, the latter that of subsidiary Anadolujet but notably that of Pegasus Airlines. As top management of both airline groups made clear during the week, aviation in Turkey is set for major growth in the coming years. But where is it coming from? Insight: the growth strategies of Turkish Airlines and Pegasus Airlines. Mehmet Nane, the vice president of Pegasus, gave a clear answer to that: “The Turkish market is very big. We have incoming traffic, domestic traffic, and transit traffic. We are in Istanbul now: with a two-hour flight to the East, you reach our eastern cities. If you go West, you go to Vienna, to Europe. Turkey is a big country, so the domestic demand is there, international demand is there.” “If you look at the tourism numbers, last year saw a strong recovery and this year will we have a record number of tourists coming to Turkey. Almost half of them are carried by Turkish carriers. We are not worried about the growth of Turkish Airlines, because there is enough demand for everybody. At the end of the day, we are not competitors but allies for the sake of the country. We are bringing tourists to Turkey.” CEO Ahmet Bolat of Turkish Airlines said: “Last year, around fifty million guests, visited Turkey, half of them carried by Turkish airlines. This year, we expect sixty million tourists will come. After the February earthquake, the numbers declined, but now we see a big improvement.” Turkish’ bold strategy Turkish Airlines announced a bold strategy update in April when it said that in 2033, it wants to grow the number of passengers carried from the current 85 million to 171 million with a network that goes to 400 destinations from 340. Revenues should grow to $52.2 billion from $18.2 billion, while the carrier wants to contribute to the Turkish economy with $140 billion. Turkish Airlines has seen annual growth of around twelve percent in the twenty years. The new strategy brings this to 7.5 percent per year. For that, it will need a fleet of over 800 aircraft versus 435 by the end of 2023. As reported this week, Ahmet Bolat said that a new mega-order for 400 narrowbodies (Boeing MAX and Airbus A320neo family) and 200 widebodies (Boeing 787/A350-900 and Boeing 777-9/Airbus A350-1000) has been delayed by the recent presidential elections. It will be confirmed some two months from now. Once this order has been finalized, Turkish will decide on the regional fleet. Turkish Airlines now has 435 aircraft but plans to grow the fleet to over 800 in 2033. (Richard Schuurman) Turkish has high expectations of attracting more tourists from the United States. “We have three Turkish tourist organizations in the US to double the number of tourists coming to Turkey. Last year, one million Americans came here, this year our goal is two million.” In November, the carrier will launch new services to Detroit but intends to increase frequencies to existing ones. “Similarly, we will have more promotional activities in South Asia. Next year, we will establish an organization in Japan and in Singapore. And before the year is over, we will start flying to Melbourne and later to Sydney with a one-stop flight via Singapore using the Boeing 787-9. There is a big Turkish population there. Many are coming not with our codeshare partners,” said Bolat. By adding the A350-1000 and/or 777-9 to the fleet, Turkish will be able to serve Australia non-stop, which should help its growing market share. Not just in Australia, but likely also too Latin America. Turkish Airlines CEO Ahmet Bolat during the Airbus cocktail party in Istanbul this week. (Richard Schuurman) Other growth regions are Africa and notably China. “This morning at the AGM, we had discussions with a Chinese carrier. We invited them to fly to Istanbul. Around 140 million Chinese visit the world every year, of which some fourteen visit Turkey. So there is a big potential. And with cooperation with Chinese airlines, we will also focus on China. We have to secure the rights, but the Chinese carrier already has. If he wants to come, he is welcome, as long as he brings tourists to Turkey.” During his presentation, Bolat said nothing about Russia, although this is an important market. Turkey is one of the countries where Russians can still travel freely. Bolat also mentioned India, where he has got additional access through the codeshare and wet-lease partnership with IndiGo. India is an important growth region in the business model. To attract more passengers, Turkish continues to improve its service offering. Bolat said that all customers will soon have free Wi-Fi available on flights, which makes Turkish another airline to offer free connectivity. “We want Turkish to become one of the top three airlines with the best digital experiences in the world. We are working on plans to achieve that.” The target for this year is to carry 86 million passengers and generate billion in revenues. The airline group will employ around 82.000 people. Turkish Cargo should grow tonnes carried to 1.6 billion, Bolat said. The airline now only operates from the new Istanbul International Airport which was opened in October 2018, with all passenger flights moved to there in April 2019. It includes one terminal and four runways with a capacity of ninety million passengers but will be expanded later to include more terminals and in total six runways for 200 million passengers. Anadolujet Turkish said in April that it intends to establish low-cost subsidiary Anadolujet as an independent airline. It will grow to 200 aircraft and mainly operate from Sabiha Gökcen and the Turkish capital Ankara, but Bolat added: “that this is subject to change.” SunExpress, the joint venture between Turkish Airlines and Lufthansa that is focused on leisure, is based in Antalya and will grow from there. Anadolujet is a subsidiary of Turkish Airlines but will become an independent airline. This is at Istanbul Sabiha Gökcen. (Richard Schuurman) Although the German subsidiary SunExpress Deutschland ceased operations in 2020, Germany remains a key market for both Anadolujet and SunExpress. Last year, nine million guests from Germany traveled to Turkey. Currently, Turkish citizens need a visa to enter the European Union. This is restricting the free travel of people and will make Europe lose money from Turkish tourists. Pegasus Airlines While Corendon is another (leisure) airline that is planning for growth, the real competitor of Turkish Airlines is Pegasus Airlines. It has its hub at Sabiha Gökcen in the Asian part of Istanbul, where the market share is close to seventy percent. Pegasus operates 2.5 more international flights from the airport than its main rival Anadolujet. In 2022, Pegasus carried 26.9 million passengers, up from 20.2 million in 2021 and 14.7 million in the first Covid year 2020. In the reference year for aviation 2019, the airline carried 30.8 million passengers. Of the pax carried, 10.8 million flew on the domestic network that consists of 36 destinations. Pegasus has a domestic market share of around 34 percent. On the international network, the airline carried 16.1 million passengers on 93 routes to 47 countries. The market share is fifteen to seventeen percent of all international and charter flights in Turkey. Leisure and visiting friends and relatives (VFR) account for most of the traffic, with business taking up only a small portion. On inbound traffic to Turkey, Turkish Airlines has a stronger position than Pegasus. Pegasus Airlines has a seventy percent market share at its main hub in Istanbul Sabiha Gökcen. (Richard Schuurman) The second half year saw the most passengers carried as Pegasus had prepared for the recovery of air travel after the worst of the pandemic was over. In fact, 9.6 million flew on international routes. Thanks to strong demand, revenues grew to €2.4 billion last year. Net profit was €341 million. As CEO Güliz Öztürk pointed out, Pegasus’ financial position is special. At 34.1 percent, the EBITDA margin is the highest in the industry. “We were the best-performing airline in terms of operational profitability in the world last year. I want to point out that reaching that 0.1 extra is so difficult to achieve,” she said. This performance resulted in a higher credit rating by Fitch in April and S&P in May. Öztürk further pointed out that at €2.18 cents, Pegasus also has the lowest costs per available seat kilometers (CASK) in the world. Chief Commercial Officer Onur Dedekoylü said that the fleet of 31 Airbus A321neo’s with more seats give is an advantage on the costs side, “so it is a big tool given the limitations of aircraft manufacturers and certain limitations at airports.” In Q1 this year, revenues were up by 64 percent year over year to €442 million, and the EBITDA margin to a record-high 15.5 percent for the first quarter. Pegasus ended Q1 with a €-22 million net loss. Capacity was up by 35 percent and international passengers carried by forty percent. Growth plans Like Turkish, Pegasus has its growth strategy. The airline is still growing the fleet based on aircraft on backlog and will soon receive its 100th aircraft. Sixteen Airbus A321neo’s are scheduled to join in 2023, with 21 to be delivered in 2024 and eleven in 2025. This will complete the current order, but as we reported during the week, Güliz Öztürk said that Pegasus is working on a follow-on order. This growth will be possible thanks to the Sabiha Gökcen hub opening a second runway in July. “This means that the capacity can grow. We will use this extra capacity to the maximum. Next year, we expect a doubling of our operations. The second terminal is another project. It should open by 2026.” The catchment area with cities and communities East of the Sabiha Gökcen airport is also very important to Pegasus. Pegasus wants to diversify into a multi-hub strategy. “We also have a second base in Antalya, which is also growing. This summer, we will operate seventeen aircraft from there, with opportunities for more growth,” said Öztürk. Antalya is an important hub of its own, as the region has many hotels and leisure opportunities on offer. “I think Turkey has more alternatives for tourism to offer,” said Onur Dedekoylü. “Why people don’t come to Istanbul, stay there for a few nights, and then go to Antalya, stay for a week, and go from there to other destinations which all have different things to offer?” Istanbul Sabiha Gökcen will open a second runway in July and should get a second terminal in 2026. (Richard Schuurman) In line with what Pegasus Vice President Mehmet Nane said, Öztürk thinks that “Turkey will attract a high number of incoming leisure traffic. And we have a population of 82 million here, so there is room for growth for both Pegasus and Turkish. When we see this infrastructural growth and demand is there, of course, we will be working on a new aircraft order. We don’t have the numbers right now, but you will be hearing from us.” The current international network is predominantly focused on Europe, but Öztürk said that Pegasus has growth plans in the Middle East, specifically the GCA Gulf countries. The airline already flies to Kuwait, Bahrain, Abu Dhabi, Dubai, Oman, Qatar, and Saudi Arabia but wants to add capacity. Another growth region is North Africa, specifically Algeria, Tunisia, Egypt, and Morocco. The airline wants to increase frequencies to Europe the main markets like Germany, Italy, Greece, France, and Spain. Dedekoylü said that no permission has been received yet, but Dublin, Lisbon, Estonia, Lithuania, and more countries in Eastern Europe are on Pegasus’ wish list. Pegasus has cut back on the network into Russia from six to two destinations: Moscow and St. Petersburg. Services to Ukraine have of course been paused because of the war. “The traffic from Ukraine and Russia was always strong and is still strong, although the numbers were lower last year,” said Öztürk. Transit hub Thanks to great airport facilities, especially at the new Istanbul airport, Istanbul is set to become an even more significant transit hub. Onur Dedekoylü said that the advantageous geographical position indeed attracts new traffic, not just for Turkish but also for the low-cost model of Pegasus. “What does that mean? Whatever the risks in the geographic region that we are operating in, we have very good incoming traffic to Turkey and very strong onward and transit traffic. So our risks are really spread into different geographies and segments. During the pandemic, we really benefited from that.” This is a real concern to European airlines, which could be exacerbated by the sustainability policy of the European Union that requires EU carriers to offset emissions and uptake more expensive sustainable aviation fuels (SAF) from 2025. This ‘carbon leakage’ especially to Turkey has been raised by airline CEOs. Mehmet Nane is not sure if it will happen: “We will have to see. Within IATA, we are supporting a fair distribution of taxes. If there is enough SAF production, the airline industry is ready to buy all of it. But if there isn’t enough, we should not be penalized for that.”

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