Mayday for Turkish Airlines’ “super-connector” strategy

Mayday for Turkish Airlines’ “super-connector” strategy
The fast growing flag carrier has also been hit by plunging tourist visits to Turkey.
By Will Conroy in Prague April 7, 2017

Turkish Airlines looks likely to be one of the airlines worst affected by the US government’s imposition in March of a selective ban on carrying on board laptops and tablets, an anti-terror measure quickly also adopted by the UK.

Citing undisclosed intelligence that terrorist groups want to smuggle explosive devices in electronic gadgets, the US introduced restrictions applying to direct flights to America originating from 10 airports in eight Muslim-majority countries, including the United Arab Emirates, Qatar and Turkey.

Turkish Airlines has responded by offering free loans of laptops aboard, Super Bowl at 30,000 feet and free long-haul wifi in cabins, but it looks unlikely that this is going to be enough to offset the inconvenience of the ban, especially for business travellers.

This is only the latest blow to hit the fast growing flag carrier’s ambitions, with tourist visits to Turkey plunging following a spate of terrorist attacks, the abortive coup and the subsequent sweeping repression.

Until late 2015, things were pretty much going swimmingly for the serial award-winning Turkish airline. It had begun an aggressive expansion that enabled it to fly to more countries than any other airline, with 296 destinations in 120 countries in all.  Investors were won over by its ambitious plan to become a “super-connector” global hub carrier exploiting the excellent geographical positioning of Istanbul Ataturk Airport and challenging Dubai – home base to Emirates – and Abu Dhabi, centre of operations for Qatar Airways and Etihad.

The descent of the Turkish Airlines share price brought on by the in-cabin electronics bans served, however, as final confirmation that its strategy has hit the buffers. The price slid from TRY5.91 to TRY5.49 from March 20 to March 23 as the market digested the bad news.

Melis Pocar, research vice president at Istanbul’s Oyak Securities, told bne IntelliNews that “provided that the regulations and bans do not get more aggressive, we are not concerned about Istanbul’s hub status in the medium-long run”. But, he added, “current geopolitical concerns and tension with the EU may continue weighing on demand and give tourism and aviation players tough times in the short term”.

He adds that the laptop ban could also distort the market, largely to the benefit of the major US carriers, which have argued that the Emirates, Qatar and Etihad airlines are unfairly subsidised by their governments.

Real turbulence

In October, HSBC Global Research was among those impressed with Turkish Airlines’ efforts in the face of adversity. “The revised fleet plan confirms weak demand outlook… but, along with stringent cost-cutting, it marks a decisiveness to shoulder headwinds for a faster recovery,” it wrote, adding that it now saw “a glass half full”.

But the skies have again darkened and, weighing up the now rather more dubious prospects of Turkish Airlines, stock analysts must add the laptop ban to an already crowded negatives column, including the TRY47mn (€11.8mn) net loss recorded in 2016 that followed 2015’s TRY2.99bn profit.

Waves of terrorist attacks (including the bloody June 2016 bombing of Ataturk Airport), rows with Moscow caused by the 2015 shooting down of a Russian fighter-bomber and referendum campaign rows between Turkey and EU capitals have badly impacted the country’s tourism industry, as well as flights to Turkey. Passenger traffic at Turkey's airports fell 3% y/y in the first quarter of 2016.

These troubles in the operating environment very much featured in the Moody’s Investors Service downgrading of Turkish Airlines’ corporate family rating last August 19.

Another cloud hanging over the airline is the transfer of the Turkish state’s 49.12% stake in the company to the country’s sovereign wealth fund in February. The fund’s assets are to be used as collateral to secure financing for major infrastructure projects, but the plan is off to a worrying start with some critics describing the fund as little more than an accounting trick. What the implications for Turkish Airlines are as yet unclear.

Striking shrinkages 

Looking at Turkey’s falling tourism, which has dropped for 19 months in a row and took one percentage point off the country’s GDP growth last year, according to the International Monetary Fund, Oyak’s Pocar noted “striking shrinkages” amid the 6.5% y/y decline in Turkey’s January-February tourist arrivals. The largest year on year declines, he said, were seen in arrivals from the US, Italy and Germany at 33%, 31% and 30%, respectively. Impressive growth figures, on the other hand, were seen with regards to Russia, Azerbaijan and Turkmenistan at 88%, 26% and 17%, respectively, with the first figure no doubt resulting from the rapprochement being pursued by Moscow and Ankara.

Despite the improvement in the flow of Russian tourists, analysts looking at the bigger picture don’t see any recent positives as amounting to much, given the setback caused by the in-cabin restrictions on large electronic devices. Even before the ban, HSBC was projecting Turkish Airlines average capacity (seats) growth of only 3% in the next three years versus the 16% achieved in the past three years, declining available seat kilometres (ASK) capacity growth from 13% last year, to 8% this year and 4% next year, and fleet shrinkage from 333 planes in 2016 to 320 in 2018.

As Ali Cinar, chairman of the Turkish Heritage Association, told Bloomberg on March 22: “Given Istanbul’s status as a global hub, these kinds of restrictions are likely to lead to declines in passenger numbers and give advantage to competitors. One should also not ignore the possibility that Istanbul being listed among locations that the ban will be imposed could negatively impact tourism.”

The US laptop and tablet ban is meant to be binding until October, when a year-long extension will be decided on, whereas the UK ban has for now been set at 90 days. For Turkish Airlines, flights terminating in America and the UK generate around 5% and 1.2% of consolidated passenger revenues, respectively. Not huge, but another reason for the airline to stick to its adopted defensive strategic approach from its previous policy of aggressive expansion.