Turkish Airlines posted strong earnings last week and I had an opportunity to sit down with the CEO of what Skytrax has named the best airline in Europe for three years running, Dr. Temel Kotil.
Kotil discussed several important issues, including the Global Power Shift, deregulation of the commercial aviation industry in Turkey and its effects on his airline, Turkish Airlines' growth story, as well as the construction of the third airport in Istanbul and its environmental impact.
Global Power Shift
In addition to his duties as CEO of Turkish Airlines, Kotil, who has a PhD in Mechanical Engineering, is a professor at Istanbul University and appears to use his engineering acumen while executing strategy for the national airline. "I believe in fate and the events of the last day, week, month or even year will not materially change the trend that is inevitable in the coming century," Kotil says while drawing a graph of a Fourier series, essentially a combination of many smaller waves of various sizes to make a larger wave. "Our outlook on the world should not be dictated by focusing on micro-events, whatever they may be," referring to the smaller waves and their minimal impact on the greater series.
Kotil views recent economic developments as the beginning of a "global power shift," one in which the "United States' status as a superpower will be challenged in the near future by the Chinese and will be done so economically." He continues that "A global power shift is underway from West to East," and Turkish Airlines, it appears, is taking full advantage of this shift with unparalleled growth in Africa and Asia.
Kotil shares a diagram depicting the center of gravity of world air traffic. The power shift he is talking about is clearly evident and he says that the center is "currently near Tunisia, in twenty years, the geographic center of gravity of world air traffic will sit at the shores of Antalya."
The double-digit growth that Turkish Airlines has been experiencing during his tenure as CEO is due in large part to the airline's ability to embrace the changes in world air travel. "Europe currently leads the world in scheduled passenger-kilometers followed closely by Asia-
Pacific and North America [all near 2 trillion kilometers]," says Kotil while reviewing Boeing's projections for the next decade. "And in 20 years' time, Asia-Pacific quadruples and the Middle East and Africa triple from 0.6 and 0.3 trillion to 1.9 and 0.9 trillion, respectively. We have positioned ourselves to take advantage of these trends. " He goes on to explain that the airline "has been very successful in predicting and adapting to the near-, mid-, and long-term trends in commercial aviation. We have a team of PhDs working diligently on strategy day and night."
In an environment where Turkey itself has grown considerably, I wondered aloud whether Turkish Airlines was just the beneficiary of the organic growth in the Turkish economy. Kotil explained that while total passenger numbers in Turkey are up 250 percent in the last 10 years, Turkish Airlines is up near 400 percent.
The "global power shift" became more evident as Kotil explained that "[w]hen comparing market shares worldwide, we see exponential growth in Turkish Airlines while our competitors are losing market share. Although many in the West may not be aware of these developments, as these airlines may not be contracting nominally and their customers and management are not aware of these trends, but the sun is rising elsewhere. Turkey is rewriting the history of aviation at every turn."
Deregulation and Competition in Turkish Aviation
Kotil is not only touting the achievements of Turkish Airlines but he is also quick to point out the "total domestic passenger numbers in Turkey have increased tenfold from 4 million in 2003 to 44 million in 2013, a statistic that is unparalleled globally. Practically 100 percent of the four million passengers in 2003 were flying on Turkish Airlines but with deregulation, competing airlines now make up a little over 40 percent of domestic passenger numbers." "Turkey's economy has only in this past decade been transformed into a liberal one.
Prior to the AK Party government and Binali Yıldırım's tenure as minister of transportation, Turkey's commercial aviation sector was stymied by anti-competitive measures but it has now become very much liberalized, allowing for growth. In the past, the Turkish economy was 'protected' as the flowers you see in my office are 'protected' from the elements; however these flowers are not able to self-sustain themselves in this artificial environment. Similarly any government-protected economy has no chance of growing," Kotil explained.
Turkish Airline's Growth Story
The recent down-turn in the Turkish lira has not had much of an effect on its bottom line, as on average, Turkish Airlines has grown 15 percent year-over-year for the last 10 years and 86 percent of all revenue is non-TL dominated, which makes it very well diversified.
The 15 percent growth rate is surpassed only by the 34 percent average year-over-year growth in transit passenger numbers. Kotil explains that "if this exponential growth continues, our international passenger numbers will have nearly completely taken over total passenger numbers."
Despite this growth, Turkish Airlines has only captured 2 percent market share, a deceivingly small number in a fragmented industry where the world's largest airline has only a 4 percent market share. Kotil explains that this leaves a lot of upside for Turkish Airlines, "Our current market share will allow us to grow for many decades to come. We currently fly 240 planes with another 260 on order. As we take delivery, our growth will continue."
Last week's numbers showed strength at the top-line while also posting solid bottom-line numbers for a company with such lofty investment goals. Kotil explains, "While we've grown we've always been profitable with a steady EBITDAR margin of over 18 percent. This is proof of our strategy paying off. We're the only airline to connect Somalia to the world, for example, and we do so while being profitable in the process."
Istanbul's Third Airport
As anyone who travels out of Istanbul can attest, Atatürk is seemingly bursting at its seams. I asked Kotil about the current construction of the third Istanbul airport and the controversy surrounding it. "Some have remarked, 'why does Turkey need such a large airport, Turkish economic growth does not necessitate such an expansive project,'" Kotil says referring to comments made about the construction, "We are no longer carrying just Turkish passengers, we are flying the world, we are going after all passengers globally. If we want to see continued economic growth, it's essential that we complete this third airport" he says. "This airport is of critical importance," he continues, "Not only is it of critical importance to Turkey and Turkish Airlines but it is of even more critical importance to the entire world. If we do not build this airport, Turkey cannot be a top ten global economy, the ideal hub for Asian carriers to use when connecting their passengers to European cities is Istanbul. Turkish Airlines will connect their passengers and it will be a win-win for both carriers. In fact, Asian carriers want this airport even more than we do, however our gain will be the Europeans' loss."
Environmental Impact of the Third Istanbul Airport
One of the main issues that some have with the building of the airport is that as with any construction there will be an environmental impact. Kotil counters that "this airport will actually cut down on global carbon emissions, air and sound pollution. With its completion, this airport will cut down the total distance travelled by Asian airlines by 10 percent, that's millions of miles saved per year," he concludes.
As Asian airlines are not able to fly directly to all European cities, they must stop off at a hub along the way so that the local European carriers can make the connections to the passengers' final destinations. Istanbul is the most logical choice, Kotil argues, and the gain of Istanbul will be the loss of less attractive hubs in Europe. Some in Europe have opposed the construction of this third airport but it has become clearer that some may have a vested interest in their opposition.