Still Prosperous on the Bosporus: In a world of growing vulnerabilities for emerging market airlines, Turkish remains perkish
Right or wrong, wise or foolish, Lufthansa’s motivations are clear: it wants a low-cost longhaul platform to combat present and future threats from Gulf carriers and far-flying LCCs, not to mention longhaul leisure rivals Air Berlin, Condor and TUI in its own backyard.
But what about Turkish Airlines? Why is it backing Lufthansa’s new Eurowings concept? The newly announced airline, after all, will be operated by Sun Express, a decades-old joint venture between Lufthansa and Turkish, one thus far flying only shorthaul flights, primarily between Germany and Turkey. The fact is, Turkish doesn’t face the same threats as Lufthansa and is, in fact, beating the Gulf carriers at their own game. In the 12 months to September, Turkish managed a 7% operating margin, topping Emirates by two points and Lufthansa by three points. Turkish also just finished an excellent third quarter, in which operating margin was 16%, a bit higher than in the same period a year earlier.
The answer to the Sun Express/Eurowings question is less about grand strategic thinking and more about a relatively easy way to earn some additional wet-lease revenues. Lufthansa will acquire the A330s and assume the commercial risk, with the German side of Sun Express merely lending its air operator certificate and providing the crews. Lufthansa, in other words, assumes most of the risk.
For Turkish unlike Lufthansa, the relevant strategic imperatives are more offensive than defensive. Turkish is building on a wealth of advantages, most importantly the geographic centrality of Istanbul (better even than the Gulf hubs for many key traffic flows) and low unit costs thanks to advantageous labor costs. And like some of the world’s most profitable airlines—think Copa—Turkish is a relatively low-cost operator situated on the doorstep of a higher-cost region, competing for some of the same traffic flows against carriers from that higher-cost region, in this case western Europe. Turkish has thus become a profitable global powerhouse by sustainably undercutting rivals on price—that’s what low unit costs enable—on an ever-increasing array of globe-spanning itineraries.
Looking beyond 2014, Turkish aims to slow its frenetic growth somewhat. It hasn’t given any specific future capacity guidance but said last spring that future network development would focus more on additional frequencies than new destinations—depth rather than breadth—especially on longer-haul routes. That said, this still leaves scope for ample expansion, even if Turkish doesn’t grow ASKs by 20%, its stunningly high annual average during the past six years. Last year alone it added 20 new destinations in nine countries, with all the further…
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