Good Horse, Bad Horse: Turkey’s fast-growing LCC Pegasus Airlines had a bad Q2 but a great Q3. What’s next?

Europe’s delightful summer didn’t do much for Air Berlin. But it sure paid dividends for ESAS Holdings, never mind that the Turkish investment company owns 12% of the struggling German carrier. Okay, so the Air Berlin investment isn’t working out. But ESAS is also the largest shareholder in Pegasus Airlines, which had a great summer.

How great? Well, its 28% operating margin from July through September, excluding foreign exchange-related special items, was fifth best among airlines reporting so far, behind only Ryanair, Wizz Air, Icelandair and Alaska (see page seven). Pegasus earned $113m at the net level in Q3 and scored an operating margin almost eight full points higher than its larger rival Turkish Airlines, which itself enjoyed a good summer.

The triumph came somewhat unexpectedly for Pegasus, given the troubles it faced in the first half of the year, when it actually lost money—operating losses for those six months totaled $8m, translating to an operating margin of negative 1%. It was the second straight year of first-half losses. But more worryingly, although Q1 improved somewhat in 2015 compared to 2014, Q2 was much worse than a year earlier. But trends were once again positive in Q3—that excellent 28% margin was an improvement, however modest, over last year’s 27%.

A lot certainly has to go right for an airline to earn such high quarterly margins, even if Q3 is peak season for Turkish carriers. Critically, inbound tourism demand held strong, with nearly 15m foreigners visiting Turkey during the three months, according to Turkey’s Ministry of Culture and Tourism, up slightly from year-ago levels and up a full 8% from two years earlier. Helpfully, the euro strengthened against the Turkish lira, fueling an 8% y/y jump in German visitors during the first nine months of the year—Germany is Turkey’s No. 1 source of foreign arrivals by far.

Pegasus stood ready to take advantage, with its Q3 seat capacity to Germany up by more than 20%, according to Diio Mi schedule data. The airline serves 12 German cities, some from multiple Turkish cities, most notably the country’s largest population center Istanbul, its premier beach destination Antalya (where world leaders were gathered for a G20 summit this weekend) and its political capital Ankara…

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