COMPETITION SPURRING TURKISH AVIATION

UNCLAS SECTION 01 OF 03 ANKARA 001950 SIPDIS PARIS FOR TSA NLARBI BRUSSELS FOR FAA KEDWARDS SENSITIVE SIPRNET E.O. 12958: N/A TAGS: EAIR ECON TU SUBJECT: COMPETITION SPURRING TURKISH AVIATION This message was coordinated with Consulate Istanbul. ¶1. (SBU) Summary: The entry of private airlines into Turkey's scheduled domestic market has increased competition for state-owned Turkish Airlines. Such private airlines provide cheaper fares and alternatives to Turkish consumers, but they also add to the regulatory burden faced by Turkey's Directorate General for Civil Aviation. Turkish Airlines will continue to push for favorable policies and should not be underestimated, but the GOT's ability to keep up with the growth in the sector will also affect the private companies' success. End summary. ¶2. (U) The entry of former all-charter airlines into Turkey's high-price scheduled domestic market has increased competition for state-owned Turkish Airlines (THY). Currently, charter companies such as Pegasus Airlines and Onur Air provide scheduled flights from Istanbul to Turkey's most popular domestic destinations. Ministry of Transportation officials announced earlier this month that four new companies have applied for permission to conduct scheduled flights, including Sunexpress (a lowcost carrier jointly owned by THY and Lufthansa) and Izmir Airlines. ¶3. (U) In addition, Europe's second largest low-cost carrier, EasyJet, recently announced that they will begin flights between Istanbul and Basel, Switzerland on May 29, and between Istanbul and London on June 29. Furthermore, EasyJet hopes to include Istanbul-Berlin and Istanbul-Paris routes in the future. EasyJet also announced the possibility that it would either acquire or establish a domestic airline in Turkey to provide domestic service, although EasyJet Turkey GM, Philippe Vignon, stated that they prefer to partner with THY. Pegasus: Bringing Southwest's Ideas to Turkey -------------- - ¶4. (SBU) Pegasus Airlines, Turkey's oldest private airline, began domestic scheduled flights in November ¶2005. CEO Ali Sabanci's business plan resembles low- cost American airlines such as Southwest. The airline currently owns a fleet of fourteen 737s but, with the help of U.S. ExIm Bank, is currently in the process of purchasing twelve additional 737s from Boeing over a five-year period. Pegasus provides service to and from Istanbul's smaller Sabiha Gokcen airport, which is located on the Asian side of Istanbul, instead of the busier Ataturk International Airport on the European side. According to Sabanci, the Asian side of Istanbul has a larger residential concentration and a higher income level than the European side, and Pegasus' location there provides a more convenient alternative for domestic air travel from Istanbul. ¶5. (SBU) Sabanci is a Columbia University MBA who hails from the powerful Sabanci business family and serves on the Board of Directors of Esas Holding, Pegasus' parent company. While charters still comprise the bulk of Pegasus operations (about 75% charter to 25% domestic scheduled flights),the company, through a subsidiary, also offers pilot training in their training facility for qualified applicants, regardless of their airline affiliation. Sabanci told us that pilots from other European countries have participated in Pegasus training programs. In addition, the company offers its employees a profit share at the end of the year equivalent to 10% of profits. "Ownership gives all of our employees a vested interest in ensuring our success," he stated. Finally, with the help of the financial backing of Esas Holding, Sabanci claimed that Pegasus currently has enough capital to run its scheduled flights without a single passenger for 18 months. Onur Air: Diversifying Service to Remain Competitive -------------- -------------- ¶6. (SBU) Another airline startup is Onur Air. While the majority of its business, like Pegasus, remains with the charter business, it provides daily domestic flights out of Istanbul's Ataturk International Airport to 15 destinations in Turkey. According to Vice President Nedim Gurbuz, Onur's leadership is currently pleased with their business and added that any future plans to expand would be hindered by the lack of terminal space available at Ataturk Airport during peak flying times. "During the mornings and evenings, it's very difficult for the smaller airlines to get additional space," he added. Onur's leadership also spotted an emerging trend in Turkey and last year began offering charters to Mecca for Turks who want to make the annual pilgrimage to Islam's holy city. "It proved to be very lucrative," he said. ¶7. (U) Onur Air and another private carrier, Atlasjet, have also attracted extensive attention with a recent promotion offering domestic flights for as little as 9 YTL (7 USD) or 19 YTL (15 USD) through April. Onur Air President Sehabettin Bolukcu noted that the company's intent is to popularize air travel and make it accessible to all. Only 10,000 seats are available through the promotion, however, roughly five percent of the airline's capacity. Turkish Airlines: Politics as Usual -------------- ¶8. (SBU) Officials at Turkey's Directorate General for Civil Aviation (DGCA) tell us that, while increased competition is needed in Turkey's airline industry, it is a very political issue. About 75% of Turkish Airlines remains state-owned (although the Privatization Administration announced in March that it plans to offer another 25% of THY for public purchase within the year),and the GOT has an interest in ensuring its continued viability. According to the DGCA, Turkish Airlines officials are well-connected and can be expected to continue to push the GOT for policies that are favorable to their business. ¶9. (SBU) For their part, THY officials display a studied nonchalance about their new low-cost rivals. Executive Vice President for Commercial Affairs Halil Tokel told us that Turkey's civil aviation sector will continue to expand dramatically for the foreseeable future. He noted that even with the new private competition it has faced over the last three years, THY itself has doubled its domestic capacity. "They have not taken passengers from us," he argued, rather "they (and we) have brought new passengers into the sector." (Note: In response to Pegasus Air, however, THY has begun offering low-cost fares out of Istanbul's Sabiha Gokcen airport. End note.) Further infrastructure is needed, however, if Turkey is to realize its potential, including a third airport for Istanbul. "We need an airport with a capacity of 60 million passengers like Frankfurt or Heathrow," Tokel argued, in place of the 15-20 million passengers that Ataturk Airport in Istanbul is currently capable of handling. Tokel also dismissed the challenge of European low-cost carriers such as Easyjet, noting that their entry will give THY the opportunity to pursue additional flights to European destinations. Turkey's Aviation Policy Trying to Keep Up With Demands -------------- -------------- ¶10. (U) In an effort to strengthen the DGCA's regulatory powers, in part due to Turkey's growing aviation market, in November 2005 the GOT passed long- awaited civil aviation legislation. The final version brought more limited benefits than envisioned in the draft legislation, but it did call for the following: -- The establishment of DGCA branch offices, first in Istanbul and then two additional branch offices in other provinces (most likely Antalya and Izmir). The DGCA has already appointed the personnel for its Istanbul office. -- The establishment of an independent DGCA budget supported by fees collected from the industry. Included in this measure was also a much-needed salary increase for DGCA personnel (which was previously pointed to as the reason for the DGCA's high turnover rate),although the DGCA must still receive Transport Ministry approval for spending. -- The authorization of additional DGCA inspector positions to be filled immediately. ¶11. (SBU) The GOT issued the implementing legislation for the new regulations in March 2006. While the improvements are seen as positive, last-minute changes to the legislation made it possible for a Transport Ministry Commission to make management level appointments regardless of an individual's education, language abilities, or knowledge of aviation security. Many within the DGCA fear that the MOT will fill management positions with political cronies with little aviation sector experience. Comment: Will the New Guys Last? -------------- ¶12. (SBU) While the new domestic carriers provide the Turkish public with more options and lower fares, their long-term effect on the industry is yet to be seen. Turkish Airlines will most certainly continue to use their clout to push for favorable policies. Their prominence and influence should not be underestimated. In addition, the GOT's ability to keep up with the growth in this sector (both in terms of regulating the new airlines and promoting the physical infrastructure growth that will enable competition to thrive) will be vital for the continued success of these smaller carriers. End comment. WILSON