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