INTERVIEW: Turkish Airlines CEO Temel Kotil

Istanbul
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"Very nice", is a turn of phrase that Temel Kotil is fond of using, gleefully employing it to describe the successes of his company. And it appears that in the world of Turkish Airlines everything is going very nicely.

Some statistics put quite how nicely into context. Its financial development has seen operating revenues rise from $1.96 billion in 2002 to $8.12 billion in 2013, says the airline, which forecasts the 2013 figure to rise to $9.75 billion. Similarly, during that period, yearly passenger numbers have risen from 10.4 million in 2002 to 38.5 million in 2012, and the airline predicts a further rise to 46 million in 2013.

Kotil, to use his own lexicon, is "very nice". The former university academic turned airline executive, who was promoted to the top job in 2005, has a relationship with his staff resembling that of a professor with his students, and is keen not to come across as a dictatorial manager. "Communication is not 'I say it, you do it'. It's 'let's do it together'," he says, his words accompanied by an infectious grin that soon places those conversing with him at ease. The affable professor image is helped along by the very noticeable number of young people in senior positions working at the airline's headquarters in Istanbul, in part a reflection of the age demographics of the Turkish population, but also Kotil's trust in their ability.

Another aspect of the country mirrored in its flag carrier is its astonishing growth - Turkey's GDP expansion averaged 9% over 2010-2011 - which is especially remarkable considering that it comes at a time when most of the airline industry is struggling. The speed at which Turkish Airlines is adding new routes and enlarging its fleet places it among the world's fastest growing airlines. This is all the more impressive when the growth rate of its international services is taken into account, since in the decade between 2002 and 2012, Turkish has gone from serving 26 domestic and 77 international destinations, to 37 domestic and 182 international. Its in-service fleet of 215 aircraft will be bolstered by 208 passenger aircraft on order and 68 options, most of which Kotil says are likely to be exercised. This includes two recent orders for 82 A320 family aircraft and 35 options as well as 70 Boeing 737s with a further 25 options, an order which includes up to 75 of the re-engined Max family

Yet what makes Turkish Airlines' growth story so remarkable is its accompanying financial figures. Its operating revenues have increased annually by around $1 billion for the past five years. While profits have fluctuated, they have largely been extremely healthy as well as consistently positive since the last loss in 2000. The airline's net profit in 2012 was TL1.13 billion ($625 million).

Natural advantage

According to Kotil, there is no secret to this success and much of it comes down to exploiting the natural advantages of Istanbul's geographical location. "We are building a bridge [from East to West] using Istanbul as a hub" is a mantra he uses to explain how the city's position between Europe and Asia, as well as the Middle East and Africa, allows passengers to transfer in less time and at a lower cost than is possible elsewhere. Kotil says that with a catchment area of 55 countries within a 3.5h flight from Istanbul and an ability to service Europe and much of Africa with narrowbodies, Turkish Airlines is able to offer greater frequencies and match capacity with demand to achieve high load factors, in a way he says its Gulf rivals cannot with their big widebody jets. With a predominantly short-haul fleet, the current proportion of Turkish's transfer traffic at Istanbul's Ataturk airport is 43%.

Describing Turkish Airlines' route network as a rose, Kotil says its short-haul operations are "the nice smelling part at the centre". Unlike other legacy carriers in Europe whose narrowbody operations often bleed money because of low-cost competition, Kotil says, "if you removed the widebodies from Turkish, still the narrowbodies alone would make a profit".

While he says the carrier was "traditionally a narrowbody airline", Turkish is gradually increasing the proportion of widebodies in its fleet, which now account for about 20% compared with 7-8% three years ago. In addition to 12 Boeing 777s in service, it has 15 on order and a further five options, which Kotil says are likely to be exercised, and 17 Airbus A330 long-haul aircraft on order with three options, while a further order for widebodies is widely expected. He says these will help the Star Alliance carrier expand into the Americas, where it only has a small number of destinations, and help realise his ambition for Turkish to genuinely "connect the world via Istanbul", since "over the Atlantic we are weak". In early April, Turkish announced that it was starting non-stop flights between Houston in the USA and Istanbul.

Great expectations

Kotil's bold blueprint for Turkish to become one of the world's mega carriers and even outgrow its Gulf rivals means it has ambitions to expand its network in every region of the globe, but he says there is a particular focus on Africa, the Commonwealth of Independent States (CIS), Europe and the Middle East.

"As a European carrier, we want to be considered the strongest carrier in Europe. We are African, we want to have more services than any other airline in Africa. We are part of the Middle East also, we want to link up the Middle East more than anybody could do it," he says.

Turkish Airlines' 34 scheduled destinations to Africa are due to become 43 very soon, says Kotil, while in the Middle East, it will shortly add two more destinations to Saudi Arabia, bringing the total to eight. Two more will be added in Egypt this autumn, making six, and another destination in Iran, totalling seven.

Kotil says Turkish wishes to increase services to Russia beyond the eight cities to which it currently flies, but it is being hindered by an ability to secure bilateral agreements. Similarly, he says, "in Ukraine we are in seven cities, if they grant it, we want to go to more". He describes the CIS states and Russia as "a secure market for us and we want to reinforce it".

Another reason for the airline's success are low unit costs, which in turn enable it to offer very competitive fares. With an average aircraft age of six years and high utilisation, Kotil says that its cost per available seat kilometre (ASK) is lower than all of its European legacy competitors at $0.08 and not far above Europe's most efficient low-cost carriers. "Apart from low-cost carriers who fit the maximum number of seats on their aircraft and have a small pitch, we are better than the other airlines," he says. The carrier also benefits by recruiting from a young, educated, multilingual workforce in Turkey, where wages are low in comparison to central Europe. Although the airline recruits pilots internationally, Kotil says many of the 300 new pilots Turkish needs each year are graduates from its own training school. He also says having a mixed fleet does not make a big difference to unit costs. "If you have more than 100 [pilots] for each type, that's big enough, so there's no loss on the synergy side of it," he says.

With geography and demographics having dealt Turkish such a winning hand, it must be wondered why its rise to prominence is so recent. Kotil says the step change came on 22 May 2006, when the Turkish government sold a 51% stake in the carrier. He refers to the benefits of a hands-off approach from the Turkish government, something that began in 2003 a year after the current Justice and Development Party took office and began deregulating Turkish civil aviation. Kotil feels that "government mentality in general is poison to companies, it is killing them", by causing them to "go for the cheapest solutions". Yet since Turkey's government relinquished its controlling stake, he says: "If we lose money, we are dead. From that point on the relationship with the government is: 'they do their job, we do ours'. There is no way we can be subsidised."

Despite this, Kotil says the airline and the government still have shared ambitions. "We are focusing on Africa, so the Turkish government focuses more on Africa," he says, describing the relationship since the partial privatisation as "wing-to-wing".

Working together

A keen advocate of industry co-operation, Kotil is also keen not to gloss over the roles Star Alliance and IATA have played in his airline's ascent. "If you stay focused on Turkey and don't shake hands with others, you will remain a local company. If you shake hands with everybody on this earth, you become global," he says.

Being a member of Star Alliance "brings a lot of things to us", says Kotil. "When we joined, our team joined Star - they had contact with very fine companies, that helped the management. Instead of being focused on Turkey, they became international in their mindset," he says. Kotil adds that the joint branding worked on by the alliance's members has also been of benefit, and when joining, the quality measures "put us under stress". "They [Star Alliance] told us what we needed to do and we did better," he says.

The carrier has also acted as the sponsor of many international activities in Turkey, such as the 2008 IATA AGM and a number of conferences and symposiums. "If a company wants to join the world, it needs to join everything - IATA, Star Alliance, meetings - it boosts us, boosts the government, boosts the ministers and all this led to the big airport," he says.

The airport he speaks about is a proposed venture to build the world's largest airport with a capacity of 150 million passengers a year, which would allow Turkish to significantly increase its operations from those at Ataturk, which is near to capacity.

To be built on greenfield land on Istanbul's European side, the project will be accompanied by a new satellite city accommodating around 1.5 million people. The new airport will be built in four stages, with the target date for the first phase set for 2017, after which it will be operational with an annual capacity of 70 million. When it opens, Ataturk, which has annual passenger traffic of 45 million and a capacity limit of 55 million, will close.

Given all that is in its favour, it is unsurprising that Kotil believes Turkish Airlines will soon become one of the largest airlines on the planet, building "the biggest network on this earth" in the process. However, he knows that a number of threats could throw his plans awry.

It would appear that Turkish's principal domestic rival is one of those threats, by the manner in which Kotil displays a statesman's talent for obfuscation when asked what he thinks about Pegasus's recent order for 75 Airbus A320neo family aircraft plus 25 options. Kotil answers with an anecdote about his late grandmother's advice to concentrate on his own job, followed by another about two rival Turkish chocolate manufacturers. Yet when pressed, he says: "Any airline orders 100 aircraft, we love it as it makes life tougher, as we know we are going to compete". If Pegasus were to use Istanbul's new airport to operate its recently ordered aircraft after they arrive, this would present Turkish with a different challenge to the one it faces from low-cost carriers at slot-constrained Ataturk airport, where it holds 77% of the available capacity.

Coping with competition

Yet Kotil insists he is not too concerned by Pegasus's expansion, or by the possibility that the likes of Ryanair and EasyJet would enter his market if Turkey were to join the EU and conclude an open-skies agreement.

"Everybody is clever, we are clever also, what we are building is a network. They can't compete in connectivity to the rest of the world, they can only compete on certain routes individually, point-to-point. If somebody comes and squeezes us, we work harder and come back," he says.

In fact, rather than Turkish being threatened by an influx of European low-cost airlines, which are challenging the flag carriers of other countries that have adopted EU open skies, Kotil thinks his airline would thrive. He says the implementation of a liberalised aviation market between the EU and Turkey would bring "more spices", a mantra he uses to explain how challenges to the airline have helped it to improve.

H ow to grow sustainably at such a fast pace while controlling costs is another of Kotil's major challenges. Yet he says that growth has enabled the carrier to incorporate efficiency measures as it expanded such as improving pilot productivity. Joining the airline in 2003 as vice-president of the technical department, from Istanbul Technical University where he was associate professor at the faculty of aircraft and space sciences, Kotil says he quickly saw a problem. "We had a very nice 2003 and we made a profit, but what happened?... In 2004, everybody started getting easy going" and as a result, he says the airline's operating profit that year dropped to $100 million, from $247 million in 2003. At that point, Kotil says he realised "cost-cutting is a continuous way of life, we need to work on it all the time".

Yet big aircraft orders also mean that Turkish's debt is increasing. "That debt is asset-based and there is 12 years' financing. We need, as management, to ensure cash production is under control. Airlines are killed because of cash-flow issues," says Kotil, adding that Turkish's cash reserves currently stand at around $2 billion.

With notable recent examples of new airport delays, Kotil says the carrier has invested heavily in Istanbul's second airport, Sabiha Gökçen, recently spending $500 million on new technical facilities, and will move 14 aircraft there this summer. Operating dual hubs would act as a contingency plan for growth should the new airport's construction run into delays. However, unlike Ataturk, Sabiha Gökçen would remain open, which is the main reason why Turkish is building another system there, he says. It is also where Turkish's two subsidiary airlines, low-cost carrier AnadoluJet and leisure carrier SunExpress which is jointly owned with Lufthansa, operate a number of their services from.

Knowing when to stop

Kotil's growth strategy for Turkish does have an endgame. "We are growing like hell, but we're going to stop. We said we'll stop at 2,000 flights a day. We know that every single company has a level at which it can sustain profit, but if you go beyond that, you cannot do it [sustain profit]," he says. A target he believes is achievable in 2020.

He also says that growth would preferably come organically and while Turkish has been heavily linked with purchasing stakes in LOT Polish Airlines and Aer Lingus, among others, nothing has yet materialised. "We are open to the acquisition of companies: it could be a way of growth, but our growth in January on international passengers was 34%. So organic growth is much bigger than any airline we could add," says Kotil. He says that Turkish's interest in acquisitions or further joint ventures is "only a little, we are so careful".

This careful behaviour extends to giving away few details on what form a partnership with fellow Star Alliance carrier Lufthansa, given publicity by Turkish prime minister Tayyip Erdoğan and German chancellor Angela Merkel, might take. "I can't comment right now. We need to finalise and communicate things. Both of us are very nice companies," he says.

While the best laid strategies can be undone by unexpected events, Kotil believes that especially with a new airport, but even without it, Turkish will be able to continue growing its network, transfer traffic, passenger numbers and profits. Very nice indeed.

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