Under the leadership of Temel Kotil, Turkish Airlines has undergone a dramatic and incredibly profitable expansion and he does not see record high fuel prices or a global downturn getting in the way of plans for yet more growth and even higher profits
It is the beginning of May and Temel Kotil has a lot to gloat about as he settles into his chair at the modest headquarters of Turkish Airlines near Istanbul's Atatürk Airport. In April Turkish Airlines joined the Star Alliance, reported record earnings for 2007 and launched a low-cost operation. In May the carrier celebrated its 75th anniversary and at the beginning of June it is hosting the IATA annual general meeting. But Kotil does not want to talk about all these accomplishments, crammed into an incredible two month window, other than to say it is "an exciting period". Instead he wants to start the interview by asking his own question: "The airline business is not doing so good now worldwide?"
"Although the atmosphere is not good for the airlines business this year, it is not affecting us"
President, Turkish Airlines
Indeed that is what the world's airline chief executives will be discussing when they gather in Kotil's home city in June. But it is a bit of a trick question because Kotil has an answer different from probably every other IATA member. "We're not feeling it actually," Kotil says, referring to record fuel costs. "What's happening is although the atmosphere is not so good for the airline business this year, it is not affecting us."
While fuel prices have surged 50% over the past year, Turkish's load factor has risen by over three percentage points and aircraft utilisation has increased by 10%. Kotil is also working on further reducing Turkish's already low non-fuel unit costs. In the first quarter of this year the carrier's traffic grew by 16% but its head count increased only 2%, translating into a 13% increase in passengers per employee.
But is all of this really enough to offset the spike in fuel prices? Kotil has another unusual answer: Turkish Airlines business class sales are increasing at a 40% annual clip. Kotil claims this will allow the carrier to keep fares constant and retain its double-digit operating profit margin this year despite the bigger fuel bill. Turkey, he adds, is also not experiencing the economic slowdown which is starting to plague North America and Western Europe.
"We are getting more premium passengers," Kotil says as he sips a cup of strong and unsweetened Turkish coffee. "We are getting more business passengers. We are getting more transit passengers. The yield is better."
Turkish is able to accommodate the surge in business passengers by expanding its business class cabins literally overnight. The carrier's 83 narrowbodies have a convertible cabin in which rows can be converted from economy to business by simply moving the curtain and placing a tray on top of the middle seats. "Our fleet is basically single aisle machines and our business class is convertible so you can expand it to whatever you want," Kotil says.
Its 12 long-haul aircraft have a fixed business cabin with 24 to 32 flat bed seats but Kotil says these cabins will be expanded to 50 seats. "Long-haul business class for us is overbooked. It is sold out months in advance."
While most of the world's full-service carriers are now looking to slow down expansion, Turkish is struggling to keep up with soaring demand. It has doubled in size over the past five years, from 10 million passengers plus $1.8 billion in revenues in 2003 to 20 million passengers and $3.7 billion in revenues in 2007. It has been consistently profitable since 2001, including a record $224 million net profit in 2007. To keep up with demand Turkish has just rolled out another ambitious five year plan which Kotil says will see the carrier reach 40 million passengers and $10 billion in revenues by 2013. This will be achieved through growth rates of 15-20% per annum.
The rapid rise of Turkish has been driven mainly by strong economic growth in Turkey and even faster growth in tourism. The Turkish airline market has exploded since 2003, with liberalisation driving a more than 200% increase in domestic traffic and tourism driving a more than 100% increase in international traffic. Turkish now has a 63% share of Turkey's scheduled domestic market, a 45% share of the scheduled international market and a 60% share of traffic at the country's main airport, Atatürk, which is due to be replaced by a new airport in about five years.
Turkey's economy and tourism sector is expected to continue to chalk up healthy growth figures over the next five years but Kotil says the flag carrier is not relying on the local market for its next growth spurt: "We are not after the Turkish market. What we are after is the transit passenger." Only 1 million or 5% of Turkish's passengers last year transited at Atatürk but Kotil says this was a 50% improvement over 2006 and international transit traffic is projected to grow another 50% this year to 1.5 million. By 2013 or 2014 transit traffic will reach 50% of Turkish's total traffic, he says.
Istanbul, perfectly positioned at the crossroads of Asia and Europe, has always been a bustling trading port. But Turkish has never really taken advantage of its hub's unique geographical position. This will change over the next five years as Turkish becomes a true hub and spoke carrier. Kotil is not concerned about the extra competition this shift in strategy will bring, in particular from Gulf carriers, because of Istanbul's geographical location.
Kotil points out that Istanbul is within a 3.5hr flight of 55 countries, including all of Europe. This allows Turkish to rely mostly on narrowbodies and enables it to serve more cities in Europe and offer more frequencies than Gulf carriers. "The business plan for the Middle East carrier is a long-haul flight to the Far East and a long-haul flight to Europe. The difference between them and us is the cost structure. For long-haul to long-haul the connection, seat mile cost-wise, is 6% more than a long-haul to a short-haul connection."
Kotil adds: "Our business plan is to be very efficient in the narrowbodies and go to the secondary airports. Our policy is for those 55 countries to serve three to 10 cities. Our future is to go to as many cities with a population of 1 million. In order to continue double-digit growth we need to open new routes."
Turkish has always considered itself a European rather than Arab carrier with Germany, where it will add a 10th destination this year, its biggest market. European routes account for 40% of Turkish's revenues. The Middle East now makes up 10% of revenues but Kotil says this figure is growing fast. Turkish is quickly expanding its network in the Middle East and Central Asia in part to accommodate demand from Star, which does not have any members from the these regions.
The Far East now accounts for 17% of Turkish's revenues and Kotil says Turkish wants to increase frequencies to its eight Far East destinations as soon as it can secure additional widebodies. "Load factor to Asia is now 85%. That's why I need more long-haul aircraft."
© Tom Gordon
Kotil also needs more widebodies to expand Turkish's North American operation. Turkish serves only two destinations in the Americas, New York and Chicago, but will add Washington Dulles, a hub of Star partner United Airlines, in October. "Demand in the US for us is increasing because we haven't increased capacity there for so long," Kotil says.
Dulles will be served with two Airbus A340s which will soon join Turkish's fleet. It is committed to adding two more A330s early next year and is actively looking for another 11 A330/A340s, which it hopes to secure by 2010. "I think we can find several because there is a downturn and in a downturn some carriers lessen their long-haul flights," he says. "When we get to 25, we'll have almost four times more long-haul aircraft compared to 2003."
Turkish is also looking for more short-haul aircraft because it has not yet committed to any additional narrowbodies beyond the 16 it will take this year. Under its five-year plan it will need to acquire about 60 additional short-haul aircraft by 2013, including up to 15 70- to 90-seat aircraft, which will be used to launch a new regional unit to serve thinner destinations in Russia and other neighbouring countries.
Domestically, Turkish is reducing flights at Atatürk to free up slots for more international flights. Kotil says the domestic market, which last year accounted for half of Turkish's passengers and one-quarter of its revenues, "is no longer a money maker". He adds Turkish will continue to serve all the main cities in Turkey to preserve international connections and meet premium demand, but "for the lower end we are leaving that one to the others".
Turkish, however, is adding full-service domestic flights at Istanbul's secondary airport, Sabiha Gokcen, and low-cost domestic services at the capital Ankara. In late April it launched a new low-cost brand, Anadolu Jet, which now connects Ankara with 20 cities throughout Turkey with a fleet of five Boeing 737-400s. Andolu Jet uses Turkish's crews, managers and operators certificate, but has a lower cost structure because it offers fewer frills and has an all-economy configuration. Kotil acknowledges it sounds strange to be launching low-cost domestic operations when the overall strategy is to focus on a full-service offering and leave the low-cost market to others, but explains: "In the Ankara operation we are exercising how we can lower the operational cost. We want to learn from that because it is a very similar operation compared to the whole business. We are trying to see as a full-service carrier how we can lower the cost. This is an exercise."
He adds that Anadolu Jet is also part of a plan to create a second hub at Ankara, where Turkish plans to later add full-service international flights. "In order to cultivate the market from Ankara we needed to lower the ticket price but we don't want to lose money of course. Our rule is to make money from every route. We don't want to subsidise."
Turkish is already one of the lowest cost carriers in Europe, with operating costs per ASK lower than every European flag carrier. At only 7.8¢ per ASK, Turkish is only 0.9¢ behind easyJet. But Kotil says Turkish is working to reduce this further: "The target is to lower the cost as much as possible."
He adds a low cost structure is critical for Turkish because its business plan envisions exploiting its cost advantage over other full-service carriers as it continues its rapid expansion. "We have a low-cost carrier cost structure but we are a full-service carrier and our policy is to provide a better service than any carriers that are serving the same routes," he says. "What we are enjoying now is producing in Turkey and selling in Europe, the Middle East and Russia. Producing here is cheaper. Our cost structure is much lower than Europe."
He says Turkish will become even more efficient as it works towards its goal of carrying 2,000 passengers per employee, a ratio that would beat almost every full-service carrier. It has already doubled its passenger per employee ratio over the past five years as it added cabin crew and technicians to keep up with growth, but cut back in other areas including the head office. "In 2003 we had 800 passengers per employee. Right now it's 1,700. This is very aggressive restructuring," Kotil says.
At first impression Kotil is soft-spoken and modest. But as he delivers his grand vision for Turkish Airlines his confidence brims over, with some of his pronouncements carrying an air of arrogance. He projects Turkish Airlines will carry 2% of the world's passenger traffic in five years and says there is nothing stopping it becoming one of the world's largest carriers. "This year we are carrying one out of a hundred worldwide passengers. So there are 99 waiting for us. I'm after those 99 passengers. We are 75 years old as a company. Maybe over the next 75 years we can get those 99 passengers. As an airline if we do our best work to our full capabilities we can get those 99 passengers. If the service, ticket price and network are good enough, in theory Turkish Airlines will carry the whole worldwide passengers."
Today his ambitions are a little closer to home. Turkish is discussing acquiring a stake in Bosnia's B&H Airlines and Kotil says it may pursue similar small projects in the region. But he insists it is not interested in buying or merging with a large carrier: "Consolidation comes from a need. Consolidation means two coming together and having a smaller company. When you lower the capacity the profit increases. But for us there is no need for this because our growth every year is close to the company you can consolidate. And I believe in the next 10 years, all over the world, flight operations will be liberalised. If the market goes to open skies there is no benefit in consolidation."
Kotil even goes as far as saying Turkish could become as big as the Air France-KLM Group or the proposed Delta-Northwest combination without a major acquisition: "Any airline can be a mega carrier. You just need to provide the resources. Turkish Airlines can order any number of aircraft because we have almost $1 billion cash in the company. And we have the supply of operational staff to do it. In Turkey we have so many young and educated people who are waiting to be pilots and flight attendants. In the airline business my personal thought is if you do your best, your cost is low and your product is high, you can play in any part of the world if the sky is open."
Kotil perhaps has a good reason to be so confident. In the three years since he took over as chief executive the carrier has chalked up net profits of $452 million. Its 11.4% operating margin last year puts Turkish among the top five carriers in Europe. Kotil says it will soon report another "very good result" for the first quarter of 2008 and its year-end 2008 performance should at least match its 2007 results.
"We are on the run. When you are running, [worldwide market] conditions don't affect you too much. Other airlines are walking. They've run in the past. It is now our turn to run. That's why the fuel cost is not affecting us."
Private or Public?
The Turkish government started preparing Turkish Airlines for privatisation in the early 1990s and initially sold a token 1.5% stake. After recovering from a rough period in the late 1990s, privatisation was revisited. A 24% stake was sold in 2004 as part of an initial public offering on the Istanbul Stock Exchange and another 25% was sold in 2006. Although the government still owns a 49% stake in the carrier, Temel Kotil says "there is no political involvement in our activities besides telling us you need to perform good". He adds "there is no decision yet" on selling the remaining 49% "but of course it will happen".
Turkish owns 100% of its maintenance subsidiary, Turkish Technic, and has a 50% stake in Sun Express, a joint venture charter carrier with Lufthansa, which turned a €14 million ($22 million) profit last year on €300 million in revenues. Kotil says there are no plans to spin off Turkish Technic, which became a separate company in 2006 and generated about $360 million in revenues last year. In 2006 Turkish established a joint venture catering company with Austria's Do&Co and Kotil says it is now talking to potential partners over establishing a joint venture company to take over ground operations at Turkey's five largest airports.
"In some businesses we are investors. In some businesses we are running it. We really make a distinction with what we are doing. All the focus is the main company and everything around us should be helping the main company. We don't need to make money from other kinds of activities because we are making money already."
© Tom Gordon
Temel Kotil did not take an ordinary route to the chief executive chair. Kotil is an engineer by training and after earning his PhD in mechanical engineering at the University of Michigan in 1991 he returned to Turkey to become a professor at Istanbul Technical University. In 2003 he made the move from academia to Turkish Airlines, where he initially served as vice-president technical. He was promoted to chief executive in April 2005.
"Coming from vice-president technical is good because you know the machine fully," Kotil says. "My engineering background is helping me a lot. Engineers work on the simulating and modelling in their mind. Engineers are also very good at working top down." Kotil has four children - two boys who are now studying at universities in New York and two girls who are still at home. He says he spends nearly all of his spare time with his family or feeding and watching his pet fish.
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