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Turkish triumph

After its first profit in nine years, Turkish Airlines is ready for global expansion.

Gunter Endres/ISTANBUL

ATTILA _ELEBI, president and chief executive of Turkish Airlines (THY), may have the imposing stature of his conquering namesake, but there the comparison ends. His demeanour is one of gentleness and he now smiles a lot.

The reason is the airline's first net profit for nine years and the vindication of a wide-ranging regeneration programme with which he was involved even before taking over from Tezcan Yaramanci in 1994. "Captain" Celebi, as he is affectionately referred to because he is a pilot, has 33 years of air-transport experience, including a long period with THY, and was the first for a long time to make the top grade from within, replacing a string of political appointees who had no aviation background. He believes that this has been a big factor in turning the airline round, but is generous in recognising the contribution made by his immediate predecessors.

At the time of his appointment, the twin strategies of THY, a wholesale renewal of the fleet and the upgrading of the skill level of its staff, had already been put into place, and his task was to complete the process.

PROFIT PRIORITY

"My aim was to have a profitable airline," he says, "and not have to go to the Government to borrow money. When I took over the presidency in 1994, I discovered that the airline was making an operating profit of around $60 million, but financial expenses on our new fleet were too high and swallowed up any money we were making." After renegotiating interest expenses and increasing aircraft usage, Celebi also continued to change the quality of the airline's personnel. Unlike most airlines,THY did not make wholesale redundancies to cut costs. In spite of a doubling of the fleet and increase in activities, staff numbers remain similar to those of 1989, but Celebi declares, productivity levels have gone up by 150% during the past six years. Labour costs are also among the lowest in Europe.

The net profit - TL366 million ($7.9 million) - is small and represents only a 1% margin, but is a huge improvement on 1994, when the airline recorded a loss of TL2,188 million. Revenues registered in 1995 almost doubled, to TL51,129 billion, compared to TL27,277 billion in 1994, but, because of inflation, this represents a slight decline in real terms of 0.7%. _elebi says that, because THY's foreign currency earnings are as high as 80%, the effect of inflation is being kept under control. A capital increase, from TL5,500 billion to TL10,000 billion, through 40.9% rights and 40.9% bonus issues, has also enabled THY to strengthen its financial structure. Some proceeds were used to pay off $35 million in debts. As a direct result, current and long-term liabilities declined substantially, with a 67.6% real decline in financial expenses against 1994 figures.

It is intended to expand THY's paid-in capital in 1996, via 75% rights and 75% bonus issues, to TL25,000 billion, which will further reduce debt and improve profitability. Post-charged depreciation expenses and deferred interest expenses on debts of TL1,059 billion will be reflected on the income statement, but this could be offset by a similar sum owed to the airline for the sale of its 30% stake in handling company Havas.

PROFIT WARNING

Global Securities in its recent assessment of the airline warns, however, that, given THY's low profit margin, "-the outcome of the non-operating items will determine profits to a large extent". While there remain uncertainties about the airline's ability to maintain its profitability, _elebi insists that it is now financially sound and has the capacity of making a regular operating profit of around $50 million a year. He also points to a low-risk assessment by the Air-watch Report of Aviation Forecasting and Economics, which puts THY fourth in Europe and 31st of 99 airlines globally.

THY is owned 98.2% by the State Privatisation Administration (PA), with the remaining 1.8% of the shares traded on the Istanbul stock exchange since its initial, unsuccessful, public offering in 1990. In the intervening years, privatisation has been put on the back burner, and in spite of the constraints of state ownership, Celebi's priorities lie in other directions.

The airline's network, is heavily concentrated within Europe, and Celebi wants to make better use of Turkey's location, at the cross-roads between Europe, the Middle East, Asia and the Central Asian Republics. The airline's only long-haul routes link Istanbul direct to Bangkok, New York, Osaka, Singapore and Tokyo. Talks with the Russian Government are in progress on Trans-Siberian over-flight rights for a new service to Beijing and Shanghai this year. Chicago and Hong Kong have been pencilled in for 1997. The complete route network encompasses 26 domestic and 55 international destinations.

To gain access beyond these gateways and expand THY's global market share, however, Celebi is determinedly seeking an airline partner. "A strategic alliance is more important at this stage than privatisation," he insists, and he has definite ideas of where he wants that partner to come from. Ruling out a European airline, because THY is already strongly present in the European market and does not wish to link up with a competitor, Celebi has a preference for a US carrier, but will consider one from the Far East. "A US partner makes more sense," he suggests, and, although a code-share agreement with Delta Airlines is already in place, it is too early to read too much into this.

Celebi is frustrated that, in spite of frequently stated intentions, the Turkish Government has yet officially to give the go-ahead for privatisation, which prevents him from making serious approaches to potential equity partners and assess the willingness of local investors to take a stake in the airline. The Government has not decided the percentage holding it will retain (although it is likely to be a controlling 51%), or whether to opt for a "golden share", which further complicates the issue. Celebi says that, whatever the eventual decision, the airline will have to have more commercial and operational freedom if it is to build on its success and take its place among the global airline community.

The constraints of Government ownership include being unable to increase fares; having to offer compulsory discounts of 50% to military, justice and security personnel, students, teachers and others; and having to fly unprofitable routes, although Celebi says that this is not a big problem. What is less easy to accept now, and will certainly be so to an airline partner, is the compulsory setting aside of 12 free business-class seats on every flight for Government officials.

Once ownership and partnership issues are resolved, the future for Turkish Airlines will be brighter than it has ever been. A revival of the tourist industry - 7.8 million tourists visited Turkey in 1995, spending an estimated $5 billion - contributed strongly to passenger growth. International revenue-passenger kilometres (RPKs) increased by 19.6%, while domestic RPKs achieved a 19.1% growth rate, to total 10,500 million. Cargo has been growing at a slower pace, but this is mainly caused by a past reluctance by the airline to invest in its cargo business. Turkey's export trade is expanding, especially with the Turkish-speaking republics of the former Soviet Union, and Celebi has made cargo one of the areas for special attention. According to Celebi, traffic has been growing by 39% in the first three months of 1996, and he sees no reason why it should not continue to outstrip the European average substantially.

THY's market is far from saturation point, he says, when measuring RPKs against population, which shows that the number of Turks travelling is well below that of comparable countries.

Turkish Department of Civil Aviation statistics show that THY has 24% of the international market in Turkey, sharing traffic with local charter airlines, but a virtual monopoly in the domestic sector. In 1995, its share was 96%, but this could gradually be eroded following a Government decree, effective from 16 February. This allows private airlines to offer domestic schedules. Two of the largest charter airlines, Istanbul Airlines and Onur Air, have already taken advantage of this, offering fares between 15% and 20% lower than those available from THY. Others, such as Air Alfa, wait in the wings. _elebi welcomes the competition and suggests that THY's modern fleet and comprehensive network will see off the other airlines' limited routes and low-frequency operations.

FLEET BALANCE

Fleet renewal is almost complete, with only one more Airbus A340-300 to be delivered out of a total of five ordered, and two more Aero International (Regional) (AI(R)) Avro RJ70s due to arrive during June. The 63-strong fleet now consists of four A340-300s, seven Airbus A310-300s and seven A310-200s; 28 Boeing 737-400s and two 737-500s; ten AI(R) Avro RJ100s and two RJ70s; and three Boeing 727-200F freighters. The average age of the fleet, at 3.3 years, is among the youngest in the world. Eleven of the A310s are being purchased, with six fully paid-up, and the 727s are also owned. The Avro RJs and A340s are on operating lease from the manufacturers, while the 737s are leased mostly from International Lease Finance and GPA. Celebi wants to have a better balance between owned and leased aircraft and may use the planned capital increase for this change. The airline is already working on new fleet plans to meet the expected growth. On the New York route, the airline now has 100% load factors on all flights, says Celebi, and may need a larger aircraft than the A340 sooner than envisaged.

The turnaround in the last five years, within the inevitable constraints of Government ownership, has been a remarkable achievement. Given its new financial health and promising traffic growth, and assuming that Celebi avoids the fate of previous presidents (whose tenures have been short) and is allowed time to consolidate this success, Turkish Airlines' arrival on the global scene cannot be long delayed.

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