Turkish Airlines has put off a decision on its planned mega order for 600 new aircraft amid mounting engine production and quality issues on some of Airbus and Boeing’s latest models.
The deal, which Turkish Chairman Ahmet Bolat has previously discussed, will include roughly 400 narrowbody Airbus A320neo and Boeing 737 Max family aircraft, and around 200 widebody Airbus A350, and Boeing 787 and 777-9 aircraft. At 600 planes, it could be the largest single aircraft order in history eclipsing recent mega deals from Air India and IndiGo.
“While we are trying to decide on which aircraft type to place, we are also very close to investigating which engine types to get and which kind of a maintenance contract to get in addition to it,” Turkish Chief Financial Officer Murat Seker said during an earnings call on Thursday. “That’s the reason why we have not announced any decision yet.”
At the end of July, Pratt & Whitney-parent RTX recalled some 1,200 geared turbofan engines on A320neo family planes. The issue is a “rare condition in powdered metal” that could result in certain parts wearing out faster than expected. Of the recalled engines, 200 need to be inspected by September, and the balance within a year.
The A320neo family of aircraft comes with either P&W geared turbofans or CFM International LEAP-1A engines. The CFM LEAP-1B is the only engine offered for the 737 Max.
Despite putting off its planned order, Turkish continued to expand with breathtaking alacrity in the second quarter. Capacity, measured in ASKs, increased another 14% year-over-year. In the Americas alone, it has added routes to Dallas-Fort Worth, Newark, Seattle, and Vancouver since 2021, according to Cirium Diio schedules. New service to Detroit begins in November. It has also added plenty of new routes to Europe, Africa, the Middle East, Central Asia, and East Asia too.
And don’t forget about Turkish’s plans to finally challenge the Gulf carriers on routes to Australia, initially by serving Sydney and Melbourne through Singapore. Nonstops will come later, when yet-to-be-ordered widebodies — either the A350 or 777-9 — arrive.
Normally, expansion this brisk would signal a severe risk of financial implosion. Not for Turkish. Despite year after year of aggressive growth, it continues to post extraordinary profits, buttressed by the advantageous geography of its Istanbul hub — a hub by the way that now has ample available airport capacity (this was a constraining factor for Turkish until the city’s new airport opened in late 2018). Last quarter, Turkish saw its operating margin match its capacity growth figure, i.e., 14%. This was much better than the roughly break even operating result it managed in the same quarter of 2019.
For most airlines, rapid growth is dangerous because it results in a surfeit of empty seats, or additional passengers paying rock-bottom fares. This has not been the case for Turkish, which continues to fill its additional seats at profitable yields. It can do so thanks to the power of the Istanbul hub, which last quarter enabled Turkish to grow international transfer passengers by 22% year-over-year, to 23% above pre-Covid levels.
“In the past, before the pandemic, in like 2017, ‘18, the share of transit passengers among international passengers was about 55%. And in the first half of this year, we observed it at 57%,” Seker said.
Make no mistake, there aren’t a lot of people that need to fly from Detroit to Istanbul. But there are plenty of people that need to fly from Detroit to somewhere in the world where Turkish flies — auto executives traveling to plants in Asia, Detroit’s large Arab-American population traveling to visit family in the Middle East, tourists visiting eastern Europe, and so on. That’s just an example of how one route can successfully plug into its network (if Delta tried Detroit-Istanbul, it’d have little chance to compete).
Turkish did have its struggles during the pandemic, just like everyone else across the industry. But it was among the least affected of any large airline, quickly getting back to its expansionary and profitable self. One thing that buffered the pandemic-era shock was its large cargo business, which is now coming down to earth — cargo revenues dropped 44% year-over-year and now account for just 13% of company revenues, down from 27% last year. Its cargo yields, however, remain “substantially higher” than they were in 2019 (like 35% higher). And Turkish Cargo commands unit revenues that are 10% above the global average, according to management.
Even with the steep drop in cargo revenues, total revenues rose 14% last quarter thanks to a 31% jump in passenger sales. One reason was Asia’s reopening. Another was extremely strong performance on routes to the Americas, boosted by greater demand for premium travel. Africa, where Turkish holds a strategic advantage given its network coverage, “performed relatively well.” Executives did not mention Russia during the call but the market is surely a lucrative one currently, as many Russians that previously transited or vacationed in Europe are now doing so in Turkey. Europe did well in part thanks to booming inbound tourism to Turkey, a trend that will magnify in the current summer quarter. Europe’s congested airspace, however, caused operational problems. And low-cost carriers like Wizz Air are expanding into the Middle East, which is depressing yields. In the Middle East, competition and capacity are growing as well, and the key Israeli market saw demand decline due to nationwide political protests. In addition, an earlier start to the school season in the Middle East has shortened the summer tourism season this year.
In general, though, travel demand across Turkish’s network remains strong, a trend still evident in forward bookings. Importantly, the airline is also seeing seasonal swings in demand moderate as its network diversifies with expansion.
Cheaper fuel naturally lifted Turkish’s second-quarter earnings. But fuel prices have since risen. Non-fuel costs, including labor, ground handling, catering, air traffic control, and maintenance, have increased as well, in some cases sharply. Capacity growth, however, is helping to spread the extra costs out over more revenue-producing seats.
Turkey’s domestic market, plagued by a weak currency, remains smaller than it was pre-pandemic. But it’s just not that significant to Turkish’s overall business. Only 12% of its sales originate in Turkey, and the Turkish lira accounts for a mere 8% of its revenue. On the other hand, 29% of its costs are in lira, which is good news when the currency weakens.
On the fleet front, Turkish is for the time being meeting its capacity needs with leased aircraft, including some that are wet-leased (meaning it’s also renting the crews to fly the planes, something frowned upon by many airline pilot unions). “Going forward, our intention is to grow the capacity in terms of ASKs by about 7% to 10% year-on-year over the next five years,” Seker said. It expects to finish 2023 with 435 planes, up from 394 at the start of the year. It plans to reach 500 in 2025, and 600 by 2028.
As if this weren’t enough to keep Turkish busy, it’s also planning to announce — sometime in the coming weeks — a new brand identity for its low-cost carrier Anadolujet. Separately, Turkish just announced a new joint venture with Thai Airways and hopes to add joint venture partners in East Asia and the Americas. It’s not, however, interested in a European joint venture (years ago it was rumored to be discussing a tie-up with Star Alliance partner Lufthansa).
Like other airlines around the world, Turkish speaks about “lack of sufficient aircraft availability, manufacturing problems in the OEM supply chain, engine durability issues, and congested European aerospace,” all acting as “constraints in the robust demand environment.” Executives added, “We expect the industry’s supply-demand imbalance to persist at least until the end of the year.”
In summary, Turkish proclaims itself “among the few global carriers to successfully adapt itself to the new normal and exceed 2019’s capacity level by almost 25% in the first half of the year.” In fact, it’s even raised its profit guidance, expecting strong demand to more than compensate for cost inflation.
Additional reporting by Jay Shabat