Serap Zuvin and Baran Sozer assess the current market share held by Turkey’s airlines, while setting out the trends in consumer and business travel in the country
1. Currently, what are the main issues (strategic and political) affecting those in the aviation sector in your jurisdiction?
Aviation in Turkey is developing at a fast pace, but this pace brings with it certain issues for the Turkish aviation sector. We would like to set out these issues very briefly.
First, the airline operators mainly focus on the profit and loss of the company, and may neglect to pay enough attention to the other issues of general importance in the sector such as flight safety, passenger satisfaction, etc.
Second, the recent bombings (especially the Ataturk Airport bombing) and the war across the southern border of the country have had a negative impact on the tourism sector. The effects of the recession in the tourism sector as a whole are evident in the decrease in the number of flights to Turkey.
Finally, airline operators will have difficulty in obtaining new financings due to the foregoing reason; in particular, capital market financings which some operators had planned to make will need to be postposed for a certain amount of time – at least until the government lifts the state of emergency.
2. Where has your jurisdiction seen the most growth in the aviation sector over the past 12–18 months? And, if any, where do you anticipate growth coming from during the next 12 months?
It is difficult to make short-term estimations on the growth of any sector in Turkey, since political instability is a big issue. For example, the latest dispute between the Turkish government and Russia caused a major downturn in summer tourism coming from Russia, which ultimately affected the aviation sector. Considering the latest disputes with Russia and with the European Union regarding visa exemption, aviation in Turkey has undergone a fall, rather than growth, in the short term. With completely new incentives provided by the Turkish government, Turkish aviation will be able to return to its good old days soon. Despite this, the main players in the aviation sector continue to seek ways to keep up the pace that is set for the long term. According to published news, Turkish Airlines has ordered several planes in order to expand its fleet and reach new destinations.
3. Does the GDS distribution model continue unchallenged as the most popular model for flight distribution?
The use of the GDS model in Turkey is becoming more widespread every day, since Turkey has become a very popular transfer centre for international flights; thus passengers choose to fly with foreign rather than local airlines. Naturally, GDS is the easiest way to book a flight with foreign airlines and is still the best way to find the cheapest price. However, the growth of tour agency companies must also be considered. Nowadays, these tour companies offer very decent and economical prices; in addition, they offer their customers certain flights at reasonable ticket prices in package deals, and some Turkish customers now choose to go with these tour companies rather than deal with plane tickets, accommodation, etc. Multiple price comparison websites are intensively used, especially by those who seek to fly for vacation purposes. Meanwhile, all major airlines in Turkey have launched their own apps for the direct distribution of their tickets. Therefore, these kinds of technological advancement are likely to constitute a challenge to GDS in Turkey in the future.
4. In your jurisdiction, does airport capacity require boosting and, if so (and even if not), what plans and/or processes are in place to address this (or increase or re-organise airport capacity, as the case may be)?
Over the past 10 years, a lot of new regional airports have opened in Turkey, and flights to these airports have started, because the idea of using planes for transportation has become more established in the minds of the public. Other new airports are planned to be opened in the future. However, new airports are opening as part of a government plan but not according to the needs of the aviation sector. As stated above, in the short term, aviation in Turkey is going through a recession period. Despite this fact, both Istanbul Ataturk and Sabiha Gokcen airports have become incredibly crowded, and thus require a boost in capacity, since these two airports are the transfer centres linking the Middle East and Asia to Europe, and lots of flights are being made to these two airports. In particular, flight traffic in Ataturk Airport is reaching its limit, and for this reason, construction of a new and larger airport in Northern Istanbul has already started. With the new airport, the authorities are expecting significant relief to flight traffic. Moreover, Turkey aims to gain the title of the “hub for Europe’s air transfers”.
5. Does the national "flag" carrier carry the most passengers into and out of the national airports and: (a) if so, what competition exists and how significant is it, and (b) if not, what are your thoughts on the reasons for this, and why do competing airlines have higher load factors?
Turkish Airlines is the flag carrier in Turkey, and with 61.2 million passengers (domestic and international), Turkish Airlines carries the most passengers in Turkey. However, according to public records, Pegasus Airlines has the biggest market share for “domestic flights”, at 28.3%, while Turkish Airlines has a 27.1% share. On the other hand, for international flights, the superiority of Turkish Airlines is evident as it has the biggest market share, at 41.6%, while Pegasus has 9.8%. As can be seen from the numbers, for international flights Turkish Airlines is the biggest actor, since it flies to many more international destinations than any other airline in Turkey and is currently the only airline to fly across the Atlantic. So competition for international flights seems to be very weak and looks set to continue like this. On the other hand, competition within the sphere of domestic flights is very high, as can be seen from the market share. This is because Pegasus Airlines is following a lower-quality service policy while offering very decent and low prices, and this attracts a lot of passengers seeking a flying option without spending a lot of money. On the contrary, Turkish Airlines provides high-quality service at a slightly more expensive rate. Nevertheless, Turkish Airlines periodically offers very low prices. Since the public perception is generally that Pegasus Airlines always provides low-price tickets, passengers tend not to turn to Turkish Airlines for their domestic flights.
6. What trends, in terms of regulatory intervention and involvement, has your jurisdiction observed over the past 12–18 months in relation to airline acquisitions and alliances? Do you anticipate a change in the regulatory environment of your jurisdiction during the coming 12 months, and if so, how?
Airline acquisition and alliances are regulated under the provisions of the Turkish Commercial Code and Civil Aviation Law. There are no other specially designed regulations constituting regulatory involvement or intervention. While this is the status quo today, if a change in the law happens in the near future, such change will definitely be in support of the airline operators, enabling alliances between them and/or facilitating transfers to third parties.
7. What trends are being observed in relation to new technologies – such as UAVs/drones – and what impact are these technologies having on the aviation regulatory environment?
Turkey is closely following the new technologies in the aviation market, and the use of UAVs is getting more and more popular. The Turkish Civil Aviation Directorate (“CAD”) has issued an Instruction on UAVs and launched a framework on the use of UAVs in Turkey. The Instruction provides certain restrictions and requirements for drone flights, such as an obligation to obtain permission to fly drones, and not to fly drones over military bases, governmental institutes, etc. Moreover, operators of drones weighing more than 25 kilograms must apply for a licence, and must complete 90 to 150 hours of training, in which they have to pass a wide range of tests on topics from technical knowledge on drones to repair and maintenance. In addition, to apply for a licence, candidates must provide documentation confirming that they do not have a criminal record.
8. Legal issues in the “lease-to-part out” market. A major market development is the interest of investors purchasing mid–end life aircraft on lease for the purposes of making returns on a leasetail and component margin model. What challenges are inherent in this segment of the aviation finance market, and what techniques and disciplines are required to manage the risks involved?
As aircraft have a useful life of 25 years and beyond, the operating lessor needs to manage the aircraft throughout its life cycle. During the course of an aircraft’s life, the lessor must find solutions to generate a return on the aircraft through re-leasing and eventually selling or “chopping up” the aircraft into parts.
The length of an aircraft lease typically ranges between 5 and 10 years. A younger aircraft tends to have longer lease terms than an older one as the expected utilisation rate of an aircraft declines as it ages. At midlife, the lease term is usually four to five years.
Debtors’ default or insolvency is the most risky part of the aviation lease market. Considering the high amount of aircraft and their equipment, such non-payment can be extremely challenging.
The Cape Town Convention was drawn up in order to prevent those risks, and Turkey is a signatory to it, alongside 64 other states and the European Union. Cape Town will apply to a lease, hire purchase agreement, conditional sale agreement, security agreement or bill of sale when the agreement has a Cape Town connecting factor. It is sufficient if a seller, buyer, lessee or security provider is situated in a contracting state for the Cape Town Convention to be applied. Basically, the Convention provides creditors an online international registry system to guarantee their rights and interests in the aircraft or in aircraft equipment such as engines. Since Turkey is a part of the Convention, such risks are managed within the techniques that the Cape Town Convention provides.
9. Manufacturer support in the new cycle of new OEM products, e.g. MRJ, E2, C-series, etc. In an increasingly sophisticated and competitive environment, in what way is the type of OEM financial and product support for this new era of aircraft more complex and far-reaching than in previous cycles?
The growth of the aviation market worldwide has been spectacular. Market research conducted by the International Air Transport Association (“IATA”) reveals that total passenger numbers will rise to 3.91 billion in 2017, compared with 2.98 billion in 2012. Due to this increase, airline companies are in need of larger fleets than ever. Therefore, aircraft manufacturers and original equipment manufacturers (“OEMs”) are striving to answer those demands.
The rapid growth in aircraft and equipment manufacturing has indeed created a more competitive and complex environment than before. However, the Cape Town Convention is able to cater to such needs in the market. In fact, an Aviation Working Group, featuring major aviation manufacturers, leasing companies and financial intuitions, was involved and shared its demands and opinions in the establishing process of the treaty.
Considering that an engine may cost up to $35 million, it is crucial for OEMs or financiers to reimburse their losses in the case of any defaults. The Aircraft Protocol arising from the Cape Town Convention provides a registry of interests (e.g. mortgage, pledge) internationally via the internet; or domestically by applying to the national Civil Aviation Authorities (“CAAs”), regarding the equipment that they sell or lease. Before the Cape Town Convention there was a gap in the protection of the rights of equipment manufacturers or financiers, as it was not possible to put a mortgage on the equipment alone; thankfully, the Aircraft Protocol has filled this gap and provided remedies, such as the ability to take possession or control of equipment, sell or grant the lease of the equipment, or collect or receive any income or profit arising from the equipment. We believe such remedies will be favourable to equipment manufacturers.
10. The advent of cheaper oil and the knock-on effects. What are the consequences that arise as a result of the unexpected purchasing power of a number of third/fourth-tier airlines? What will challenge lessors and suppliers in particular as they are faced with speculative judgments on an airline's longer-term financial viability?
The dramatic drop in oil prices is among the most significant – and unexpected – forces to have shaken the global economy in 2015 and 2016. It is not difficult to guess the winners of this precipitate drop in prices, who are consumers, owners of gas-guzzling vehicles and the energy-intensive sector. Fuel prices have fallen by more than 50% but agents, operators and travellers should not expect airfares and other transportation prices to come down much, if at all.
Lower fuel prices may encourage airlines to increase capacity, either by deferring the retirement of older aircraft or increasing the flying hours of older aircraft, which had previously been reduced due to high fuel prices. In fact, at the beginning of 2015, as Bloomberg reported, one aircraft leasing company leased out five Airbus A340s and Boeing 747s – both fuel-intensive aircraft that were intended to be retired. At the same time, cheaper oil has pushed up the relative cost of acquiring new fuel-efficient aircraft, such as the Boeing 787. Although a longer-term trend away from fuel-efficient aircraft is unlikely, depressed oil prices could allow airlines to take advantage of an older fleet as long as lower prices persist.
11. Iran and the market return. What remain as barriers, including sanctions-related issues to navigate, where Iran and aerospace and aircraft transactions are concerned? What sort of jurisdiction is Iran from a risk perspective, and what techniques from a supply perspective are likely to be needed so that Iran's potential and promise for OEMs, lessors, suppliers and service providers is realised and does not become the latest example of a disappointing gold rush?
On 16 January 2016, the United States and the EU lifted certain sanctions against Iran, under the Joint Comprehensive Plan of Action (“JCPOA”), which regulates the gradual removal of the sanctions against Iran.
Further, on 16 January 2016, the International Atomic Energy Agency (“IAEA”) stated that Iran was in compliance with the conditions indicated in the JCPOA. Moreover, the military aspects of Iran’s nuclear programme had been dismantled.
Iran has implemented the nuclear-related measures agreed under the JCPOA. As a result, all of the EU’s nuclear-related economic and financial sanctions have been lifted. On the other hand, the US government did not lift all of its sanctions, but rather, only specific ones. Those which have been lifted by the US are mostly the secondary sanctions that applied to non-US individuals and companies.
It is predicted that Turkey’s financial sector will see changes, and many different areas such as energy and aviation will be deeply affected by the removal of the sanctions against Iran.
Following the lifting of the sanctions, an efficient process of modernisation and growth can clearly be observed in Iran's air transport industry. Mohammad Khodakarami, caretaker director of Iran's Civil Aviation Organization (“CAO”), announced that “Iran will buy a total of 80 to 90 airplanes per year from the two aviation giants in the first phase of renovating its air fleet”. This statement attests to the growth of the Iranian air industry. As an example, Airbus and Iran have signed a preliminary agreement for 118 Airbus jets worth $27 billion to be delivered to the country. Currently, Iran Civil Aviation consists of 250 aircraft, and their primary purpose is to buy 400 new airplanes by 2025.
Considering Turkey and Iran are neighbours, the lifting of the sanctions should be beneficial, as importation and exportation are crucial for both countries. Turkey and Iran will sell each other a wide range of products, from agricultural to energy. Accordingly, it is expected that businesspeople from both countries will be conducting business trips and therefore flights between Turkey and Iran will increase.