Pegasus clears one hurdle at a time

Pegasus Airlines strengthened its recovery in the first quarter of this year, lifting passenger numbers by 18% as holidaymakers in western Europe and Russia rekindled their love affair with Turkish resorts.
The positive result comes just two years after the low-cost carrier sunk to a rare loss amid a perfect storm of Daesh terror attacks, a failed military coup, and a diplomatic row with Russia. Fears of a lengthy downturn were dispelled by last year’s profit and, with demand still growing, chief executive, Mehmet Nane, is in bullish mood about the airline’s prospects.
Despite his newfound optimism, however, the challenges facing developing nations in general and Turkey in particular loom large at Pegasus.
“When we look at 2018 in general, the number of tourists will be much better than 2017,” Nane said. “But when we look at the income side, the per capita spending is going to be less because of the devaluation [of the Turkish lira] – it’s down about 30% [since summer 2017].”
Even if the lira stabilises after this year’s general election, there is no shortage of headwinds buffeting Nane’s business plan.
“What is the challenge for any developing-country businessman? Those are valid for us,” he shrugged. “Liquidity, hard currency, geopolitical issues, and how are we going to be affected by the developed countries’ actions. For example, if the United States decides to increase interest rates, it will attract more [asset managers to hold] dollars, and there will be less flow of hard currency to the developing countries.
“This is why they call us developing countries. There is huge potential but there are certain risks attached. As long as we can remove those hurdles or make them palatable, then there is success.”
Turkey’s burgeoning opportunities are well understood in the business world.
With a population of 80 million and a balanced economy combining services, industrial and agricultural sectors, the country’s investment potential has earned it a place – alongside Mexico, Indonesia and Nigeria – in the MINT grouping of emerging economies. Its geography at the crossroads of three continents and President Recep Tayyip Erdogan’s heavy investment in Africa only strengthens its appeal.
Government officials believe that air transport is an essential catalyst for economic growth, and major development projects are now gathering pace on both sides of the Bosporus, the strait that divides Istanbul.
On the Asian side of the city, Sabiha Gokcen Airport, Pegasus’ home base, will gain a new metro link this year and a second runway in 2019. Although scheduled maintenance work means that the two runways will not be operated in tandem until 2020, Nane believes the expansion will be transformational.
“When we have two runways it will increase the capacity at least 50%,” he beamed. “It is very congested at the moment. This capacity increase will give a huge breath for the airport and the passengers.”
More landing slots will allow Pegasus to boost frequencies and add new routes, particularly to under-served but heavily protected markets in the CIS and MENA region.
The airline’s international network currently focuses heavily on western and central Europe, home to most of Turkey’s foreign visitors. Just 16 cities are served in the Middle East and the Caucasus, four in Russia and two in central Asia.
“We are flying to almost all major European destinations,” Nane said. “Which part is missing when we look in our flight peninsula? It is the CIS countries, Middle East countries and northern Africa.”
He cited this summer’s addition of Muscat, Oman and Dammam, Saudi Arabia as proof that bilateral negotiations over traffic rights are bearing fruit. But Pegasus still has a list of destinations it would “fly to next day” if given the chance, including major cities in Saudi Arabia, Iran, Algeria, Morocco and Tunisia.
In the west of Istanbul, meanwhile, an even bigger airport project is under way.
Ataturk Airport, the home base of Turkish Airlines, will this year be replaced by the Istanbul New Airport. Its parallel runways will immediately boost capacity for the flag-carrier – itself no stranger to congestion – and by 2030 the hub should be the biggest in the world, with six runways accommodating up to 200 million passengers a year.
Even without basing aircraft at the New Airport, Nane expects to benefit indirectly from the city-wide increase in landing slots. As foreign countries gain improved access to Istanbul for their own carriers, they are likely to ease traffic restrictions on Turkish operators like Pegasus.
But the low-cost carrier is also evaluating more direct involvement in the new gateway.
“After the third runway [opens in 2019] it will be a new game. We are making ourselves ready for operations,” Nane confirmed.
“Our main hub is going to be Sabiha, but according to the availability it [the New Airport] can be a point-to-point or it can be a transit [base] for certain routes. We made a feasibility study. We even made [an estimate of] the additional number of aircraft we need if we totally fulfil our expectations in the third airport.”
Further expansion is also on the cards at Antalya Airport on the Mediterranean coast and Ankara Esenboga Airport in central Anatolia – the country’s third and fourth busiest gateways – with Nane predicting that “in time, they are going to be sub-hubs for us”.
Tourism will be the main driver of growth in Antalya, while in Ankara it is transfer traffic between Europe and eastern Anatolia that has caught Pegasus’ eye.
“We have lots of flights from the Anatolian cities to Europe because there is a huge demand for ethnic traffic,” Nane noted. “The Turkish workers are coming back to their home towns during the summer time. Instead of bringing them from Istanbul as transfer passengers, Ankara is a place to divest this traffic.”
Pegasus also bases seven aircraft in Izmir on the Aegean coast through 99%-owned subsidiary IZair.
Though he is cagey when asked about upcoming route launches, Nane stressed that new markets are continually evaluated and the fleet plan factors-in steady growth of the network.
Pegasus snubbed longstanding partner Boeing in 2012 when it agreed to buy 75 Airbus A320-family neos – at the time Turkey’s largest single aircraft order.
Firmed-up options subsequently lifted the deal to 100 units, of which 18 will be A321neos and 25 A321neo aircraft cabin flexes (ACFs).
The 239-seat ACF variant is described as a “game-changer” by Nane, because of its higher capacity and lower unit costs.
To date, 20 A320neos have been delivered, joining 12 A320ceos, 45 Boeing 737-800s and one 737-400. The 78-strong fleet will rise to 91 units by the end of next year and the last Boeing is currently due to be withdrawn in 2024.
However, having already switched suppliers once, Nane stressed that all options are on the table and Pegasus continues talking to both manufacturers about its long-term requirements.
“We don’t know what will happen,” he admitted. “With the additional capacity coming from the second runway at Sabiha Gokcen and the establishment of the third and the fourth runways in the third airport, we will definitely need additional orders.”
Asked whether it would be too costly to deploy a mixed fleet of Airbuses and Boeings, he hinted that anything is viable at the right price: “Of course, cost-wise, having a single aircraft is always effective. But the contract you make with the vendors is also important in that effectiveness. So we cannot say anything today. It will be much clearer when we see the offers.”
This pragmatic, open-minded approach is also evident in Nane’s stance on subsidiaries.
Alongside IZair, Pegasus owns 49% of Air Manas, an airline based in Kyrgyzstan, and management have repeatedly talked up their appetite for further joint ventures.
Opening a subsidiary in the EU or UK is not considered prudent, with Nane insisting he “would like to find our blue oceans instead of going to the red ocean” – a reference to fierce competition and over-capacity in Europe. But almost anywhere else within narrow-body range of Turkey could be evaluated in future.
“We consider ourselves logical businessmen,” the chief executive concluded. “As long as there is logic and there is potential for expansion and feeding our traffic to Turkey, we look at every single opportunity.
“Currently, in our target range there is no such study. But it doesn’t mean that is going to be the same tomorrow. If any occurrence comes through we will definitely look at it seriously.”