Pegasus riding into a brave, new future
Mehmet Nane, CEO of Turkey's second-largest airline, gives Alan Dron the lowdown on re-fleeting, expansion plans and an aircraft manufacturer's indecent proposal.
Pegasus Airlines last month became the first airline in the world to operate the CFM LEAP-1A-powered version of the Airbus A320neo.
It was another milestone in the steady expansion of Turkey’s largest low-cost carrier (LCC), which is now second only to giant flag-carrier Turkish Airlines in the strategically-positioned nation.
Pegasus and Turkish have ridden the wave of the nation’s economy, which has expanded at close to 5% annually for the last three decades. That growing wealth, together with a youthful national demographic and a population of 80 million, has seen Turks taking to the skies in steadily increasing numbers.
Additionally, the explosion of inbound tourism to the country since 1985 has helped fuel Pegasus’ growth.
Tourism has brought considerable benefits to Turkey, but is vulnerable to external factors. A series of terrorist bombings in Istanbul, Ankara and elsewhere this year has seen western European tourist numbers drop significantly.
At least as serious has been the diplomatic stand-off between Russia and Turkey. The two countries have backed opposing sides in the civil war in Syria, with Moscow giving military backing to President Bashar Assad, while Ankara supports opposition factions.
Tensions between Turkey and Russia – both headed by leaders who take a strong approach on international affairs – came to a head last December with the shooting down by Turkish Lockheed Martin F-16s of a Russian Sukhoi Su-24 that had intruded into Turkey’s airspace.
A diplomatic row erupted, with President Vladimir Putin slapping sanctions on Turkey and banning the sale of Turkish charter holidays to Russians. The seriousness of that move for the Turkish tourist economy can be gauged by the fact that 4.5 million of the 11 million visitors to Turkey last year were Russians.
The effect of both these developments could be seen in Pegasus Airlines’ Q1 2016 financial figures. The carrier’s net loss widened to TL173.6 million ($61.2 million) from TL50 million for the same period a year earlier, and it described the period as “difficult”.
Nevertheless, turnover for the quarter was a substantial 19% up on the same period in 2015 at TL691 million and passenger numbers climbed at virtually the same rate, 18.6%, to 5.36 million, indicating that although yields had been squeezed, the popularity of flying – particularly within Turkey – had not.
Domestic traffic last year accounted for almost 14 million of Pegasus’ 22.3 million passengers and the rate of domestic expansion was 15.4%, compared to growth of 9.8% on its international routes.
In 2015, Pegasus flew 28.3% of all Turkish internal passengers and its figures for Q1 2016 saw it breach the 30% mark.
The country is ideal territory for the creation of a domestic market, said CEO Mehmet Nane, who succeeded Sertaç Haybat in March. “Turkey is a big country. Flying from Istanbul [in the west] to Van or Erzurum [in eastern Anatolia] takes almost two hours. That’s the same time as it would take to fly from Istanbul to Vienna or Budapest.”
Additionally, Turkey has a weak rail network, while buses, the traditional method of making lengthy domestic journeys, take 24 hours to cross the country. The latter are being replaced by air traffic and Pegasus serves no fewer than 33 domestic destinations.
That market remains strong and Nane believes that the geopolitical problems will be fixed sooner rather than later. Turkey would unite against terrorism, he said and he believed Ankara and Moscow were talking to each other to resolve their differences. He anticipated an improvement in the second half of the year.
Pegasus’ international route map covers Europe and, increasingly, the Middle East and Central Asia. Nane sees all these areas, together with Russia and sub-Saharan Africa, as targets for further expansion. He declined to say where in Africa Pegasus might serve, but if it does launch itself into Africa, it will be following in the footsteps of Turkish Airlines, which has expanded aggressively there in recent years and has said its ambition is to be the largest carrier on the continent.
When interviewed by Arabian Aerospace three years ago, Nane’s predecessor was cautious about involvement in the highly-competitive Gulf market, but Pegasus now flies into Dubai, Doha, Muharraq and Kuwait.
However, it is the large Saudi Arabian market that really attracts Pegasus and a significant development came earlier this year with the signing of a codeshare agreement with Saudi carrier Flynas.
Pegasus already operates into Jeddah and Medina, but the new agreement will allow it to cast its net further afield, with Saudi-based customers now able to book through Flynas to the Turkish cities of Trabzon, Hatay, Adana, Ankara and Antalya, connecting through Pegasus’ hub at Istanbul’s second airport, Sabiha Gökçen.
It will stay at Sabiha Gökçen for the next few years at least, but with Istanbul’s giant new airport due to open progressively from 2018 to replace Ataturk International and building up to no fewer than six runways, Nane said he was open to the idea of moving there.
Also a possibility is long-haul flights: “We are following very closely some low-cost carriers that are testing long-haul from Europe,” said Nane. Norwegian, for example, is using a growing fleet of Boeing 787s to operate from Scandinavia and the UK to several long-haul destinations, primarily in the US.
“If there is demand from customers, we will consider that. But there are no plans at the moment,” said Nane.
Pegasus has built its fleet on the Boeing 737-800, of which it has 59 (plus a single, older 737-400) but in December 2012 it stole a march on Seattle by placing an order for up to 100 Airbus A320-family aircraft.
Ten were in service by early June, with the first of the CFM-powered neo versions about to arrive. From July, all remaining deliveries will be neo variants. Of the 75 on firm order, 58 will be A320s, while 17 will be the larger A321. No decision has yet been taken on firming the remaining 25 options.
Switching a large fleet is not a decision taken lightly, but there was one simple factor behind the move, said Nane: “Airbus made an indecent proposal to us that we couldn’t refuse. They seduced us.”
Leaving aside the intriguing vision of Airbus’ chief salesman, John Leahy, as a 21st century Casanova, the new aircraft will deliver some 15% better fuel-burn than the current Boeings. The new 737MAX would have provided roughly the same improvement in fuel consumption but, at the time the order was placed, it was around two years behind the A320neo in its development timetable.
The financial deal behind the European single-aisle aircraft must have been extraordinarily good, because Pegasus is prepared to bear the costs and complexity of running a two-type fleet for several years into the future.
And yet, the airline ordered a further five 737-800s in March. Why? Simply because Pegasus wants to keep on good terms with both major manufacturers, said Nane. “We have a very good relationship with both companies. This [order] is demonstrating that good relationship.”
Regardless of which type is used, Pegasus is focusing on improving aircraft utilisation and efficiency. In recent years, turnaround times have been reduced from 45 to 25 minutes, through measures such as stocking the aircraft’s galley with sufficient food and drink for between two to four sectors at the start of a working day, eliminating restocking times at intermediate stops.
The company is also working hard to improve its ancillary revenues. The success of that policy could be seen in its 2016 Q1 figures, with ancillary revenues up 38% compared to a year previously.
Last year delivered considerably improved annual figures, with net profit rising to TL291.5 million compared to TL15.7 million in 2014. Pegasus is hoping the CFM-powered A320neos will help it further improve those figures.