Turkish Airlines' Turbulent Quarter

0:00Jay Shabat: Hello and welcome to the Airline Weekly Lounge. I'm your host Gordon Smith and I'm joined as usual by co-host Jay Shabat. In part one we're talking Turkish Airlines and in part two we turn our attention to Allegiant.

0:28Gordon Smith: hi jay how's it going all right gordon how's your summer enjoying the beaches of portugal

0:35Jay Shabat: enjoying the beaches of portugal and i'm sure many many people will be enjoying the beaches of florida with allegiance but uh actually no it's not really a good time to go to florida is it's a bit too hot and muggy there but they may be thinking about a q4 trip down to florida with allegiance and that's a very very rough segue for allegiance in part two but we're going to be discussing turkish airlines in part one jay because we've had some earnings out of them and you just if you haven't been following the podcast following the issues recently we are i would say about 80%, 85 % of the way through Q2 earnings season.

1:11Jay Shabat: The very, very large airlines that do report with the usual caveat, they're not every airline that you might have on the top of your heads, Virgin Atlantic, Emirates, et cetera, are publicly traded and they don't always give the full numbers. So of those that do report, I'd say we're about 85 % of the way through. And we've got Air Canada coming tomorrow as we're recording here on the 11th of August. So there are still a few holdouts, but for the intents and purposes of this podcast, we're running you through two of the notable airlines that we've had numbers from in the past few days. And let's begin with Turkish Airlines, Jay, an enormous airline.

1:42Jay Shabat: I think they like to describe themselves as flying to more countries than any other, more destinations than any other. And we just had a report today from ACI Europe, Airports Council International Europe, that Istanbul, the main hub there, has just overtaken London Heathrow as Europe's busiest. And there are various factors at play there.

2:00Gordon Smith: Heathrow, very, very exposed to the Gulf carriers.

2:03Jay Shabat: I think you've got six A380s from Emirates alone going through Heathrow, not to mention Etihad, Gulf Air, Kuwait, so, so many others. So it will be interesting to see how that settles down once things fully bounce back. But yes, Turkish Airlines, Jay, give us the headline numbers. How was their Q2?

2:21Gordon Smith: Not very good. They lost money in Q2, which is unusual for Turkish, and we'll try to explain that. So Turkish had a negative 1 % operating margin. They did have a net profit that includes some financial gains and et cetera, et cetera. But on an operating level, they lost money. And they just didn't quite have the same pricing power as some of the Western European carriers. If you look at, you know, I should stay just at the onset that fuel is a huge explanatory factor here. The fact that fuel prices went up so much. But if you look at the European airlines, their margins were down year over year by about four to five points.

3:08Gordon Smith: And I don't know offhand, they might have been a little bit better hedged than Turkish. I think Turkish had some fuel hedges as well. So I don't know that that was a big distinguishing factor. But whereas the European guys saw their margins declined by about four to five percent, Turkish was down by 11 full points. so it was they had a 10 a positive 10 operating margin in q2 of last year so you kind of think there's more than just fuel behind that and i'll give you a sort of what what seems to be the case here so with the um with the iran conflict and what's that what that what that's done to the gulf hubs you know dubai doha abu dhabi obviously these cub these hubs not clubs these hubs uh yeah i've done too much baseball i was watching some baseball this weekend chicago cubs are doing

4:01Jay Shabat: really well but yeah anyway the hubs it's a bear market not a cub market very good very good

4:07Gordon Smith: you said yeah so you these hubs in the gulf uh of course compete very closely with istanbul There's a lot of overlap in terms of the traffic flows. And so naturally having those hubs more or less, I don't want to say offline, but more or less disrupted, Istanbul in many ways benefited a lot from that, as did other hubs like Amsterdam and Frankfurt, et cetera, et cetera. Even hubs like Seoul and Hong Kong. So Istanbul certainly saw some benefits. And a real good example of that would be on their flights to Australia, Europe to Australia. That's a classic example of an itinerary that would normally go through Dubai or Doha.

4:58Gordon Smith: Istanbul picked up quite a bit of that. And yeah, I just think you're up to Bangkok, you're up to some of the islands like Mauritius and Seychelles. I think they've added some capacity. So it was definitely a positive in terms of their business. On the other hand, however, Turkish does fly to a lot of points in the Middle East that they're no longer able to fly to or that maybe they're flying to but not seeing as much demand anymore. and those routes are also important in supporting some of their long-haul routes as well. So if you think about some of their U.S. routes, a lot of those flights between the U.S.

5:44Gordon Smith: and Istanbul are filled with people connecting onward to Middle Eastern destinations, which at this point in time are either no longer being flown for security reasons or there's just not a lot of demand there also because of the negative headlines and all that's going on in the middle. So the U.S. market, I think, was a little bit weak for Turkish, maybe some other connecting markets as well with a lot of Middle Eastern flow traffic. I'm just going to give you one, well, let's say two countries that are kind of good examples of that. So last year, last summer, Turkish actually flew to one, two, three, four, five, six, seven, eight, nine, it looks like nine destinations in Iran and Iraq.

6:30Gordon Smith: So those are, they actually looks like they're still operating a couple of the, two of the Iraqi routes, but otherwise everything, all of that is gone there. You know, clearly they can't fly to Iran right now. And then Iraq also They're just doing that much less. So those are good examples of routes that they just can't serve anymore. And that obviously affects their entire network.

6:57Jay Shabat: Yeah, that number there. At the height of the war, our Middle East operations were temporarily reduced to only eight destinations in three countries, down from 26 destinations in 12 countries. So there you go.

7:09Gordon Smith: Yeah.

7:10Jay Shabat: Meaningful stuff there.

7:11Gordon Smith: I think what's happening also, just one more point to add on that, is that, you know, like Lufthansa made this clear in their earnings call that with Emirates and Qatar Airways and Etihad, their schedules are more or less back to normal. Maybe not fully, but they're operating at generally a full schedule. And so there are people now, remember everything I said earlier, we were talking about the entire second quarter. So now that we're in, so things have changed. But now that we're in the third quarter and the Gulf carriers have more or less rebuilt their schedules, they are capturing, again, some of that demand going through Australia, to Australia, to East Asia, whatever.

7:53Gordon Smith: Now, what Lufthansa made clear is that a lot of what they're capturing now, the Gulf carriers, is the more price sensitive stuff. And the corporate stuff still maybe not so much. now if you have if you think about what turk the the typical or the most common traffic that turkish is is handling a lot of that is going to be some of the more price sensitive stuff so turkish even said in their call that basically the competition with the gulf carriers is is getting close to back to where it was before so again back to my very original point when we were starting is that turkish doesn't quite have the same pricing power to offset the fuel inflation as maybe a Lufthansa

8:40Jay Shabat: does or an Air France does or an IAG.

8:42Gordon Smith: So yeah, I think that's more or less the story of why Turkish airlines suffered a loss in such a big year of year margin decline last quarter.

8:53Jay Shabat: Yeah, I really appreciate that insight, Jay. Some great points there. This is not a cargo podcast, it never will be, at least as long as I'm sitting in this chair. But it is important to consider cargo as part of the broader mix in terms of the group numbers, because you do have big companies, Lufthansa Cargo, I'm thinking even Korean Air, which we discussed a few weeks ago, and their exposure to cargo, air cargo, can really help offset any weakness in passenger yields, especially at times of difficulty. COVID was a great example of that, where you actually had passenger revenues plummet, but cargo revenues, if you played it right, like Korean Air, Ethiopia, and a few others, could really help you get through the crisis.

9:30Jay Shabat: Just a number here from the Turkish Airlines investor relations piece that came out just a few days ago. They say cargo was another highlight. And what you're thinking, why are you telling me about cargo when you said it didn't matter, Gordon? Here is the number that I want to share. It said, quote, adapting to shifting trade flows on our extensive network, revenues increased by 58%, reaching nearly$1.3 billion, mainly driven by more than 40 % increase in yields. Accordingly, our total revenues rose more than 20%, surpassing$7.2 billion. So I just wanted to share that with our listeners, viewers, to show how big an impact cargo can have on the bottom line and compensate, again, maybe for some slight weakness or even just some reduced strength in the traditional passenger divisions.

10:15Gordon Smith: Yeah, great point. Cargo is very, just, yeah, that's got to be doing really well right now. As you mentioned, revenue is up almost 60%. And I think the yields on the cargo up almost 40%. I just did some quick math while you were talking. I was hoping you'd keep talking here. Give me some time to - Oh, sorry. I can ad lib. That's what I do best. Well, you actually gave me a perfect amount of time. Just in the nick of time, I got my figure that I was calculating here. So it looks like cargo represents 17 % of Turkish airlines, the total revenue. So that's a lot. I mean, 17 % is a lot more than say a US carrier, maybe not as much is a korean air but but you know kind of pretty close up there so uh yeah so when that when that part of the business is doing very well that's got it got to be very helpful now the fact they still lost money last quarter goes to tell you that the passenger yields the pricing power on the passenger side was as i mentioned before pretty weak now i think you know the big test will be, one big test will be this quarter because they are a very seasonal airline.

11:26Gordon Smith: Turkey is a very seasonal market. So the third quarter tends to be very, very strong. So we'll see how the earnings come in. Of course, a lot is going to depend on, you know, where fuel prices go over the next couple of weeks. What are we already in mid-August? So we're, I guess, roughly halfway through the quarter. So, you know, still a lot to be determined. The U.S., you mentioned the U.S. market. I think, you know, there's, of course, going to be a lot of that U.S. traffic that can't get on Turkish to some of these Middle Eastern destinations still. One thing that will be a little bit different is that there won't be no more World Cup.

12:05Gordon Smith: Although, I guess, you do have i guess july you did have some uh world cup traffic that's tends to be more of a negative um during the games a lot of people stay home they don't travel as much so um and i think they they basically said that for you know it affected june which was in the second quarter so you know a lot of moving parts so no nothing to panic about but um clearly the uh you know the destruction to the Middle East is affecting them. In some ways, positive, some ways, negative. But it seems like, you know, on that, maybe more negative than positive.

12:42Jay Shabat: Giveth and taketh, but maybe a little bit more taketh. Jay, regular listeners and viewers might be wondering about Air Europa, because that was obviously a Spanish, I don't want to call it a leisure carrier, because it's a genuine network carrier. You can get down to South America, you can cross the Atlantic to New York and other bits and pieces. But it also does have, you know, sort of what you would probably call a regional network within Iberia and Western Europe as well. That was obviously under the gaze of IAG. And then they said, actually, no, we don't want this. Or the regulators said, we don't want this.

13:17Jay Shabat: And they got all very messy. And then you had Turkish airlines come up and say, hey, we'll take it. Was there any sort of color around an update on Air Europa with Turkish or was that going a bit quiet?

13:27Gordon Smith: Yeah, quiet. No mention of it at all in any of their documents or any of their earnings calls. So I think it's just, you know, they don't, I can't remember exactly how much they own, but it's a minority investment. They don't control it. So they, you know, the routes that Air Europa flies, as you mentioned, between Madrid and South America, Latin America, even a few North America are, I mean, that's a very, very strong market at the moment. It's thriving. So you have to believe that it's a good time to have ownership in an airline like that. Now, because they're privately held, this is not a publicly traded carrier.

14:14Gordon Smith: We don't know exactly what their costs are, if they're making money. But yeah, pretty quiet on that. I don't know if they would characterize it as a passive investment. But, you know, there's obviously some strategy involved. They bought it to gain more exposure to the Americas, particularly Latin America. But it doesn't fit extremely well into their, you know, network. There's not a whole lot of network synergies there.

14:40Jay Shabat: Yeah, not to mention the fact that I think off the top of my head, Air Europe is still Sky Team and obviously Turkish Airlines in Star. So some various complications and historical elements there as well, Jay. But we'll keep an eye on it because I think probably I agree. it does feel like a bit of a passive investment, but I'm not sure how long that status as a passive investment will stay. You can imagine, particularly with the new management team at Torka Share Lines in this year, there may be a slightly more, just a bit more of a purposeful approach to that investment as things bed in. And maybe once they get the current fuel spike and other immediate term crises and micro crises under the belt, maybe they can start looking a little bit closer how they can best leverage that Europa investment.

15:24Gordon Smith: Yeah, there's a reason why, oh, I'm sorry to cut you off. I was just going to do one more ad. I mean, it's the reason why the network synergies are not obvious or not, you know, it's, you don't really, they don't kind of come out at you. I mean, if you think about, you know, someone wanted to go from South, let's say a Brazil to somewhere in the Middle East or Central Asia, someplace that, you know, Turkish has a very strong network too. They'd have to double connect over Madrid and Istanbul. So it's not like super competitive. You know, some of the European airlines can do it just with a single connect over their hubs.

15:59Gordon Smith: Unfortunately, Istanbul, they can do, you know, they fly to Sao Paulo, they fly to Mexico City, a couple other places. But it's just so far that there are limits. You know, you're never going to do as much South America from Istanbul as you can do from Madrid. So, you know, you can see why they want the added exposure. But whether or not they'll get a whole lot of network synergies is somewhat questionable.

16:22Jay Shabat: Yeah, remains to be seen. That's going to wrap up our conversation around Turkish. But if you are looking for more detail, I was able to have a one-on-one conversation with the relatively new chairman of Turkish Airlines, Murat Shekhar, at the IATA AGM in May. So that's on the archives there. We were discussing premium economy, the crystal suite, and various other elements there. So jump into the archive if you're looking for a bit more insight around Turkish Airlines and the new management team there. Jay, okay. Before we get into Allegiant in part two, a quick reminder to send any questions or comments that you might have for us to podcasts at skiff.com.

16:59Jay Shabat: That's podcasts with an S at the end. And please don't forget to follow or subscribe to the podcast wherever you're listening or watching. And if you are enjoying the show, please write us five stars and leave us a post review so we can continue to spread the word about the airline weekly launch. Don't go anywhere. We'll be back in part two talking Allegiant Airlines. Hello, and welcome back to the Airline Weekly Lounge. I'm Gordon Smith, joined as usual by co-host Jay Shabit. Part one, we were discussing Turkish Airlines. We are turning our attention now to Allegiant, Jay. And for anyone that's been under a rock for the past six, nine months, we are now discussing Allegiant Air with some country built in, or are they still separate?

17:38Jay Shabat: Give us a little bit of a scene setter on what we're actually discussing when we discuss Allegiant before we take through those numbers.

17:44Gordon Smith: Yeah, sure. Sure. So the merger is all done and all the T's were crossed and I's were dotted. So it's all done, done deal.

17:53Jay Shabat: So still separate AOCs? Still separate AOCs.

17:57Gordon Smith: So they're working on getting that integrated. And then there's, of course, union issues that they have to integrate. So there's definitely, operationally, they're still separate. But in terms of, you know, this is one company now. So think of it like that. Now, when they presented their second quarter results, they actually gave two numbers. They gave a number with Sun Country as of the date that the merger was finalized, which was middle of the quarter, I think sometime in May. And then they gave a date just the Legion, so not Sun Country. Now, thankfully for me and for all of us, they made it easy.

18:35Gordon Smith: 9 % were both numbers. So we can 9.2 with part of Sun Country and a 9 without. So we'll just use that 9 % number. And either way, that 9 % is ranks number one of all the U.S. airlines that have reported. And I guess they're all in, right? So that's all the publicly traded scheduled airlines. This doesn't count SkyWest and Republic. I should put a little asterisk there. They actually earned even higher margins than that.

19:10Jay Shabat: SkyWest is 14%, Republic is 13%.

19:12Gordon Smith: That's a totally different business model. So we're going to throw those aside. That's not playing on the same playing field here. So Allegiant, they were the kings of the U.S. airline industry. Not an unfamiliar spot for them. They ran through some bumpy years post-COVID, but sounds like they're kind of back to where they used to be at the top of the rankings with that 9%. So, yeah, looking back, a lot going on at Allegiant. They announced the new first-class seating. They're going to keep their extra legroom seating, which they said was just doing so well that it was obvious, okay, we got to add a first-class product as well.

19:56Gordon Smith: So they're going to be doing that. They're offering free drinks now. They're kind of going a little bit upscale. And remember, Sun Country was also kind of a little bit upscale coming in. They have a new pilot deal, Legion does. They are now distributing their tickets through Expedia. They used to be militantly against any kind of third-party distribution. But you can see this is a very open-minded airline. It's an airline that's changing, that's adopting new strategies, new policies. They do say that there's a lot of decisions to make in the coming quarters, coming months, quarters, about what are we going to, as we integrate operationally Sun Country, what products are we going to have across the whole fleet, et cetera, et cetera.

20:45Gordon Smith: So a lot going on at Allegiant, but they're doing great.

20:48Jay Shabat: It's interesting you mentioned that Jay, because when we were speaking to Greg Anderson, the CEO of Allegiant, just in the few weeks before the merger got completely finalized from a regulatory point of view, he was saying actually one of the reasons he was quite encouraged by the merger and that it was a relatively easy process in terms of getting through DC and others, is the fact that it was only within one or two routes and the entire Allegiant and Sun Country network that overlapped. But there are differences in the business model as we've already suggested that so it'll be really interesting to see which ones stay dominant and you're probably going to expect most of the Allegiant format to stay it's been very very profitable but Sun Country was also a very very profitable airline and actually I was looking back through some of our airline weekly graphs from 2013, 2014, 2015 even and then also more recently so the past 23, 24, 25 years and these have been two carriers that have been sustainably profitable for the best part of a decade plus.

21:43Jay Shabat: So very interesting that you've got two of the most profitable carriers in the entire US coming together to almost make some sort of super profitable carrier, albeit one that is still relatively modest in size compared to the scale of the big four. So yeah, from an outsider looking in, really, really interesting times ahead there, Jay. And was there any sort of color on the call or in the transcript around just general consumer behavior consumer confidence they're obviously very exposed to to florida and to las vegas

22:11Gordon Smith: traditionally yeah well they said demand is very good as which that's pretty much what what all all airlines particularly in the u.s have been seeing so they're seeing really really strong demand in fact they did did they i don't have it in front of me but i think they're they were able to uh yeah i just don't have the number in front of it but the revenue growth is very impressive which does, you know, could be reflective of several things. It could be, you know, they did overlap with Spirit on maybe a few routes. But I think clearly they're seeing real nice demand. Interestingly enough, you know, they're just getting, over time, they're getting more and more Florida heavy.

22:50Gordon Smith: And I'm just looking at forgetting about the Sun Country Network, which is mostly Minneapolis to, you know, different beach spots around the country, but even some international.

23:00Jay Shabat: But in terms of Allegiant, it's very, very Florida heavy.

23:04Gordon Smith: So if you look at what is their busiest airport in their network is Orlando Sanford. Then comes St. Petersburg in Florida. Then comes Punta Gorda in Florida. And then Las Vegas, which is still big for them. That's their headquarter city. But they've kind of de-emphasized it over the past few years. I think we've talked about how Las Vegas as a tourism economy has had some challenges. Phoenix Mesa is next on the list. And then you get into more Florida, Fort Lauderdale, Sarasota. Was it VPS? Is it Destin? I think Destin over on the panhandle of Florida. So yeah, very, very Florida heavy airline.

23:44Gordon Smith: uh they did say that actually they're going to make money in the third quarter so that's the current quarter we're in right now which remember third quarter for florida is that's that's downtime you know that's hurricane season it's uh i think you asked me uh you know you mentioned earlier that uh florida in august is not you know the best place to visit because it's just extremely hot so but they they said they're going to make money even even in third quarter so uh yeah they're doing something right maybe oddly enough you know they i don't want to say high fuel prices benefit them but a carrier like allegiant with that business model they have they're probably better able to deal with fuel prices than anyone else because when it gets to the point where the flight can't make money because the fuel prices are too high they just won't fly it.

24:35Gordon Smith: They just ground the planes. And obviously, they can't do that. They can only do that to a certain extent. They don't have paid for MD-80s anymore. I mean, they do have bills to pay. They need to generate cash flow. But that is a model that just works relatively well when you're in a fuel crisis.

25:00Jay Shabat: It sure helps, Jay. Anything else to add on Legion before we head into the end of the episode?

25:05Gordon Smith: No, I'll just, I'll add one small negative thing that they did say, and I imagine that it's just a temporary thing. Room for improvement on the school report card. Yeah, yeah, it needs improvement.

25:19Jay Shabat: A little, yeah, a little negative thing there,

25:23Gordon Smith: but is that they are losing pilots in Minneapolis to Delta. so sun country is you know minnesota is there minneapolis is there minneapolisst paul is their their big uh their headquarters and their their big operation there and then delta has there as well so since the merger i guess a lot of past a lot of pilots have been uh leaving sun country and taking jobs um over there over there delta so you know that that's just one one thing that they mentioned. And, you know, one other just thing that popped into my mind that I think is interesting to point out is, you know, as they add the first class seats, as they, you know, add the free drinks, you know, whatever amenities, when airlines do this, because it's so common now, you know, just every day you wake up and it's like, oh, another airline is adding some premium amenity.

26:17Gordon Smith: Just keep in mind that not only are airlines getting paid for that, you know, in terms of being able to charge higher fares, it also makes these loyalty programs more valuable. And then they can go turn around and in Allegiance case, Bank of America is their credit card partner. They can say, you know, hey, look, we've got more perks for your, you know, your credit card holders here. And so there's, you're, you're kind of getting value in different areas. So something to keep in mind. That's all I got.

26:49Jay Shabat: That's all you got. All right. Well, we'll finish it up there. Thank you for your insight, Jay, not just on Allegiant Air, but also Turkish Airlines. And speaking of airlines, well, the Airline Weekly Launch podcast, that was probably an even worse segue, Jay, than my segue at the very start of the show. I wanted to share that we've got a very exciting addition to our SCIFT Global Forum speaking lineup, because it was confirmed just in the past couple of days, we've got Hamad Ali Al-Khata, who's the relatively new group CEO at Qatar Airways. He's going to be joining us at the Skift Global Forum.

27:21Jay Shabat: If you haven't already got your tickets, tickets are selling very, very fast. It's September 22nd through 24th in New York City. We're returning to the North Javits Center. Hope to see many of you there. If you haven't already got your tickets, live.skift.com is the details there. We've also got Cornel Costa and also Mark Gallardo from Canada from an aviation point of view, but loads and loads and loads of other big heavyweights in the broader travel industry. Live.skift.com for the latest speaker lineup and also to secure your ticket. Not to be confused with our Skift Aviation Forum, which is in November at the TWA Hotel at JFK.

27:54Jay Shabat: The first set of speakers already confirmed for that. We've got Luis Gallego, David Nealman amongst the heavyweights joining us. Many, many more to be confirmed there as well. So live.skift.com for all the details. And if you are an airline weekly the subscriber for the Skift Aviation Forum, you should have a promo code that you can enter for a specially discounted ticket. Great. That brings us to the end of this week's show. A reminder that there's no Airline Weekly issues for the next couple of weeks. We'll be back with normal cadence on Monday, August 31st. Jay, thank you for that. Interesting insight into both Turkish and Allegiant.

28:25Jay Shabat: Thanks also to our producers, Jean Moniker, Kelsey, and Will. And wherever you are in the world, thanks for listening, and we'll catch you next time. Bye for now. Whether you're listening to us on Spotify, Apple, or wherever you get your podcasts, please remember to subscribe rate us five stars or leave us a positive review this really helps us get the word out about the airline weekly launch so we can continue to bring you this podcast every week absolutely free of charge and if you're watching us on youtube be sure to subscribe to the skiff channel and hit the notification bell to find out whenever a new video drops