Turkish Airlines - Strategic Analysis

Turkish Airlines Strategy Analysis MGT 525

Turkish Airlines Strategy Report

Final ProjectProfessor Fiona Scott MortonYale School of Management

The following members hereby confirm that they have understood and respected the honour code

Hikmetcan Bilici Siddharth Dixit Anunay Sahay

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1. Introduction

1.1. Turkish Airlines: Past and PresentTurkish Airlines was founded in 1933 as part of the Ministry of

Defense with 100% state equity. However, after the liberalization

of the airline industry in Turkey and the privatization efforts

of state-owned companies, the government currently owns 49% of

the company, while the rest of the shares are publicly traded on

Istanbul Stock Exchange1.

Before the 1990s, Turkish Airlines suffered from a tarnished

reputation due to frequent delays, poor customer service, and

falling victim to hijackings and plane crashes. In an effort to

promote Turkey and enhance Turkey’s image, the government

initiated efforts to reorganize its fleet and re-vamp its

management. Turkish Airlines had predominantly focused its

business on the domestic market. However, as the intensity of

domestic and international competition increased within the

airline industry, the company decided to reorganize its

operations. Its current strategies in the 21st century is proving

to be strongly successful for Turkish Airlines as the company

modernized its fleet, expanded its routes to service

international travellers, achieved crucial alliances in the

industry, and upgraded the quality of its services.

Between 2006 and 2013, Turkish Airlines has seen a dramatic

increase in its annual passengers, from 17.0 million is 2006 to1 Turkish Airlines Annual Report, 2013

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48.3 million passengers in 2013. Total revenues also climbed

dramatically during this time period from $2.23 to $9.8 billion

by the end of 20132.

After the deregulation of the domestic market in Turkey, Turkish

Airlines has launched several low-cost carrier brands under

Anadolu Jet, Sun Express, and Northern Cyprus Turkish Airlines to

compete with this segment, while positioning itself as an

international player.

Turkish Airlines has several hub locations in Turkey with

Istanbul Ataturk Airport as its primary hub, where Turkish

Technical Maintenance is also held. Due to an increase in volume

of passengers to Turkey, a third airport in Istanbul is under

construction, which signals more expansion and investment

opportunities for Turkish Airlines, while also attracting more

intense competition to the market.

Turkish Airlines was awarded the prize for the best airlines in

Europe in 2011, 2012, and 2013. Turkish Airlines, with 245

destinations, flies to more countries than any other airline.

Successful government initiatives to promote tourism in Turkey,

in combination with major sponsorship deals with giant sports

clubs such as Dortmund, Barcelona, and Manchester United has all

helped Turkish Airlines to gain visibility and customer awareness

in the international airline market.

2 Turkish Airlines Annual Report, 2013

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In 2008, Turkish Airlines became a member of the Star Alliance

Network, thereby expanding its network and partnerships with

other major international carriers. Its rewards program, “Miles &

Smiles”, has been successfully implemented both domestically and

internationally and created further customer loyalties to the

airline through its excellent rated customer service and rewards

share system with the Star Alliance carriers.

2. Industry Analysis Before the deregulation of the airline industry in Turkey,

Turkish Airlines enjoyed monopoly pricing as the nations’ only

flag carrier. Turkish Airlines had no rivalry in domestic routes

and had a low competitive landscape, as city-pairings to Istanbul

for foreign carriers were not as important. By studying the

Porter’s five forces, we hope to understand the intensity of the

rivalry within the Turkish Aviation market.

Before the deregulation, most of the air travellers consisted of

people with high-income and Turkish Airlines had a reasonable

supplier power in the domestic aviation industry. As Turkish

Airlines was a natural monopoly and the degree of substitution

was low for air traveller, the only other means of travelling was

road travelling. Considering the wide geographic layout of Turkey

and the amount of time consumed travelling by road, road travel

was not a direct substitute for air travel by high-income

population. In 2012, high-speed railway projects were completed

between Istanbul and Ankara, which can be seen as a substitution

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for air travel. Along with the deregulation in 2003, some private

chartering companies entered into the market and the degree of

substitution increased as new entrants offered different

networks, services and prices.

The entry to market was obviously freed after the deregulation of

the market, however due to capacity constraints at Ataturk

Airport, the largest and busiest airport in Turkey, airlines

experienced difficulty in gaining airport slots and gate

positions, which are valuable resources for the airlines.

Consequently, the civil aviation authority no longer permits

entry due to lack of slots3. The ease of entry will be limited

until the two current airports serving Istanbul is expanded.

Additionally, there is an ongoing construction for the third

airport, which will be the largest airport in the world with 150

million annual passenger capacity4.

Along with the entry of new players with low-cost,

differentiation, or focus strategies, the number of both domestic

and international travellers rose and the power of buyers

increased. As seen from the graph below, the number of domestic

passengers grew approximately from 9 million in 2003 to 76

million in 2013 and the number of international passengers rose

from approximately 25 million to 75 million.

3 Orhan, Gamze, A Study of The Strategic Responses of Turkish Airline Companies to the Deregulation in Turkey, Journal of Management Research, 2013, p.464 http://en.wikipedia.org/wiki/Istanbul_New_Airport

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Figure 2.1: Number of Passengers on Turkish Airline Source: Turkish Ministry of Transportation, 2003-2013Statistical Booklet, p.41

Overall, the degree of rivalry has intensified in the Turkish

aviation market for Turkish Airlines as the Company has to

compete with low-cost carriers in the domestic market and large

and experienced airlines in the international market.

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Figure 2.2: Passenger Segmentation Source: http://centreforaviation.com/analysis/turkish-airlines-narrowing-the-strategic-gulf-part-1-112352

It can be inferred from the graph above that there has been a

steady increase in the Turkish aviation market since 2004. With

the deregulation in 2003, there was a tremendous growth of

approximately 60% in 2004 in which Turkish Airlines was able to

increase its growth and share. As there was more entry into the

market, Turkish Airlines growth in the domestic market declined

to 10% by 2012; along with the steep decline in the overall

Turkish domestic passenger market.

Along with the challenges, Turkish Airlines achieved to position

itself successfully both in the domestic market and in the

international market. In the next stages of our analysis, we hope

to evaluate the positioning, differentiation and competitive

advantages of Turkish Airlines and look into the competitive

interactions of the Company in different markets.

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3. Competitive Advantages of Turkish AirlinesAs an incumbent, Turkish Airlines had a first-mover advantage

upon the deregulation of the Turkish aviation industry. As stated

in our class discussion, when two or more firms compete, the

winner is often the firm with the largest installed base, thereby

enhancing value of networks and attracting more customers.

Furthermore, Turkish Airlines was able to benefit from higher

economies of scope due to its early entry.

High quality of inflight service, brand awareness, and the safety

concerns associated with competitors has helped Turkish Airlines

to retain most of its existing customers and continue its price

leadership. Additionally, having the biggest domestic network and

seamless international and domestic passenger transit

capabilities added further competitive advantages for Turkish

Airlines.

The low-cost operation model of Turkish Airlines while keeping

the quality of services constant helped the Company to retain its

leadership position. Once Turkish Airlines cut its costs, its

customers started to return and lock themselves through the use

of its premium loyalty card.

The de-integration of its value chain has also helped Turkish

Airlines to become operationally efficient and low-cost company.

Through the de-integration of its maintenance, catering, ground

handling, and call center subsidiaries into stand-alone

companies, the stand-alone subsidiaries became more efficient and

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profitable. At the same time, the subsidiaries were also serving

other airlines, thereby achieving a better economies and scale

and lower-price reflection to Turkish Airlines5.

Marketing activities of Turkish Airlines also helped to company

to achieve higher brand recognition around the globe. Turkish

Airlines has invested significantly to improve its brand image

through the redesign of its logo, celebrity endorsements with

Lionel Messi and Kobe Bryant, sports team sponsorships with

Barcelona and Manchester United, and viral marketing campaigns.

Figure 3.1: Turkish Airlines market positioning

All of this growth, both organic and through alliances has been

matched by significant progress in terms of service quality.

Skytrax, the global organization that ranks airline quality, has

given Turkish Airlines a host of awards in recent years. These

include recognition in 2011, 2012, and 2013 as Europe’s Best

Airline, Southern Europe’s Best Airline and best Economy

Catering6.

5 Orhan, Gamze, A Study of The Strategic Responses of Turkish Airline Companies to the Deregulation in Turkey, Journal of Management Research, 2013, p.556 Turkish Airlines Annual Report, 2013, p.7

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4. Domestic Positioning and Competitive InteractionsAs explained by Porter, companies usually focus on three

different types of strategies. The strategies are outlines as

cost-leadership, differentiation, and focus7. Upon the entry of

new players into the Turkish aviation industry, new players chose

one of the options outlined above, as it is very difficult to

implement two strategies under one firm. As seen from the table

below, the industry has six players besides Turkish Airlines and

each airline seems to be strategizing on one topic. The strategic

competitive tools for players are based on network, quality of

service, and price8. In order to map out the cost/quality

positioning of Turkish Airlines amongst other players, we will be

studying the competitive tools of other players relative to

Turkish Airlines.

Most of the new entrants followed a low-cost business model,

thereby targeting the low and mid-income population of Turkey.

Along with cost leadership, the entrants relied on its hub-and-

spoke networks and popular city-pairings for high utilization

rates and operational efficiencies. Because offering a single

fare is not competitive, such airlines adopted yield maximization

pricing systems and adjusted their prices in accordance to

7 Orhan, Gamze, A Study of The Strategic Responses of Turkish Airline Companies to the Deregulation in Turkey, Journal of Management Research, 2013, p.378 Orhan, Gamze, A Study of The Strategic Responses of Turkish Airline Companies to the Deregulation in Turkey, Journal of Management Research, 2013, p.46

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Turkish Airline prices, as Turkish Airlines is the clear dominant

player and price maker9.

Figure 4.1: Current state of the operational airlines

Other entrants such as Atlas Jet offered better in-flight

services to its customers and mainly competed on the service

tools. At the same time, the Company still offered prices that

are higher than low-cost carriers, but the prices were not as

high as Turkish Airline’s prices. Atlas Jet also chose to focus

on its network and look for destinations where the average income

is higher.

Pegasus Airlines entered the market in 2005 as another low-cost

carrier. However, the Company differentiated itself by focusing

on its network and by choosing Sabiha Gokcen Airport, Istanbul’s

second airport, as its hub location. Just like other airlines,

Pegasus was also utilizing yield management systems for pricing.

Additionally, the Company acquired IzAir, which has its hub in

Izmir. With this acquisition, the company seeks to differentiate

its network and serve markets with different city-pairings10.

9 Orhan, Gamze, A Study of The Strategic Responses of Turkish Airline Companies to the Deregulation in Turkey, Journal of Management Research, 2013, p.4610 Orhan, Gamze, A Study of The Strategic Responses of Turkish Airline Companies to the Deregulation in Turkey, Journal of Management Research, 2013, p.51

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SunExpress, in which Turkish Airlines has 50% equity, offers

services from Antalya, Izmir, and other popular cities to

Istanbul’s Sabiha Gokcen Airport. The reason why the Company is

using Sabiha Gokcen Airport is basically to be in direct

competition with Pegasus Airlines in Sabiha Gokcen Airport.

SunExpress offers low-cost seats with additional value-add

services on demand so the company is flexible in meeting

different customers perceptions and budgets.

As a strategic response to low-cost carriers, Turkish Airlines

focused on lowering its costs whole maintaining the same level of

quality for its customers. In 2003, Turkish Airlines has decided

to grow its fleet and made a credible capacity commitment to the

industry whilst keeping the other resources stable excluding the

cabin and crew11. Turkish Airlines achieved to keep its costs

stable while improving productivity.

Additionally, Turkish Airlines decided to vertically de-integrate

its ground operations such as handling and catering. This move

has given the other parts of the value chain efficiency, as they

were able to serve other companies and achieve economies of scale

while Turkish Airlines was able to focus on its operations and

outsource service for lower costs.

Yet, Turkish Airline’s most impactful reaction to the

deregulation of the market was the launch of Anadolu Jet, a low-

cost sub-brand of Turkish Airlines. Although Turkish Airlines was

11 Orhan, Gamze, A Study of The Strategic Responses of Turkish Airline Companies to the Deregulation in Turkey, Journal of Management Research, 2013, p.54

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keeping its position on the cost/quality curve through its

efficiencies and image, these strategies were not enough to

tackle competition in the market place, as there was a

significant price competition with the entry and the low-cost

business models of entrants.

Anadolu Jet, with its hub operations in the capital city of

Ankara, offered its passengers a low-cost flight with the

structural advantages of Turkish Airlines and its geography.

Anadolu Jet was able to integrate its network to Turkish Airlines

for domestic passengers with international flight connections.

Furthermore, Ankara is a highly populated city located in the

center of Turkey, with its hub and spoke network, Anadolu Jet was

able to offer low-cost and efficient city-pairings to its

passengers.

Figure 4.1: Price Quality frontier set by Turkish Airlines

Based on the value map analysis above, we can see that all

airlines are plotted on the indifference curve and segregated

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themselves through their network, service, price, as well as

differentiation strategies. Turkish Airlines is clearly the

leading quality provider of services with its price leadership

while Onur Air, Pegasus, and Anadolu Jet are following a low

pricing strategy with lower quality of services. Atlas Jet has

positioned itself in between the low-cost carriers and Turkish

Airlines.

Post-deregulation of the domestic aviation industry seems to be

based on price competition under the auspices of Turkish

Airlines. By expanding its capacity, Turkish Airlines made a

tough commitment. Since products are not differentiated enough to

justify the price difference for the price-sensitive travellers.

Upon capacity expansion, Turkish Airlines focused on its

utilization rate while keeping the service quality constant and

lowering prices. See graph below for illustration purposes of

Cournot and Bertrand best response function adjustments.

Figure 4.2: Competitive responses of Turkish Airlines signifying commitment

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5. International Positioning and Competitive Advantages

Turkish Airlines is, and has been, benefited from its main

operation hub in Istanbul. Istanbul’s strategic location in

linking the East to the West has offered a natural uniqueness in

the Aviation industry. Being able to reach to 55 countries within

3.5 hours substantiates the attractiveness of the location12.

The strategic location of Istanbul translates into three main

competitive advantages for Turkish Airlines against its

competitors such as Etihad and Emirates.

The first main advantage is to be able to offer flexible route

planning to destinations that are within 3.5 hours. This

flexibility offers last minute adjustments to the plane size. For

example, if a scheduled flight from Istanbul to Paris is under

booked, the trip can be allocated to a smaller body plane,

thereby lowering the costs associated with the flight and

increasing the average revenue per customer.

The second advantage that is associated with location is the

increase in the volume of transit passengers. Since there are

limited number of flights from Northern Europe, Northern Africa,

and Middle East to long haul destinations such as North America,

South America, and Asia Pacific; Turkish Airlines is able to link

passengers from neighboring countries to its long haul flights.

The Star Alliance network further increases the number of transit

passengers from neighboring countries as well as from countries

12 http://www.turkishairlines.com/tr-TR/kurumsal/faaliyet-raporu/2011/en/m-1-9.html 15


such as U.S.A. and Singapore. Going further, the company seeks

additional high-transfer potential destinations for growth.

However, Turkish Airlines is also aware of the fact that

operating just as a network carrier is not aligned with their

vision to become a leading airline operator not only in Europe,

but also in the World. Therefore, Turkish Airlines is also

focused on improving and growing its operations as a service

carrier.

Figure 5.1: Airway operations of Turkish Airlines – the expansion story

The third advantage is the increase in the visibility of Turkey

as a Tourism destination. The influx of passengers to Turkey for

Tourism has benefited Turkish Airlines as Turkish Airlines was

the most preferred carrier to Turkey.

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Figure 5.2: Efficiency increment in Turkish Airlines Operations Source: Turkish Airlines Annual Report,2013, p.5

6. International Expansion

In the Company’s international growth success, several strategies

such as adding new routes, having cost leadership, sponsorships,

and its strategic alliances have played a big role.

When adding new routes, focusing on potential high transit

passenger markets is very well aligned with Turkish Airline’s

international business model. Additionally, balancing both short

haul and long haul flights and optimizing the frequency of its

flights in its network to reduce passenger transit time and

increase customer quality has strengthened Turkish Airline’s

position. In its expansion to high-transit markets, Turkish

Airlines successfully identified potential opportunities in

Africa and Far East. The international growth mainly came from

regions outside Europe, however, the international-to-

international transfer, meaning the use of the Turkish hub only

as a facilitator between two countries has risen significantly17


from 4.4 million in 2009 to 11.6 million in 201313. The

international-to-international transfer area is where Turkish

Airlines is in direct competition with other premium Middle East

airlines such as Etihad, Emirates, and Qatar Airways. As seen

from the graph below, Turkish Airlines is on par with Emirates in

terms of international passenger numbers in 2012.

Figure 6.1: Passenger increment distribution a.) Overall increment Source: Turkish Airlines Annual Report,

2013, p.6; b.) Comparative increment in Airline traffic between Turkish Airline and others. Source: http://centreforaviation.com/analysis/turkish-airlines-narrowing-the-strategic-gulf-part-1-112352

Turkish Airline’s cost leadership has also been reflected to its

customers, thereby giving an additional advantage in comparison

to its international competitors. Especially, the expected

marginal price sensitivity of passengers from Middle East and

Africa will offer Turkish Airlines in a more competitive

position.

13 Turkish Airlines Annual Report, 2013, p.518


Figure 6.2: Cost Sensitivity analysis for low cost carriers. Source:http://centreforaviation.com/analysis/turkish-airlines-narrowing-the-strategic-gulf-part-1-112352

Furthermore, the brand awareness of Turkish Airlines through its

sponsorships, celebrity endorsements, media coverage, as well as

quality awards form Skytrax has attracted millions of passengers.

Partnerships and Agreements played a key role in the

international expansion of Turkish Airlines. As stated in its

annual report: “The company will support its organic growth

through strategic collaborations with other airlines in its

targeted markets as called for in its growth plan. In this way,

it will also strengthen its standing as a global network carrier

while increasing its opportunities to provide better service in

other territories.”

7. Future Outlook

Turkish Airlines is not only a carrier on its own but also an

active player in the lower end of the market via its subsidiaries

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such as Anadolu Jet and SunExpress. This strategy helps Turkish

Airlines focus on the core business and continue its full service

role.

By expanding its business in Eastern Europe, Middle East and Far

East, Turkish Airlines is enjoying increasing revenue and profits

and the market is definitely appreciating the strategic moves as

one can judge from the share price demonstrated in the chart

below:

Figure 7.1: Turkish Airlines Stock Price (THYAO)14

Growth opportunity is supported by the booming economy in Turkey,

a country with a population of 75 million people. National air

travel demand is growing, helping the strong financials of the

company. Turkey is investing its national transportation and

liberalizing its policies, which will make it a more important

spot for tourism.

One of the most important competitive advantages the company has

is the geographic location of the company. Istanbul, located only

3 hours difference to 50 countries, gives a unique advantage,

making the city an international flight hub.15

14 http://www.google.com/finance?q=thyao&ei=G6B2VPmlEMmQqwH36oDoDQ15 http://centreforaviation.com/analysis/turkish-airlines-narrowing-the-strategic-gulf-part-1-112352

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In terms of financials, it has a significant rise in its revenue

and profitability figures and more importantly a cost advantage

over its rivals. In terms of EBITDAR margin, Turkish Airlines has

achieved an 18% EBITDAR margin, well above the industry average.

Another important factor that supports the strong financials is

the revenue-expense profile of the company.

The strength of euro over USD is a major contributor of the

growth starting from 2009. Strong dominance in the domestic

market and the ability of charging premium is also a core

advantage for the company.

We have seen in the value chain analysis, Turkish Airlines is

also spreading the risk and raising the barriers for entry by

holding the subsidiaries in technical maintenance, catering

services, fuel supply and ground services. Recently, the Company

has signed another joint venture in which, Turkish Airlines

started the production of the first Turkish airline seats16. Star

Alliance membership gives it a brand recognition advantage and

the ability to charge premium.

On the other hand, aggressive expansion strategy should be

evaluated with a bit of caution as the network synergies will

take time to replicate when expanding into regions such as

Africa, Far East and Australia. The requirement for the new fleet

for expansion may also bring a drain on the strong financials of

Turkish Airlines. The expansion policy will also have an impact

16 Turkish Airlines Annual Report, 2013, p.9

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on utilization rate of the fleet and Cost per ASK. As stated in

the class, large financial liabilities can stiffen price

competition as airlines have a fixed capacity, perishable

product, and the ability to sell future demand.

Turkish Airlines is unquestionably one of the rising stars in the

region, enjoying profitable growth and compelling expansion

opportunities. The competition with Gulf competitors will be

fiercer going forward. Overall however, Turkish Airlines appears

very well positioned and ready to manage the risks that it will

face during its expansion period and maintain its growth position

and strong financials.

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Turkish Airlines - Strategic Analysis

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