While most investors in the UK are in and out of easyJet and Ryan Air stock every time the government trots out its latest traffic light system for travellers, some other airline stocks are getting ignored, but there are some very significant success stories out there with a similar or even lower risk profile.
Although the aviation industry took a hard hit in 2020 and suffered its heaviest losses to date, Turkish Airlines [IST:THYAO] distinguished itself with relatively good business performance. According to CAPA (Centre for Aviation, part of the Aviation Week Network) Turkish Airlines established itself as the busiest aircraft carrier in Europe during the pandemic, and one of the top five airlines in the world. This was achieved by a series of agile steps to maintain liquidity, keep costs at a manageable level and adapt to the “new normal”.
Turkish Airlines successfully ended the fiscal year 2020 with 6.7 billion USD revenue, which accounts for 50% of the preceding year’s level, with a net loss of only 836 million USD. During these uncertain times, the airline was also able to maintain its robust route network.
Turkish Airlines shares trade in Istanbul. The stock has risen from TRY 9 in November to trade at close to the TRY 15 mark at time of writing. There has been some volatility in the 12-14 TRY range in recent months but holders over the six month period have already been well-rewarded.
According to Eurocontrol, in April 2021 Turkish Airlines operated an average of 685 flights per day – almost double the number of its closest competitor in Europe, Lufthansa. In 2020, Turkish Airlines flew 28 million passengers, with an impressive load factor of 71%.
Currently, the airline serves 179 international destinations with 16 intercountry and 58 intercontinental flights. The new Istanbul Airport also stayed on top: even with a 68% loss of traffic, it was still Europe’s most successful airport as of March 2021, with 616 departing and arriving flights.
How has Turkish Airlines managed to keep flying high?
This success is based on cost cutting activities, capex reduction and active capacity management. In fact, Turkish Airlines achieved such performance without relying on any governmental cash injections. Furthermore, agreements with Boeing and Airbus on fleet growth will further decrease the aircraft financing needs of Turkish Airlines by around 7 billion USD in the coming years, the airline said in a statement this week.
“Our success as the best performing flag-carrier airline in Europe is not coincidental,” says Turkish Airlines’ Chairman of the Board and the Executive Committee, M. İlker Aycı. “Apart from the multiple measures we took, we owe this success to our dedicated staff. While other airlines faced layoffs, we did not part ways with any of our colleagues during this process. Instead everyone within Turkish Airlines accepted salary cuts from up to 50% depending on the role and responsibilities. The exceptional sense of unity within our staff is what sets Turkish Airlines apart: together as a family, we decided that no member of the Turkish Airlines family would be left behind during this crisis.”
Increase in cargo operations during pandemic
Turkish Airlines also turned the pandemic into an opportunity to increase its cargo operations, with 50 of its passenger aircraft being reconfigured to increase its cargo fleet capacity. Turkish Cargo managed to become one of the top five air cargo companies in the world and the sixth largest cargo company. The company increased its market share in total global cargo revenue from 0.6% in 2009 to 4.7% in 2020. As of February 2021, one in 20 cargo flights around the world were handled by Turkish Cargo.
This allowed Turkish Cargo to deliver 50,000 tons of medical supplies, including more than 45 million doses of COVID-19 vaccines, to destinations all over the world. In addition, new technologies and innovative solutions have been developed. One example is SmartIST, one of the largest air cargo facilities in the world, which is scheduled to open this year. Located at Istanbul Airport, the facility uses modern technology such as drones and automated robots to process and deliver goods even faster.
Turkish Airlines still has some way to go to get back to its pre-pandemic valuations, but given the solid underlying proposition, could well add another 20-25% in the next six months. Investors should watch out for the local currency exposure, which can also be volatile from time to time, so a currency hedge may be in order.
