Turkish Delight or Hard Rock?

THY-Turkish Airlines' recent half year figures have raised eyebrows and led to mutters about the airline's borrowings being too high. In the meantime the company is pushing ahead with adding more desitinations to its network. What is really going on and is the three dimensional reality as bad as it looks at first sight?

The half year result shows a swing from a 115 million Euro profit last year to a 248 million loss this year. That's a 363 million Euro difference to the worse. So far, so bad. Total liabilities have also grown by 50% in the same period and short term bank borrowing (usually expensive) by 40% . Again that doesn't look good. "Analysts" don't like debt and don't define between its good and bad forms. Turkish has quite a lot of both.

Again, how did all this red ink get there? Being squeezed between European legacy carriers with long and shorthaul networks to the west, new European including other Turkish low cost entrants all around, and the fast growing dominance of the Gulf carriers to the east ,Turkish Airlines has had to think seriously about its future strategy. To remain static wasn't an exciting option.

The conclusion was clearly for the airline to fight its way out of its traditional corner and take on the Gulf airlines by adopting their recipe and high levels of investment. The Turkish network has therefore rapidly expanded to 145 international and 41 domestic destinations. Like the Gulf bretheren, it reaches deep into Europe's secondary cities which home based national carriers always find difficult to serve profitably as domestic to international connections are never as seamless as the best international to international. The operating costs have therefore risen sharply and the figures tell us that the revenue has not yet caught up. Those losses are serious as they cost interest payments and cumulatively can become crippling. They may be a necessary sort term pain barrier to be gone through to fund the expansion but they can not be allowed to continue for long. Revenue must catch up quickly. The level of apparent liabilities, although high is less worrying. Much of it is self liquidating so long as the airline continues in business. Modern purist accounting insists that amounts outstanding on future leases are shown as debt. The actuality is that, provided the scheduled payments are made throughout their duration the amount outstanding reduces year by year to zero on the day of the final payment. "Wonderful,- well done" exclaim the analysts. "But we've no fleet left" say the airlines... Operating leases could reasonably be seen as an operating cost and it appears that the Gulf airlines, unworried by private shareholders, take this view. If so, it is one factor that has enabled them to grow way beyond the capability of their long established rivals who have looked on with their financial hands more or less tied behind their backs.

Turkish's problem is that it is neither a large legacy carrier nor a new Gulf one. It is trying the straddle the gap between the two. Its origins, structure , financing and accounting are similar to the former, whilst for its expansionist strategy to work it has to emulate the latter. Its network gets more comprehensive by the day and it is geographically well placed to add both long and short spokes. Only nonstops to Australasia are beyond its reach, the Gulf being better located for those, but otherwise it can do pretty much all they do and a bit more in the eastern Mediterranean area. It needs to enhance its ground and air service offerings and style and invest even more in international brand marketing . The tough bit is that while those will bring in the revenue there is always a lag between the investment and the rewards. Also the investment has to be ongoing, not a one-off. Bridging the time gap between investment and the returns flowing into the bank is the difficult one. It has to be as short as possible or there is a danger of doing the financial splits, the risk and need for ongoing additional funds just getting too great for the backers to bear. On the other hand once the potential effects on backers and creditors of a collapse becomes catastrophic the debtor regains the upper hand. It's going to be an interesting one to watch.