Temel Kotil, Turkish Airlines
Release Date: 2010-01-29
Temel Kotil, CEO of Turkish Airlines, has been interviewed for Business Guide Turkey for Kommersant, to talk about the successful strategy of branding and business development of Turkish Airlines and the ambitious prospects that the airline is committed to attain in the short and mid-term.I would like to start with the results of 2009. I know that you set two ambitious targets $5 billion USD. How was the year?
I’m happy. Being aggressive is better. Sometimes companies prefer to stay at home and shut down their business in cold weather. Instead of competing outside, they prefer to stay at home because they are afraid of catching cold. These companies want to decrease capacities and downsize, because less money is coming in. Last year our fares dropped 15%, meaning our average ticket price was 15% less than 2008 in Euros; we use Euros in order to get a better picture of the business. We also lost 3% because of increased capacity. In 2009 we increased capacity 21% over 2008. Because of the 21% increase in capacity, our load factor went down because the price went down decreasing the unit income - while our seat/km income average is 0.05 eurocent. So, our income went down 18%, which was very bad. The average for the industry was 25%. What will happen? Our costs also went down: food is less expensive than in 2008, but also because of volume cost decrease of unit cost was 19%, which still means a 1% improvement.
If I were a banker I would say you play on lira, dollar and euro rates…
Turkish Airlines’ income mainly comes in Euros, and the company has US dollar expenses because fuel contracts are in US dollars. We have some TL expenses and income, so our case is balanced. Increasing capacity helped us to decrease average cost. In 2008 in the worldwide airline business, the company was listed 7th in operation profit and 4th in net profit. 2009 was better than 2008. In 9 months last year, Lufthansa made some profit and we were second to Lufthansa, but in 2009 they have already announced a loss whilst we announced profit.
Compared to your European peers, Turkish Airlines does slightly better?
Much better because, as I said, we were very ambitious and aggressive, but the Europeans stayed home in cold weather.
What will happen in 2009 is that many airlines, except Turkish Airlines, will cut the capacity pulling up from the market. We increased it 21%. For example, Iberia used to have daily Barcelona-Istanbul flights, which were cut. The same thing happened in Italy, Germany, and France.
The conclusion is that in the very difficult Siberian winters, if you stay at home this could be the right policy, but if you go out into the cold, your profit margin is good enough - if you work hard enough, your body will produce enough heat to protect you from the cold. This is the strategy of Turkish Airlines.
In January, Turkish Airlines signed for 20 of the A380 family. Why so aggressive? It was almost a $1 billon USD.
The price was very low and we needed to grow. We signed for more than $3 billion USD in total. We are given good terms and when you have an aircraft, you can lease it in 12 years for long-term leasing where the caps are not so high, and we plan to produce money with these machines. Turkish Airlines altogether has 54 machines for the moment; we aim at 105 machines altogether, with only a half completed. The other aircraft will be ordered very soon. We’re acting aggressively because we have a solid business plan.
We mostly purchase, which is rare for Turkish airlines. Purchase is financial leasing - you go to a financial institution, they find an asset, you pay an installment for 12 years with a very low rate. Right now we target about 3-3.5%, which is an excellent rate. It’s perhaps half of the commercial financing of the equipment. The company is very strong and risk in Turkish Airlines is very low.
In 2009 we proved again that being aggressive works. But it needs to be supported with cost cutting - we do it like an art - and we’re also very good in product quality improvement and in branding.
Because of the company’s growth, Turkish Airlines is hiring many people for operations. Last year we hired 1,100 cabin attendants out of our total of 3,000, and this year we’re going to hire an additional 1,500. All of them are young and educated. Some of them even have a high university degree because of lack of jobs. When we hire one person there are ten unsuccessful applications behind them, and 11,000 for every 1,100. We use an institute in Turkey to select them with a very solid selection process. The lack of jobs in Turkey is helping us to attract these people, who are happy to get paid much higher than the average in Turkey. They also dilute our average cost because newcomers are cheap and not so many have experience but they have big hearts. They work with the best company in Turkey and it motivates them.
The second aspect is the quality. Historically, our product quality was not that good, but in 2006 we became a private company, which was an important motivational factor. Our boss was no longer with us and the state could not subsidize us any more. We set ourselves a challenge: from now on, our boss would be the passenger. We became nicer to the passenger. Turks are so good in the service sector, and this comes from the heart.
What practices have changed?
We communicate. We have weekly discussions: Tuesday for the cabin, Wednesday for the cockpit, we have an internal direct communication line with the manager and we use the Internet effectively. In service quality, we motivate ourselves. We have 4 stars. The most famous companies with 5 stars are Singapore Airlines, King Fisher, Malaysia and Qatar. Sky Track is a company that employs auditors who check the quality. We are 4 stars right now but in Europe we are 4 stars in business, economy and first class.
What is missing is consistency. We have very good service and if we are consistent with it, it reaches a 5-star level. We’ll never cut from the service, in spite of the crisis. We fly more cabin attendants than is normally required. One additional person increases the cost structure but still we increase it.
Our unit cost is 5.1 eurocent. Lufthansa’s is about 12. And Lufthansa charges more than double per ticket. Cost is low; quality is better, and branding. Why are we not making ten times more profit? Because of the brand name. Our competitors - Emirates, Qatar, European airlines - have a bigger brand names. But they started before.
What makes you believe in the future?
With cost cutting, we can continue forever. The companies we compete with will never be able to lower their costs. If you know there is life cycle in any company: childhood - spending and no profit. Young - profit-maker but spends a lot. A grown-up is well positioned and optimized, like Lufthansa.
In April it will be two years since you joined Star Alliance. Turkish Airlines along with Egypt Air profited less from joining the alliance.
Our location is perfect. Any pass purchase from Turkish Airlines should feel good - price, flexibility, and service quality. We grow organically with the market share. Our passengers should feel much better than purchasing a ticket from another airline. Whether through the company’s website or through an agency, it should be a better experience than with another airline.
One of the things I heard you say is that you’re not only interested in Turkish customers but also in transit passengers traveling with Turkish Airlines. I would not consider Istanbul as a beautiful hub as it is, given the many neighboring European cities. What should be changed?
Istanbul is the best location for the big European market. What happens is that there are always direct flights among the big cities and it is unreasonable to get somebody to fly via Istanbul if there is another direct flight, due to carbon footprint issues. Unfortunately, there are not so many big cities in Europe: Vienna, London, Paris, Rome, Munich, and Frankfurt. What we can do is give them a one-day stay in Istanbul to go to Singapore afterwards. Like this, we look to make added value. The big airline hubs are inside Europe. Distances are small, and it is costly. For almost the same cost, you can come to Istanbul in 3 hours. Take-off and landing are optimized. Europe accounts for 30% of the global economy and 27% of the global airline business. They will come to Istanbul: they do not want Dubai where you need a long-haul machine that is twice as expensive. To sustain the passenger flow from Europe to Dubai or Qatar, they need four times more money. I can collect them much better: in Germany we service nine cities with 220 flights per week. In tourist cities in Spain, the UK and France - we’re going to small roots. In Nice we’re making profit.
What’s the objective - cities with a population of a million people?
It could be even less. It’s important to sustain the daily frequency and the profit.
Is your strategy to go East?
Our policy is to go to the old major cities: Jakarta, Vietnam, Bangladesh and Dakar.
Who will you be bringing there?
Europeans and Russians. We fly to six destinations in Russia. We’re the best choice to go to Central Asia or the Middle East from Europe. We will put on a very extensive network.
How are your relations with Aeroflot, given that you trying to eat from the same plate?
What we learned is that every company needs to use a lot of factors to compete. Our network covers 119 cities now and will be 120 international routes very soon. With high frequency, we’ll go from 120 to 200 very soon. Every year we add between ten and eleven new roots. Istanbul’s central location enables it to compete with anybody.
The point is that Moscow could be a hub, like Istanbul and Athens. If an airline gets ranked and the brand and the ball is moving, the market is captured. Aeroflot is in Sky Team, otherwise we would be very good friends. In the Russian case, thanks to a bold Prime Minister and President, they cooperate and we want to have joint activities with Russian carriers.
Thanks to the fact that the governments opened the roots for us and we were waiting for the decision to remove the visa. We need to share what we have with the locals. If you’re active on the Russian market, we need Russian carriers to be active on the Turkish market.
Would you let them fly to Turkey? The Turkish market seems very closed. You hold about 64% of market share!
I cannot speak for the government but personally I support open sky. I believe there should be no protection at all. Like my children - if I protect them, they’ll never grow. Our success in 2003 came with the new government and new Minister of Transport, who in 2003 said: “No protection”, although we used to be protectors. Now it’s 100% different. In 2003 we charged whatever we wanted for an Istanbul-Ankara flight. The government made decisions on pricing: flying was considered luxury and the flights were taxed. The new government removed the taxes and let us operate on our own.
As an example, I can give a case in Seoul, where we used to fly with Turkish Airlines. At some point, Korean Airlines wanted to start flying and what happened was that our profit increased. When they competed with us, there were more passengers than when we were flying ourselves. Competition helps to improve the product and bring the costs down. We also put plane manufacturers between them to compete.
How much would you like to extend to the Russian market?
What we want to do for Russia is to connect all Russian cities to Istanbul, Antalya and Ankara. Not tomorrow but as early as possible, and make it a 50-50 market. We are the best choice to go to Syria, Lebanon, and the Middle East.
You’re not afraid of getting too big? What challenges do you see ahead in your growth plans? In the next 2 years, you envisage a growth of 30-40 million passengers by 2012. What’s the challenge?
The biggest challenge is that after so many years of making profit you start believing you’re good. Never say you’re good enough. Companies fail when they become arrogant. Take every single thing seriously. What is difficult about growth? One side is in production - not enough operations staff and captains. We have a pilot school, and a cabin attendant school. The government supports us. To ensure quality, we use the services of Germans for testing pilots. We do not test pilots ourselves, as we know that the Germans created the standards, and we’re always open to any improvement. We have to make sure that the flow of employees comes to operate aircraft.
What about the political stability of the company?
If a company is doing well and there are nice people in the company, you can continue forever. If you establish a professional structure, success comes from the employee side. If there’s a shortage somewhere, it can be supplied from another part. We train at all levels to ensure the company in continuity as a living creature. Everybody understands that an airline is the image of the country.
Your final message on the governmental and individual level for the Russians who would like to team up with Turkey?
My message is that Russia is a big country and authorities of our countries are approaching each other. They had very productive talks about cooperation between the Russian and Turkish markets. There are very good things in store for us. We’re ready to cooperate with any Russian carriers. We had a recent meeting in Genova with 2nd level Aeroflot management who proposed cooperation and I said that we’re ready to cooperate with Aeroflot at any moment. There’s a lot of travelling between Russia and Turkey: it’s good for all of us. And, of course, good luck to all Russians!
| Company: | Turkish Airlines |
| Position: | CEO |
| Country: | Turkey |