Turkish Airlines and Pegasus , coronavirus in crisis advantageous than its competitors'

zge zdemir BBC in Turkish

Aviation is one of the sectors that are hit hardest by the coronavirus crisis

. In the spring, when the crisis was severe all over the world, flights almost stopped. Likewise, Turkish Airlines, which is also the largest sector in Turkey (THY) and Pegasus , domestic and international passenger flights were performing during the last few months. However, as of June 1, both companies started domestic flights with the relaxation of the measures taken under the coronavirus . Can THY and Pegasus overcome this crisis financially? Despite the resumption of flights, when airline companies will start flying at full capacity and how these companies will overcome this crisis financially are still under discussion. Esra irinel , aviation industry analysts, Yatrm Menkul Deerler, Research Assistant, and Deniz Yatrm Menkul Deerler Senior Equity Analyst Gaye Yaln answered our questions on this matter .

Coronavirus crisis poses a risk of causing Turkey for the aviation sector?

Business Investment Values of Research Deputy Director Esra irinel , the answer to this question in the following way: "In April and May, both airlines had to drop their fleets on the ground due to international flight bans to prevent the spread of the epidemic. Unless the airlines fly, they have to bear fixed costs such as personnel costs, financial lease payments and some maintenance costs. "Given the new weak passenger demand, capacity management, the need for shifting new aircraft deliveries, and rising costs, the airline industry is waiting for challenging processes for at least 1-2 years ahead."

How did THY's first quarter balance sheet come?

Turkish Airlines' first quarter loss increased by 61.5% in 2020 compared to the same period of last year and reached 2.02 billion liras. Esra irinel from IS Investment explains that THY's passenger traffic, which fell by 20 percent in the first quarter, caused a 12% drop in passenger revenues in dollar terms. On the other hand, according to irinel , the cargo revenues of THY increased in this period: "The unit cargo revenues, which increased with the increasing demand for medical supplies transportation during the epidemic, caused THY's cargo revenues to increase by 15% in dollar terms in the same period, which resulted in a 8.5% decrease in annual consolidated revenues of the company .

" How did Pegasus' first quarter balance sheet come?

Net loss of Pegasus in the first quarter increased by 88 percent compared to the same period of the previous year and reached 401.5 million TL. Esra irinel from IS Investment states that the flight restrictions that started in mid-March in order to prevent the epidemic were effective in 49 million euro loss . According to data shared by irinel , the number of passengers dropped by 10 percent in the first quarter; however, with the increase in the contribution of ancillary revenues (due to voluntary ticket cancellation fees), total sales revenues fell only 1 percent in euro terms.

How will Turkish Airlines and Pegasus be affected financially by this crisis?

Gaye Yaln, Senior Equity Analyst at Deniz Yatrm Menkul Deerler , states that they expect THY's total sales revenues and EBITDA (Tax, depreciation , profit before interest) to decrease by 11% and 15% in 2020, respectively. The projections for Pegasus are the total sales revenues and EBITDA (Tax, depreciation , profit before interest) contraction by 18% and 30%, respectively, in 2020. Yaln lists the reasons why they expect a lower rate of contraction for THY as follows:

THY's cargo operations continue

Cost of a lower portion of 2020 fuel use is fixed by derivative instruments

Potentially less affected by the negative effects of the epidemic in terms of passenger traffic decline due to a wider international flight network

Are Turkish Airlines and Pegasus strong enough to overcome this crisis financially?

Esra irinel from IS Investment says that both THY and Pegasus have competitive cost structures compared to their foreign competitors. "Both airlines benefited from the state's short-term work allowance support in three months," said irinel , stressing that THY had $ 1.8 billion in cash reserves and made cost-saving savings plans as of the first quarter. Gaye Yaln, Deniz Yatrm, also reports that Pegasus closed the first quarter of the year with a cash position of 486 million Euros and monthly fixed payments decreased from 50 million to 35 million Euros . "We think that the cash position of both companies will be sufficient by the end of the year thanks to the new loans provided," says Yalcin .

How affected international competitiveness of Turkey's aviation sector?

The two analysts we talked to say that it will take 2-3 years for passenger traffic to reach levels before the coronavirus crisis. Rising costs and weak passenger demand due to the global aviation industry and is open to both the aviation industry expects a difficult period in Turkey. However, analysts believe that it is advantageous for aerospace companies in Turkey compared to its competitors. "I think that Turkish aviation companies' competitive and flexible cost structures and many crisis management experiences provide a competitive advantage compared to other international players," said Esra irinel of IS Investment . says. Gaye Yaln from Deniz Yatrm also thinks that Turkish Airlines and Pegasus are more advantageous compared to their peers. Yaln said, "Due to the changes in the supply-demand balance in the airline industry, pressure may occur from time to time. Therefore, airlines with low cost structure can overcome such fluctuations with less damage," adding that it has become more important to have a low cost structure after the pandemic : "We think that both Turkish Airlines and Pegasus will be at an advantageous position compared to their foreign counterparts. We have seen that the low cost airline model has been increasing its weight in recent years, the pandemic process experienced can be expected to support this trend."

Will there be acquisitions, mergers and shrinkage in the industry?

Deniz Investment Gaye Yalcin, "continued abroad for years a consolidation there of course, the pandemic can expect an increase in such transactions. In Turkey, we do not have a forecast for the near future." says.

• Questions:
• 1. What are the strengths, weaknesses, opportunities and threats of Turkish Airlines and Pegasus ? Explain separately.
• 2. Which of the generic competitive strategies does TYH and Pegasus Porter apply or should they apply under coronavirus conditions?