AIR TRANSPORT

TURKEY

Having tailored its low-cost business

model to Istanbuls hub-and-spoke
network, Pegasus Airlines is on the
march for traffic rights. Chief
commercial officer Gliz Ozturk
outlines the strategy to Martin Rivers.

Pegasus
harnesses
the best of
both worlds
W

hen Pegasus Airlines was acquired by ESAS Holdings

and rebranded as a low-cost carrier (LCC) in 2005, the
airlines incoming management team was faced with an
immediate strategic dilemma.
On the one hand, their home nation of Turkey was poised to
embark on a decade of break-neck civil aviation growth matched
in scale and ambition only by the Gulf mega-hubs. Istanbuls
geographical location at the crossroads of three continents was
enabling Turkish Airlines (THY), the countrys flag-carrier, to
transform Istanbul Atatrk Airport into one of the worlds preeminent intercontinental hub-and-spoke networks.
On the other hand, across Turkeys western border with Europe,
LCC giants Ryanair and EasyJet were perfecting the art of ultralow-cost travel, tearing up the rulebook for hub economics and
unlocking the full potential of the point-to-point business model.
Just as Istanbul straddles east and west, so Pegasus found itself
balancing two competing and seemingly incompatible schools of
thought for airline management: full-service hub connectivity
versus no-frills A-to-B travel.
Less than a decade on, having grown its fleet from 14 to 54
aircraft and secured the title of Europes second most profitable
carrier, the company seems to have found a sweet-spot.
We call it low-cost network carrier, because we
Continued
also carry connecting traffic, said Gliz Ozturk,
on Page 52
Pegasuss chief commercial officer. Istanbul is

Istanbul is located in such

a way that east and west is
a natural combination.
So if you dont use this
connectivity, then you lose
an advantage.
GLIZ OZTURK

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TURKEY

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located in such a way that east and west is a natural

combination. So if you dont use this connectivity,
then you lose an advantage.
Being an LCC inevitably starts with stripping
your cost-base to the bare bones. The airlines
Boeing 737-800s have an all-economy, maximumdensity configuration of 189 seats; its in-flight
products are unbundled, requiring customers to
pay extra for ancillary services; and Turkeys low
labour costs ensure cheap human resources.
Crediting the 2005 re-launch of Pegasus with
introducing the first and only low-cost product of
Turkey, Ozturk stressed: Cost management is in
the DNA of the company.
But abiding religiously to the ultra LCC model
would mean ignoring some of the unique
characteristics of the Turkish market. Istanbul, like
Dubai or Doha, lends itself perfectly to transit
traffic. With about one in four Pegasus customers
using the city as a stopover, the airline has to look
beyond simple origin-and-destination flows. Its
passengers take a wider array of routings than in
Europe, encompassing myriad different travel
purposes.
We are a very cost-conscious company but at
the same time we have designed the model in a way
that would serve the needs of different customer
segments, Ozturk explained. The customer is not
actually interested in having your costs low. Hes
interested in having the lowest fare available.
Recent years have, therefore, seen Pegasus
selectively hybridise some elements of the business,
signing up to Global Distribution System (GDS)
channels and rolling out a loyalty programme. As
long as the associated costs are shouldered by the
customer using those services, Ozturk said, the
underlying cost-base remains optimal. If the
airline manages its costs well enough, then you will
still have the cheapest fare in the market, she
insisted.

Second gateway
Pegasus operates from Istanbuls second gateway,
Sabiha Gken International Airport, on the
Anatolian side of the city, so options for connecting
with THY are limited. The airline must rely on its
own self-sufficient network, currently offering 56
international and 30 domestic points across 36
countries.
Excluding domestic flights, which account for
three quarters of its operations, Europe is by far the
largest market. About 20.5% of Pegasus flights
serve the continent, giving the rest of the world a
market share of just 4.5%. Trunk routes to the UK,
Germany and Switzerland are being targeted for
higher frequencies, while new destinations in
France, Italy and Scandinavia are also under
evaluation.
But a more complicated picture emerges
elsewhere in the network. Russia, Asia, the Middle
East and north Africa all have the potential to be
major markets for Pegasus, yet bilateral restrictions
have stymied progress.
Moscow is cited by Ozturk as the clearest
example. According to the bilateral air services

52

agreement signed by Russia and Turkey, the second

carrier designated on either side is permitted up to
seven weekly frequencies between Istanbul and
Moscow. Despite securing this designation,
however, Pegasus is allocated just three of the
available Turkish slots. The other four were initially
given to THY bolstering its already sizable 28
weekly services until Russia objected. They have
since been revoked and are not being used.
Other Russian cities are, meanwhile, limited to a
single designation on either side, meaning that
Pegasus serves just three more points from Istanbul
(Krasnodar, Omsk and Mineralnye Vody)
compared with THYs nine (St Petersburg, Kazan,
Ufa, Yekaterinburg, Novosibirsk, Rostov,
Stavropol, Astrakhan and Sochi).
Theres huge traffic between Turkey and
Russia, so why not liberalise it? The two countries
will benefit from this, Ozturk complained.
Wherever they give to us [in Russia], we will fly.
Wherever. It is very valuable.
Despite praising Turkeys civil aviation authority
for working hard for us, she admitted that
securing designations is a constant headache. In the
Middle East, the airline lacks any presence in Saudi
Arabia and Jordan, and would like greater access to
Iran. In north Africa, Pegasus may be launching
new routes to Egypts Sinai Peninsula this year, but
it continues to face hurdles in Cairo, Algeria and
Tunisia.
The bilateral issue has proved so troublesome
that, in 2012, after trying in vain to secure traffic
rights between Istanbul and Bishkek, Kyrgyzstans
capital, Pegasus went down the joint-venture route.
Pegasus Asia deploys a single 737-400 on mostly
Russian routes, and is working with authorities to
expand to India, China and the United Arab
Emirates. A second aircraft was due to be added as
Arabian Aerospace was going to press, potentially
followed by a third in 2015. It is a model that
Ozturk can see being pursued elsewhere.
There may be others. There are countries we are
working on, she said, singling out Kazakhstan as
one market where talks are under way. As long as
it is a country where the [low-cost] penetration is
low, as long as it is a feasible project, and that
country will be supportive in terms of bilateral
traffic rights, then why not?
Overseas joint ventures are also being pursued
by Turkish rival Atlasjet, which stole a march on

Pegasus last year by launching Iraqi subsidiary

Zagrosjet.
Pegasus had been looking to establish its own
offshoot in the country, Ozturk confirmed, but
those talks have now been abandoned. The airline
continues to receive lots of requests from foreign
operators, and will consider each proposal on its
own merits.
Back in Istanbul, Sabiha Gken Airport
recorded 28% passenger growth last year with
overall footfall of 18.8 million. The gateway is
planning to open a second runway by 2016, lifting
annual capacity to about 50 million.
The citys hotly anticipated third airport
mooted to have a capacity of 150 million,
rivalling even Dubai World Central could one
day become a second base for Pegasus. Its an
opportunity for us to start a new hub if we want
to do so, Ozturk speculated, noting that the
airline would gain exposure to a different
catchment area on the European side of the
city. But no decision has been taken, and the
project still has environmental hurdles to clear.
Pegasus cannot base aircraft at Atatrk Airport
due to slot constraints.

Upcoming delivery
For now the company is focused on its upcoming
delivery of 75 Airbus A320-family neos plus 25
options. The deal, Turkeys largest-ever single
aircraft order, was announced in December 2012
following years of tough negotiations.
Proving once again that it will not be constrained
by traditional LCC theory, Pegasus plans to operate
a mixed fleet for at least the duration of the
deliveries between 2016 and 2022. Indeed, the
Boeing operator has already leased four A320s to
kick-start this smooth and soft diversification.
Asked whether it will eventually transition fully
to Airbus, Ozturk responded: Its a flexible fleet
plan. Either we may replace all the current aircraft
with the new ones, or we may keep them and also
add the new ones.
With Pegasus expanding at 1.5 times the rate of
Turkeys aviation market this year a market that
has seen average annual passenger growth of 14%
since 2003 management are wise to keep all
options open. This is one airline that, pending
further bilateral progress, probably needs all the
planes it can get.