RESEARCH
TURKISH AVIATION SECTOR
Secular growth rather than cyclical
February 2014
Analyst: Baris Ince Sales Contact: +90 (212) 384 1141 +90 (212) 384 1155 [email protected] [email protected]
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Table of Contents
EXECUTIVE SUMMARY 3
Recommendations & Valuations 4
A closer look at the aviation sector 8 A study on LCC vs. FSC 13 Turkey in Global Rankings 14 Global Sector Outlook 17 Turkish Aviation Sector at a glance 19 Our Passenger Forecasts 24 Airports in Turkey 26 Capacity Enhancement Studies 26 The Third Airport 29 Recent Developments in Turkish Aviation Sector 30 Airline Terminology 31
THY 32 Investment Positives 34 Investment Negatives 36 Valuation 38 Peer Comparison 38 Model Assumptions 40 How we stand alongside the consensus 41 2014 Guidance vs. Garanti Securities 41 Bussiness Overview 41 Recent Developments 49 The Company Overview 51 The Company Profile 55 PE and EV/EBITDAR graphs 57
Pegasus 58 Investment Positives 60 Investment Negatives 61 Valuation 63 Peer Comparison 63 Model Assumptions 65 How we stand alongside the consensus 66 Bussiness Overview 66 The Company Overview 74 PE and EV/EBITDAR graphs 77
THY vs. Pegasus 80
TAV 82 Investment Positives 84 Investment Negatives 85 Valuation 86 Peer Comparison 87 How we stand alongside the consensus 88 The Company Overview 89 Key DCF Assumptions & Forecasts 91 The Company Profile 101
Disclaimer 105
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Executive Summary
Strong traffic momentum since sector deregulation Passenger numbers have risen at a CAGR of 16% in Turkey between 2003 and 2013, 3x the real GDP growth in the same period. Even in 2009, when real GDP contracted by 5%, passenger numbers in Turkey expanded by 6%. We believe that Turkey’s underpenetrated aviation market, its geographically advantageous position, the lack of alternative transportation infrastructure, its increasing attractiveness as a tourism destination and the government’s supportive approach to the sector will help sustain this above average growth. Only 1.2 flights are taken per capita in Turkey - half of the EU15 average. The ambitious fleet expansion plans of Turkey’s two largest carriers’ to double their fleets in the next decade signal the anticipation of strong demand in the sector as well. We project an 10% CAGR in Turkish air passenger traffic between 2013-2016.
Turkey’s priceless geographical advantage Although Gulf countries and Turkey are both well positioned to attract and distribute European passengers through Africa, Southern Asia and the South Pacific thanks to their geographic advantage, Turkey’s position is within reach Europe, Africa and India with short- haul flights from its Istanbul hub; however, the UAE and Qatar need wide-body aircraft to collect passengers from Europe to distribute them to India, Southeast Asia and the Southern Pacific. However, more than 40% of world-wide international traffic from Turkey is within the range of narrow body aircraft. Although the recently-placed massive aircraft orders by Gulf Carriers is likely to spell an increase in competition in the region, we do not see the Gulf carriers as a major threat to Turkish Carriers. To illustrate this, THY’s total pax numbers have grown at a CAGR of 16% over the past five years, compared to the 13% CAGR notched up by Emirates. The deviation was more pronounced in 2013, when THY achieved 24% YoY growth vs. the 16% growth at Emirates.
THY Outperform, Pegasus Outperform, TAV Market Perform We reinitiate our coverage of the Turkish Aviation Sector with this report with Outperform ratings for Turkish Airlines (THYAO) and Pegasus Airlines (PGSUS); Market Perform rating for TAV Airports (TAVHL). Our valuations for the airlines is based on 2014E target EV/EBITDAR levels (6.3x for THY and 8.0x for Pegasus) while we value TAV through a sum-of-the parts (SOTP) valuation. On multiple comparison side, THY and Pegasus trade at 8% and 30% discounts on the basis of their 2014 P/E multiples. THY appears expensive on the basis of its 2014E EV/EBITDA, but it offers stronger revenue growth compared to peers. We do not rely on comparisons for TAV, as we believe there is no perfect peer for the company given that the concession agreements differ.
Our preferred play is THY We prefer THY over Pegasus on the back of i) having the lowest exposure to Turkey, given rising macro concerns for the time being (domestic passengers constitute 41% of the total vs. 61% for Pegasus), ii) increasing competition from THY at Pegasus’s main hub (Sabiha Gokcen Airport) and iii) Pegasus’s limited visibility on international expansion. We believe that capacity expansion at Ataturk Airport and a potential delay in Istanbul’s new airport have recently served as catalysts for TAV shares and is now priced in. Aside from ongoing political events, which could have a negative impact on growth, the current theme on Turkish Equities is exchange rate volatility, and aviation stocks are no exception. We believe TAV is the least exposed to domestic macro concerns and the main beneficiary of TL weakness, with Pegasus being relatively the most vulnerable. Bear in mind that TAV and Pegasus’s functional currencies are EUR while that of THY is USD although all three report in TL.
Risks A slowdown in passenger growth momentum, weaker than expected unit revenues or a deteriorating cost base are key risks for airlines. In addition, failure to win new airport tenders or increasing political tension in the region where TAV operates in, as well as a heavy dependence on Istanbul Ataturk Airport are considered as key risks for TAV. Specifically, a potential sale of the Privatization Administration’s stake (49.12%) or a verdict in favour of Pegasus regarding its appeal to the Competition Board would lead to share price weakness for THY.
Net BIST-100 3M Avg Target Revenue EBITDAR Income EBITDAR Relative Company Ticker Recom. Mcap Volume Price Upside CAGR CAGR CAGR EV/EBITDAR P/E margin Performances (TLmn) (TLmn) (TL) 2014-2016E 2014-2016E 2014-2016E 2014E 2015E 2014E 2015E 2014E 3M YTD Pegasus Airlines PGSUS Outperform 3,119 72 40.00 31% 18% 21% 24% 6.3 5.4 10.0 8.4 20.9% -7% -11% Turkish Airlines THYAO Outperform 9,715 205 9.20 31% 20% 19% 17% 7.0 6.8 8.9 7.8 17.3% 9% 16% TAV Airports TAVHL Market Perform 5,722 21 18.80 19% 10% 12% 11% 4.3 4.1 9.7 9.4 47.5% 35% 8% Source: Garanti Securities
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RECOMMENDATIONS & VALUATIONS
THY
Recommendation: OUTPERFORM. THY has differentiated itself on the basis of service quality and competitiveness in recent years. Istanbul’s geographical advantage and the airline’s relatively low labour costs (especially when compared to European carriers) enhances THY’s competitiveness. As an emerging international travel hub, Istanbul is in the position of enabling the airline to boost its transit passenger numbers and better utilize the fleet (especially its narrow body aircraft) and seat capacity. With a young fleet (6.7 years on average), improved brand awareness and increased capacity, THY is in a position to capture market share from EU carriers, which struggle to offer high quality service and capacity additions with their relatively old fleets. THY shares have outperformed the index by 39% in 2013 and 16% ytd and now trade at a 8% discount to its peer group on the basis of its 2014E PE. Ongoing TL weakness and anticipated strong traffic figures should have a positive impact on profitability in 2014.
Risks. A decline in the economic activity, rising oil prices, Euro weakness against the Dollar and the Privatization Administration’s sale of its stake in THY pose risks. A negative outcome of Pegasus’s legal action at the Competition Board and geopolitical tensions could also emerge as risks.
2014-end target price of TL9.20/share. Our 2014-end target share price of TL9.20 derived from our target EV/EBITDAR multiple offers 31% upside potential for THY. Our valuation for THY is based on the 2014E target EV/EBITDAR multiple. To reach our target Mcap, we adjusted net debt to 8x aircraft related rental expenses and current PDP receivables. We employed a 6.3x target multiple for THY, which is the 5-year average EV/EBITDAR multiple.
THY Valuation Summary Target EV/EBITDAR mutiple (x) 5.75 6.00 6.25 6.50 6.75 GS 2014E EBITDAR(TLmn) 4,399 4,399 4,399 4,399 4,399 Target EV (TLmn) 25,294 26,394 27,494 28,593 29,693 Adj. Net debt (TLmn) 14,794 14,794 14,794 14,794 14,794 Target Mcap (TLmn) 10,500 11,600 12,700 13,799 14,899 Outstanding number of shares (mn) 1,380 1,380 1,380 1,380 1,380 Target share price (TL) 7.61 8.41 9.20 10.00 10.80 Current share price (TL) 7.04 7.04 7.04 7.04 7.04 Upside potential 8% 19% 31% 42% 53% Source: Garanti Securities
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Pegasus Airlines
Recommendation: OUTPERFORM. Given its proven track record on growth, we believe that Pegasus stands out as a preferred play in an underpenetrated sector coupled with its ambitious expansion plans and effective cost management. As the number one LCC and second largest carrier in Turkey, Pegasus will be one of the key beneficiaries of increasing GDP and attractive demographics, which bodes well for discount carriers. Using Istanbul Sabiha Gokcen Airport as its main hub, Pegasus differentiates itself from an ordinary LCC whose business models are based on only point to point travel; Pegasus operates like both a network and point to point carrier, thanks to Istanbul’s geographical advantage connecting 50 countries within 3 hours’ flying time. Furthermore, we think Pegasus’ low cost management enables the airline to boast one of the lowest CASK levels on the back of its young fleet, strong punctuality, high utilization and low labour costs. We expect a CAGR of 18% in net sales, 21% in EBITDAR and 24% in net profit over the 2014-16 period. We believe these are outstanding figures that place Pegasus as a clear growth play in the coming years. Pegasus is not an undiscovered stock; it outperformed the index 116% since IPO in April 2013. Yet, the shares still look cheap, despite the prospect that Pegasus offers stronger growth for foreseeable future. We initiate our coverage of Pegasus with a Outperform recommendation.
Risks. The key risks would be an increase in oil prices, unrest in Turkey and neighbouring countries, stiff competition, limited international expansion and EUR weakness against the USD.
2014-end target price of TL40.00/share. We value Pegasus using a 2014E target EV/EBITDAR multiple. On our EV/EBITDAR multiple valuation, we apply a 2014E EV/EBITDAR multiple of 8.0x, inline with the peers. Finally, to reach our target Mcap, we adjusted net debt for 7x aircraft related rental expenses and 0.5x PDP receivables.
Pegasus Valuation Summary EV/EBITDAR multiple (x) 7.50 7.75 8.00 8.25 8.50 GS 2014E EBITDAR (TLmn) 646 646 646 646 646 Target EV (TLmn) 4,844 5,005 5,166 5,328 5,489 Adj. Net debt (TLmn) 1,074 1,074 1,074 1,074 1,074 Minorities (TLmn) 2 2 2 2 2 Target Mcap (TLmn) 3,768 3,929 4,091 4,252 4,413 Outstanding number of shares (mn) 102 102 102 102 102 Target share price (TL) 36.84 38.42 40.00 41.58 43.15 Current share price (TL) 30.50 30.50 30.50 30.50 30.50 Upside potential 21% 26% 31% 36% 41% Source: Garanti Securities
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TAV Airports
Recommendation: Market Perform. TAV Airports is Turkey’s leading airport terminal operator. The Company operates Istanbul Ataturk, Ankara Esenboga and Izmir Adnan Menderes Airport, located in Turkey’s three largest cities. TAV Airports’ business structure ensures high operating leverage, and since the passenger fees are mainly fixed, higher volumes going forward will be the major growth driver for TAV, also supporting the company’s retail operations. In addition to a solid long term outlook, we believe the company should benefit from the current macro environment, as the lion’s share of revenues are based in hard currencies. Moreover, we believe that the Company is a good proxy to benefit from growth in number of pax in Turkey without the fuel risk. The Company has outperformed the BIST-100 by 102% in 2013 and by 8% so far in 2014, a trend we would attribute to the company’s revenue structure, which is mostly € and $ denominated, and its strong operational performance along with the mounting expectations of a delay in the third airports project and planned capacity expansion in its flagship Istanbul Ataturk Airport.
Risks. Key risks include a slowdown in passenger traffic growth, increasing political tensions in its regions of operation, failure to replace IAA or overpaying in acquisitions.
2014-end target price of TL18.80/share. We value TAV Airports using sum-of the parts (SOTP) analysis based on target Net Asset Value (NAV). We employed DCF analysis to value each of the Company’s operations separately. Our valuation is solely based on DCF, as we believe DCF analysis is the most appropriate means of reflecting TAV Airports’ long-term growth potential as well as TAV Airports’ well designed structure. We only valued TAV Airports’ existing airport operations, not taking into account any terminal value and assuming that the Company would neither win any new tenders, nor would it be awarded another term upon expiry of its current concession agreements. On the other hand, as the services companies’ operations will not end with the expiry of operating rights at the airports, we did include a terminal value in calculating the value of the services companies. We put HAVAS to our valuation on its transaction value in late 2012. TAV had paid EUR80mn for 35% of HAVAS at that time.
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TAV Airports Concession Equity Value Valuation TAV's stake Contribution % share SOTP Valuation Due (€mn) Method (€mn) (€mn) in total Airport Operations 2,657 2,105 82% TAV Istanbul Jan-21 1,168 DCF 100% 1,168 45% TAV Izmir Jan-32 124 DCF 100% 124 5% TAV Esenboga May-23 144 DCF 100% 144 6% TAV Gazipaşa May-34 15 DCF 100% 15 1% TAV Tunisie May-47 264 DCF 67% 177 7% TAV Georgia Jan-27 241 DCF 76% 183 7% TAV Macedonia Mar-30 38 DCF 100% 38 1% TAV Medina 2037 663 DCF 33% 219 9% TAV Zagreb 2042 246 DCF 15% 37 1% Services 675 467 18% ATU 357 DCF 50% 179 7% HAVAS 229 Transaction Value 100% 229 9% BTA 90 DCF 67% 60 2% TOTAL 2,572 (-) Others (€mn) 187 Target Value for TAV Airports (€mn) 2,385 Current Mcap (€mn) 1,886 2014-end target price per share (TL) 18.80 Current share price (TL) 15.75 Upside potential 19% Source: Garanti Securities
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A closer look at the aviation sector
Before going into the company sections, we believe it would be instructive to set out our understanding of the dynamics of the aviation sector, as the companies under our aviation coverage operate in different subsectors of the aviation sector: THYAO (Full Service Carrier), PGSUS (Low Cost Carrier) and TAVHL (airport operator).
Companies at a glance # of destinations or # of Total # of 12M trailing Mcap Listed countries of operations employees passenger in 2013 revenues as of 9M13 Name Ticker (USDmn) since Main Business as of 2013-end as of 9M13 (mn) (TLmn) Pegasus PGSUS TI 1,430 Apr-13 Low Cost Carrier 45 int'l + 31 domestic 3,005 16.8 17,776 THY THYAO TI 4,382 Dec-90 Full Service Carrier 201 int'l + 42 domestic 22,971 48.3 2,279 TAV TAVHL TI 2,606 Feb-07 Airport Operator 7 countries* 13,904 83.6 2,307 Source: The Company data, Garanti Securities **Turkey, Georgia, Macedonia, Saudi Arabia, Tunisia, Latvia, Croatia
Differences between the LCC model and the FSC model The key differences between the LCC model and the more traditional FSC model are shown in the table below. We would note here that the low-cost carriers should not be confused with regional airlines that operate short flights without service, or with full-service airlines offering some reduced fares. Some airlines have recently actively sought to market and advertise themselves as low-cost, budget, or discount airlines while maintaining products usually associated with traditional mainline carriers, which often result in increased operational complexity. Differences between Low Cost Carriers and Full Service Carriers LCC FSC Low er service level (ancillary revenues) High Service Level Faster turnaround times Low er turnaround times One type aircraft in fleet Diffrent types of aircraft in fleet Point-to-Point model Hub and spoke model Higher seat density Low er seat density (multiple classes) Secondary or regional airports Primary airports Higher share of online sales channel Low er share of online sales channel Limited frequent flyer programme Attractive frequent flyer programme Source: Garanti Securities
We will put the differences into perspective, comparing low cost carriers with full service carriers with the following examples of THYAO and PGSUS:
Service LCC’s ticket prices are usually based on a low amount of service, since generally no service is associated with the ticket price before the flight, while passengers may instead be charged for a wide range of services during or just before the flight. To make up for revenue lost by the lower ticket prices, the airline may charge for extras like food, priority boarding, seat allocation and baggage. In case of delays or cancellations, customers should not expect meals and/or accommodation to be provided for them; and on the whole, no free food or drinks are provided during the flight on LCCs, but rather may be purchased at relatively inflated prices. However, the FSC ticket price includes a range of services which would be treated as extras in LCCs. After the flight, FSCs generally help their
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customers with connecting flights, transport to the city center or hotels, baggage and in other areas, while LCCs generally would not.
Turnaround LCC’s generally aim for low turnaround times; typically the flight schedules only allow for less than an hour for the turnaround. This leaves only a short period of time for passengers to disembark, baggage to be offloaded and boarding to be complete with a new load of passengers and baggage to be completely loaded. The fact that LCCs do not use air bridges also helps speed up this process as passengers walk straight out of the aircraft as the stairs pull up beside the aircraft and passengers can use both the front and back exits. As these airlines do not serve free food and drink on-board, this also speeds up the turnaround between flights as the cabin crew is only required to perform a quick cleaning during stops; a thorough clean is only carried out at night. This cannot be done on full service airlines. The low turnaround time also means that LCC’s are able to increase their daily aircraft utilisation, in what can be considered as one of the main cost advantages over full service airlines, as LCC’s are then obviously able to carry out more round trips between a given city pair than an airline with longer turnaround times. As of 2013, Pegasus’ turns per day stood at 7.4 vs. THY’s 4.5 according to our calculations.
Fleet LCC’s are generally pursuing a strategy of a homogenous fleet with only one type of aircraft, enabling important cost savings with respect to pilot training and maintenance. FSC’s are of course forced to use a mixed fleet, operating both short-haul and long-haul flights, in contrast with LCC’s. PGSUS’s fleet is currently composed entirely of Boeing 737-800s but the airline will shift to Airbus from 2016, when the airline will start to receive deliveries from its 100 Airbus orders in 2H16. On the other hand, THYAO has a range of aircraft in its fleet (45% being Boeing 49% Airbus at the end of 2013).
Point-to-point or hub-and-spoke Point-to-point and hub-and-spoke terms stand out as one of the main differences between LCC’s and FSC’s. Point-to-point travel basically means that the airline is only responsible for carrying you between two points, and is usually applied by LCC’s as it minimizes connections and travel time. In addition, given the lack of interdependency of flights and hubs, a delayed flight or a closed airport will not significantly affect other flight schedules. On the other hand, FSC’s tend to operate a hub and spoke model, consisting of a hub (usually the primary airport) and spokes, which are secondary airports that feed the hub with passengers in order to fill the aircraft. Another reason FSC’s prefer the hub and spoke model is that they can schedule more frequent flights along each route and make full use of the capacity of each plane, while centralizing operations at the hub also give rise to economies of scale. However, in contrast with most LCCs, Pegasus differentiates itself by operating like a network carrier rather than a point to point carrier, thanks to Istanbul’s / Turkey’s natural geographical hub. That was emphasized by the Chairman of Pegasus Airlines, Ali Sabancı; “We aim to combine the network benefits of full-service carriers, and the price benefits of LCCs, to provide low cost travel, on-time performance and new planes.”.
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Geographical Advantage
Source: THY presentation
Seat density Higher seating density is an important element of the LCC business model and a source of potential cost advantages. The average seat pitch in an LCC is normally more restricted than the economy class seat of a FSC. This obviously allows LCC’s to fit more seats into their aircraft, increasing the maximum capacity of each flight. For example, Pegasus fits 188 seats on average into their fleet while THY fits 168 seats, which would – assuming similar operating costs – translate into lower costs for Pegasus. However, it is worth highlighting that a reason for the lower number of seats on THY aircraft is the presence of a business class section which command considerably higher ticket prices than economy class seats, thus producing much higher yields, thus offsetting some of the cost of a lower seat density.
Airports Airports are generally categorised in 3 categories; primary airports, such as Ataturk Airport in Istanbul; secondary airports, which are smaller but still near major cities, like Sabiha Gokcen, also in Istanbul; and thirdly, regional airports, which are typically situated in the province some distance from city centres. Regional airports are typically characterised by the lowest levels of traffic. The primary airports are mainly used by the larger network carriers as the “hub” in their hub-and- spoke systems and are therefore command a strong position with regard to bargaining power, given that they have the size and infrastructure needed to process large passenger numbers. To illustrate this, Istanbul Ataturk Airport processes more than 50mn passengers annually. Primary airports are the most expensive when it comes to airport fees and charges, which include landing fees, a charge per passenger and/or tonne of freight handled, aircraft parking charge and other charges such as airport traffic control and air bridges. In a bid to lower these costs, low fare carriers like Pegasus have followed a strategy of developing routes to secondary and regional airports, while still maintaining a presence in primary airports such as Istanbul Ataturk Airport (with only three aircraft). Another reason for choosing secondary airports is the large volume of traffic in primary
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airports, which can often become congested – hardly optimal for LCC’s aiming for low turnaround times, which would often be compromised by delays caused by congestion in primary airports. Using less utilized secondary and regional airports resolves this problem. The downside for passengers is, of course, that regional airports are far from city centres. As shown below, it seems that fees and charges between Istanbul Ataturk Airport and Sabiha Gokcen Airport are generally similar except ground service expenses.
Istanbul Ataturk Airport vs. Istanbul Sabiha Gokcen Airport Fees / Charges Istanbul Ataturk Aırport (IST) Istanbul Sabiha Gokcen (SAW) per Passenger Domestic 15$ 15 € international 3 € 3 € İntl to intl 5 € 5 €
per Aircraft Domestic Landing 0.8 TL 0.4 € Parking 0.55 TL 0.3 € Illimunation 33 TL 15.0 € International Landing 6.7 € 6.5 € Parking 2.0 € 2.0 € Illimunation 41.0 € 40.0 €
Ground services Seat Capacity 101-150 125.0 € 113.0 € 151-200 167.0 € 149.0 € 201-250 215.0 € 191.0 €
Follow me 34 € 33 € Source: DHMI,HEAS
Typically a contract between the airport and airline states that the airport provides its aeronautical services (passenger fee, ground handling, landing, parking and fuel). The operators also generate revenues from non-aeronautical charges such as duty-free, food and beverages, car parking (see revenues sources of TAVHL below). Once the initial investment in airport facilities has been completed, the marginal costs of accommodating the extra traffic are very low, because additional traffic improves the utilization of spare capacity for which airport management has already paid. Given that additional passengers carry relatively low marginal terminal costs, we think airports may prefer to add or alter the mix of retail shops to maximize the revenue generated by the increased passenger numbers as they focus more on non-aeronautical services, if the charges for aeronautical services become unfavorable.
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Aeronautical charges Non-aeronautical charges Country Passenger fee Ground Handling Landing Parking Fuel Duty-free Food and Beverage Car park Istanbul x x x x x Ankara x x x x x Turkey Izmir x x x x x Gazipasa x x x x x x x x
Enfidha x x x x x x x x Tunisia Monastır x x x x x x x x
Tbilisi x x x x x x x x Georgia Batumi x x x x x x x x
Skopje x x x x x x x x Macedonia Ohrid x x x x x x x x Latvia Riga x x
Saudi Arabia Medina x x x x x x x x Source: The Company
Sales channels The majority of LCC´s ticket sales are realised through the online channel. Both LCC’s and FSC’s prefer the internet as a means to distribute tickets rather than travel agents or call centres, in a bid to cut costs. No paper tickets are issued, and the issue of a booking code, which may be presented upon check-in, reduces distribution costs.
THY's Revenue by point of sale Pegasus' sales breakdown by channel Other Other Internet/Call 1% Call Center 8% Center 2% 14% Africa 5% Europe 29% America Internet 8% 46% Agent Middle East Turkey 44% 9% 23%
Asia/Far East 11% Source: The Company data
Unions In countries with strong unions, it is very difficult for airlines to reduce their labour costs by cutting wages or reducing the size of the workforce when they are hit by downturns in the sector. The employees of many LCC’s are not unionized, helping these airlines keep labour costs under control. Pegasus has no unionized staff, while THY has experienced some troubles with its labour union in the past.
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Frequent flyer programs/alliances Frequent-flyer programs are marketing schemes by airlines which offer their passengers a gift, usually free travel, when they have completed a certain amount of travel with the airline. These programs have resulted in many passengers, especially business travelers, preferring a certain airline or airline alliance as they would receive bonus flights, free hotel accommodation or other free gifts provided through the scheme, although at the same time these passengers may be able to buy cheaper flights with another airline. The reason has often been that the flights are paid by their companies, but the individual employee receives the air miles or associated awards. Such programs/alliances are not generally provided by LCC’s, while FSC’s generally do offer them. Pegasus has no intention to join any alliance while THYAO is a part of the Star Alliance and has various frequent flyer programs.
Turkey capacity seats share by alliance system (8-14 April, 2013)
Star 36.8% oneworld 58.7% SkyTeam
2.9% Unalligned 1.5%
Source: IATA A Study on LCC vs. FSC
Cost gap between low cost and full service carriers is diminishing According to a KPMG survey on airline unit costs, the cost gap between legacy and low cost carriers has narrowed to 2.5 US cents per ASK from 3.6 between 2006-2011. The global crisis in 2009 resulted in more focus on the cost side. Although many of the easily applicable cost minimization targets have been achieved and both LCC’s and FSC’s continue their focus on cutting costs, it is thought that the cost gap will never be fully closed for the following reasons; i) FSC’s will be unable to eliminate their historical staff costs and practices, ii) Only LCCs would viably be able to maintain further efficiencies creating by single fleet types and iii) LCC’s have an inherent ability to operate at lower cost airports and routes stemming from the lack of network limitations. However, LCC’s will continue to capture market share from FSC’s by targeting their higher value customers. This will pave the way for the launch of new products and services such as free luggage, priority boarding and pre-assigned seating. In this respect, the key challenge will be to maintain cost control to remain competitive in the face of increasingly streamlined competitors. On the other hand, FSC’s will need to evolve their business models through partnerships, joint ventures and mergers and acquisitions to overcome the cost challenges and compete with the newer and large hub carriers.
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Cost Gap Betw eeen LCC and FSC is diminishing Cost Gap Betw eeen LCC and FSC in 2006-2011 by category 4.0 4.0 3.5 0.1 3.5 0.2 0.5 0.1 3.0 0.4 3.0 0.1 0.1 2.5 0.1 0.1 0.1 2.5 0.7 0.0 0.0 0 0 2.0 3.6 2.0 1.5 3.6 2.5 1.5 1.0 2.5 0.5 1.0 0.0
0.5 IT 0.0 Fuel
Cost 2007 2008 2009 2010 2011 Cost Airmeals
Marketing
Manpower Other AOV Other
advantage to advantage to and Selling
Fees Engineering low cost low cost Lease
carriers in carriers in expenses Other
to legacy carriers… legacy to carriers… legacy to
2006 2011 Parking & Landing
Cost disadvantage Cost disadvantage Cost Dep, Amort, and Op and Amort, Dep,
Source: KPMG 2013 Airline Disclosures Handbook Source: KPMG 2013 Airline Disclosures Handbook
LCC Capacity Share (%) of Total Seats: 2001 - 2013*
30.0% 26.1% 25.6% 24.3% 25.0% 23.4% 21.9% 19.3% 20.0% 16.7% 14.9% 15.0% 13.5% 11.4% 9.5% 10.0% 8.0%
5.0%
0.0% 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2013* Source: IATA * Jan-April
TURKEY IN GLOBAL RANKINGS
In 2012, the biggest movers in the overall World Top 50 list include THY, which jumped seven places to rank 15th globally, while the Indonesian carrier Lion Air vaulted eight places to enter the global Top 40 for the first time. Iberia and India's Jet Airways fell four and seven places in the 2012 rankings, respectively.
As far as LCC’s are concerned, Southwest Airlines remains the world's biggest LCC, extending its lead over Ryanair, in second place, thanks to the Ryanair’s marked reduction in capacity. The Top Five LCC rankings remain unchanged, but there has been significant movement lower down the list. India's IndiGo and the US-based Spirit continue to rise up the leaderboard, while AirAsia X has dropped back as it redeployed capacity from long-haul European sectors to shorter Asian routes. The Europe based Vueling has grown by a remarkable 40% in terms of ASK, with IndiGo and Lion Air each expanding by 35%. Turkey’s Pegasus ranked at 23rd.
In terms of seats offered, Turkey largest airport, Istanbul Ataturk Airport is in the world’s top 20.
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The World's Top 20 Airports by Capacity Offered (starting w eek 31 March 2013) Rank Airport Total Seats 1 ATL Atlanta Hartsfield-Jackson International Airport 2,183,726 2 PEK Beijing Capital International Airport 2,068,130 3 HND Tokyo Haneda Airport 1,887,497 4 LHR London Heathrow Airport 1,774,606 5 DXB Dubai International Airport 1,639,176 6 ORD Chicago O'Hare International Airport 1,534,449 7 LAX Los Angeles International Airport 1,491,895 8 DFW Dallas/Fort Worth International Airport 1,445,441 9 HKG Hong Kong International Airport 1,440,997 10 CDG Paris Charles De Gaulle Airport 1,421,231 11 CGK Jakarta Soekarno-Hatta International Airport 1,400,299 12 FRA Frankfurt Airport 1,394,143 13 SIN Singapore Changi Airport 1,371,158 14 BKK Bangkok Suvarnabhumi International 1,237,778 15 CAN Guangzhou Baiyun Airport 1,225,526 16 DEN Denver International Airport 1,176,220 17 JFK New York John F Kennedy International Airport 1,172,450 18 PVG Shanghai Pudong Airport 1,154,933 19 KUL Kuala Lumpur International Airport 1,134,217 20 IST Istanbul Ataturk Airport 1,125,132 Source: Innovata
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World's top 50 airlines by capacity (ASKs per w eek): Dec-2012 vs Dec-2011** Global rank Ranking Airline Dec-11 Dec-12 % change Dec-11 Dec-12 Variance
United Airlines* 3,676,173,972 6,149,398,758 67.30% 4 1 3 Delta Air Lines 5,659,984,201 5,643,676,049 -0.30% 1 2 -1 Emirates 4,217,428,241 4,992,911,535 18.40% 3 3 -
American Airlines 4,740,187,417 4,800,884,481 1.30% 2 4 -2 Southw est Airlines 3,052,855,291 3,276,525,770 7.30% 6 5 1 Lufthansa 3,232,470,602 3,158,824,795 -2.30% 5 6 -1 British Airw ays 2,969,790,657 3,049,528,888 2.70% 7 7 - Air France 2,947,863,927 2,825,526,843 -4.20% 8 8 - China Southern 2,338,943,535 2,596,677,741 11.00% 10 9 1 Singapore Airlines 2,284,561,770 2,375,715,435 4.00% 11 10 1 Cathay Pacific 2,518,689,815 2,311,927,122 -8.20% 9 11 -2 Air China 1,975,786,807 2,193,529,512 11.00% 13 12 1 US Airw ays 2,148,315,118 2,016,797,120 -6.10% 12 13 -1 China Eastern 1,802,997,303 1,987,445,996 10.20% 15 14 1 Turkish Airlines 1,546,786,987 1,918,119,411 24.00% 22 15 7
Qantas Airw ays 1,967,029,665 1,863,468,681 -5.30% 14 16 -2 Qatar Airw ays 1,653,642,624 1,798,311,481 8.70% 19 17 2 KLM 1,743,421,204 1,785,622,278 2.40% 16 18 -2 Korean Air Lines 1,699,049,358 1,734,522,605 2.10% 17 19 -2 Thai Airw ays 1,601,385,091 1,702,802,250 6.30% 20 20 - Air Canada 1,698,644,091 1,671,164,061 -1.60% 18 21 -3 All Nippon Airw ays 1,246,645,650 1,549,773,945 24.30% 25 22 3 TAM 1,484,265,530 1,494,027,291 0.70% 23 23 - Ryanair 1,590,511,473 1,476,213,184 -7.20% 21 24 -3 Japan Airlines 1,392,363,846 1,375,619,611 -1.20% 24 25 -1 JetBlue Airw ays 1,189,448,769 1,214,788,293 2.10% 27 26 1 Aeroflot 1,032,936,073 1,197,672,318 15.90% 29 27 2 Etihad Airw ays 989,471,343 1,135,831,421 14.80% 32 28 4 easyJet 1,056,070,278 1,124,069,015 6.40% 28 29 -1 Iberia 1,197,798,613 1,046,122,223 -12.70% 26 30 -4 Malaysia Airlines 1,020,187,141 1,039,171,244 1.90% 30 31 -1 Virgin Atlantic 974,968,392 1,005,248,585 3.10% 33 32 1 Gol 1,007,352,569 913,465,718 -9.30% 31 33 -2 Asiana Airlines 801,526,420 876,324,179 9.30% 36 34 2 Air India 897,084,182 869,253,552 -3.10% 34 35 -1 Alaska Airlines 807,036,820 866,811,809 7.40% 35 36 -1 Saudi Arabian 797,784,368 859,673,901 7.80% 37 37 -
China Airlines 797,010,713 824,521,813 3.50% 38 38 - Lion Airlines 602,332,879 810,548,478 34.60% 47 39 8 Hainan Airlines 756,248,033 789,659,041 4.40% 40 40 - SWISS 735,342,198 768,204,291 4.50% 41 41 - Jetstar Airw ays 627,376,629 732,129,754 16.70% 46 42 4 Air New Zealand 727,101,490 710,174,817 -2.30% 42 43 -1 Westjet 677,374,415 703,526,653 3.90% 45 44 1
Alitalia 713,564,199 702,771,404 -1.50% 43 45 -2 Jet Airw ays 766,255,713 682,168,104 -11.00% 39 46 -7
Transaero Airlines 590,637,778 681,909,360 15.50% - 47 n/a Air Berlin 704,680,454 678,119,686 -3.80% 44 48 -4 Virgin Australia 563,988,380 667,351,376 18.30% - 49 n/a EVA Air 600,022,403 661,811,048 10.30% - 50 n/a GRAND TOTAL 81,823,394,427 87,310,342,925 6.70% Source: Innovata *United and Continental has been combined for 2012 but not 2011 **Representative sample w eek in December of each year Note: US major airlines include the regional services operated by other carriers but marketed by the majors only.
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Top 25 LCCs worldwide by capacity (ASKs per week): Dec-2012 vs Dec-2011 Global rank Ranking Airline Dec-11 Dec-12 % Change Dec-11 Dec-12 Variance Southw est Airlines 3,052,855,291 3,276,525,770 7.30% 1 1 - Ryanair 1,590,511,473 1,476,213,184 -7.20% 2 2 -
JetBlue Airw ays 1,189,448,769 1,214,788,293 2.10% 3 3 - easyJet 1,056,070,278 1,124,069,015 6.40% 4 4 - Gol 1,007,352,569 913,465,718 -9.30% 5 5 - Lion Airlines 602,332,879 810,548,478 34.60% 9 6 3 Jetstar Airw ays 627,376,629 732,129,754 16.70% 8 7 1 Westjet 677,374,415 703,526,653 3.90% 7 8 -1
AirTran Airw ays 704,027,357 593,301,841 -15.70% 6 9 -3 AirAsia Berhad 514,497,106 592,750,621 15.20% 10 10 - Indigo 363,580,357 489,547,961 34.60% 14 11 3 Norw egian 376,017,532 460,529,531 22.50% 12 12 - Condor 408,981,174 400,293,763 -2.10% 11 13 -2 Virgin America 350,169,261 387,519,726 10.70% 16 14 2 Spirit Airlines 297,900,830 373,126,368 25.30% 19 15 4 Volaris 305,039,639 348,697,350 14.30% 18 16 2 Frontier Airlines 363,405,399 330,101,798 -9.20% 15 17 -2 Wizz Air 314,854,410 330,075,746 4.80% 17 18 -1 SpiceJet 270,033,409 313,233,746 16.00% 20 19 1 AirAsia X Sdn. Bhd. 367,668,226 306,214,544 -16.70% 13 20 -7
Cebu Pacific Air 262,579,589 285,040,540 8.60% 21 21 - Air Arabia 247,294,792 275,508,189 11.40% 23 22 1 Pegasus 247,563,308 268,113,218 8.30% 22 23 -1 Vueling Airlines 175,838,664 246,848,248 40.40% 24 24 - Allegiant Air 173,834,741 217,749,960 25.30% 25 25 - GRAND TOTAL 15,546,608,096 16,469,920,012 5.90% Source: Innovata Representative sample week in December of each year GLOBAL SECTOR OUTLOOK
Airlines expecting a 31% increase in passenger demand by 2017
The International Air Transport Association (IATA) released the IATA Airline Industry Forecast for 2013-2017, finding that airlines expect to see a 31% increase in passenger numbers between 2012 and 2017. Total passenger numbers are expected to reach 3.91bn by 2017, up from the 2.98bn carried in 2012.
The IATA Airline Industry Forecast 2013-2017 is a consensus outlook for system- wide passenger growth. Demand is expected to expand at an average CAGR of 5.4% between 2013 and 2017. This would compare to the CAGR of 4.3% in global
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passenger numbers between 2008 and 2012, largely reflecting the negative impact of the 2008 global financial crisis and the recession that followed. Of the new passengers, approximately 292mn will be carried on international routes and 638mn domestically.
The emerging economies of the Middle East and Asia-Pacific will see the strongest international passenger growth with a projected CAGR of 6.3% and 5.7%, followed by Africa and Latin America with CAGR rates of 5.3% and 4.5%.
Routes to or within China will be the single largest driver of growth, accounting for 30% of new passengers during the forecast period. Of the anticipated 227.4mn additional passengers, 195mn will be domestic and 32.4mn will be international.
The Asia-Pacific region (including China) is expected to add around 300mn additional passengers by the end of the current forecast horizon. Of these, around 225mn or 75% are expected to be domestic passengers.
With 677.8mn domestic passengers in 2017, the United States will remain the largest single market for domestic passengers, although it is only forecasted to add 70mn passengers over the forecast period (marking a 2.2% CAGR). This reflects the market’s maturity. China is firmly established in second place (487.9mn passengers by 2017, with a 10.2% CAGR.). The US also will reclaim the top spot from Germany for international passengers by the end of the forecast period. Germany will add 27.2mn passengers to the 149.4mn in 2012 (3.4% CAGR), while the US will add 28.2mn international passengers, the number increasing at a CAGR of 3.5% from 149.3mn in 2012 to 177.5mn in 2017.
Forecast Highlights
International Passenger Development
International passenger numbers are expected to rise by 25% from 1.2 bn in 2012 to 1.5bn in 2017, bringing 292mn additional passengers (4.6% CAGR).
Uzbekistan (10.3% CAGR) has displaced Kazakhstan (9.0% CAGR) as the fastest growing market for international passenger traffic. The next eight fastest growing markets are Russia (7.7% CAGR), Turkey (7.6% CAGR), Oman (7.5% CAGR), China (7.1% CAGR), Vietnam (6.9%CAGR), Saudi Arabia (6.9%), Azerbaijan (6.8% CAGR), and Pakistan (6.7% CAGR). No Latin American or African countries are among the fastest growing markets.
The United Arab Emirates will see air passenger numbers increase by 29.2 mn (a 6.6% CAGR) over the forecast period, nearly as many additions as in China. For international traffic, routes between the Middle East and Asia-Pacific will see the most rapid growth.
Domestic Passenger Development
Domestic passenger numbers are expected to rise from 1.82 billion in 2012 to 2.46bn in 2017, an increase of 639mn reflecting a CAGR of 6.2% over the period.
Brazil will firmly establish itself as the third largest domestic market after the US and China, with 122.4mn passengers in 2017, an increase of 32 million
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passengers from the 90mn 2012 (a 6.3% CAGR).
Turkey will enter the top 10 largest markets with 26.3mn passengers carried with an addition of 17.2mn more (10.6% CAGR) over the forecast period. It is also the second fastest growing domestic market.
The lower five of the top ten fastest growing markets on the basis of domestic passenger numbers, the bottom five are all in Latin America: Brazil, Peru, Colombia, Mexico and Ecuador.
Regional Outlook over the 2013-2017 forecast period
Asia-Pacific passenger traffic is forecast to grow at a CAGR of 5.7%. Traffic within the Asia-Pacific region will represent 31.7% of global passengers in 2017, up from 28.2% in 2012. North America and Europe will continue to see their share decline, from 26% to 24% for North America, and from 24% to 23% for Europe.
The Middle East is set to follow the strongest international passenger growth, with a CAGR of 6.3%.
Europe is on course to see international passenger demand grow at a CAGR of 3.9%.
North America is projected to see the slowest international passenger demand growth with a CAGR of 3.6%.
Latin America is forecasted to see international passenger demand grow at a CAGR of 4.5%.
TURKISH AVIATION SECTOR AT A GLANCE
Turkish air passenger traffic posted a 16% CAGR in 2003-2013
Passenger traffic in Turkey has witnessed strong momentum since the deregulation of the sector in 2003. Passenger numbers have grown at a CAGR of 16% in Turkey between 2003-13, at a multiple of 3x real GDP growth. Even in 2009, when real GDP contracted by 5%, passenger numbers in Turkey grew by 6%. The Turkish aviation industry continued to register high rates of growth, even at the time of the global financial crisis (in 2008-09), the SARS outbreak (in 2004) and natural phenomena such as the volcanic eruption in Iceland (in 2011). Domestic passenger numbers have also surged on the back of affordable fares with a CAGR of 24% between 2003-2013, surpassing the CAGR of 11% in international passenger numbers. We think that Turkey’s geographical position, its increased tourism potential, its still under-penetrated nature and a generally supportive approach to the sector by the government will help sustain this above- average growth. Turkey’s two biggest carriers THY and Pegasus plan to double their fleet size by 2021, indicating their anticipation of strong demand. We project air passenger traffic to reach 150mn by 2016, marking a CAGR of 9.3% CAGR for 2014-2016E vs. State Airports’ Authority’s projection if a 9.9% CAGR (see page 25 for details).
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Pax grow th vs. GDP grow th
35% 30% 25% 20% 15% 10% 5% 0% -5% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* -10%
Total pax growth GDP growth
Source: DHMI, Garanti Securities *2013E GDP growth
Pax numbers evolution since 2003
160 140 Domestic 24% CAGR 2003-2013 International 11% CAGR 2003-2013 120 Total 16% CAGR 2003-2013 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Domestic International Total
Source: DHMI
Under penetration offers potential growth for Turkish aviation industry
Turkey lags far behind EU countries and the US in terms of the number of air passenger movements per capita. Although Turkey has higher or similar GDP figures compared to some European countries, the level of air travel in the country is considerably lower at 1.2 (pax per capita) – virtually half the figure seen in larger European economies.
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Pax per capita (2011)
4 3.5 3 2.5 2 3.6 3.2 1.5 2.9 2.8 2.5 2.6 2.2 2.2 1 1.9 2.0 1.9 2.0 1.4 1.6 0.5 1.2 0.4 0.8 0.5 0.4 0.3 0.5 0.4 0.3 0.8 0 Turkey Italy France Germany US EU-15 UK Spain
Domestic International Total
Source: Pegasus presentation Natural geographical hub
With almost 50 countries within a 3-hour flight of Turkey, the country is placed as a natural geographical hub. Turkey’s geographical advantage is one of the main triggers of the Turkish aviation industry, as it helps the country to capture more transit passengers and there are plans in Turkey to establish Istanbul as an international hub. For this end, the government plans to build one of the world’s largest airports in Istanbul with an initial capacity of 70mn by 2018 and a final capacity of 150mn by 2027. (see page 29 for details).
Low penetration levels and geographical advantage
Source: Pegasus Presentation
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Ambitious growth plans of THY and Pegasus
Turkish airlines and Pegasus recently placed massive aircraft orders to expand their operations, both internationally and domestically. According to their plans, THY’s fleet will expand from 232 aircraft in 2013 to 436 by 2021, nearly doubling the airline’s total seating capacity from 42,200 to 83,500. Meanwhile, Pegasus ordered 100 new aircraft (75 firm orders plus 25 optional) in December 2012. After the deliveries, Pegasus’ fleet size is estimated to be between 75-126. We believe the orders will bode well for growth in the industry.
Fleet profiles of Turkish carriers
600
500 60 400 206 300
200 233 25 100 79 0 45 32 32 14 THY Pegasus Onurair SunExpress Atlasjet
Existing On order Options
Source: Pegasus presentation
Turkey’s attraction for tourism
We believe Turkey’s tourism industry offers tremendous growth potential, given that 50 countries are all within a 3 hour flight of Turkey, Turkey’s long coastal regions and its relatively warm climate compared to Europe. As with Spain and Greece, Turkey could continue to benefit from an increased number of tourists going forward, as observed in the recent years. As seen below, Turkey has recorded an 8% CAGR in tourist arrivals over the last decade. Note that Antalya, located on Turkey’s South coast of Turkey, has Turkey’s second largest airport in terms of passenger numbers, after Istanbul’s Ataturk Airport. The overwhelming majority of tourists come to Turkey by air. Gazipasa Airport (operated by TAV), another airport serving the area near Antalya, has recently entered operation – another clear sign of Turkey’s increasing tourism potential.
Tourist figures
40 35 8% CAGR 2004-2012 30 25 20 15 10 5 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*
Tourist numbers (mn)
Source: TUIK *Jan-Nov 2013
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Supportive demographics
Turkey is the second largest country in Europe in terms of population, after Germany, with a demographically young population; half of the population is under the age of 30, meaning more people tend to fly as they reach working age. In Turkey, it is believed that passport ownership ratio is yet at low teens and we believe the majority of passport holders are Turkish citizens living in other countries. We believe the high passport fees are one of the reasons for the low passport ownership in Turkey. There has been increasing controversy on that issue with campaigns to ensure passport ownership is more affordable or easy.
Growth in air travel supported by lack of alternative transport system and mountainous terrain
As a generally mountainous country, Turkey currently lacks a developed network of railways, high speed trains and infrastructure. Despite high special duties on motor vehicle purchases (on top of VAT) and petrol, Turkish people still prefer road travel, which accounts for 90% of total transport in Turkey. We believe that with mounting competition, increasing seat capacity and attractive fares, the growth in air travel will outpace road travel. Along with the increasing GDP, disposable income rises, resulting in an increase in awareness of time value of air travel compared to car or bus transportation. Although the government is about to finalize a high speed rail link between Turkey’s biggest two cities of Istanbul and Ankara, we do not expect this to significantly compromise growth in the domestic aviation sector, as Turkey needs a much more comprehensive network of high speed trains. According to government plans, high speed railways are going to connect many Turkish cities. They could negatively affect the growth in domestic air travel by the 2020s. Yet, at this stage, we do not find those plans are worrisome.
Special Consumption Tax on autos (%) Transportation of domestic passengers in Turkey Engine size 2002 2014 Current 2023 Target below 1,600 cc 27% 45% Road 90% 72% 1601-2000 cc 46% 90% Rail 2% 10% above 2,000 cc 50% 145% Air 8% 14% Source: ADA Sea 0% 4% Source: Transportation Ministry
Number aircraft and seat capacity in Turkey
70,000 400 60,000 350 50,000 300 250 40,000 200 30,000 150 20,000 100 10,000 50 - - 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Seat capacity (lhs) Number of aircrafts (rhs)
Source: Civil Aviation Authority
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Competition
Turkish Airlines (THY): Turkish Airlines was founded in 1993 under the supervision of the Ministry of National Defence. THY initiated its operations with a fleet of just 5 aircraft and initiated cargo transportation operations in 1995. It is now the 3rd biggest airline in terms of pax carried, the 4th largest in terms of ASK and 5th largest according to RPK among AEA (Association of European Airlines). At the end of 2013, it was operating with a fleet of 232 aircraft and served 48.3 million passengers (vs. 22.6 million in 2008). The airline generated USD8.3bn of revenue in 2012 (vs. USD4.7bn in 2008). The airline uses Istanbul Ataturk Airport as its hub and was flying to 42 domestic and 201 international destinations as of 2013. THY was ranked as Europe’s best airline by Skytrax three years in a row (2011, 2012 and 2013).
Pegasus: Established in 1990, and acquired by Esas Holding in 2005, Pegasus was Turkey’s first low cost carrier and is the second largest carrier after the national flag carrier, THY. Based at Istanbul Sabiha Gokcen Airport, Pegasus was flying to 76 destinations as of 2013, 31 of which were domestic and the remaining 45 international. As an LCC, ancillary revenues comprised of excess luggage, cancellations, seat selection and meals represented 13% of total revenues in 9M13. Pegasus is named as the fastest growing LCC in Europe in 2010 and 2011 in terms of seat capacity, according to OAG.
SunExpress: SunExpress was founded in 1989 as a subsidiary of THY and Lufthansa. SunExpress is one of the leading airlines in terms of passenger numbers between Germany and Turkey. The home base of SunExpress is in Antalya on the Turkish Riviera The second most important base is the hub Izmir on the Aegean coast. As of 9M13, it flies to/from 22 airports in Germany, 21 in Turkey and 44 in other countries and operates with 21 B737-800 aircraft with total seat capacity of 3.969. it carried 4.3mn passengers as of 9M13, by achieving load factor of 84.4%
AnadoluJet: Founded in 2008, as THY’s low cost carrier brand, Anadolujet uses Ankara Esenboga Airport as its hub and is focused on domestic operations. It has 27 aircraft in its fleet, according to its website.
OnurAir: Founded in 1992, Onur Air has a fleet of 23 aircraft. It mainly operates for charter flights both internationally and domestically. It flies to 80 destinations internationally and serves 15 domestic airports.
Atlasjet: Founded in 2001, Atlasjet operates 17 aircraft. It also provides cargo transportation in domestic and international routes through scheduled and non- scheduled flights, in addition to passenger services.
OUR PASSENGER FORECASTS
Turkish air passenger traffic grew by 15% in 2013 (vs.11% in 2012), with international passenger numbers reaching 73mn on the back of 12% annual growth while domestic passenger traffic increased by 18% to 76mn in 2013.
We project that total passenger traffic will reach 150mn by 2016E, following a 10.3% CAGR between 2013-2016. We forecast 10.4% growth in international
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passenger traffic with 10.3% growth in domestic passenger traffic during the same period. The State Airports Authority (DHMI) anticipates a CAGR of 9.9% between 2013-2016, in parallel with our forecast in overall terms.
Pax Projections (mn)- our numbers are inline w ith DHMI
250 200 150 100 50 2014E - 2015E
2016E
DHMI
Domestic Domestic
International International Garanti Securities Garanti
Source: DHMI, Garanti Securities
Passenger Assumptions (mn) 2011 2012 2013 2014E 2015E 2016E THY Domestic 14.5 15.9 20.1 25.4 31.1 37.6 growth 6.8% 9.5% 26.3% 26.7% 22.4% 20.9% International 18.1 23.2 28.2 32.0 37.4 43.5 growth 16.9% 27.7% 21.8% 13.4% 16.7% 16.3% Total 32.7 39.0 48.3 57.4 68.5 81.0 growth 12.2% 19.6% 23.6% 18.9% 19.2% 18.4% Pegasus Domestic 6.8 8.3 10.2 12.1 14.4 17.0 growth 36.4% 22.7% 23.3% 18.6% 18.4% 18.2% International 3.9 5.3 6.6 7.9 9.4 11.1 growth 29.4% 33.7% 24.8% 20.3% 19.0% 18.0% Total 10.7 13.6 16.8 20.1 23.8 28.1 growth 33.7% 26.8% 23.9% 19.3% 18.6% 18.1% Market Shares (%) THY 37.0% 40.0% 43.3% 46.0% 49.6% 54.0% Domestic 49.8% 49.2% 52.7% 58.5% 65.3% 73.5% International 30.7% 35.4% 38.4% 39.3% 41.4% 44.0% Pegasus 12.1% 13.9% 15.1% 16.1% 17.3% 18.7% Domestic 23.2% 25.7% 26.9% 28.0% 30.2% 33.2% International 6.7% 8.1% 9.0% 9.7% 10.5% 11.3% Turkish Market Domestic 29.2 32.3 38.1 43.4 47.6 51.1 growth 15.5% 10.7% 18.0% 14.0% 9.7% 7.4% International 59.0 65.4 73.4 81.4 90.3 98.8 growth 13.1% 10.8% 12.2% 10.8% 11.0% 9.5% Total 88.2 97.7 111.5 124.7 137.9 149.9 growth 13.9% 10.8% 14.1% 11.9% 10.5% 8.7% Source: DHMI, The Company data, Garanti Securities
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AIRPORTS IN TURKEY
Currently, 49 airports are open to civil aviation in Turkey, 44 of which are operated by the General Directorate of State Airports (DHMİ) while Istanbul Sabiha Gökçen International Airport is run by a private company (HEAŞ; Airport Operations and Aviation Industries Ltd.), which operates under the control of the Defence Industries Undersecreteriat. A total of 24 of the airports are used for both domestic and international flights, with 25 of used solely for domestic flights.
Airports in Turkey
Source: Civil Aviation Authority Capacity Enhancement Studies
Istanbul Ataturk
Istanbul Atatürk Airport (IAA) is the biggest in Turkey in terms of total number of passengers. It served 51mn passengers in 2013, and is the world’s 20th largest airport in terms of pax handling capacity. The airport is operated by TAV under a concession agreement which continues until January 2021, and is estimated to have a current capacity of 60-65m passengers. Therefore, capacity constraints appear inevitable within the next couple of years given the strong growth potential of air traffic. For this reason, the State Airports Authority (DHMI) will take some measures to expand the airport’s capacity to handle traffic properly until the third airport is completed (see page 29 for details). It is believed that with the measures on tower management, aircraft movements would be able to increase from the current 58 to 80 per hour, while 43 additional parking positions will be made available later this year. In addition, a new international terminal could mean 21 additional boarding gates, which could increase the terminal capacity from 42mn to 63mn. Furthermore, there would be some managerial measures such as i) easy -pass implementation, ii) the privatization of passport control and iii) the elimination of security checks at the terminal entrance. It is thought that these measures could a set the stage for a 30% increase in capacity.
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Istanbul Ataturk Airport Capacity Enhancements
Source: THY presentation International vs Domestic Passenger Growth in Istanbul Ataturk Airport Domestic 35% International 30% Domestic average International average 25% 20% 15% 10% 5% 0% -5% -10%
Jul-11 Jul-12 Jul-13
Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13
Jan-11 Jan-12 Jun-13 Jun-11 Jun-12 Jan-13
Feb-12 Feb-13 Feb-11 Mar-11 Mar-12 Mar-13
Nov-11 Aug-12 Nov-12 Aug-13 Sep-13 Nov-13 Aug-11 Sep-11 Dec-11 Sep-12 Dec-12
May-12 May-13 May-11 Source: DHMI
International vs Domestic Passenger('000) in Ataturk Airport
3,500 Domestic ('000) International ('000)
3,000
2,500
2,000 1,500 1,000
500
0
Jul-12 Jul-11 Jul-13
Apr-12 Oct-12 Oct-13 Apr-11 Oct-11 Apr-13
Jan-11 Jun-12 Jun-11 Jan-12 Jan-13 Jun-13
Feb-11 Mar-11 Feb-12 Mar-12 Feb-13 Mar-13
Aug-12 Sep-12 Nov-12 Nov-13 Dec-13 Aug-11 Sep-11 Nov-11 Dec-11 Dec-12 Aug-13 Sep-13
May-12 May-13 May-11
Source: DHMI
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Sabiha Gokcen Airport
Sabiha Gokcen Airport (SAW) is Istanbul’s second airport and the main hub for Pegasus Airlines. The airport was privatized in 2008 and air traffic has increased considerably since then, as shown below. The total number of passengers using the airport has increased at a CAGR of 34% between 2008 and 2013 and reached to 18.6mn. Although the airport operates with a relatively low capacity (75%), the DHMI plans to double its capacity to 50mn within the next two years following the completion of a second runway. Since the planned third airport in Istanbul will be located further (60km) from the city centre than Sabiha Gokcen Airport (35km), we believe the attraction of Sabiha Gokcen for air travel will increase going forward. Furthermore, Sabiha Gokcen is located on the Anatolian side of Istanbul, a more rapidly developing region of the city compared to the European side.
International vs Domestic Passenger('000) in Istanbul Sabiha Gokcen Airport
1,400 Domestic ('000) International ('000)
1,200
1,000
800
600
400
200
0
Jul-11 Jul-12 Jul-13
Apr-11 Apr-12 Apr-13 Oct-11 Oct-12 Oct-13
Jun-11 Jun-12 Jun-13 Jan-11 Jan-12 Jan-13
Mar-13 Feb-11 Mar-11 Feb-12 Mar-12 Feb-13
Aug-11 Sep-11 Nov-11 Dec-11 Aug-12 Sep-12 Nov-12 Dec-12 Aug-13 Sep-13 Nov-13 Dec-13
May-11 May-12 May-13
Source: DHMI
International vs Domestic Passenger Growth in Istanbul Sabiha Gokcen Airport
70% Domestic International 60% Domestic average International average 50%
40%
30%
20%
10%
0%
-10%
Jul-12 Jul-11 Jul-13
Apr-11 Oct-11 Apr-13 Apr-12 Oct-12 Oct-13
Jan-11 Jan-12 Jun-12 Jun-13 Jun-11 Jan-13
Feb-11 Mar-11 Mar-13 Feb-12 Mar-12 Feb-13
Nov-11 Dec-11 Aug-12 Sep-12 Dec-13 Aug-11 Sep-11 Nov-12 Dec-12 Aug-13 Sep-13 Nov-13
May-13 May-11 May-12
Source: DHMI
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Please see the last page of this report for important disclosures. February 11, 2014 RESEARCH Aviation
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The third airport
In line with the government’s target of Istanbul being an international hub for air travel, a tender for a 3rd airport in Istanbul was held in May 2013, where the Cengiz-Kolin-Limak-Mapa-Kalyon consortium submitted the winning bid, offering a total of EUR22,152mn in rent (EUR26,139mn including 18% VAT) over a period of 25 years (EUR1,046mn per annum). The new airport will be completed in four phases. Once complete, the airport will have a pax capacity of 150mn. The first phase, which will have a pax capacity of 70mn, is expected to be completed within 42 months. The Minister of Transportation, Binali Yildirim, recently said that the construction of the 3rd airport would begin in 1Q14 at the latest. Nihat Ozdemir, from the winning consortium, stated that the 3rd airport would enter operations by the beginning of 2019. However, given the current global liquidity conditions and mounting political turmoil in Turkey, we believe delays in the construction of the 3rd airport project are likely.
Istanbul’s 3rd Airport at a glance…
Istanbul's Third Airport 1st phase 2nd phase 3rd phase 4th phase Total
New terminal capacity/passenger per annum 70,000,000 20,000,000 30,000,00 30,000,000 150,000,000
# of terminals 2 1 1 4
Runways 3 1 1 1 6
Taxiways 8 3 2 3 16
Aircraft parking capacity 500
*Phase 4 to be completed by 2027
There will be a pax revenue guarantee for the first 12 years of the concession, as indicated in the table below. Pax fees are consist of €20 per international outgoing passenger, €5 per transfer passenger and €3 for each domestic outgoing passenger transferring to an international flight.
(mn €) 1 2 3 4 5 6 7 8 9 10 11 12 Total
Rev. guarantee 316 334 351 367 541 563 585 607 628 649 670 690 6,300
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Airports in Istanbul
3rd Bridge Project
Source: Pegasus Presentation, Garanti Securities
Recent Developments in Turkish Aviation Sector
Price ceiling On December 2, the Minister for Transportation, Binali Yıldırım, stated that economy class domestic fares will be capped at TL299 with effect from December 3. This TL299 price cap will remain in effect indefinitely until market conditions allow otherwise. We believe the aviation sector will not be affected by the price ceiling exercise, considering only 1.5% of domestic travellers paid more than TL300 for their flights. We are not especially troubled by the price ceiling for domestic fares.
Fewer security points at airports The National Civil Aviation Council plans to reduce number of security control points at airports from two currently to one. If approved, the new plan would initially be implemented at Istanbul Ataturk Airport. We believe the new plan would be positive for the aviation sector as it would decrease the amount of time spent at security and increase efficiency at the airports. Less time spent at security control points could support duty free spending improve punctuality levels.
Government plans to expand air space capacity There have been reports in the media that commercial flights may be able to use air space that is normally specifically reserved for the air force when air traffic requires an increased number of air corridors. The use of air force flight corridors would reduce the amount of time spent in holding patterns and lower the incidence of delays. This would result in lower fuel consumption and maintenance costs for airlines and increased efficiency for airports.
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Airline Terminology
Revenue passengers: Revenue passengers represents the total number of paying passengers flown on all flight segments.
Revenue passenger kilometers (RPK): Revenue passenger kilometers (RPK) represents the numbers of kilometers flown by revenue passengers
Available seat kilometers (ASK): Available seat kilometers (ASK) represents the aircraft seating capacity multiplied by the number of kilometers the seats are flown.
Load factor: Load factor represents the percentage of aircraft seating capacity that is actually utilized (calculated by dividing RPK by ASK).
Breakeven load factor: Breakeven load factor is the passenger load factor that will result in passenger revenues being equal to operating expenses.
Aircraft utilization: Aircraft utilization represents the average number of block hours operated per day per aircraft for the total aircraft fleet.
Block hours: Block hours refers to the elapsed time between an aircraft leaving an airport gate and arriving at an airport gate.
Yield per passenger kilometer: Yield per passenger kilometer represents the average amount one passenger pays to fly one kilometer.
Passenger revenue per available seat kilometer: Passenger revenue per available seat kilometer represents passenger revenue divided by available seat kilometers.
Operating revenue per available seat kilometer (RASK): Operating revenue per available seat kilometer (RASK) represents operating revenues divided by available seat kilometers.
Average stage length: Average stage length represents the average number of kilometers flown per flight.
Operating expense per available seat kilometer (CASK): Operating expense per available seat kilometer (CASK) represents operating expenses divided by available seat kilometers.
Wet Lease Arrangement: A wet lease is a leasing arrangement whereby one airline (lessor) provides an aircraft, complete crew, maintenance, and insurance, to another airline (lessee), who pays by hours operated. The lessee provides fuel, covers airport fees, and any other duties, taxes, etc. The flight uses the flight number of the lessee. A wet lease generally lasts one month to two years, anything less would be considered an ad-hoc charter. A wet lease is typically utilized during peak traffic seasons or annual heavy maintenance checks, or to initiate new routes. Ground handling is usually done by the lessor although this can vary from country to country. In some cases the lessee provides these services (or one of its partners).
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February 11, 2014
RESEARCH
Turkish Airlines Turkey - Equity - Airlines Re-initiation of Coverage Outperform (Maintained) Growing globally on a natural hub
We re-initiate coverage of THY with an Outperform recommendation. Our 2014-end target price of TL9.20 Current Price TL 7.04TL indicates 31% upside potential. 2014-end Target Price TL 9.20TL THY trades at a 8% discount based on the 2014E P/E of 8.9x Potential Return TL 31% for its emerging market peers, while trading at a slight Current Mcap (TLmn) 9,715 premium over the peers on the basis of its 2014E EV/EBITDA 24,509 of 6.7x, reflecting the airline’s bullish growth prospects. Current EV (TLmn) Current Mcap (US$mn) 4,367 We deem THY to still be one of the best growth stories on the Bourse Istanbul with its attractive passenger growth potential and cost efficiencies driven by a young fleet and Price Performance (TL) relatively low workforce expenses. 9.00 Attractive passenger growth is the key for THY 7.50 After posting a CAGR of 16% in passenger numbers between 2008 6.00 and 2012 (vs. the 13% in Turkey), THY’s total passengers grew by 4.50 24% YoY in 2013. As well as a strong domestic market, Turkey’s 3.00 growing status as an international transfer hub given its geographical 1.50
advantage – at the juncture of East-West corridor of global air traffic
01.12 05.12 07.12 01.13 07.13 01.14 09.12 11.12 03.13 05.13 09.13 11.13 – and improving brand awareness are the main factors behind the 03.12 strong growth in demand. We project a CAGR of 19% in passenger THYAO BIST-100 numbers for THY between 2013 and 2016, lower than the company’s target of 20%+. Stock Market Data
Bloomberg/Reuters: THYAO.TI / THYAO.IS Growing in a profitable manner thanks to competitive cost base Relative Performance: 1 mth 3 mth 12mth THY’s CASK is among the lowest in its peer group, driven by better utilization of the fleet and lower labour costs. THY aims to almost 5% 9% 53% double the size of its fleet by 2021, suggesting 9% CAGR in seat 52 Week Range (TL): 5.56 / 8.7 capacity in 2013-2021. Implementation of a new yield management Average Daily Vol (US$mn) 3 mth: 95.5 scheme and capacity expansion (30%) at its main hub would be YTD TL Return: 9% another plus for the company in sustaining its competitive edge and Shares Outstanding (mn): 1,380 boosting its market share (currently number 3 among AEA airlines in Free Float (%): 51 terms of passenger numbers as of 9M13). Foreign Ow nership in Free Float : 64%
Financials and Ratios 2012 2013E 2014E 2015E Net Sales (TLmn) 14,909 19,057 25,422 30,430 EBITDA (TLmn) 2,640 2,788 3,190 3,787 Research Analyst: Baris Ince EBITDAR (TLmn) 3,064 3,598 4,399 5,190 +90 (212) 384 1141 Net Income (TLmn) 1,133 989 1,086 1,240 [email protected] EBITDA Margin 17.7% 14.6% 12.6% 12.4% EBITDAR Margin 20.6% 18.9% 17.3% 17.1% Sales Contact: P/E (x) 8.6 9.8 8.9 7.8 +90 (212) 384 1155-58 EV/EBITDA (x) 6.3 7.3 6.7 6.3 [email protected] EV/Sales (x) 1.11 1.06 0.84 0.79 EPS (TL) 0.82 0.72 0.79 0.90 DPS (TL) 0.13 0.22 0.24 0.27
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The Company in Brief Turkish Airlines is Turkey’s flag carrier with a fleet of SUMMARY FINANCIALS (TLmn) 232 aircraft as of 2013. Following the SPO in 2006, the Government’s stake was reduced to 49.12%, thus Income Statement 2012 2013E 2014E 2015E 13E/12 THY is considered as a private company. THY Net Sales 14,909 19,057 25,422 30,430 28% became a full member of Star Alliance in 2008. Operating Expenses -13,861 -17,828 -24,043 -28,838 29% Shareholders Privatization Administration 49.12%, Operating Profit 1,048 1,229 1,378 1,592 17% Free Float 51.88% Consolidated EBITDA 2,640 2,788 3,190 3,787 6%
Consolidated EBITDAR 3,064 3,598 4,399 5,190 17%
Net Other Income/ Expense 557 95 127 152 -83%
Profit (Loss) from Subsidiaries 5 167 223 267 3143%
Net financial Income/ Expense -253 -254 -370 -461 1%
Profit (Loss) before Tax 1,357 1,237 1,358 1,550 -9%
Tax -224 -247 -272 -310 10%
Net Income 1,133 989 1,086 1,240 -13%
Ratios
EBIT Margin 7.0% 6.4% 5.4% 5.2% -0.6 pp
EBITDA Margin 17.7% 14.6% 12.6% 12.4% -3.1 pp
EBITDAR Margin 20.6% 18.9% 17.3% 17.1% -1.7 pp
Net Income Margin 7.6% 5.2% 4.3% 4.1% -2.4 pp
Balance Sheet 2012 2013E 2014E 2015E 13E/12
Current Assets 3,917 4,412 6,778 8,796 13%
Cash and Cash Equivalents 1,833 1,480 3,061 4,365 -19%
Short-Term Trade Receivables 777 1,194 1,436 1,712 54%
Inventories 259 398 493 579 54%
Other Current Assets 1,048 1,340 1,787 2,139 28%
Long Term Assets 14,881 21,382 24,780 30,038 44%
Total Assets 18,798 25,794 31,558 38,834 37%
Short Term Liabilities 4,551 6,515 8,356 10,051 43%
Short-Term Financial Loans 897 1,340 1,622 2,062 49%
Short-Term Trade Payables 912 1,382 1,730 2,012 51%
Other Short-Term Liabilities 2,742 3,793 5,004 5,976 38%
Long Term Liabilities 8,842 12,255 15,418 20,131 39%
Long-Term Financial Loans 7,801 10,722 12,976 16,497 37%
Other Long-Term Liabilities 1,041 1,534 2,441 3,634 47%
Shareholders Equity 5,405 7,024 7,784 8,652 30%
T. Liabilities & SE 18,798 25,794 31,558 38,834 37%
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Investment Positives
A growing focus on the international market THY has been one of the world’s fastest growing full service carriers in last decade. THY operates an effective network and implements marketing strategies aimed at increasing profitability in parallel with its growth. The airline is expanding its network by adding new destinations, having become renowned worldwide for its expansion strategy. THY’s current growth strategy has mainly hinged on increasing its presence in medium to long haul routes since 2010. In terns of number of destinations, medium and long-haul routes accounted for 45% of all routes in 2013, compared to 35% in 2009. The airline’s main focus is to increase the share of transit passengers in total pax carried to 50%+ from current 23% compared to around 50% for Lufthansa. In parallel with this strategy, THY’s domestic revenues accounted for 14% of its total in 9M13, compared to the 21% in 2008.
Istanbul is the key for growth Istanbul, being a transfer point on Europe- Middle East, Europe-Far East and Asia, Europe-Africa, and America-Middle East lines, reduces flight time and introduces the flexibility to use a variety of fleets of diverse capacity. Thanks to its geographical position, Istanbul offers more convenient connections when compared with other potential transfer points. Istanbul serves as a geographical bridge between East and West, enabling the use of a narrow body fleet, thus providing considerable cost advantages and contributing to competitive superiority. In 9M13, a total of 8.5mn international passengers arrived from various points on THY flights and transferred through Istanbul to fly to another international destination. Notably, this number was 29% YoY higher when compared to 9M12.
Revenue maximization/cost minimization efforts have gained importance We believe the company’s strategy of opening new routes and increasing market share in international markets will continue to put pressure on revenue yields until 2017. We observed a 6% decline in revenue yields in USD terms in 9M13 after the 4.6% fall in 2012. According to our assumptions, revenue yields will drop by 1.2% per annum over the 2013-2016 period, vs. the 4.7% between 2008-2012. It is worth highlighting that the management started to implement new yield management software from the beginning of 2013. The new system uses an origin -destination formula (O&D) rather than a point-to-point formula. As THY’s flight network expands, a new revenue management system will be required to value each seat on the network more precisely. The new system, O&D based revenue management, maximizes the total revenue of the network by using sophisticated demand forecasting and flight optimization tools, developed by the leading vendor in the industry. Accordingly, the system displays the availability for each O&D pair separately, resulting in the overall maximum gain. The CEO of THY stated that 2013 would be a calibration period for the new software and that yields would tend to increase once transition was completed later this year. Therefore, we believe the airline will more focus on unit cost minimization as observed in recent years but which had been interrupted in 9M13 due to the one-off increase in maintenance and personnel costs. We are not assuming a major change in unit costs in 2013 after the 4.9% decline in 2012. Our projections suggest that unit costs will register a 1.1% decline between 2013-2016 compared to the 2.7%
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decline in 2008-2012, driven by a younger fleet, a more efficient workforce and the delivery of wide body airliners.
Fleet to almost double by 2021 The company aims to nearly double the size of its fleet from 233 aircraft in 2013 to 436 aircraft by 2021. The total order stood at 265 aircraft as of 2013, of which 212 were firm orders and the remainder optional. The airline would record a 9% seat capacity increase per annum between 2013-2021. In March 2013, THY had placed a massive order for 117 narrow-body aircraft from Airbus, of which 82 were firm orders and 35 optional, with the aircraft to be received between 2015-2020. THY then placed another substantial order in April, this time for Boeing aircraft, for 95 narrow-body planes (70 firm and 25 optional) to enter the fleet between 2016 and 2021. A young and narrow-body denominated fleet would help THY to sustain its competitive edges compared to both European and Gulf carriers.
Increasing brand awareness The airline has undertaken a number of important projects to further develop its global brand image. In addition to effective and successful campaigns in the social media, the airline has invested heavily in its brand through a variety of platforms including sponsorship agreements and global advertising. In recent years, THY has made extensive use of the most popular communication channels in disseminating corporate news in the fastest possible manner, to better communicate with its passengers and become a part of their daily lives. THY’s continuing investment in increasing quality and improving its branding has recently won recognition by international aviation ranking organizations. THY has been selected as Europe’s best airline by Skytrax for the last three years in a row (2011, 2012 and in 2013).
Inorganic growth THY has always been in search of inorganic growth opportunities, as indicated by its previous attempts to acquire the Polish LOT and Portuguese TAP. However, THY abandoned its attempts to acquire LOT due to EU regulations. The chairman of THY, Mr. Hamdi Topcu was recently quoted as saying that THY was working on an acquisition in Africa. An acquisition in a growing African market would likely be perceived positively by investors, in our view, depending on price.
Strike concerns are over THY reached an agreement with the new management of labour union, Hava-Is, on pay for 2013-2015, officially ending the prolonged strike. Accordingly, pay will be raised by 8.1% cumulatively in 2013 (backdated), 6.1% cumulatively in 2014 and 6.1% cumulatively in 2015. Importantly, THY agreed on a gross one-off payment of TL5,500 to each unionized member of staff, subject to proportionate days of worked during 2013 for each relevant member of staff. At the end of 9M13, THY had 22,971 personnel on its payroll, most of which were unionized. The one-off payment could result in an additional expense of around TL100mn, which we would not find worrisome. Occasional threats of strike action have long been an issue affecting the share price.
2014 budget guidance implies strong top line, but cautious cost side According to THY‘s 2014 budget guidance, the management of THY aims to generate US$11.4bn in revenues (GS estimate: US$11.7bn). The company anticipates a total pax number of 59.5mn, implying 23% YoY growth vs. our own forecast of 19%. Total pax numbers are expected to be driven by domestic growth
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(30% YoY expected) in 2014 more than by international growth (15% expected). THY aims to boost its ASK by 21% to 141bn in line with our forecast of 20% growth. Regarding the load factor, the airline is assuming a 78.8% load factor (GS estimate : 79.0% vs. the 79.0% in 2013). As far as yields are concerned, THY expects a 2% decline in domestic (TL) yields, but a 1% increase in international (EUR) yields. We believe that achieving a 1% increase international yields could present a challenge to the airline given the observed yield contraction in recent quarters. However, we find the airline more cautious on the cost side, expecting a 2% increase in its CASK ex-fuel (USD) in 2014. We appear to be more optimistic on the cost side; we do not have any information on what exchange rates were budgeted by THY in 2014 but we believe that exchange rates assumptions would be the reason behind this divergence. (see details on page 41)
An attractive valuation Our 2014-end target share price of TL9.20, derived from target EV/ EBITDAR multiple, offers 31% upside for THY. Our valuation for THY is based on the 2014E target EV/EBITDAR multiple. To reach our target Mcap, we adjusted net debt for 8x aircraft related rental expenses and current PDP receivables. We employed a 6.3x target multiple for THY, which is inline with its 5-year average EV/EBITDAR multiple. THY trades at a discount of 8% to its peers on the basis of its 2014E P/E, but 14% premium based on its EV/EBITDA which is justified with THY’s strong prospects, in our view, based on our forecasts.
Investments Negatives
High sensitivity to oil prices and FX rates THY’s major cost item is fuel, which accounts for around 37% of overall COGS, followed by staff costs (18%). The company has a strategy of passing 50% of fuel price increases to customers through the fuel surcharge, while hedging 50% of its fuel expenses; we did not factor in the potentially positive effect of the fuel surcharge and hedging in our assumptions. Considering its lower hedging ratio when compared to the 60% levels of its European peers, THY’s margins - and our valuation – are highly sensitive to movements in fuel prices. Due to the currency mismatch in THY’s operations (FX denominated costs account for 74% of THY’s total costs, while FX denominated revenues account for 86% of revenues), the TL weakness effectively serves to support THY’s profitability.
Deterioration in demand and higher than expected contraction in yields THY’s expansion and its fleet plans are based on increasing demand; hence lower than expected demand in any of the markets where THY operates in represents a key risk for the company. The airline industry is highly volatile and exposed to a number of risks, including macro conditions, geopolitical tensions in the region and natural disasters. Other than that, the opening of new routes and increased capacity coupled with stiff competition on its routes would result in a steeper than expected contraction in yields.
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Capacity constraints at Istanbul Ataturk Airport (IAA) – THY’s main hub IAA served 51mn passengers in 2013, not far short of its capacity of 60-65mn. However, the capacity constraint is less of concern now as the government plans to increase capacity at the airport by 30% with some new measures. Through such capacity enhancements, the company will seek to handle operations at the airport properly until the 3rd Airport enters operation. Recall that the Minister of Transportation, Binali Yildirim, said that the construction of a 3rd airport would begin by 1Q14 at the latest, and that the President of Limak Holding, Nihat Ozdemir, stated that the 3rd airport would enter operation by the beginning of 2019. Given the current global liquidity concerns and political turmoil in Turkey, we would not expect the delays in the completion of Istanbul’s new airport to hurt THY’s operations. Alternatively, THY also has a presence at Istanbul Sabiha Gokcen Airports (SAW) which currently has a pax capacity of 25mn. As of 9M13 the airline operated 14 aircrafts from the airport serving 30 destinations (19 domestic and 11 international). It carried 2.6mn passengers (+100% YoY) in 9M13 with 77% load factor. The airline plans to appoint 24 aircraft to SAW and to fly to 36 destinations (9 domestic and 27 international) in 2014. After the completion of a second runway at the airport, SAW’s capacity will reach to 50mn pax.
Pegasus’ legal action at the Competition Board There is an ongoing investigation into THY after Pegasus filed a complaint to the Competition Board. This is a long running dispute related to the question of whether THY abused its dominant position in domestic and international flights from Istanbul and blocked others seeking to penetrate the market. The Competition Board had earlier ruled against THY, but the decision was later overruled in court, whereupon the Competition Board re-opened the investigation. As far as we know, there are currently no further developments. A negative outcome related to the investigation would cause share price weakness for THY.
A potential SPO The Privatization Authority holds a 49.12% stake in THY and announced back in December 2010 that it would evaluate advisory/consultancy services for a further stake sale in THY. Therefore, a potential secondary offering could create overhang on the shares.
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Please see the last page of this report for important disclosures. February 11, 2014 RESEARCH Aviation
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VALUATION
Multiple Valuation
2014-end target price of TL9.20/share. Our 2014-end target share price of TL9.20 derived from our target EV/EBITDAR multiple offers 31% upside potential for THY. Our valuation for THY is based on the 2014E target EV/EBITDAR multiple. To reach our target Mcap, we adjusted net debt to 8x aircraft related rental expenses and current PDP receivables. We employed a 6.3x target multiple for THY, which is the 5-year average EV/EBITDAR multiple.
THY Valuation Summary Target EV/EBITDAR mutiple (x) 5.75 6.00 6.25 6.50 6.75 GS 2014E EBITDAR(TLmn) 4,399 4,399 4,399 4,399 4,399 Target EV (TLmn) 25,294 26,394 27,494 28,593 29,693 Adj. Net debt (TLmn) 14,794 14,794 14,794 14,794 14,794 Target Mcap (TLmn) 10,500 11,600 12,700 13,799 14,899 Outstanding number of shares (mn) 1,380 1,380 1,380 1,380 1,380 Target share price (TL) 7.61 8.41 9.20 10.00 10.80 Current share price (TL) 7.04 7.04 7.04 7.04 7.04 Upside potential 8% 19% 31% 42% 53% Source: Garanti Securities
Peer comparison. We have presented multiples for international airlines to put THY’s valuation into perspective. As shown below, THY trades at a 8% discount to its emerging market peers on the basis of its 2014E P/E, while at 14% premium on the basis of EV/EBITDA multiples, which is justified with THY’s strong growth prospects, in our view.
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Peer Comparison* EV/SALES EV/EBITDA P/E Company Country MCAP (US$) 2014 2015 2014 2015 2014 2015 Full Service Carriers (FSC) Developed 0.45 0.43 4.46 3.58 13.08 8.17 Deutsche Lufthansa AG GERMANY 11,070 0.30 0.29 3.0 2.4 11.8 7.3 Air France-KLM FRANCE 3,508 0.37 0.37 4.3 3.7 11.4 6.1 International Consolidated Airlines Group SA BRITAIN 14,108 0.58 0.55 4.8 3.9 14.5 9.4 Air Berlin PLC GERMANY 325 0.24 0.23 10.4 7.9 n.a n.a Qantas Airw ays Ltd AUSTRALIA 2,141 0.36 0.35 5.1 3.7 n.a n.a Virgin Australia Holdings Ltd AUSTRALIA 1,053 0.63 0.59 12.7 8.8 n.a n.a Emerging 1.10 0.93 5.86 4.99 9.74 7.87 Cathay Pacific Airw ays Ltd HONG KONG 7,810 0.89 0.83 6.6 5.8 12.3 9.6 Air China Ltd CHINA 8,310 1.04 0.94 5.7 5.1 9.8 7.6 Aeroflot - Russian Airlines OJSC RUSSIA 2,555 0.43 0.40 3.7 3.4 4.8 4.8 Gol Linhas Aereas Inteligentes SA BRAZIL 1,209 0.66 0.60 6.4 5.2 n.a 18.2 China Airlines Ltd TAIWAN 1,774 1.05 1.01 5.2 n.a 12.3 n.a China Eastern Airlines Corp Ltd CHINA 5,049 0.79 0.72 5.6 4.8 8.2 6.1 China South City Holdings Ltd HONG KONG 3,198 2.94 2.01 6.7 4.2 8.4 5.7 THYAO multiples 4,367 0.8 0.8 6.7 6.3 8.9 7.8 Discount/Premium to Developed FSC 87% 84% 50% 77% -32% -4% Discount/Premium to Emerging FSC -24% -16% 14% 26% -8% -1% Source: Bloomberg, Garanti Securities
Recommendation: OUTPERFORM. THY has differentiated itself on the basis of service quality and competitiveness in recent years. Istanbul’s geographical advantage and the airline’s relatively low labour costs (especially when compared to European carriers) enhances THY’s competitiveness. As an emerging international travel hub, Istanbul is in the position of enabling the airline to boost its transit passenger numbers and better utilize the fleet (especially its narrow body aircraft) and seat capacity. With a young fleet (6.7 years on average), improved brand awareness and increased capacity, THY is in a position to capture market share from EU carriers, which struggle to offer high quality service and capacity additions with their relatively old fleets. THY shares have outperformed the index by 39% in 2013 and 16% ytd and now trade at a 8% discount to its peer group on the basis of its 2014E PE. Ongoing TL weakness and anticipated strong traffic figures should have a positive impact on profitability in 2014.
Risks. A decline in the economic activity, rising oil prices, Euro weakness against the Dollar and the Privatization Administration’s sale of its stake in THY pose risks. A negative outcome of Pegasus’s legal action at the Competition Board and geopolitical tensions could also emerge as risks.
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MODEL ASSUMPTIONS Model Assumptions at a glance* 2011 2012 2013E 2014E 2015E 2016E # of total passengers (mn) 32.7 39.0 48.3 57.4 68.5 81.0 YoY 12.2% 19.6% 23.6% 18.9% 19.2% 18.4% Load factor 72.6% 77.7% 79.0% 79.0% 79.1% 79.2% YoY (pps) -1.1 pps 5.1 pps 1.3 pps 0.0 pps 0.0 pps 0.1 pps ASK (mn) 81,167 96,131 116,423 140,133 163,325 189,741 YoY 24.7% 18.4% 21.1% 20.4% 16.6% 16.2% RPK (mn) 58,918 74,705 91,981 110,761 129,169 150,275 YoY 22.8% 26.8% 23.1% 20.4% 16.6% 16.3% RASK (US cents) 7.5 7.6 7.7 7.5 7.5 7.4 Revenue Yield (US cents) 10.2 9.8 9.7 9.4 9.4 9.3 Revenue (TLmn) 11,813 14,909 19,057 25,422 30,430 36,415 YoY 40.2% 26.2% 27.8% 33.4% 19.7% 19.7% CASK (US cents) 8.4 8.0 8.0 7.9 7.9 7.8 CASK-ex fuel (US cents) 5.5 5.1 5.1 5.1 5.0 5.0 EBITDA (TLmn) 945 2,640 2,788 3,190 3,787 4,566 YoY 4.5% 179.5% 5.6% 14.4% 18.7% 20.6% Revenue yield-CASK (spread) 1.8 1.7 1.6 1.5 1.5 1.5 EBITDA margin 8.0% 17.7% 14.6% 12.6% 12.4% 12.5% YoY (pps) -2.7 pps 9.7 pps -3.1 pps -2.1 pps -0.1 pps 0.1 pps EBITDAR (TLmn)** 1,365 3,064 3,598 4,399 5,190 6,218 YoY 3.9% 124.5% 17.4% 22.3% 18.0% 19.8% EBITDAR margin 11.6% 20.6% 18.9% 17.3% 17.1% 17.1% YoY (pps) -4.0 pps 9.0 pps -1.7 pps -1.6 pps -0.2 pps 0.0 pps Net Income (TLmn) 19 1,133 989 1,086 1,240 1,493 YoY -93.5% 6020.1% -12.7% 9.8% 14.2% 20.4% Net margin 0.2% 7.6% 5.2% 4.3% 4.1% 4.1% YoY (pps) -3.2 pps 7.4 pps -2.4 pps -0.9 pps -0.2 pps 0.0 pps ROAE 0.4% 22.9% 15.9% 14.7% 15.1% 17.7% YoY (pps) -7.5 pps 22.4 pps -7.0 pps -1.2 pps 0.4 pps 2.6 pps Average Brent price (USD) 111 112 108 103 103 103 YoY 38% 1% -3% -5% 0% 0% Capex (TLmn) 5,475 2,635 6,604 2,655 4,138 4,507 YoY -52% 151% -60% 56% 9% Macro assumptions 2011 2012 2013 2014E 2015E 2016E USD/TRY-eop 1.89 1.78 2.13 2.20 2.29 2.38 USD/TRY-avg 1.67 1.79 1.90 2.17 2.25 2.33 EUR/TRY-eop 2.44 2.35 2.93 2.86 3.09 3.26 EUR/TRY-avg 2.32 2.30 2.53 2.90 2.98 3.17 EUR/USD-eop 1.29 1.32 1.38 1.30 1.35 1.37 EUR/USD-avg 1.39 1.29 1.33 1.34 1.33 1.36 Basket (EUR+USD)-eop 2.17 2.06 2.53 2.53 2.69 2.82 GDP growth 8.8% 2.2% 4.0% 1.5% 4.0% 4.0% CPI 10.5% 6.2% 8.2% 7.7% 6.0% 6.0% Source: The Company, Garanti Securities *Figures are based on our own calculations may differ from company's figures ** Our EBITDA[R] calculation includes net other income/(expense) and income/(loss) from associates
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HOW WE STAND ALONGSIDE THE CONSENSUS According to the forecasts compiled by Bloomberg, we are generally in line with consensus at the top line and EBITDA line for 2013E and 2014E; however, our 2014E net income forecast is 16% lower than the consensus estimate.
Consensus vs. Our estimates THYAO Bloomberg Garanti Securities Difference (TLmn) 2013 2014 2015 2013 2014 2015 2013 2014 2015 Net Sales 18,878 24,730 28,714 19,057 25,422 30,430 1% 3% 6% EBITDA 2,689 3,323 4,077 2,788 3,190 3,787 4% -4% -7% Net Profit 940 1,300 1,553 989 1,086 1,240 5% -16% -20% EBITDA Margin 14.2% 13.4% 14.2% 14.6% 12.6% 12.4% 0.4 pps -0.9 pps -1.8 pps Net Income Margin 5.0% 5.3% 5.4% 5.2% 4.3% 4.1% 0.2 pps -1.0 pps -1.3 pps Target Share Price 9.00 9.20 2% Source: Bloomberg, Garanti Securities 2014 Guidance vs. Garanti Securities THY management provided its guidance for 2014 on 30 December. THY 2014E Guidance Garanti Total Pax (mn) 59.5 57.4 management targets revenue generation of US$11.4bn (GS estimate: US$11.7bn) -Domestic 26.2 25.4 by carrying 59.5m passengers (GS estimate: 57.4m) and increasing its ASK by -International 32.3 32.0 21% (GS estimate: 20%) with a 78.8% load factor (GS estimate: 79.0%). THY - Hajj and charter flights pax 1.0 plans to open 16 new routes in 2014 and have 267 aircraft in its fleet by the end of Revenue (USDbn) 11.4 11.7 Total ASK grow th 21% 20% 2014. In terms of unit revenue, THY anticipates a 2% decline in domestic revenue -Turkey 33% yields (in TL terms), in line with the GS estimate, but a 1% increase in -South America 29% international revenue yields in EUR terms (GS estimate: 1% decline). On the cost -Africa 25% side, the airline expects a 2% increase in CASK (ex-fuel) in USD terms (GS -Far East 22% -North America 20% estimate: 1% increase). THY management’s passenger targets are 4% higher -Europe 16% than our own passenger forecasts, but we are in line with the airline for the top -Middle East 13% line. We do appear to be more optimistic on the cost side. We have no information Load Factor 78.8% 79.0% regarding the exchange rate levels which were budgeted by THY in 2014 but we Passenger revenue yield -Domestic (TL) -2% -2% believe exchange rate assumptions would be the reason behind the discrepancy. -International (EUR) 1% -1% CASK-ex fuel grow th (USD) 2% 1% Source: The Company, Garanti Securities BUSINESS OVERVIEW
Revenue
The passenger segment is the main source of revenue, followed by cargo. As of 9M13, THY generated 89% of its top line from the passenger segment, with 14% of this derived from domestic flights. THY’s strong pax figures (which followed a CAGR of 16% between 2008-13) was the main reason behind the strength in passenger revenues. The airline recorded 24% growth in 2013 (see details for traffic figures on page 50). We forecast a 19% CAGR in pax numbers for the 2013 -2016 period. Relatively robust GDP growth and Turkey’s rising attractiveness for tourism, coupled with the country’s geographical advantage, supporting transit passenger numbers, were seen as the key drivers of passenger growth. THY has been diversifying its geographical exposure as shown below. Cargo is the second largest segment in total revenues, with an 8% share in total revenues. We assume cargo revenues will comprise around 9% of total revenues going forward.
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THY Revenue Split by geography THY Revenue by segment 2003 9M13 9M13 3% 2% 1% 6% 8% 8% 9% Europe 10% Europe Passenger Far East Far East 34% Cargo 44% Domestic Domestic Middle East 13% Middle East Other 23% America 89% America Charter 14% Africa 15% Africa 21%
Source: The Company data Source: The Company data
Passenger revenue yield (US cents)
Along with the increasing share of medium/long haul routes in THY’s network between 2005 and 2011, the airline managed its unit revenues successfully and increased them by 2.4% over the same period. However, it would appear that this trend was reversed in 2012 and 2013 as a result of the airline’s strategy to tap markets in the hinterland of major carriers (in Europe, the Far East and the Americas) by introducing a significant volume of seating capacity, giving rise to stiff competition in these regions. Furthermore, the calibration of the airline’s new revenue system has had a negative impact on yields in 2013. The transition to a new system is expected to be completed in 2014 and we assume a further 2% decline in unit revenues in 2014. We believe yields will come under pressure till 2017 in view of the airline’s intention to open new routes and boost its market share in international markets. We project a 1% contraction in yields in 2013 after the 5% decline in 2012. We also assume a 1.3% decline in yields between 2013 and 2016 with declines of 2.3% in 2014, 0.8% in 2015 and 0.8% in 2016.The positive outcomes of the airline’s more effective revenue yield management and potential rationalization in terms of competition coupled with the likelihood of lower capacity additions could prove upside challenges to our numbers.
Revenue Yield evolution(US cents)
12.5 12.2 12.1 11.9 12.0 11.8 11.5 11.0 11.0 11.0 10.5 10.2 10.0 9.4 10.0 9.8 9.7 9.1 9.9 9.4 9.5 9.9 9.4 8.8 9.3 9.5 9.6 9.5 9.4 9.3 9.3 9.0 9.4 9.4 8.5 9.3 8.0 2010 2011 2012 2013E 2014E 2015E 2016E 9M12 9M13
Domestic International Total
Source: The Company, Garanti Securities
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Load Factors THY’s load factor has been improving since 2011 after registering an annual decline of almost 110 bps in 2011 as the company was unable to keep its load factor at reasonable levels, especially on its routes to the Far East, the Americas and Africa, and as the airline had difficulty filling in the increasing capacity in those regions. The airline’s load factor did increase by 510bps in 2012 to reach 77.7%, and this was followed by a further 130 bps improvement in 2013. The 2013’s load factor figure was better than the 78.8% figure initially guided by the management. We expect a 79% load factor in 2014, marginally higher than the airline’s own guidance of 78.8%. The company plans to increase its seat capacity by 15% per annum between 2014 and 2016 (after increases of 18% in 2013 and 12% in 2012) and we believe the company’s load factor will continue to hover around 79% for the next three years.
THY's ASK vs. Load Factor
79.0% 79.1% 79.2% 200,000 79.0% 80.0% 77.7% 175,000 78.0% 150,000 76.0% 125,000 73.7% 100,000 72.6% 74.0% 75,000 72.0% 50,000 25,000 70.0% - 68.0% 2010 2011 2012 2013 2014E 2015E 2016E
ASK (mn) Load Factor (%)
Source: The Company, Garanti Securities
In addition to THY’s relatively lower operating costs when compared to major airlines, enabling it to offer lower ticket prices, the maturity of routes opened in recent years and Istanbul’s increased appeal for transfer passengers could result in higher load factors along with improving brand awareness globally. The company plans to increase its ASK by 21% in 2014. In terms of region, the strongest increase is expected in flights within Turkey (33%) followed by flights to South America (29%) and flights to Africa (25%), illustrating the airline’s target of benefiting from the strong demand in those regions.
Available Seat Km ('000) 2012 2013 YoY 2014 Budget YoY Middle East 8,936,948 10,536,040 17.9% 13% Europe 30,251,679 36,714,670 21.4% 16% Far East 22,206,118 25,800,389 16.2% 22% N.America 11,177,957 13,715,060 22.7% 20% Africa 7,601,716 9,800,327 28.9% 25% S.America 1,499,985 2,045,469 36.4% 29% Domestic 11,942,667 15,227,947 27.5% 33% Total 93,617,070 113,839,902 21.6% 21% Source: The Company
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Load Factor (%) 2012 2013 YoY (ppt) 2014 Budget YoY Middle East 71.9 72.4 0.6 Europe 76.8 78.2 1.5 Far East 80.5 81.3 0.8 N.America 82 83.6 1.6 Africa 74.6 76.2 1.6 S.America 72.5 81.4 9 Domestic 79.1 79.4 0.4 Total 77.9 79.1 1.2 78.8 Source: The Company
Seat Capacity Evolution
20% 17% 18% 16% 16% 15%
14% 13%
12% 11% 10% 8% 8% 8%
6%
4%
2% 1%
0% 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E -2%
Source: The company
Average Daily Flight Utilization (hours) 14:59 14:21 14:21
13:26 13:20 13:18 12:49 12:43 12:31 12:14 12:18 12:02 11:40 11:39 11:40 11:13 12:19 11:55 11:48 11:55 11:32 11:40 11:00 11:20 2007 2008 2009 2010 2011 2012 9M12 9M13
WB Long Haul NB Medium Haul Total
Source: The Company
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Cost
As with all airlines, fuel is the largest operating cost item, followed by personnel costs. Given the growth in operations, we believe these two items will continue to challenge the airline’s profitability.
Cost Assumptions at a glance TLmn 2011 2012 2013E 2014E 2015E 2016E Jet fuel expenses 3,999 5,159 6,602 8,553 10,382 12,530 as of total revenues 33.9% 34.6% 34.6% 33.6% 34.1% 34.4% as of total cogs 34.9% 37.2% 37.0% 35.6% 36.0% 36.3% per ASK in US cents 3.0 3.0 3.0 2.8 2.8 2.8 Personnel expenses 2,237 2,470 3,186 3,990 4,605 5,374 as of total revenues 18.9% 16.6% 16.7% 15.7% 15.1% 14.8% as of total cogs 19.5% 17.8% 17.9% 16.6% 16.0% 15.6% per ASK in US cents 1.7 1.4 1.4 1.3 1.3 1.2 Lease expenses (dry+wet) 421 425 810 1,209 1,403 1,652 as of total revenues 3.6% 2.8% 4.3% 4.8% 4.6% 4.5% as of total cogs 3.7% 3.1% 4.5% 5.0% 4.9% 4.8% per ASK in US cents 0.3 0.2 0.4 0.4 0.4 0.4 Depreciation 812 1,030 1,297 1,462 1,776 2,127 as of total revenues 6.9% 6.9% 6.8% 5.8% 5.8% 5.8% as of total cogs 7.1% 7.4% 7.3% 6.1% 6.2% 6.2% per ASK in US cents 0.6 0.6 0.6 0.5 0.5 0.5 Maintenance 385 391 572 763 913 1,092 as of total revenues 3.3% 2.6% 3.0% 3.0% 3.0% 3.0% as of total cogs 3.4% 2.8% 3.2% 3.2% 3.2% 3.2% per ASK in US cents 0.3 0.2 0.3 0.3 0.2 0.2 Ground Handling 786 879 1,048 1,398 1,674 2,003 as of total revenues 6.6% 5.9% 5.5% 5.5% 5.5% 5.5% as of total cogs 6.9% 6.3% 5.9% 5.8% 5.8% 5.8% per ASK in US cents 0.6 0.5 0.5 0.5 0.5 0.5 Advertisement 146 169 216 288 344 412 as of total revenues 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% as of total cogs 1.3% 1.2% 1.2% 1.2% 1.2% 1.2% per ASK in US cents 0.1 0.1 0.1 0.1 0.1 0.1 Commission 379 523 668 891 1,067 1,277 as of total revenues 3.2% 3.5% 3.5% 3.5% 3.5% 3.5% as of total cogs 3.3% 3.8% 3.7% 3.7% 3.7% 3.7% per ASK in US cents 0.3 0.3 0.3 0.3 0.3 0.3 Other costs 2,289 2,817 3,430 5,489 6,673 8,010 as of total revenues 19.4% 18.9% 18.0% 21.6% 21.9% 22.0% as of total cogs 20.0% 20.3% 19.2% 22.8% 23.1% 23.2% per ASK in US cents 1.7 1.6 1.5 1.8 1.8 1.8 Source: The Company, Garanti Securities *Figures are based on our own calculations may differ from company's figures
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CASK
THY’s unit costs came in at 8.4 US cents in 2011, up slightly from the 7.9 US cents in 2010 mainly due to the sharp increase in fuel costs (oil prices increased to USD111 in 2011, up from the USD80 in 2010). Although the airline recruits personnel before the delivery of aircraft for training purposes as a part of its fleet expansion in a bid to successfully manage its growing operations, we have observed a declining trend in personnel costs per ASK over the past three years. At the beginning of 2012, costs started to ease and the company lowered its CASK to 8.0 US cents. Despite the relatively lower oil prices in 2013 when compared to 2012, we believe that airline will have closed 2013 with a similar CASK figure to 2012, as we have observed an increase in costs (mainly maintenance) other than fuel and personnel in 9M13. We anticipate that CASK and CASK-ex-fuel levels to remain little changed for the 2013 full year. Looking to 2014, we anticipate a 1% increase in CASK (ex-fuel) yet a 2% decline in CASK, thanks to our assumption of a 5% decline in the oil price. However, the airline is more cautious on CASK-ex-fuel, budgeting for a 2% YoY increase in 2014. We assume a 1% decrease for both CASK and CASK-ex-fuel for 2015 and 2016 considering the airline’s ongoing cost cutting efforts. To recap, we do not factor in any fuel hedging to our estimates.
CASK evolution (US cents)
9.0 8.4 8.0 7.9 7.9 7.8 7.9 8.0 7.8 7.9 8.0 7.0 6.0 5.0 3.8 4.0 3.6 3.8 3.8 3.7 4.0 3.6 3.3 3.6 3.0 2.2 3.0 3.0 3.0 2.8 2.8 3.0 3.0 2.0 2.8 1.8 1.7 1.0 1.4 1.4 1.3 1.3 1.2 1.5 1.3 0.0 2010 2011 2012 2013E 2014E 2015E 2016E 9M12 9M13
CASK Personel/ASK Fuel/ASK Others/ASK
Source: The Company, Garanti Securities
EBITDAR margin
According to our calculations, the airline has averaged a 16% EBITDAR margin over the 2010-2012 period. As of 9M13, THY’s EBITDAR margin had improved to 21.3% from the 19.7% in 9M12. We forecast a 160 bps YoY decline in the EBITDAR margin in 2014 due to yield contraction and increase in ex-fuel costs. Based on the forecasts we have set out above, we expect the EBITDAR margin to remain close to its current levels over the 2014-2016 period, parallel to our revenue-cost yield spread forecast, which is projected to stand at around 1.5 US cents during the same period under the assumption of no one-off time unit cost spikes. The increasing aircraft utilization, wide body deliveries, the young fleet of the airline and its relatively low cost workforce could set the stage for further efficiencies, helping EBITDAR margins improve beyond our projections.
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Fleet
THY had 232 aircraft in its fleet at the end of 2013, 78% of which were narrow body aircraft. The number of wide body aircraft has been increasing more rapidly than its narrow body fleet, in line with THY’s strategy of increasing its presence in medium/long haul routes. The airline plans to almost double its wide body fleet by 2016. Year End Fleet* Type 2013 2014 2015 2016 2017 2018 2019 2020 2021 A330-200 8 14 14 14 12 12 11 11 11 A330-300 12 17 25 30 30 30 30 30 30 A340-300 7 7 7 7 7 7 7 7 7 Wide Body B777-3ER 12 16 23 29 32 32 32 32 32 Wet Lease 3 0 0 0 0 0 0 0 0 Total 42 54 69 80 81 81 80 80 80 B737-900ER 10 10 15 15 15 15 15 15 15 B737-9 MAX 0 0 0 0 0 0 5 10 10 B737-800 48 55 55 75 74 65 65 65 65 B737-800 WL 22 35 34 32 32 30 28 20 20 B737-8 MAX 0 0 0 0 0 20 30 55 65 B737-700 3 3 3 1 1 0 0 0 0 Narrow Body B737-700 WL 10 8 2 2 2 0 0 0 0 A320-200 33 36 33 33 26 22 15 12 12 A321-200 41 43 56 66 68 68 68 66 64 A320 NEO 0 0 0 4 4 4 4 4 4 A321 NEO 0 0 0 0 4 31 56 88 88 A319-100 14 14 14 14 11 9 8 6 6 Total 181 204 212 242 237 264 294 341 349 A310-300 2 2 2 2 2 2 2 2 2 A330-200 5 5 5 5 5 5 5 5 5 Cargo Wet Lease 2 2 0 0 0 0 0 0 0 Total 9 9 7 7 7 7 7 7 7 GRAND TOTAL 232 267 288 329 325 352 381 428 436
As shown above, according to the fleet expansion program, the airline aims to reach a fleet of 436 aircraft by the end of 2021, raising its seat capacity from the end-2013 figure of 42,200 to 83,500 by 2021.
Net debt-capex
As of 9M13, THY’s debt position stood at TL9.1bn. According to our calculations, THY had an adjusted net debt level of TL14.7bn as of 9M13. Some 76% of THY’s financial debt has fixed rate interest, while the rest is subject to floating interest rates. According to our calculations, we anticipate an adjusted Net Debt/EBITDAR ratio of 4.8x in 2013E, up from the 3.3x in 2012E, as we believe operating profitability will decrease in 2014, assuming there is no repeat of the one-off gain in other income, as was recorded in 2012 (TL351mn).
Considering the fleet expansion program above mentioned, we have assumed a 40% manufacturer discount in calculating our fleet expansion cost, and assumed that it would be financed through a ratio of 90% financial leasing and 10% operational leasing, in line with the airline’s general approach.
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THY's debt profile
10% 8% Operational US$ 24% Lease Floating EUR Financial 41% 51% Fixed 90% Lease JPY 76%
Source: The Company
Maturity Profile of Debt Balance
1000 821 800 743 733 642 606 600 539 526 535
US$mn 400
189 200 158 69 12 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Source: The Company
THY Indebtedness
30,000 6.0
25,000 4.8 4.8 4.9 5.0
20,000 4.0
3.3 2.7 15,000 2.9 3.0 2.4
10,000 1.9 2.0
5,000 1.0
- 0.0 2012 2013E 2014E 2015E
Adj. Net Debt (TLmn) EBITDAR (TLmn) Adj. Net Debt /EBITDAR (rhs) Adj. Net Debt /Equity (rhs)
Source: Garanti Securities
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Sensivities
THY’s profitability and valuation are highly sensitive to fuel prices and currency moves, since 86% of the company’s revenues (41% in EUR; 16% in USD) and 74% of the company’s expenses (55% in USD; 12% in EUR) are in hard currencies.
THY Revenue by currency THY Expenses by currency
9M13 9M13 Other, 7% EURO, 12%
Other, 28%EURO, TL, 26% 41% USD, 55% TL, 14% USD, 16%
Source: The Company data
Impact on THY ----- US$5/bbl increase ------5% increase ----- 2014E estimates Oil price EUR vs.USD
EBITDA (TLmn) -13% 24%
EBITDAR (TLmn) -9% 18%
Source: Garanti Securities
RECENT DEVELOPMENTS
Lufthansa’s decision to end the code share agreement with THY
On November 26, 2013, Lufthansa announced that it had decided to end the code sharing agreement with THY by March 2014. Lufthansa also stated that it would credit their customers with only a quarter of the status miles they could earn on Lufthansa when flying with THY. After this decision, THY issued a statement where it announced that the code sharing revenues accounted for just 2% of the airline’s total consolidated revenues, adding that “although Lufthansa has reached a decision to end its code-sharing agreements with Turkish Airlines, we will still maintain a close relationship within the context of the Star Alliance. We do not expect this to affect Turkish Airlines’ business in the future. As Turkish Airlines continues to grow, strengthen and extend its network with more destinations and increased frequency of flights, it is natural for strategic partnerships in the business to change and evolve”. More recently, the managements of both THY and Lufthansa met in Istanbul. Mr.Hamdi Topcu, the Chairman of THY, was quoted as saying that Lufthansa would review its decision to end the code sharing agreement. Although we do not attach a great deal of importance to the code sharing agreement between THY and Lufhansa considering that it only accounts for around 2% of revenues, as stated above, a move by Lufthansa to reconsider
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its recent decision could bring hopes of a partnership between THY and Lufthansa back on the table.
Strong Traffic figures in 2013
THY’s pax numbers rose by 24% YoY to 48.3mn and its load factor increased by 1.4 pp YoY to 79.0% in 2013 (see details below). Hence, THY exceeded its 2013 pax target of 46mn. We anticipate 57.4mn pax for THY in 2014, implying 19% growth on an annual basis. The airline will likely to release its January traffic figures in the second week of February. Stronger than expected traffic results would have a positive impact on the share price, despite the weak seasonality generally seen in the first quarter.
Cumulative Figures 2009-12M 2010-12M 2011-12M 2012-12M 2013-12M Number of Landing 213,953 243,348 265,628 302,416 369,572 Available Seat Km (mn) 56,574 65,056 81,167 96,131 116,423 Revenue Passenger Km (mn) 40,130 47,928 58,941 74,658 92,003 Passenger Load Factor (%) 70.9% 73.7% 72.6% 77.7% 79.0% Revenue Passengers (mn) 25.1 29.1 32.7 39.04 48.27 Cargo and Mail (Tons) 238,060 313,410 371,033 470,636 565,338 Fleet 132 156 179 200 233 Seat Capacity 23,549 27,886 32,554 36,504 42,236 Number of Destinations 156 171 189 217 243 Km Flow n ('000) 312,869 358,326 449,565 542,293 690,561 Hours Flow n 540,492 621,718 707,066 836,953 1,016,092
Change YoY 2009-12M 2010-12M 2011-12M 2012-12M 2013-12M Number of Landing 12% 14% 9% 14% 22% Available Seat Km (mn) 22% 15% 25% 18% 21% Revenue Passenger Km (mn) 17% 19% 23% 27% 23% Passenger Load Factor (%) -3.06 pp 2.74 pp -1.05 pp 5.05 pp 1.36 pp Revenue Passengers (mn) 11% 16% 12% 19.6% 23.6% Cargo and Mail (Tons) 20% 32% 18% 27% 20% Fleet 4% 18% 15% 12% 17% Seat Capacity 6% 18% 17% 12% 16% Number of Destinations 10% 10% 11% 15% 12% Km Flow n ('000) 19% 15% 25% 21% 27% Hours Flow n 19% 15% 14% 18% 21% Source: The Company
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THE COMPANY OVERVIEW
Turkish Airlines was founded in 1933. In 1990, a 5% stake in Turkish Airlines was sold to the public, followed by a 23% stake in 2004 and 29% in 2006. Currently, the Privization Authority holds 49.12% of the shares in THY, with the remaining stake floating freely on the stock exchange. THY has been a member of Star Alliance since 2008. According to Skytrax's World Airline Awards, Turkish Airlines was ranked as Europe's best airline in 2011, 2012 and 2013. Turkish Airlines is Europe’s third largest airline in terms of passenger numbers, and the world’s seventh biggest according to the number of destinations served. The company flies to a total of 239 destinations (42 domestic and 197 international) with a fleet of 233 aircraft as of the end of 2013.
THY ownership
Privatization Authority 50.88% 49.12% Free Float
Source: The Company data
Ownership Structure There are two types shares for THY; A-type and C-type. Six A-type type shareholders and one C-type shareholder are represented on THY’s Board of Directors. The Privatization Authority is represented on the board through its C type share ownership, which bear some privileges and provides the state with special management and approval rights. The Privatization Authority is evaluating the sale of a further stake in THY and appointed a consulting firm to determine the strategy for the process in December 2010. According to THY’s Articles of Association, foreign ownership may not exceed 40%, suggesting the Privatization Authority would not sell a stake exceeding 7% to foreign investors unless an amendment was made to the Articles of Association; foreign ownership in THY is hovering at around 65%. We would not deem a potential SPO in THY to be very likely.
SUBSIDIARIES
THY Turkish Technic Turkish Technic offers maintenance, repair and technical support to Turkish Airlines and more than 100 domestic and international airlines. Established in 2006, the company is a wholly-owned subsidiary of Turkish Airlines.
With its subsidiary operations and more than 2,000 employees, Turkish Technic conducts its activities with the goal of becoming an important regional air transport technical maintenance base by supplying the full range of maintenance, repair, and technical and infrastructure support the aviation industry requires.
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SunExpress
Founded in 1989, SunExpress is a joint venture between Turkish Airlines and Lufthansa, in which each holds a 50% stake. It is the market leader in charter flights between Germany and Turkey.
Having inaugurated its flights in 1990, the company has served the charter market for many years. It began to operate on the Antalya-Frankfurt route as the first privately owned airline in Turkey to operate a regularly scheduled international flights. The airline currently has a fleet of 23 aircraft and a workforce of 1,695 employees as of 2012.
Turkish OPET Aviation Fuels
Turkish OPET Aviation Fuels, established in 2009, is a joint venture between Turkish Airlines and OPET Petrolcülük A.Ş, in which each holds an equal stake. It provides jet fuel storage and supply services at İstanbul Atatürk and other airports in Turkey.
The company commenced operations on 1 July 2010. In addition to all kinds of aviation fuel , it also engages in the domestic and international sale, import, export, distribution, and transport of chemicals, lubricants, and paints.
Turkish Ground Services
The company provides ground handling services at İstanbul Atatürk Airport and at five other airports in Turkey. Established in 2009 as a joint venture between Turkish Airlines and HAVAŞ Havaalanları Yer Hizmetleri A.Ş under TAV, in which each holds a 50% stake, TGS (Turkish Ground Services) has been in operation since the beginning of 2010.
Providing services to high international standards, TGS serves approximately 70 domestic and international airlines in addition to Turkish Airlines at Turkey’s İstanbul Atatürk, Ankara Esenboğa, İzmir Adnan Menderes, Antalya, Adana, and İstanbul Sabiha Gökçen airports. Employing over 7,000 personnel, TGS has provided ground services to more than 400,000 flights to date.
THY Turkish DO & CO
The Company provides catering services to Turkish Airlines and more than sixty other domestic and international airlines. Commencing operations in 2007, Turkish DO&CO is a joint venture between Turkish Airlines and DO&CO Restaurants & Catering AG (DOCO TI, NR), in which each holds a 50% stake.
Headquartered at İstanbul Atatürk Airport, it provides catering services to domestic and international airlines out of kitchens operating at nine locations in Turkey. These kitchens turn out around 140,000 meals a day, each choice of which is carefully prepared by Turkish DO&CO’s own culinary staff. Turkish DO&CO has been responsible for substantial improvements in the quality of catering on THY flights.
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Pratt&Whitney THY Turkish Engine Center (TEC)
This company, established in 2008, provides aircraft engine maintenance, repair, and overhaul services to customers both in Turkey and its hinterland. It is a joint venture between Turkish Airlines and United Technologies, a subsidiary of Pratt & Whitney. Turkish Airlines holds a 51% stake in TEC. Operating out of a high-tech, environmentally-friendly maintenance centre with an area of around 25,000 m² at İstanbul Sabiha Gökçen International Airport, TEC has the capacity to perform maintenance on more than 200 aircraft engines per year.
Goodrich Turkish Airlines Technical Service Center
The company provides high quality services for maintenance and repair of nacelles, thrust reversers, related parts and rotable support at its Gebze facilities. Established in 2010, the Goodrich Turkish Airlines Technical Service Centre is a joint venture between Turkish Technic (40%) and TSA-Rina Holdings (60%), the latter being a subsidiary of the Goodrich Corporation.
The Goodrich Turkish Airlines Technical Service Centre aims to be an important player in the industry by providing maintenance and repair services meeting international standards to Turkish Airlines and other international airline companies, underpinned by technical certification.
Turkish Cabin Interior Systems Industries Inc.
This company aims to capture a share of world markets with its cabin interior system products. Formed in 2011, it is owned by Turkish Airlines (30% stake), Turkish Tecnic (21%) and Türk Havacılık ve Uzay Sanayi A.Ş. (TUSAŞ -TAI) (49% stake).
TCI’s objective is to undertake the design, manufacture, logistical support, modification and marketing of aircraft cabin interior systems and components, and to capture a share of the international markets with the goods and services that it produces.
Aircraft Seat Manufacturing Industry & Trade Inc.
Established to design and manufacture airline seats, and to make, modify, market, and sell spare parts to Turkish Airlines and other international airline companies, the company is a joint venture with the Assan Hanil Group. Formed in 2011, the company is 50% owned by the Assan Hanil Group, 45% by Turkish Airlines and 5% by Turkish Tecnic.
HABOM Aviation Maintenance, Repair and Modification Center
This facility, established in Sabiha Gokcen International Airport, aims to become the largest centre of its kind in the region, providing maintenance, repair and modification services. The company was established in 2011 as a wholly-owned subsidiary of Turkish Airlines.
HABOM’s principal business activities consist of buying, selling, renting, leasing, maintaining, repairing, and modifying all manner of aircraft and aircraft equipment, as a full range of aviation related equipment, instruments and engines; it also
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provides a comprehensive spectrum of training activities related to such undertakings, including, but not limited to seminars and courses.
TURKBINE Technical Gas Turbines Maintenance & Repair Inc.
The company is a collaboration that derives its strength from international experience, technically competent personnel and strong brand underpinning. Established in 2011, it is a joint venture of Turkish Technic and Zorlu O&M Enerji Tesisleri İşletme ve Bakım Hizmetleri A.Ş., in which each holds an equal stake.
The signed agreement envisions the provision of maintenance, repair, and overhaul services for a variety of aircraft engines that are beyond the activity scope of existing subsidiaries, and also for industrial gas turbines used at power plants.
THY Aydın Çıldır Airport Management Inc.
The company was established in 2012 as a wholly-owned subsidiary of Turkish Airlines. To commence operations, it was established to operate Aydin Çıldır Airport, provide aviation training, organize sports-training flights and conduct all activities related to the transportation of passengers with aircraft types appropriate to the prevailing runway length.
THY's subsidiaries
Source: The Company
Source: The Company
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THE COMPANY PROFILE
Market share among AEA Airlines THY Passenger Breakdown as of 9M13 14.0% 12.6% THY ranking: #3 in Pax 12.0% #4 in ASK 10.3% 10.1% 10.0% #5 in RPK 8.7% 8.5% 8.2% Int'l-Int'l 7.5% 7.2% 10.0% 8.0% 6.1% 6.3% Transfer, 5.2% 5.6% 8.4% 23% Domestic, 6.0% 4.8% 4.2% 6.8% 41% 3.7% 3.9% 6.0% 4.0% 5.2% Int'l-Dom Transfer, 3.7% 4.1% 2.0% 3.3% 16% Int'l Direct, 20% 0.0% 2006 2007 2008 2009 2010 2011 2012 9M13
ASK % RPK % Pax % Source: The Company Source: The Company International to International Transfer Passengers
10,000 Int'l Passenger breakdown by geography 9,000 8,976 8,457 America, 8,000 Africa, 8% 6% 7,000 6,550 6,000 6,249 Far East, 12% 5,000 5,147 4,445 4,000 Middle East, Europe, 14% 3,000 3,129 60% 2,000 2,229 1,563 1,000 - 2006 2007 2008 2009 2010 2011 2012 9M12 9M13 Source: The Company Source: The Company
THY Revenue by passenger class
9M13
3%
Economy 17%
Business
80% Comfort
Source: The Company data
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EBITDAR Margin Comparison vs. Peers (2012 and 9M13) 25.0% 20.9% 20.0% 18.3% 15.7%16.5% 15.0% 11.1% 10.4% 10.3% 9.4% 9.1% 10.0% 8.3% 8.2% 6.9% 5.0% 0.0% TK SQ** AF-KL LH* IAG UA
2012 9M13
*LH is based on airlines business only. Others based on Group Financials. ** April-June 13, 1st quarter results in the 9M13 column Source: The Company
Pax per personnel (2012)
2,500 2,184
2,000 1,866 1,660
1,500
927 917 1,000 826 769
500
- TK LH* UA SQ IAG EK AF-KL
LH is based on airlines business only. Others based on Group Financials. Source: The Company
CASK (US cents)-9M13
14.0 12.0 2.1 10.0 3.7 2.6 1.0 8.0 3.3 2.1 2.2 2.0 3.4 3.6 1.3 6.0 3.4 3.5 2.5 3.3 3.0 4.0 5.3 6.6 2.0 4.6 4.1 4.8 3.9 4.6 3.6 - AF-KL LH* IAG AA SQ** UA DL TK
Others/ASK Fuel/ASK Personnel/ASK
*LH is based on airlines business only. Others based on Group Financials. ** April-June 13, 1st quarter results in the 9M13 column Source: The Company
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APPENDIX
12M Forward P/E and Trailing EV/EBITDAR graphs for THY
THY 12M trailing EV/EBITDAR
Current: 6.6x vs. Hist. avg of 6.1x 9x 8x 7x 6x 5x 4x
3x
Jul-11 Jul-12 Jul-13
Jan-12 Jan-14 Jan-11 Jan-13
Mar-12 Mar-11 Mar-13
Sep-11 Nov-11 Sep-12 Nov-12 Sep-13 Nov-13
May-11 May-12 May-13 12M trailing EV/EBITDAR 3-year Average +1 std dev -1 std dev +2 std dev -2 std dev Source: Bloomberg
THY 12M forw ard PE
Current:7.4x vs. Hist. avg of 6.1x 10x
8x
6x
4x
2x
0x
Jul-13 Jul-12
Apr-12 Oct-13 Oct-12 Apr-13
Jun-12 Jun-13 Jan-14 Jan-12 Jan-13
Mar-12 Feb-14 Feb-12 Feb-13 Mar-13
Sep-12 Dec-12 Aug-13 Sep-13 Nov-13 Dec-13 Aug-12 Nov-12
May-12 May-13 12M forward PE 2-year Average +1 std dev -1 std dev +2 std dev -2 std dev Source: Bloomberg
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February 11, 2014
RESEARCH
Pegasus Airlines Turkey - Equity - Aviation Initiation of Coverage Outperform (pre. Not Rated) Sees the first benefits the most
We initiate coverage of Pegasus Airlines with an Outperform recommendation. Our 2014-end target price of TL40.00 Current Price TL 30.50TL indicates 31% upside potential. 2014-end Target Price TL 40.00TL
As Turkey’s first LCC, we believe Pegasus is well positioned Potential Return TL 31% to benefit from underpenetrated high growth potential Current Mcap (TLmn) 3,119 markets, while also benefiting from significant cost efficiencies when compared to its competitors. Current EV (TLmn) 4,195 1,402 Although Pegasus trades at a c30% discount to its peers, Current Mcap (US$mn) based on their 2014-15 multiples-an unjustified discount, in our view, given the airline’s strong growth prospects, with Price Performance (TL) our forecasts posting to a 24% CAGR in earnings and 21% in 45.00 EBITDAR over the 2014-2016 period. 38.00 Cost advantage 31.00 Pegasus commands a significant cost advantage over its 24.00 competitors, enabling the airline to offer attractive fares. Thanks to its 17.00 young fleet, high utilization and low cost execution capabilities, we 10.00 believe the airline will be able to maintain its competitive advantages.
Pegasus’s CASK of 4.2 Euro cents is considerably lower than the
04.13 05.13 06.13 07.13 08.13 10.13 12.13 09.13 11.13 01.14 average for airlines, and compares with the CASK of 3.2 cents for Ryanair, 5.4 cents for Easyjet and 6.0 cents for THY in 2012. PGSUS BIST-100
Potential to increase ancillary revenues Stock Market Data Ancillary revenues accounted for 13% of overall sales as of 9M13. Bloomberg/Reuters: PGSUS.TI / PGSUS.IS Ancillary revenues per pax improved from EUR7.1 in 9M12 to Relative Performance: 1 mth 3 mth Since IPO EUR7.8 in 9M13. We think there is more room for growth in ancillary -18% -7% 116% revenues considering the EUR15.20 figure for Ryanair and 52 Week Range (TL): 18.2 / 43.5 EUR11.60 for Easyjet. Pegasus aims to lift its ancillary revenues to Average Daily Vol (US$mn) 3 mth: 33.4 EUR10 within the next 2-3 years, in line with our projections. YTD TL Return: -16% Fleet expansion plans Shares Outstanding (mn): 102 Pegasus placed an order of 100 aircraft (75 firm with the option for a Free Float (%): 35 further 25) in 2012 and Pegasus plans to expand its fleet, currently Foreign Ow nership in Free Float : 73% 49 aircraft, to between 75-126 aircraft by 2022.
Financials and Ratios 2012 2013E 2014E 2015E Net Sales (TLmn) 1,920 2,438 3,097 3,603 EBITDA (TLmn) 296 415 554 644 Research Analyst: Baris Ince EBITDAR (TLmn) 380 498 646 763 +90 (212) 384 1141 Net Income (TLmn) 126 191 311 370 [email protected] EBITDA Margin 15.4% 17.0% 17.9% 17.9% EBITDAR Margin 19.8% 20.4% 20.9% 21.2% Sales Contact: P/E (x) 24.7 16.3 10.0 8.4 +90 (212) 384 1155-58 EV/EBITDA (x) 14.6 8.6 6.1 5.1 [email protected] EV/Sales (x) 2.25 1.47 1.10 0.91 EPS (TL) 1.23 1.87 3.05 3.62 DPS (TL) 0.00 0.00 0.00 0.00
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The Company in Brief Pegasus Airlines is a low cost carrier with a fleet of SUMMARY FINANCIALS (TLmn) 49 aircrafts and c9k total seat capacity. Founded in 1990 to provide charter services, Pegasus’s business Income Statement 2012 2013E 2014E 2015E 13E/12 model was changed following its acquisition by Esas Holding in 2005. The Company operates at 4 airports Net Sales 1,920 2,438 3,097 3,603 27% in Turkey, using Istanbul Sabiha Gokcen Airport as main hub. and flies to 31 domestic and 45 Operating Expenses -1,731 -2,144 -2,683 -3,119 24% international destinations. The Company carried Operating Profit 188 294 414 484 56% 16.8mn passengers in 2013. In 2012 Pegasus placed 100 aircrafts (75 firm + 25 optional) orders to be Consolidated EBITDA 296 415 554 644 40% delivered through 2016- 2022. Consolidated EBITDAR 380 498 646 763 31% Net Other Income/ Expense 4 5 6 7 16% Shareholders Esas Holding 62.92%, Profit (Loss) from Subsidiaries -2 -2 1 1 27% Sabancı Family Members 2.57% Free Float 34.51% Net financial Income/ Expense -36 -58 -31 -29 62% Profit (Loss) before Tax 155 239 389 463 54%
Tax -29 -48 -78 -93 65%
Net Income 126 191 311 370 52%
Ratios
EBIT Margin 9.8% 12.1% 13.4% 13.4% 2.3 pp
EBITDA Margin 15.4% 17.0% 17.9% 17.9% 1.6 pp
EBITDAR Margin 19.8% 20.4% 20.9% 21.2% 0.6 pp
Net Income Margin 6.6% 7.9% 10.1% 10.3% 1.3 pp
Balance Sheet 2012 2013E 2014E 2015E 13E/12
Current Assets 339 1,095 1,589 2,321 223%
Cash and Cash Equivalents 210 893 1,390 2,044 325%
Short-Term Trade Receivables 44 111 83 143 153%
Inventories 2 1 3 2 -42%
Other Current Assets 83 90 114 132 8%
Long Term Assets 1,870 2,149 2,411 2,695 15%
Total Assets 2,209 3,245 4,000 5,016 47%
Short Term Liabilities 538 657 814 991 22%
Short-Term Financial Loans 186 135 167 219 -27%
Short-Term Trade Payables 130 140 145 186 8%
Other Short-Term Liabilities 222 382 502 586 72%
Long Term Liabilities 1,344 1,430 1,717 2,185 6%
Long-Term Financial Loans 1,241 1,219 1,506 1,974 -2%
Other Long-Term Liabilities 103 211 211 211 106%
Shareholders Equity 327 1,157 1,469 1,839 254%
T. Liabilities & SE 2,209 3,245 4,000 5,016 47%
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Investment Positives
Operating in an underpenetrated market as the largest LCC Pegasus is the second largest carrier in Turkey after THY, with a market share of around 27% in the domestic market in terms of passenger numbers and around 9% in international passenger numbers. Using Istanbul Sabiha Gokcen Airport (SAW) as its main hub, the airline flies to 45 international and 31 domestic destinations. The penetration level of LCCs in Turkey and the surrounding region (mainly the CIS) is lower than in Europe. Therefore, we believe the airline offers high growth potential. An average of only 0.4 flights are taken per capita each year in Turkey compared to 0.8 in Spain, while it is believed that passport ownership ratio is yet at low teens and we believe the majority of passport holders are Turkish citizens living in other countries, another sign of the under penetration. Increasing GDP (positive for disposable income) and a young population (around half of the population are under the age of 30) are also very positive for the long term growth potential for the airline.
Istanbul is a natural geographical hub Turkey stands out as a natural geographical hub, with 50 countries within a 3-hour flight. This helps Pegasus operate with a network model, rather than a point-to- point one, as is the case for Ryanair and EasyJet. This approach is also summed up by the Chairman of Pegasus, Ali Sabancı, when he says “we aim to combine the network benefits of full-service carriers, and the price benefits of LCCs, to provide low cost travel, on-time performance and new planes.” SAW currently operates with a capacity of 25mn (with a CUR of around 75%) which is expected to double in two years’ time after the completion of a second runway. Benefiting from this geographical advantage, Pegasus aims to increase the share of international to international transfer passenger traffic in its total passenger numbers (current 12%). In 9M13, 24% of Pegasus’ passengers were transit passengers, who either transited to a different part of Turkey or to other international destinations. The company plans to continue using SAW as its main hub after the completion of Istanbul’s new airport, which is planned to have an initial capacity of 90mn by 2017 and later reaching 150mn by 2027.
Effective cost management Pegasus commands a significant cost advantage over its competitors, enabling the airline to offer attractive fares. Thanks to its young fleet, high utilization and low cost execution capabilities, we believe the airline will be able to maintain its competitive advantages. Pegasus’ CASK of 4.2 Euro Cents in 2012 was below the average for airlines, and compares with the CASK of 3.2 cents for Ryanair, 5.4 cents for Easyjet and 6.0 cents for THY in 2012. Pegasus has been always in search of cost cutting initiatives and to this end, it employs a "continuous improvement team" (CIT) management team charged with the duty of closely following and controlling costs by developing efficiency initiatives. Thanks to its cost-efficiency, Pegasus realizes higher EBITDAR margins than its peers.
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The potential to increase ancillary revenues Ancillary revenue is the revenue from non-ticket sources, such as baggage fees and on-board food and services, and has become an important financial component for low-cost carriers. Higher margin ancillary revenues accounted for 13% of overall sales as of 9M13. Ancillary revenues per pax rose from EUR7.1 in 9M12 to EUR7.8 in 9M13. There is more room for growth in ancillary revenues, in our view, considering the EUR15.20 figure for Ryanair and EUR11.60 for EasyJet. Pegasus aims to lift its ancillary revenues per pax to EUR10 within 2-3 years. We forecast that Pegasus will attain ancillary revenues of EUR10.1 per pax by 2016 - which would be at the lower end of the management target within three years.
Fleet expansion plans Pegasus has a fleet of 49 aircraft with an average age of 4 years. The airline has recently placed an order for 100 new aircraft (75 firm + 25 optional). Accordingly, its fleet could reach a size of between 75-126 aircraft by 2022. We expect Pegasus to register a CAGR of 18% in its seat capacity between 2013-2016.
The potential beneficiary of a slowdown in economy Our macroeconomic scenario projects 1.5% GDP growth in 2014E compared to the 4% in 2013E on the back of increased interest rates and a weaker currency. Domestic and foreign demand will contribute 0.6 pps and 1.7 pps to 2014E GDP growth, respectively. Domestic revenues account for 42% of Pegasus’ total scheduled revenues, Turkish passengers could trade down in a weaker economy. That could be positive for Pegasus as its competitive prices were also highlighted by a recent report by a flight comparison website, WhichAirline. After comparing 20 airlines, the survey found Pegasus to be the cheapest low cost carrier in Europe, with an average total fare of EUR63.19 per one-way flight (including the 20kg baggage allowance and a transaction fee).
Valuation Pegasus trades at a 33% discount to international LCC peers on 2014E multiples (37% discount on the basis of the P/E and 29% discount on the basis of its EV/ EBITDAR). Our multiple based valuation suggests a target price of TL40.00, offering a 31% potential return.
Investment Negatives
Bilateral agreements Generally, airlines need to secure operating rights for international flights which are designed by bilateral agreements between the countries. As the flag carrier, THY has the upper hand over other Turkish carriers when it comes to obtaining the rights in most international markets. Therefore, the requirement to be a part of bilateral agreements could limit the visibility of international expansion. Pegasus’ international expansion is focused on in its routes to the Middle East, the CIS and Eastern Europe, which are deemed as catchment areas; international pax revenues account for 46% of Pagasus’ total revenues. The company added nine international destinations to its network and announced that it will start flying to Frankfurt, Germany and Madrid, Spain and Kuwait starting from late March 2014.
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Increasing competition at SAW THY has been stepping up its presence at SAW in recent years, mainly due to capacity constraints at Istanbul Ataturk Airport (IST). THY operated with 14 aircraft at SAW airport in 9M13, serving 30 destinations (19 domestic and 11 international) with these flights carrying 2.6mn passengers (up 100% YoY) with 77% load factor. In 2014, THY plans to appoint 24 aircraft to SAW and fly to 36 destinations (9 domestic, 27 international). This should result in more competition and increased congestion at SAW, which could compromise Pegasus’ high rankings regarding metrics of on-time performance (90%), turns per day (7.4) and aircraft utilization (12.6 BH) as of 2013.
Change in fleet type Pegasus currently operates with a fleet of Boeing aircraft with an average age of 4 years. In a marked shift, however, the airline had lodged 75 firm orders for Airbus aircraft with a further 25 optional orders ahead of the IPO, with deliveries to start by 2H16. Although the new generation Airbus aircraft consume around 15% less fuel, the transition to a dual type fleet would result in an increase in maintenance and personnel costs. The management believes the fuel efficiency of the new aircraft will compensate for the extra costs stemming from operating a dual fleet. Therefore, the airline’s margins may come under pressure until the successful completion of the transition.
Sensitivity to FX and oil prices Although the airline implements fuel hedging and fuel surcharges, its profitability is still highly sensitive to oil prices as fuel is the largest item (accounting for around 35% of the total) in Pegasus’ COGS. The company’s hedging policy covers up to 60% of projected fuel consumption. Under this policy, the airline has hedged 48% of its projected fuel consumption for 2013 at USD947/tonne and 35% of its expected fuel consumption for 2014 at a price of USD926/tonne. Pegasus hedging ratio stands below its peer of Ryanair and EasyJet, which have hedging ratios of around 90%. Pegasus’s functional currency is the EUR while it reports in TL. Some 55% of Pegasus’s total revenues are denominated in hard currencies (11% in USD; 40% in EUR) while 66% of total costs are in hard currency (36% in USD; 29% in EUR), therefore, Pegasus benefits from a strong EUR against the TL and USD from an operational perspective. The airline uses a swap/forward mechanism to eliminate the adverse impact of exchange rate movements.
Risk of new supply A 34.5% stake in Pegasus was offered to the public through an IPO in April 2013. The stock’s average trading volume is around USD33mn. According to the terms of the IPO, there is a 365 day lock-up period for pre-IPO shareholders. There is a risk that further supply may come to the market after the lock-up period ends in April 2014.
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VALUATION
Multiple Valuation
2014-end target price of TL40.00/share. We value Pegasus using a 2014E target EV/EBITDAR multiple. On our EV/EBITDAR multiple valuation, we apply a 2014E EV/EBITDAR multiple of 8.0x, inline with the peers. Finally, to reach our target Mcap, we adjusted net debt for 7x aircraft related rental expenses and 0.5x PDP receivables.
Pegasus Valuation Summary EV/EBITDAR multiple (x) 7.50 7.75 8.00 8.25 8.50 GS 2014E EBITDAR (TLmn) 646 646 646 646 646 Target EV (TLmn) 4,844 5,005 5,166 5,328 5,489 Adj. Net debt (TLmn) 1,074 1,074 1,074 1,074 1,074 Minorities (TLmn) 2 2 2 2 2 Target Mcap (TLmn) 3,768 3,929 4,091 4,252 4,413 Outstanding number of shares (mn) 102 102 102 102 102 Target share price (TL) 36.84 38.42 40.00 41.58 43.15 Current share price (TL) 30.50 30.50 30.50 30.50 30.50 Upside potential 21% 26% 31% 36% 41% Source: Garanti Securities
International peer comparison. We present the multiples of international LCCs to put Pegasus’s valuation into perspective. Accordingly, Pegasus trades at a significant discount on all 2014-15 multiples.
Peer Comparison* EV/SALES EV/EBITDA P/E Company Country MCAP (US$) 2014 2015 2014 2015 2014 2015 Low cost carriers (LCC) Devekoped 1.55 1.44 8.48 7.35 16.01 13.03 Ryanair Holdings PLC IRELAND 13,358 2.03 1.94 10.1 8.8 19.6 15.3 easyJet PLC BRITAIN 11,121 1.36 1.28 9.0 8.0 15.5 13.4 AirAsia BHD MALAYSIA 1,937 2.39 2.17 7.7 7.0 8.0 7.1 Spirit Airlines Inc UNITED STATES 3,353 1.44 1.14 7.4 6.0 16.0 13.1 JetBlue Airw ays Corp UNITED STATES 2,380 0.71 0.66 4.9 4.4 11.8 10.1 Norw egian Air Shuttle AS NORWAY 1,312 0.56 0.48 7.0 4.7 12.6 7.5 WestJet Airlines Ltd CANADA 3,038 0.75 0.71 4.6 4.0 12.2 10.1 Emerging 1.95 1.71 10.23 8.32 14.35 12.15 Cebu Air Inc PHILIPPINES 673 1.04 0.89 7.5 6.5 12.6 10.4 Air Arabia PJSC UAE 2,084 2.25 1.98 11.1 8.9 14.9 12.7
PGSUS multiples 1,402 1.1 0.9 6.1 5.1 10.0 8.4 Discount/Premium to Developed LCC -29% -37% -28% -31% -37% -35% Discount/Premium to Emerging LCC -44% -47% -40% -39% -30% -31% Source: Bloomberg, Garanti Securities
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Recommendation: OUTPERFORM. Given its proven track record on growth, we believe that Pegasus stands out as a preferred play in an underpenetrated sector coupled with its ambitious expansion plans and effective cost management. As the number one LCC and second largest carrier in Turkey, Pegasus will be one of the key beneficiaries of increasing GDP and attractive demographics, which bodes well for discount carriers. Using Istanbul Sabiha Gokcen Airport as its main hub, Pegasus differentiates itself from an ordinary LCC whose business models are based on only point to point travel; Pegasus operates like both a network and point to point carrier, thanks to Istanbul’s geographical advantage connecting 50 countries within 3 hours’ flying time. Furthermore, we think Pegasus’ low cost management enables the airline to boast one of the lowest CASK levels on the back of its young fleet, strong punctuality, high utilization and low labour costs. We expect a CAGR of 18% in net sales, 21% in EBITDAR and 24% in net profit over the 2014-16 period. We believe these are outstanding figures that place Pegasus as a clear growth play in the coming years. Pegasus is not an undiscovered stock; it outperformed the index 116% since IPO in April 2013. Yet, the shares still look cheap, despite the prospect that Pegasus offers stronger growth for foreseeable future. We initiate our coverage of Pegasus with a Outperform recommendation.
Risks. The key risks would be an increase in oil prices, unrest in Turkey and neighbouring countries, stiff competition, limited international expansion and EUR weakness against the USD.
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MODEL ASSUMPTIONS
Model assumptions at a glance* 2011 2012 2013E 2014E 2015E 2016E # of total passengers (mn) 10.7 13.6 16.8 20.1 23.8 28.1 YoY 33.7% 26.8% 23.9% 19.3% 18.6% 18.1% Load factor 74.9% 78.2% 80.2% 80.7% 81.2% 81.7% YoY (pps) -0.8 pps 3.3 pps 2.0 pps 0.4 pps 0.5 pps 0.5 pps ASK (mn) 13.5 16.4 20.2 22.9 25.9 29.3 YoY 26.6% 22.0% 22.7% 13.4% 13.4% 13.1% RPK (mn) 10.1 12.8 16.2 18.4 21.0 23.9 YoY 25.3% 27.3% 25.9% 14.0% 14.1% 13.8% RASK (EUR cents) 3.6 3.8 3.7 3.6 3.5 3.4 Ancillenary revenue/pax (EUR) 5.9 7.4 8.5 9.1 9.8 10.1 YoY -0.6% 25.4% 16.1% 7.0% 7.0% 3.3% Revenue Yield (EUR cents) 4.8 4.9 4.6 4.4 4.3 4.2 Revenue (TLmn) 1,484 1,920 2,438 3,097 3,603 4,313 YoY 51.8% 29.4% 27.0% 27.0% 16.3% 19.7% CASK (EUR cents) 4.8 4.6 4.2 4.1 4.0 4.0 CASK-ex fuel (EUR cents) 2.8 2.7 2.5 2.4 2.4 2.4 EBITDA (TLmn) 81 296 415 554 644 781 YoY -2.5% 266.1% 40.3% 33.6% 16.3% 21.2% Revenue yield-CASK (spread) 0.1 0.3 0.4 0.4 0.3 0.2 EBITDA margin 5.4% 15.4% 17.0% 17.9% 17.9% 18.1% YoY (pps) -3.0 pps 10.0 pps 1.6 pps 0.9 pps 0.0 pps 0.2 pps EBITDAR (TLmn)** 192 380 498 646 763 951 YoY 19.3% 97.7% 30.8% 29.8% 18.1% 24.6% EBITDAR margin 13.0% 19.8% 20.4% 20.9% 21.2% 22.0% YoY (pps) -3.5 pps 6.8 pps 0.6 pps 0.5 pps 0.3 pps 0.9 pps Net Income (TLmn) -13 126 191 311 370 477 YoY n.m n.m 51.6% 62.7% 18.8% 28.8% Net margin -0.9% 6.6% 7.9% 10.1% 10.3% 11.1% YoY (pps) -2.4 pps 7.4 pps 1.3 pps 2.2 pps 0.2 pps 0.8 pps ROAE -7.2% 49.0% 25.8% 23.7% 22.4% 25.2% YoY (pps) n.m 56.1 pps -23.2 pps -2.1 pps -1.3 pps 2.8 pps Average Brent price (USD) 111 112 108 103 103 103 YoY 37.9% 0.7% -2.8% -5.5% 0.5% 0.0% Capex (TLmn) 637 421 345 395 437 566 YoY -33.8% -18.2% 14.7% 10.6% 29.4% Macro assumptions 2011 2012 2013 2014E 2015E 2016E USD/TRY-eop 1.89 1.78 2.13 2.20 2.29 2.38 USD/TRY-avg 1.67 1.79 1.90 2.17 2.25 2.33 EUR/TRY-eop 2.44 2.35 2.93 2.86 3.09 3.26 EUR/TRY-avg 2.32 2.30 2.53 2.90 2.98 3.17 EUR/USD-eop 1.29 1.32 1.38 1.30 1.35 1.37 EUR/USD-avg 1.39 1.29 1.33 1.34 1.33 1.36 Basket (EUR+USD)-eop 2.17 2.06 2.53 2.53 2.69 2.82 GDP growth 8.8% 2.2% 4.0% 1.5% 4.0% 4.0% CPI 10.5% 6.2% 8.2% 7.7% 6.0% 6.0% Source: The Company, Garanti Securities *Figures are based on our own calculations may differ from company's figures ** Our EBITDA[R] calculation includes net other income/(expense)
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HOW WE STAND AGAINST CONSENSUS
According to the forecasts compiled by Bloomberg, we are generally in line with consensus at the top line for 2013E and 2014E; however, our 2013E and 2014E EBITDA and net profit forecasts are 11% and 4% lower than the consensus estimate.
Consensus vs. Our estimates PGSUS Bloomberg Garanti Securities Difference (TLmn) 2013 2014 2015 2013 2014 2015 2013 2014 2015 Net Sales 2,366 2,989 3,463 2,438 3,097 3,603 3% 4% 4% EBITDA 474 578 678 415 554 644 -12% -4% -5% Net Profit 216 324 405 191 311 370 -11% -4% -9% EBITDA Margin 20.0% 19.3% 19.6% 17.0% 17.9% 17.9% -3.0 pps -1.4 pps -1.7 pps Net Income Margin 9.1% 10.8% 11.7% 7.9% 10.1% 10.3% -1.3 pps -0.8 pps -1.4 pps Target Share Price 40.54 40.00 -1% Source: Bloomberg, Garanti Securities
BUSINESS OVERVIEW
Revenue
Scheduled revenues accounted 78% of total revenues (45% for international and 33% for domestic) in 9M13, representing the main source of revenues, while ancillary revenues - the second largest source of revenues – accounts for a 13% share in the total. Ancillary revenues include various service items such as service fees, check-in fees, online seat selection fees, travel insurance, duty-free sales offered on international flights, reservation changes/cancellation charges and excess baggage charges. Considering the strong growth expected in Pegasus’s passenger numbers (19% CAGR for domestic and international between 2013 and 2016), we believe scheduled revenues will remain the largest item in the revenue structure; however, we expect international markets (besides Europe) to account for as much as 14% of total scheduled revenues by 2016, up from the 11% in 2013, illustrating the company’s increasing exposure to markets outside Europe. As the second largest source of revenues, we expect the share of ancillary revenues in total revenues to increase from 13% in 9M13 to 20% in 2016; we believe these revenues offer strong growth potential given the lower level of ancillary revenue per pax ratio of Pegasus (7.8 EUR in 9M13) compared to Ryanair (11.6 EUR) and EasyJet (15.2 EUR). We assume that ancillary revenues per pax will reach 10.1 EUR by 2016, denoting a CAGR of 35% between 2013-2016, vs. the 56% CAGR between 2010-2012.
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Pegasus Revenue Split by segment
2010 9M13 International 1% International 10% scheduled 2% 13% scheduled Domestic Domestic scheduled scheduled Charter 7% Charter 13% 44% 45% Ancillary Ancillary
32% 33% Other Other
source: The Company data
Scheduled Revenues breakdown by geography (%)
2010 9M13
Other, 1% Other, 12%
Domestic, Domestic, 42% 42% Europe, Europe, 56% 46%
source: The Company data
Ancillary Revenue Development Ancillary revenue per pax (EUR) - 2011 900 35 32.2 800 35.0 30 30.0 700 25 25.0 600 20.0 15.2 12.3 11.6 11.6 500 20 15.0 10.0 9.8 9.6 7.4 7.8 7.4 10.0 5.5 7.1 400 15 5.0 300 0.0 10
200
GOL
Spirit Tiger 5 Copa
100 AirAsia
JetBlue
Ryanair easyJet
0 0 Norwegian
2010 2011 2012 2013E 2014E 2015E 2016E 9M12 9M13
Pegasus 2011 Pegasus 2012 Pegasus
Pegasus 9M12 Pegasus Pegasus 9M13 Pegasus Ancillary Revenue (TLmn) (lhs) Ancillary Revenue per pax (in TL) (rhs) Source: Pegasus presentation Source: The Company data
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Passenger revenue yield (EUR cents)
According to our calculations, Pegasus’s passenger revenue yields increased by 2% in 2011 and by 8% in 2012. The improvement in the load factor and shorter stage length was the main reason behind this positive trend. However, taking into account the tougher competition and new route launches in international markets, we expect yields to decline in 2013 and 2014, as observed in 9M13 (3% YoY de- cline according to our calculations). We project a 3% decline per annum in inter- national yields (in EUR terms) between 2013-2016 while forecasting an decline in domestic yields of 5% in 2014, 3% in 2015 and 2% in 2016. We believe that the risks to our passenger revenue yield assumption are limited, given the airline’s relative better focus on unit revenue management.
Revenue Yield evolution(EUR cents)
6.0 5.8 5.7 5.7 5.5 5.5 5.3 5.2 5.1 4.9 5.0 4.8 4.9 4.8 4.9 4.8 4.7 4.6 4.4 4.5 4.6 4.3 4.2 4.4 4.3 4.4 4.3 4.0 4.2 4.1 4.0 3.9 3.5
3.0 2010 2011 2012 2013E 2014E 2015E 2016E 9M12 9M13
Domestic International Total
Source: The Company, Garanti Securities
Load Factors
Pegasus improved its load factor by more than 3pps in 2012 and 2pps in 2013. Strong seat utilization on international routes (up 2.5pps YoY in 2013) supported the improvement in the load factor vs. up 1.7pps on domestic front. Domestic load factor increased by 1.5pps to reach 82.0% in 9M13, comparing with the 84.4% load factor of THY’s LCC arm, SunExpress, which carried one third of Pegasus total pax during the same period. Given the THY’s strong domestic passenger target for 2014 (THY budgets a 2% YoY decline in domestic yields (TL) in 2014) and the allocation of majority of ASK growth to Turkey, we believe Pegasus’s load factor improvement will lose some momentum, with a 0.5 pp improvement per annum between 2014 and 2016. We believe we are in line with the airline in our assumptions, as Pegasus’s short-midterm target is to achieve load factors of over 80% by adding 12-16% of additional ASKs annually to its network over the next three years, comparing to our forecast of 13% for 2013-2016.
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Pegasus' ASK vs. Load Factor
35.0 81.7% 84.0% 81.2% 30.0 80.2% 80.7% 82.0% 25.0 78.2% 80.0% 20.0 78.0% 75.7% 74.9% 15.0 76.0% 10.0 74.0% 5.0 72.0% - 70.0% 2010 2011 2012 2013 2014E 2015E 2016E
ASK (mn) Load Factor (%)
Source: The Company, Garanti Securities
Cost As with all airlines, fuel and personnel costs account for the largest share of total costs. Fuel costs accounted for 46% of its total costs in 9M13, with personnel comprising a 13% share.
Cost Assumptions at a glance TLmn 2011 2012 2013E 2014E 2015E 2016E Jet fuel expenses 611 702 848 1,084 1,280 1,503 as of total revenues 41.1% 36.6% 34.8% 35.0% 35.5% 34.9% as of total cogs 41.0% 40.6% 39.6% 40.4% 41.0% 40.4% per ASK in EUR cents 2.0 1.9 1.7 1.6 1.7 1.6 Personnel expenses 162 198 296 334 379 441 as of total revenues 10.9% 10.3% 12.1% 10.8% 10.5% 10.2% as of total cogs 10.9% 11.4% 13.8% 12.5% 12.1% 11.8% per ASK in EUR cents 0.5 0.5 0.6 0.5 0.5 0.5 Lease expenses (dry+wet) 112 85 83 92 118 169 as of total revenues 7.5% 4.4% 3.4% 3.0% 3.3% 3.9% as of total cogs 7.5% 4.9% 3.9% 3.4% 3.8% 4.6% per ASK in EUR cents 0.4 0.2 0.2 0.1 0.2 0.2 Depreciation 76 104 117 134 153 181 as of total revenues 5.1% 5.4% 4.8% 4.3% 4.2% 4.2% as of total cogs 5.1% 6.0% 5.5% 5.0% 4.9% 4.9% per ASK in EUR cents 0.2 0.3 0.2 0.2 0.2 0.2 Maintenance 109 70 98 124 144 173 as of total revenues 7.4% 3.6% 4.0% 4.0% 4.0% 4.0% as of total cogs 7.3% 4.0% 4.5% 4.6% 4.6% 4.6% per ASK in EUR cents 0.3 0.2 0.2 0.2 0.2 0.2 Ground Handling 100 111 149 189 220 263 as of total revenues 6.7% 5.8% 6.1% 6.1% 6.1% 6.1% as of total cogs 6.7% 6.4% 6.9% 7.0% 7.0% 7.1% per ASK in EUR cents 0.3 0.3 0.3 0.3 0.3 0.3 Advertisement 35 37 47 68 79 95 as of total revenues 2.3% 1.9% 1.9% 2.2% 2.2% 2.2% as of total cogs 2.3% 2.1% 2.2% 2.5% 2.5% 2.5% per ASK in EUR cents 0.1 0.1 0.1 0.1 0.1 0.1 Commission 18 25 34 43 50 60 as of total revenues 1.2% 1.3% 1.4% 1.4% 1.4% 1.4% as of total cogs 1.2% 1.5% 1.6% 1.6% 1.6% 1.6% per ASK in EUR cents 0.1 0.1 0.1 0.1 0.1 0.1 Other costs 267 399 473 616 696 837 as of total revenues 18.0% 20.8% 19.4% 19.9% 19.3% 19.4% as of total cogs 17.9% 23.0% 22.1% 22.9% 22.3% 22.5% per ASK in EUR cents 0.9 1.1 0.9 0.9 0.9 0.9 Source: The Company, Garanti Securities *Figures are based on our own calculations may differ from company's figures
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CASK (EUR cents)
As mentioned in the earlier sections of this report, unit costs are relatively low compared to full service carriers, in line with the nature of the low cost carrier business. Pegasus is no exception, and indeed has some of the lowest unit costs among its peers. Based on our calculations, Pegasus’ CASK figure was 4.6 EUR cents in 2012 vs. 4.8 EUR cents in 2011. We assume a CASK figure of 4.2 EUR cents for the 2013 full year and 2.5 EUR cents for CASK-ex-fuel. Given our assumption of a lower oil price and lower non-fuel operational costs, we assume a 4% and 5% decline in both CASK and CASK-ex-fuel in 2014, followed by a 1% decrease for both between 2014-2016. We believe Pegasus’s competitiveness on the cost side will be sustainable, thanks to its young fleet, strong punctuality, high utilization, lower labour costs and potential for further cost reductions.
CASK evolution (EUR cents)
5.0 4.8 4.7 4.5 4.2 4.2 4.5 4.6 4.0 4.0 4.0 4.1 3.5 3.0 2.3 2.5 2.3 2.2 2.3 2.0 1.9 1.9 1.9 1.9 2.0 1.6 2.0 1.9 1.9 1.5 1.7 1.6 1.7 1.6 1.7 1.0 0.5 0.6 0.5 0.5 0.6 0.5 0.5 0.5 0.5 0.5 0.0 2010 2011 2012 2013E 2014E 2015E 2016E 9M12 9M13
CASK Personel/ASK Fuel/ASK Others/ASK
Source: The Company, Garanti Securities
EBITDAR margin
According to our calculations, Pegasus posted an EBITDAR margin of 19.9% in 2012, up from its average of 16.4% in the 2010-2012 period and wrapping up a stunning 54% CAGR in its EBITDAR between 2010 and 2012. We forecast a CAGR of 21% in the airline’s EBITDAR between 2014-2016, driven by strong revenue growth coupled with initiatives aimed at curtailing costs, leading to better margins. A comparison of margin performances with European carriers would indicate that Pegasus has fared better than its peers. Based on our above mentioned forecasts, we expect the EBITDAR margin to hover at around 21-22% over the 2014-2016 period. .
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Fleet
Pegasus had a fleet of 49 aircraft with an average age of 4 years as of 2013-end. The fleet is mainly composed of Boeing 737-800 aircraft, with 2% of the planes owned by the airline with 55% operated under financial lease. The company ordered 100 Airbus aircraft (75 firm orders with an option for a further 25) in 2012. The firm orders (57 A320neo and 18 A321neo aircraft) will be delivered between 2015 and 2022. According to the airline’s fleet expansion plan, Pegasus will have a fleet of between 75-126 aircraft by 2022. With the deliveries, Pegasus’ fleet will mostly shift from the current Boeing dominated fleet to one consisting largely of to Airbus planes. This will lead necessitate additional costs like training and maintenance - but the company is confident that the new generation Airbus aircraft are much more efficient than the Boeing aircraft, and that the anticipated efficiencies could compensate for the extra costs related to the shift in fleet. That was also emphasized in the media by the CEO of Pegasus, Sertac Haybat, when he said that new generation engines will be used in 100 of the aircraft orders, with the new engines achieving 15% savings in fuel consumption.
Total Fleet 2012 2013 2014 Aircraft Type Year End 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Boeing 737-800 38 38 42 44 46 47 48 48 48 Boeing 737-400 2 1 1 1 1 1 1 1 1 Airbus A320 CEO 0 0 0 0 2 5 6 6 6 Airbus A320 NEO 0 0 0 0 0 0 0 0 0 Airbus A321 NEO 0 0 0 0 0 0 0 0 0 Total 40 39 43 45 49 53 55 55 55 Source: The Company
Net debt-capex
Pegasus had TL537mn of net debt as of 9M13 vs. TL1.2bn at the end of 2012. The airline’s indebtedness has declined thanks to the cTL500mn of IPO proceeds. Based on our calculations, Pegasus had an adjusted net debt of TL1.2bn as of 9M13 and we expect the adjusted Net Debt/EBITDAR ratio to ease down from 1.9x at the end of 2013 to 1.3x by the end of 2014. We assume a 30% manufacturer discount on aircraft list prices when calculating our fleet expansion cost, and assume that it will be financed by financial and operational leasing in a 55:45 ratio, broadly in line with the current approach. However, our understanding is that the airline will likely shift to a more balanced system of financing of 50:50.
2012 2013 2014 Financing Type Year End 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Ow ned 3% 3% 2% 2% 2% 2% 2% 2% 4% Financial Lease 65% 67% 60% 58% 55% 51% 49% 49% 49% Operational Lease 33% 31% 30% 29% 31% 36% 40% 40% 40% Wet lease 0% 0% 7% 11% 12% 11% 9% 9% 9% Source: The Company
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Pegasus Indebtedness
2,000 6.0 5.7 1,800 5.0 1,600 4.9 1,400 4.0 1,200 1,000 3.0 800 2.0 600 1.9 400 1.3 1.2 1.0 0.8 200 0.6 0.5 - 0.0 2012 2013E 2014E 2015E
Adj. Net Debt EBITDAR Adj. Net Debt /EBITDAR Adj. Net Debt /Equity
Source: Garanti Securities
Sensivities
Pegasus’ profitability and valuation are highly sensitive to movements in fuel prices and the exchange rate, since 55% of the airline’s revenues and 66% of the company’s expenses are FX-denominated.
Pegasus Revenue by currency Pegasus Expenses by currency
9M13 9M13
Other, 1%
Other, 4% EURO, EURO, TL, 34% 29% 40% TL, 45% USD, 36%
USD, 11%
Source: The Company data
Impact on Pegasus ----- US$5/bbl increase ------5% increase ----- 2014E estimates Oil price EUR vs.USD EBITDA (TLmn) -5% 9% EBITDAR (TLmn) -4% 7% Source: Garanti Securities
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TRAFFIC FIGURES
Pegasus Airlines carried 16.8mn passengers in 2013, corresponding to 24% YoY growth. The airline’s load factor reached 80.2% in 2013, up by 2.0pps on an annual basis, with a 22% YoY increase in ASK. The airline managed to increase block hours by 15% YoY with a 21% YoY increase in the number of destinations. The airline also achieved better utilization of aircraft, with 12.6 BH in 2013 vs. 11.7 BH in 2012, while the number of landings (cycle) increased by 20% YoY in 2013. Meanwhile, although the load factor has been improving, it can still be considered low for an LCC and we believe that increasing aircraft utilization should compensate for the yield pressures to some extent.
Pegasus Airlines Traffic Figures Domestic 2010 2011 2012 2013 YoY 4Q12 4Q13 QoQ Pax (mn) 4.96 6.76 8.30 10.23 23% 2.06 2.63 28% Seat (mn) 6.35 8.91 10.39 12.54 21% 2.65 3.27 23% Load Factor (%) 78.2% 75.9% 79.8% 81.6% 1.7 pps 77.6% 80.4% 2.9 pps Cycle 38,152 50,229 55,726 66,756 20% 14,119 17,412 23% Pax per cycle 130 135 149 153 3% 146 151 4% ASK (mn) 3.68 5.18 5.98 7.17 20% 1.53 1.90 24%
International 2010 2011 2012 2013 YoY 4Q12 4Q13 QoQ Pax (mn) 3.05 3.95 5.28 6.59 25% 1.23 1.61 31% Seat (mn) 4.23 5.39 6.96 8.42 21% 1.67 2.09 25% Load Factor (%) 72.1% 73.3% 75.9% 78.3% 2.4 pps 73.7% 77.0% 3.4 pps Cycle 24,604 29,979 38,074 46,029 21% 9,160 11,442 25% Pax per cycle 124 132 139 143 3% 134 141 5% ASK (mn) 6.95 8.29 10.45 12.93 24% 2.50 3.13 25%
Total 2010 2011 2012 2013 YoY 4Q12 4Q13 QoQ Pax (mn) 8.01 10.71 13.58 16.82 24% 3.29 4.24 29% Seat (mn) 10.58 14.30 17.35 20.96 21% 4.32 5.36 24% Load Factor (%) 75.7% 74.9% 78.2% 80.2% 2.0 pps 76.1% 79.1% 3.0 pps Cycle 62,756 80,208 93,800 112,785 20% 23,279 28,854 24% Pax per cycle 127.67 133.58 144.76 149.13 3% 141.25 146.95 4% ASK (mn) 10.63 13.47 16.43 20.10 22% 4.03 5.03 25% Source: The Company, Garanti Securities
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THE COMPANY OVERVIEW
A leading low-cost airline in Turkey, Pegasus was founded as a joint venture between Aer Lingus Group, Silkar Yatırım ve Insaat Organizasyonu A.S. and Net Holding A.S. in 1990, entering commercial operation with two airplanes. After being acquired in 2005 by Esas Holding A.S., which is owned by Sevket Sabanci and his family, Pegasus started scheduled domestic flights. Pegasus ownership
2.57%
Esas Holding 34.51% Free Float 62.92% Sabanci Family Members
Source: The Company data Initial Public Offering (IPO)
IPO price was TL18.40/share. Pegasus Airlines shares started trading on the Bourse Istanbul on April 26, 2012. 34.5% of the company was offered to public at a price of TL18.40/share (vs. price range of TL17.0-20.4). Esas Holding was the main selling shareholder. According to the final structure of the partnership following the IPO, 62.9% of the shares are held by Esas Holding A.S, and the remainder owned by Sevket Sabanci and his family. The company increased its paid in capital from TL75mn to 102.3mn. The company raised TL502mn cash from the IPO and injected the entire amount into the company. Pegasus Airlines’ aims to use IPO proceeds to finance its fleet and network expansion.
Since IPO, Pegasus Airlines outperformed the index and THY significantly until mid-January 2014 as shown below. After then, anticipated yield contraction on stiff compettion and rising macro concerns for Turkey coupled with poltical risks for 2014 resulted in a weakness on Pegasus Airlines shares. Pegasus Airlines underperformed the index and THY by 11% and 23% YTD.
Airlines Share performances since Pegasus' IPO on 26 April 2013
240.0
205.0
170.0
135.0
100.0
65.0
Jul-13
Oct-13 Apr-13
Jun-13 Jan-14
Nov-13 Dec-13
Sep-13 Aug-13 May-13
S PGSUS BIST100 THYAO
Source: Rasyonet, Garanti Securities 74
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Pax evolution (mn)
18.0 17.0 16.0 14.4 14.0 12.1 11.1 12.0 10.2 9.4 10.0 8.3 7.9 8.0 6.8 6.6 5.0 5.3 6.0 3.9 4.0 3.1 2.0 0.0 2010 2011 2012 2013 2014E 2015E 2016E
Domestic International
Source: The Company, Garanti Securities
Pegasus high ranking on selected metrics
100.0% 92% 89% 88% 91% 90.0% 82% 78% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 16.5% 20.0% 15.3% 7.1% 10.0% 0.0% Pegasus easyJet Ryanair
ASK 2010-12 CAGR Load Factor(%) On-Time record
Source: Pegasus presentation
Turns per day vs. Aircraft utilisation
14 12.6 12.0 11.5 11.8 11.7 12 10.9
10 7.4 8 6.9 6.3 6.6 6.5 5.6 6
4
2
0 2008 2009 2010 2011 2012 2013
Turns per day Aircraft utilisation (BH)
Source: The Company, Garanti Securities
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Aicraft Utilisation vs. Average Stage Length (2012) 1400 14.0 1241 1200 1096 12.0 947 1000 10.0
800 8.0
600 6.0 11.7 11.0 400 8.5 4.0
200 2.0
0 0.0 Pegasus easyJet Ryanair
Aircraft Utilization (BH) Average Stage Length (km) (rhs)
Source: Pegasus presentation
2008-12 pax CAGR vs. İnternational peers 38% 40% 35% 29% 30% 25% 19% 18% 20% 15% 12% 11% 9% 8% 10% 7% 7% 5%
0%
GOL
Tiger Spirit
Copa
JetBlue
Ryanair Air Asia Air easyJet
Pegasus
Scheduled Norwegian
Source: Pegasus presentation
Strong growth compared to peers
60% 56% Source: Pegasus presentation 50%
40% 35%
30% 17% 17% 20% 14% 12% 10%
0% Pegasus easyJet Ryanair
2010-12 Revenue CAGR 2010-12 EBITDAR CAGR
Source: Pegasus presentation
Internet Sales share in total
120% 99% 98% 100% 80% 80% 67% 65% 60% 41% 42% 41% 46% 40% 20% 11%
0%
Spirit
Copa
Ryanair easyJet Air Asia Air
Norwegian
Pegasus 2011 Pegasus 2012 Pegasus
Pegasus 9M12 Pegasus 9M13 Pegasus
Source: The Company data
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APPENDIX
12M Forward P/E and Trailing EV/EBITDAR graphs for LCCs
Pegasus Airlines 12M forw ard PE
Current:9.7x vs. 8M average of 10.4x 14x 13x 12x 11x 10x 9x 8x 7x
6x
Jul-13 Jul-13
Oct-13 Oct-13
Jun-13 Jun-13 Jan-14 Jan-14 Jun-13
Feb-14
Nov-13 Nov-13 Nov-13 Dec-13 Dec-13
Aug-13 Aug-13 Sep-13 Sep-13
Source: Bloomberg Ryanair 12M forw ard PE
Current:15.2x vs. Hist. avg of 10.1x 16x 14x 12x 10x 8x 6x
4x
Jul-12 Jul-13 Jul-11
Jan-11 Jan-13 Jan-14 Jan-12
Mar-12 Mar-13 Mar-11
Sep-12 Nov-12 Nov-13 Sep-11 Nov-11 Sep-13
May-12 May-13 May-11 12Mforward PE Average +1 std dev -1 std dev +2 std dev -2 std dev Source: Bloomberg
easyJet 12M forw ard PE
Current:13.4x vs. Hist. avg of 9.9x 15x
13x
11x
9x
7x
5x
Jul-13
Oct-12 Oct-11
Jun-12
Mar-13
Feb-12 Dec-13 12Mforward PE Average +1 std dev -1 std dev +2 std dev -2 std dev Source: Bloomberg
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Air Arabia 12M forw ard PE
Current:8.0x vs. Hist. avg of 7.6x 11x
9x
7x
5x
3x
05.11 02.12 10.12 07.13 01.11 09.11 06.12 03.13 11.13 1 year forward P/E Average +1 std dev -1 std dev +2 std dev -2 std dev
Source: Bloomberg
Ryanair 12M trailing EV/EBITDAR
Current:9.1x vs. Hist. avg of 6.7x 10x 9x 8x 7x 6x 5x
4x
Jul-11 Jul-12 Jul-13
Jan-12 Jan-13 Jan-11 Jan-14
Mar-11 Mar-12 Mar-13
Nov-11 Nov-12 Nov-13
Sep-11 Sep-12 Sep-13
May-11 May-12 May-13
12M trailing EV/EBITDAR 3-year Average +1 std dev -1 std dev +2 std dev -2 std dev Source: Bloomberg
easyJet 12M trailing EV/EBITDAR
Current:8.8x vs. Hist. avg of 5.4x 10x
8x
6x
4x
2x
0x
Jul-13
Oct-12
Jan-11 Jun-12
Feb-12 Mar-13
Nov-13 Sep-11 May-11 12M trailing EV/EBITDAR Average +1 std dev -1 std dev +2 std dev -2 std dev Source: Bloomberg
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Air Arabia 12M trailing EV/EBITDAR
10x Current:7.7x vs. Hist. avg of 7.7x
9x
8x
7x
6x
02.11 06.11 03.12 07.12 04.13 12.13 10.11 11.12 08.13
12M trailing EV/EBITDAR Average +1 std dev -1 std dev +2 std dev -2 std dev
Source: Bloomberg
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THY vs. PEGASUS
Although THY and Pegasus both operate in the same region, they differ in terms of their business models, specifically in fleet structure, revenue and their approach to cost management . While Pegasus’s fleet is primarily composed of Boeing B737 -800NGs, THY has a wider range of aircraft in its fleet. Based on our calculations, Pegasus fits an average of 188 seats into its aircraft, compared to the 168 seats for THY’s aircraft. That is obviously means a lower operational cost, assuming all else is equal. However, THY offers more seat classes with high yields (such as business class) compared to the one class seating in Pegasus’s aircraft. More importantly, as mentioned before, THY’s growing focus on the international market, mainly through international transfers from the domestic market, is one of the advantages for Pegasus operating as an LCC in an underpenetrated market. THY’s domestic revenues accounted for 14% of its total in 9M13, down from the 21% in 2008. On the other hand, while the share of international transfer passengers in its total increased from 16% in 2005 to 23% in 9M13, it remains far below the 50% levels for Lufthansa. The other difference is on the average stage length side, where THY has a strategy of focussing on long haul routes and operating with a hub and spoke model rather than the point to point model pursued mostly for the time being by Pegasus. As such, THY has a higher average stage length compared to Pegasus, another reason behind Pegasus’s competitive edge over THY. In addition to these factors, high aircraft utilization, a good on time record coupled with less congested airports with relatively lower fees and turns per day should mean higher margin levels for Pegasus, in common with low-cost carriers generally. However, it is also worth noting that THY has relative strengths in traffic, revenue and cost management efficiencies over other major FSC, as shown on page 56, so a definite conclusion between Pegasus and THY would be difficult given the different business models, in our view.
CASK (EUR cents - 2012) 2010-13 pax CAGR
12 35% 9.8 29% 10 30% 27% 8 6.9 25% 6.3 6 22% 5.4 5.6 5.4 6 4.9 20% 4.2 3.7 4 3.2 14% 2.1 15% 2 10% 0
5%
THY
GOL
Spirit Tiger
Copa 0%
AirAsia
Jetblue
Ryanair easyJet
Pegasus THY Domestic Pegasus Domestic THY International Pegasus Avg FSCs Avg Norwegian International
Source: Pegasus presentation Source: Pegasus presentation
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CASK ex-fuel (EUR cents - 2012)
8 7.2 7 6
5 4.3 4.1 3.8 3.7 4 3.4 3.3 2.9 3 2.4 2.2 1.8 2 1.1 1
0
THY
GOL
Spirit Tiger
Copa
AirAsia
Jetblue
Ryanair
easyJet
Pegasus
Avg FSCs Avg Norwegian
Source: Pegasus presentation
THY on ASL and CASK
2000 20 14.7 1500 12.2 14.4 13.8 15 9.5 1000 8.9 8.5 9.2 10 500 5 1461 1549 1759 1852 0 0 2010 2011 2012 9M13
Average Stage Length (km) CASK (TL kurus) CASK ex-fuel (TL kurus)
Source: Pegasus presentation Pegasus on ASL and CASK
1100 12.0 9.8 9.7 1050 9.9 10.0 7.8 8.0 1000 5.7 5.0 5.4 5.7 6.0 950 4.0 900 947 2.0 1078 996 966 850 0.0 2010 2011 2012 9M13
Average Stage Length (km) CASK (TL kurus) CASK ex-fuel (TL kurus)
Source: Pegasus presentation
Indexed Domestic RASK Pegasus vs. THY
200 174 176 163 150 150 100 100 100 100 100
50
0 2010 2011 2012 9M13
THY Pegasus
Source: Pegasus presentation
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RESEARCH
TAV Airports Turkey - Equity - Aviation Re-initiation of Coverage Market Perform (pre. Market Perform) The most defensive play seeking opportunities
We re-initiate our coverage of TAV Airports with a Market Current Price TL 15.75TL Perform recommendation. Our 2014-end target price of TL18.80 indicates 19% upside potential 2014-end Target Price TL 18.80TL Potential Return TL 19% TAV Airports stands out as a safe choice in the aviation sector without the risk of higher fuel costs and resilient Current Mcap (TLmn) 5,722 margins thanks to better revenue-cost composition Current EV (TLmn) 8,734
A potential delay in work on Istanbul’s new airport and Current Mcap (US$mn) 2,572 planned capacity expansion at Istanbul Ataturk Airport (IAA) have recently served as catalysts for the shares and is Price Performance (TL) already priced in, in our view. A new catalyst could be prolonged TL weakness against the EUR, which would 18.00 support TAV Airports operationally 15.60 Seeking new opportunities at home and abroad 13.20 Although TAV will receive compensation for any loss of profit arising 10.80 from the opening of the new Istanbul airport before 2021, we believe 8.40 investors are still focused on how the Company will replace IAA – 6.00
which accounts for around half of the consolidated EBITDA.
02.13 04.13 08.13 10.13 06.13 12.13 Meanwhile, the anticipated 30% increase in the capacity of IAA will 12.12 also support TAV. The consortium, in which TAV holds a 15% stake TAVHL BIST-100 in, took over operations at Zagreb International Airport in December 2013. New terminal tenders are expected to be held in Turkey, in Stock Market Data Bodrum, Dalaman (March 2014) and for airports in Saudi Arabia, Bloomberg/Reuters: TAVHL.TI / TAVHL.IS such as Riyadh and Jeddah. NY La Guardia’s terminal tender also Relative Performance: 1 mth 3 mth 12mth presents an opportunity for new business. 3% 35% 92%
Well positioned to benefit from strong pax figures. 52 Week Range (TL): 9.82 / 17.2 The total number of passengers in airports operated by TAV Average Daily Vol (US$mn) 3 mth: 9.7 increased by 17% YoY in 2013. TAV is likely to continue benefit from YTD TL Return: 2% increasing passenger numbers in the regions it operates in Shares Outstanding (mn): 363 (principally in Turkey) and we conservatively assume that TAV will Free Float (%): 40 post a CAGR of 7% in total passenger numbers between 2013-2016. Foreign Ow nership in Free Float : 79%
Financials and Ratios 2012 2013E 2014E 2015E Net Sales (TLmn) 2,343 3,232 4,044 4,382 EBITDA (TLmn) 765 1,071 1,385 1,549 Research Analyst: Baris Ince EBITDAR (TLmn) 1,099 1,500 1,919 2,096 +90 (212) 384 1141 Net Income (TLmn) 286 366 560 599 [email protected] EBITDA Margin 32.6% 33.1% 34.3% 35.3% EBITDAR Margin 46.9% 46.4% 47.5% 47.8% Sales Contact: P/E (x) 20.0 15.6 10.2 9.5 +90 (212) 384 1155-58 EV/EBITDA (x) 14.2 11.0 7.9 6.1 [email protected] EV/Sales (x) 4.5 3.6 2.6 2.1 EPS (TL) 0.79 1.01 1.54 1.65 DPS (TL) 3.51 6.98 9.05 10.37
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The Company in Brief TAV Airports, the leading airport operator in Turkey, SUMMARY FINANCIALS operates 13 airports: Istanbul Atatürk, Ankara Esenboga, Izmir Adnan Menderes Antalya Gazipasa Income Statement 2012 2013E 2014E 2015E 13E/12 in Turkey, Tbilisi and Batumi in Georgia, Monastir Net Sales 2,343 3,232 4,044 4,382 38% and Enfidha in Tunisia, Skopje and Ohrid in Macedonia, Medinah in Saudi Arabia, Riga (only Operating Expenses -1,823 -2,357 -2,939 -3,195 29% commercial areas) in Latvia and Zagreb in Croatia. TAV Airports provides service in all areas of airport Operating Profit 521 876 1,105 1,187 68% operation such as duty-free, food and beverage, ground handling, IT, security, and operations Consolidated EBITDA 765 1,071 1,385 1,549 40% services. The company and its subsidiaries provided Consolidated EBITDAR 1,099 1,500 1,919 2,096 36% service 84 million passengers in 2013. Non-operating Income/ Expense -145 -310 -388 -421 114%
Shareholders Profit (Loss) before Tax 376 565 717 767 50% Aeroports De Paris 38.0% Tepe Insaat 8.1% Tax -83 -189 -143 -153 128% Akfen Holding 8.1% Sera Yapi 2.0% Minority Interests 7 10 13 14 50% Free Float 40.3% Other 3.5% Net Income 286 366 560 599 28%
Ratios EBIT Margin 22.2% 27.1% 27.3% 27.1% 4.9 pp
EBITDA Margin 29.8% 33.1% 34.3% 35.3% 3.3 pp
EBITDAR Margin 46.9% 46.4% 47.5% 47.8% -0.5 pp
Net Income Margin 11.1% 11.3% 13.9% 13.7% 0.2 pp
Balance Sheet 2012 2013E 2014E 2015E 13E/12
Current Assets 1,701 2,295 1,467 1,737 35%
Cash and Cash Equivalents 93 230 -554 -429 147%
Short-Term Trade Receivables 310 487 520 591 57%
Inventories 16 24 26 29 47%
Other Current Assets 1,282 1,555 1,476 1,545 21%
Long Term Assets 3,279 4,151 5,223 5,869 27%
Total Assets 4,981 6,446 6,690 7,606 29%
Short Term Liabilities 1,137 1,556 1,576 1,729 37%
Short-Term Financial Loans 505 599 557 570 19%
Short-Term Trade Payables 100 152 163 185 52%
Other Short-Term Liabilities 532 804 857 974 51%
Long Term Liabilities 2,578 3,069 2,861 2,943 19%
Long-Term Financial Loans 2,411 2,860 2,657 2,723 19%
Other Long-Term Liabilities 167 209 204 220 25%
Shareholders Equity 1,265 1,822 2,253 2,933 44%
T. Liabilities & Sh. Equity 4,981 6,446 6,690 7,606 29%
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Investment Positives
Well positioned to benefit from strong passenger volumes in growing markets TAV Airports, the leading airport operator in Turkey, operates 13 airports (4 in Turkey, 2 in Georgia, 2 in Tunisia, 2 in Macedonia, one in Saudi Arabia, one in Latvia and one in Croatia). TAV Airports provides services in all areas of airport operations such as duty free, food and beverage, ground handling, IT, security and operations services. Going forward, we believe the outlook for traffic growth in the regions where TAV Airports operates remains positive thanks to the underpenetrated nature of the air traffic market in the high growth regions. The Turkish aviation industry has demonstrated an outstanding performance on the back of strong pax growth following the market deregulation in 2003. Between 2007 and 2013, period, total pax numbers in the Turkish aviation market increased at a CAGR of 13% to reach 150mn. TAV Airports’ pax numbers increased at a CAGR of 19% between 2007-2013. Outside Turkey, there was eye-catching growth in passenger numbers in Macedonia (17%) and Georgia (18%) in 2013. Overall, TAV Airports registered 17% pax growth in 2013 to reach a count of 84mn, with domestic passengers accounting for 43% of total pax.
Seeking new opportunities coupled with synergies with Aeroport de Paris We expect TAV Airports, together with its main shareholder, Aeroports de Paris, to seek new business opportunities both in Turkey and abroad. Aeroport de Paris and TAV Airports now offer a global footprint with a platform of 37 airports under management representing 200mn pax. The extensive know-how of both companies in airport management and operations will enhance the competitiveness of the duo in forthcoming tenders. The consortium, in which TAV Airports holds a 15% stake, recently took over operations at the relatively small Zagreb International Airport on December 5,2013. The Consortium will incur capex until the end of 2016, increasing the airport’s capacity from 2mn to 5mn; the capacity is eventually projected to increase to 8mn. New terminal tenders are expected to held in Turkey like Bodrum, Dalaman (in March 2014) and for Saudi Arabian cities like Riyadh and Jeddah. Dalaman and Bodrum airports served 7.7mn passengers in 2013, indicating 5% YoY growth. We expect TAV Airports to participate in the tender but we believe the competition will be fierce - as observed in Istanbul’s third airport tender back in May 2013, when TAV Airports placed the third best offer. Furthermore, the company has shown an interest in the Indian GMR’s entire 40% stake in Istanbul’s second largest airport, Sabiha Gokcen Airport (SAW), but in regard to first right of refusal, the other partner in SAW - Malaysia Airports - acquired the 40% stake for EUR225mn. We would also note that La Guardia’s terminal improvement and management tender could prove another source of new business. On a separate note, TAV Construction (not a subsidiary but has same shareholder) is the world’s second largest airport construction company, principally active in the MENA region, which could provide opportunities for TAV Airports.
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A relatively defensive business in airline sector We believe TAV Airports has a diversified balanced portfolio both operationally and regionally. As mentioned before, TAV Airports has a presence in six different countries where are underpenetrated in terms of air traffic, delivering above average growth in passenger volumes which reduces country specific risks to some extent. Furthermore, the company is exposed to both non-cyclical operations (such as terminal operation and ground handling) as well as highly cyclical operations (such as duty-free, food and beverage). Thanks to this composition of operations, oil price fluctuations do not present a major risk for TAV Airports, in contrast with airlines.
Operational leverage Once the major investments in airport construction are completed, the majority of cash cost become fixed as rent expenses with no immediate need for additional recruitment due to surging passenger volumes. Rental expenses and personnel expenses constitute 14% and 21% of total revenues, respectively. Therefore, by the nature of business, growing volumes mean increasing operational leverage; and we believe this is the main reason behind the improvement in EBITDA (a 50% CAGR between 2006 and 2012) while revenues recorded an 18% CAGR during the same period.
Capacity increase at Istanbul Ataturk Airport (IAA) is another plus IAA is the flagship of TAV Airports, accounting for 36% of overall revenues and 61% of total passengers in 2013. In addition, IAA provides almost half of TAV Airports’ consolidated EBITDA. Therefore, we attach more importance to IAA regarding TAV Airports’ profitability. According to our calculations every 1% increase on top of our 2013-2020E CAGR estimate of 5% in total pax of IAA increases our target Mcap of TAV Airports by 2%. IAA served 51mn passengers in 2013 (up 15% YoY), just short of its 60-65mn capacity. However, the capacity constraint is less of concern now as the government plans to increase the capacity at the airport by 30%. We incorporate the above mentioned capacity enhancements and forecast that pax numbers at IAA will rise to 73mn by 2020.
Investment Negatives
Lower than expected organic growth The global economic slowdown has had a negative impact on the entire aviation industry, including airport operators, through lower air traffic activities. A slowdown in air traffic could be considered as the major risk for TAV Airports. On the other hand, as most of TAV Airports’ investments have been completed in previous years, and given that most of the countries where the company has a presence in are developing countries, we believe TAV Airports is in a relatively advantageous position. Although we believe there are strong growth prospects in terms of passenger numbers and air traffic movement at the airports where TAV Airports operates, the airline sector does face a number of risks such as terrorist attacks, wars and natural disasters which could curb demand for air travel at any time, curtailing the company’s organic growth. Hence, our valuation is obviously highly sensitive to passenger growth forecasts.
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The difficulty of replacing IAA and its high dependence on the airport Based on our assumptions, IAA accounts for 45% of our target net asset value. TAV Airports hold the concession for IAA until 2021; however, IAA will be closed to scheduled flights when Istanbul’s new airport enters operation. Although TAV Airports will receive compensation for any loss of profit arising from the opening of the new Istanbul airport opening before 2021, we believe investors are still focused on how the Company will replace Istanbul Ataturk Airport. Although the Aeroport de Paris partnership provides a global footprint when it comes to seeking opportunities, we believe it could prove extremely difficult to find an asset to compensate IAA’s profitability, as the tenders mentioned above on page 84 do not offer the degree of growth offered by IAA, or add value to TAV Airports to any extent comparable to IAA. High dependence on IAA is also means a high dependence on THY’s business, since THY accounts for almost 75% of IAA pax volumes.
Country specific risks Operating in seven different countries, TAV Airports is vulnerable to country specific risks such as political, regional and economic risks. For example, the ongoing civil unrest in Tunisia limits the visibility of its operations there. We would not rule out potential political tensions between Russia and Georgia, or regional risks in Syria, Iraq or Iran.
Exposure to the retail business Since the share of the retail business (duty-free and food & beverage) in total revenues has been increasing, a deterioration in demand would result in lower than expected revenues and could leave the company less resilient in the face of economic downturns.
VALUATION
Sum-of-the-Part (SOTP) Valuation
2014-end target price of TL18.80/share. We value TAV Airports using sum-of the parts (SOTP) analysis based on target Net Asset Value (NAV). We employed DCF analysis to value each of the Company’s operations separately. Our valua- tion is solely based on DCF, as we believe DCF analysis is the most appropriate means of reflecting TAV Airports’ long-term growth potential as well as TAV Air- ports’ well designed structure. We only valued TAV Airports’ existing airport opera- tions, not taking into account any terminal value and assuming that the Company would neither win any new tenders, nor would it be awarded another term upon expiry of its current concession agreements. On the other hand, as the services companies’ operations will not end with the expiry of operating rights at the air- ports, we did include a terminal value in calculating the value of the services com- panies. We put HAVAS to our valuation on its transaction value in late 2012. TAV had paid EUR80mn for 35% of HAVAS at that time.
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TAV Airports Concession Equity Value Valuation TAV's stake Contribution % share SOTP Valuation Due (€mn) Method (€mn) (€mn) in total Airport Operations 2,657 2,105 82% TAV Istanbul Jan-21 1,168 DCF 100% 1,168 45% TAV Izmir Jan-32 124 DCF 100% 124 5% TAV Esenboga May-23 144 DCF 100% 144 6% TAV Gazipaşa May-34 15 DCF 100% 15 1% TAV Tunisie May-47 264 DCF 67% 177 7% TAV Georgia Jan-27 241 DCF 76% 183 7% TAV Macedonia Mar-30 38 DCF 100% 38 1% TAV Medina 2037 663 DCF 33% 219 9% TAV Zagreb 2042 246 DCF 15% 37 1% Services 675 467 18% ATU 357 DCF 50% 179 7% HAVAS 229 Transaction Value 100% 229 9% BTA 90 DCF 67% 60 2% TOTAL 2,572 (-) Others (€mn) 187 Target Value for TAV Airports (€mn) 2,385 Current Mcap (€mn) 1,886 2014-end target price per share (TL) 18.80 Current share price (TL) 15.75 Upside potential 19% Source: Garanti Securities Peer Group Comparison
We base our fair value estimate for TAV on DCF, mainly in view of the important differences between the company and its peers, such as i) its growth potential, ii) its revenue structure and iii) its business structure. However, we did present a peer group comparison for instructive purposes.
Most of TAV’s European peers totally own the airports they operate, and therefore a terminal value is calculated when valuing these airports. Conversely, TAV Air- ports operates its airports under the BOT scheme or operational lease agreement. As a result of this difference, we have not carried out a peer comparison in our fair value calculation.
Peer Comparison EV/SALES EV/EBITDA P/E Company Country MCAP (US$) 2014 2015 2014 2015 2014 2015 Airports of Thailand PCL THAILAND 7,470 6.28 5.56 11.8 10.1 20.6 17.1 Beijing Capital International Airport Co Ltd CHINA 3,255 4.12 3.83 7.5 6.9 12.7 10.7 Auckland International Airport Ltd NEW ZEALAND 4,037 12.49 11.84 16.7 15.8 28.6 26.4 Fraport AG Frankfurt Airport Services Worldw ide GERMANY 6,898 3.44 3.29 10.3 9.6 19.6 16.7 Sydney Airport AUSTRALIA 7,673 12.77 12.13 15.9 15.0 44.4 38.7 Mcap Adjusted Average 7.9 7.4 12.7 11.7 26.8 23.2 TAVHL multiples 2,572 2.61 2.09 7.89 6.10 10.2 9.5 Discount/Premium -67% -72% -38% -48% -62% -59% Source: Bloomberg, Garanti Securities
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Recommendation: Market Perform. TAV Airports is Turkey’s leading airport ter- minal operator. The Company operates Istanbul Ataturk, Ankara Esenboga and Izmir Adnan Menderes Airport, located in Turkey’s three largest cities. TAV Air- ports’ business structure ensures high operating leverage, and since the passen- ger fees are mainly fixed, higher volumes going forward will be the major growth driver for TAV, also supporting the company’s retail operations. In addition to a solid long term outlook, we believe the company should benefit from the current macro environment, as the lion’s share of revenues are based in hard currencies. Moreover, we believe that the Company is a good proxy to benefit from growth in number of pax in Turkey without the fuel risk. Our DCF based SOTP analysis sug- gests a 2014-end target share price of TL18.80 for TAV Airports; offering 19% upside potential. Therefore, we reinitiate our coverage of TAV Airports with a Mar- ket Perform recommendation. The Company has outperformed the BIST-100 by 102% in 2013 and by 8% so far in 2014, a trend we would attribute to the compa- ny’s revenue structure, which is mostly € and $ denominated, and its strong oper- ational performance along with the mounting expectations of a delay in the third airports project and planned capacity expansion in its flagship Istanbul Ataturk Airport.
Risks. Key risks include a slowdown in passenger traffic growth, increasing political tensions in its regions of operation, failure to replace IAA or overpaying in acquisitions.
HOW WE STAND ALONGSIDE THE CONSENSUS
According to the forecasts compiled by Bloomberg, we are generally in line with consensus at the top line for 2013E and 2014E; however, our 2014E EBITDA forecasts is 11% higher than the consensus estimate, probably recent appreciation of EUR is not in forecasts yet.
Consensus vs. Our estimates TAVHL Bloomberg Garanti Securities Difference (TLmn) 2013 2014 2015 2013 2014 2015 2013 2014 2015 Net Sales 3,306 3,738 4,103 3,232 4,044 4,382 -2% 8% 7% EBITDA 1,059 1,250 1,396 1,071 1,385 1,549 1% 11% 11% Net Profit 413 563 652 366 560 599 -11% 0% -8% EBITDA Margin 32.0% 33.4% 34.0% 33.1% 34.3% 35.3% 1.1% 0.8% 1.3% Net Income Margin 12.5% 15.1% 15.9% 11.3% 13.9% 13.7% -1.2% -1.2% -2.2% Target Share Price 17.24 18.80 9% Source: Bloomberg, Garanti Securities
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Sensitivity to FX rates
TAV Airports reports in EUR vs. its share price in TL. Since 67% of total revenues are in hard currencies, the company is highly exposed to FX volatility through its businesses while 45% of its costs are in TL. Hence, TL weakness bodes well for the company operationally, According to the 9M13 dipnotes, a 10% weakening of EUR against TL and USD would reflect as EUR 9.3mn and EUR9.5mn FX income on the income statement.
TAV Airports Revenue by currency TAV Airports Expenses by currency
9M13 9M13
Other, 8% Other, 6% EURO, TL, 33% EURO, 33% 46% TL, 45% USD, 14% USD, 15%
Source: The Company
THE COMPANY OVERVIEW
TAV Airports operates four airports in Turkey; Istanbul Ataturk Airport (Lease Agreement), Ankara Esenboga Airport (BOT), Izmir Adnan Menderes Airport (BOT) and Gazipasa Airport (Concession). All first three Turkish airports are among Turkey’s five largest airports. In addition, TAV operates two airports in Tunisia, two airports in Macedonia and two in Georgia. A consortium formed by TAV Airports Holding, the Saudi Oger Ltd. and Al Rajhi Holding Group had signed a BTO contract for the Medinah Airport tender, with TAV Airports holding a 33% stake in the consortium. The consortium will operate Medina Airport for a period of 25 years under the BTO scheme. The Company also has some service companies in its portfolio, such as ATU, BTA and HAVAS, which create synergies with its airport operations. Through ATU, TAV has a duty free operations in Riga International Airport in Latvia. TAV has recently acquired 15% stake in Zagreb International Airport.
TAV Airports ownership
3.5% Aeroports De Paris Tepe Insaat 38.0% Akfen Holding 40.3% Sera Yapi Free Float Other 8.1% 2.0% 8.1%
Source: The Company data
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TAV Airports Holding
Source: The Company
Business Segments Airport operations (Aviation) and Services (Retail) are TAV Airports’ two major business segments.
Airport Operations TAV Airports’ main business area is the management of airports and the company currently manages 13 airports. In its three Turkish airports, TAV only operates the landside (airside is operated by the state-owned DHMI), while in Georgia, Gazipasa, Macedonia and Tunisia, the contract covers the airside as well.
TAV Airports’ operations in the aviation sector comprise of four airports in Turkey; Istanbul Ataturk Airport (Lease Agreement), Ankara Esenboga Airport (BOT), Izmir Adnan Menderes Airport (BOT) and Gazipasa Airport (Concession).
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There are two major types of airport operation:
1-Concession/Lease: TAV pays a fixed rent payment in return for the right to operate Istanbul Ataturk Airport and Gazipasa Airport.
2-BOT Contracts: TAV undertakes the necessary construction/investment to build the airport in return for a guaranteed passenger number of pax in Ankara and Izmir.
TAV Airports has BOT+ Concession model as well, briefly combining above two types, in airports in Macedonia, Saudi Arabia and Croatia
The company aims to expand its non-regulated revenues (services and commercial revenues) and expand its portfolio by bidding for new concessions in and outside Turkey.
Service Operations The Company runs its duty-free operations under the ATU umbrella. ATU is a 50/50 joint venture between TAV and Unifree (a Turkish retailer majority owned by Heinemann, a retailer involved in duty-free operations in Germany) operating as the sole operator of duty-free stores at airports operated by the Company (excluding Monastir Airport, but including Riga Airport which is not operated by TAV Airports). In addition, TAV Airports holds a 67% stake in BTA, which manages restaurants and food shops. In Istanbul Ataturk Airport’s international terminal, BTA manages 146 outlets with a total seating capacity of 12,500 and the Airport Hotel in Istanbul.
KEY ASSUMPTIONS & FORECASTS
TAV Airports operates the terminals under lease agreements or BOT and BTO contracts, and therefore all airport operations have a finite term. Although the Company may well be in a favoured position to extend its contracts at the end of the contract period, we have not assumed any terminal value for the airport terminal operations.
TAV Airports also has interests in some services companies such as HAVAS, ATU and BTA. In our view, these companies do deserve a terminal value, since they will continue to operate after the airports’ concession period expires.
On the other hand, each airport runs under separate companies which are focused only on their operations. Moreover, these companies have a different debt structure and are faced with specific macro-economic risks as a result of their area of operation. Therefore, we calculated a different WACC for each operation when valuing the companies.
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Revenue Per departure (RPD) Guranteed Pax Guranteed Pax Start Type Expire Concession Fee (mn) TAV Stake Net Debt(mn)(1)Currency RPD (K) Year Istanbul Lease 01-2021 $140 + VAT 100% € 68 International US$ 15.0 Transfer € 2.5 Domestic € 3.0 Ankara BOT 05-2023 - 100% € 83 0.6mn Dom., International € 15 2007 0.75mn Intn'l for Domestic € 3 2007 +5% p.a. 2007 Izmir BOT + Lease 12-2032 €29mn starting from 2013 (6) 100% € 58 International € 15 1.0mn intn'l for 2006 Domestic € 3 2006 + 3% p.a. Gazipasa Lease 05-2034 $50,000+VAT(5) 100% € 16 International € 5 Domestic TRL 4 Tblisi BOT 11-2027 - 76% -€ 4 International US$ 22 Domestic US$ 6 Batumi BOT 08-2027 - 76% € 0 International US$ 12 Domestic US$ 7 Monastir&Enfidha BOT+Concession 05-2047 %11-26 of Revenues from 2010 to 2047 67% € 345 International € 9 Domestic € 1 Macedonia BOT+Concession 03-2030 %15 of the gross annual turnover (2) 100% € 57 Skopje € 17.5 Ohrid € 16.2 Medina BTO+Concession 2037 54.5%(4) 33% € 116 SAR 80 (3)
Zagreb BOT+Concession 04-2042 €2.0 - €11.5m fixed 15% - € €15 (7) 0.5% (2016) - 61% (2042) variable €4 (Transfer) 1) As of September 30, 2012 2) The concession fee is going to be 15% of gross annual turnover until the number of pax using the tw o airports reaches 1mn, and w hen the number of pax exceeds 1mn. 3) SAR 80 from both departing and arrivign international pax. Pax charge w ill be increase as per cumulative CPI in Saudi Arabia every 3 years. 4) The concession charge w ill be reduced to 27.3% for the first 2 years that follow the copletion of the construction. 5) TAV Gazipaşa shall make a yearly rent payent of US$50,000+VAT as a fized amount, until the end of operation period; as w ell as a share of 65% of the net profit to the DHMI. 6) Cash basis 7) €10, €4, €4 before April 2014 respectively for international, domestic and transfer pax
Istanbul Ataturk Airport
Istanbul Ataturk Airport (IAA), Turkey’s largest airport in terms of passenger traffic, accounts for more than 61% of TAV Airport’s total passenger traffic. Total passenger traffic at Istanbul Ataturk Airport rose by 14% YoY in 2013, reaching 51mn (a total of 17mn domestic passengers used IAA, marking 13% YoY growth, with 34mn international passengers using the airport, up 14% YoY). Istanbul Ataturk Airport’s car park is also one of Europe’s largest car parks under a single roof. We are very conservative on pax growth at IAA and we expect IAA to register a 5% CAGR in pax numbers over the 2013-2021 period.
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DCF for Istanbul Ataturk Airport (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E Total Pax (mn) 55.9 58.4 61.0 63.8 66.6 69.6 72.7 Total Revenues (mn) 474.6 495.5 517.3 540.1 564.0 588.9 614.9 EBITDAR 359.5 375.3 391.9 409.2 427.2 446.1 465.8 EBITDAR Margin 76% 76% 76% 76% 76% 76% 76% EBITDA 232.4 253.0 271.3 288.6 306.6 325.5 345.2 EBITDA Margin 49% 51% 52% 53% 54% 55% 56% Tax -46.4 -50.3 -53.9 -57.4 -61.0 -64.8 -68.7 Chg in WC -0.4 -0.2 -0.2 -0.2 -0.2 -0.2 -0.3 Capex -4.1 -4.2 -4.2 -4.2 -4.3 -4.3 -4.4 FCF 181.6 198.3 212.9 226.7 241.1 256.1 271.8 WACC 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% Discount Factor 1.00 1.08 1.18 1.27 1.38 1.50 1.63 PV of FCF(2014-2020) 181.6 182.8 181.1 177.8 174.4 170.9 167.2 Sum of PV of FCF(2014-2020) 1,236 Terminal Value 0 Net Debt (as of 9M13) 68 Value of TAV Istanbul 1,168 TAV Stake % 100% TAV Stake (€mn) 1168 Source: Garanti Securities Ankara Esenboga Airport
Tepe-Akfen signed the BOT contract for Ankara Esenboga Airport in 2004. The construction was to be completed in a period of 36 months with an operation period of 15 years and 8 months. The project carried an investment cost of €250mn. Since the construction was completed a year ahead of schedule, the operation period increased by one year accordingly. TAV Esenboga started operations on October 16, 2006 and TAV Airports currently holds a 100% stake in TAV Esenboga. We project that Ankara Esenboga Airport will record a CAGR of 4% in the 2013-2023 period.
DCF for Ankara Esenboga Airport (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Total Pax (mn) 11.7 12.2 12.7 13.2 13.7 14.3 14.8 15.4 16.1 16.7 Total Revenues (mn) 53.5 56.2 58.9 61.8 64.9 68.1 71.4 75.0 78.7 82.5 EBITDA 30.7 32.1 34.0 36.0 38.0 40.2 42.6 45.0 47.6 50.4 EBITDA Margin 57% 57% 58% 58% 59% 59% 60% 60% 61% 61% Tax -4.9 -5.1 -5.5 -5.9 -6.3 -6.8 -7.2 -7.7 -8.2 -8.8 Chg in WC 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Capex -1.0 -1.0 -1.1 -1.1 -1.1 -1.1 -1.1 -1.1 -1.1 0.0 FCF 24.8 25.9 27.4 29.0 30.6 32.4 34.2 36.2 38.2 41.6 WACC 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% Dicount Factor 1.00 1.08 1.16 1.25 1.35 1.45 1.56 1.68 1.81 1.95 PV of FCF(2014-2023) 24.8 24.1 23.6 23.2 22.8 22.3 21.9 21.5 21.1 21.3 Sum of PV of FCF(2014-2023) 227 Terminal Value 0 Net Debt (as of 9M13) 83 Value of Ankara Esenboga Airport (€ mn) 144 TAV Stake % 100% TAV Stake (€mn) 144 Source: Garanti Securities
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Izmir Adnan Menderes Airport
Following the Group’s restructuring in December 2006 and January 2007, TAV Izmir became a 100% owned subsidiary of TAV Airports. The project cost €174mn, and the operating period will end in 2015. In November 2011, TAV Air- ports won the tender for the leasing of the operating rights of Izmir Adnan Mende- res Airport’s existing International Terminal, CIP and Domestic Terminal (€250mn capex for domestic terminal and €610mn concession). The company will build a new terminal to increase the annual passenger capacity of the terminals to 25mn. TAV Airports already holds the operating rights of Izmir Adnan Menderes Airport International Terminal until 2015, and shall maintain these operating rights until the end of 2032, as the winning party. Izmir Adnan Menderes served 10.2mn pax in 2013, while the domestic terminal served 2.5mn pax in the same period.
DCF for Izmir Adnan Menderes Airport (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E-2032E Total Pax (mn) 10.9 11.6 12.4 13.3 14.2 15.1 16.2 307.4 Total Revenues (mn) 66.0 69.5 76.0 81.2 86.8 92.7 99.1 1878.8 EBITDA 32.8 2.1 8.6 13.8 19.4 25.3 31.7 1070.0 EBITDA Margin 50% 3% 11% 17% 22% 27% 32% 57% EBITDAR 43.0 37.5 44.0 49.2 54.8 60.7 67.1 1494.8 EBITDAR Margin 65% 54% 58% 61% 63% 65% 68% 80% Tax -4.8 0.0 0.0 0.0 -0.9 -2.1 -3.4 -178.7 Chg in WC 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -1.2 Capex -62.5 -62.5 -62.5 -5.0 -2.0 -2.0 -2.0 -24.0 FCF -34.5 -60.4 -53.9 8.8 16.4 21.2 26.2 866.1 WACC 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% Discount Factor 1.00 1.09 1.19 1.30 1.42 1.55 1.69 PV of FCF(2014-2032) -34.5 -55.4 -45.3 6.8 11.6 13.7 15.6 270.0 Sum of PV of FCF(2014-2032) 182 Terminal Value 0 Net Debt (as of 9M13) 58 Value of Izmir Adnan Menderes Airport (€ mn) 124 TAV Stake % 100% TAV Stake (€mn) 124 Source: Garanti Securities
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Gazipasa Airport
Gazipasa Airport, offering short transfer times to holiday resorts located to the east of Antalya, aims to become a tourism base for the region. In August 2007, TAV Airports was awarded the tender to operate Antalya Gazipasa Airport for a period of 25 years. The airport offers significantly shorter transfer times to nearby holiday resorts east of Antalya when compared to the main airport located closer to the city of Antalya. The Alanya region, which hosts over 2 million annual visitors, is only a 30 minute drive from Gazipasa Airport. The Gazipasa airport has a terminal building area of 2144 square meters and a capacity to handle 0.5m (will be increased to 1.5m) passengers per year. TAV Airports has extended the airport’s runway to 2000 metres to enable a wider range of aircraft operations.
DCF for Gazipasa (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E-2034E Total Pax (mn) 0.4 0.5 0.6 0.6 0.7 0.8 1.0 1.1 43.9 Total Revenues (mn) 1.2 1.4 1.6 1.9 2.2 2.5 2.9 3.3 138.1 EBITDA 1.0 1.1 1.3 1.5 1.7 2.0 2.3 2.7 110.5 EBITDA Margin 80% 80% 80% 80% 80% 80% 80% 80% 80% Tax -0.2 -0.2 -0.3 -0.3 -0.3 -0.4 -0.5 -0.5 -21.8 Chg in WC 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Capex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 FCF 0.8 0.9 1.0 1.2 1.4 1.6 1.8 2.1 88.7 WACC 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% Dicount Factor 1.00 1.08 1.17 1.27 1.37 1.48 1.61 1.74 4.86 PV of FCF(2014-2034) 0.8 0.8 0.9 0.9 1.0 1.1 1.1 1.2 18.2 Sum of PV of FCF(2014-2034) 31 Terminal Value 0 Net Debt (as of 9M13) 16 Value of Gazipasa (€ mn) 15 TAV Stake % 100% TAV Stake (€mn) 15 Source: Garanti Securities
Georgian Operations (TAV Georgia)
TAV Airports holds a 76% stake of TAV Georgia, with the remainder of the shares held by Urban Insaat, a Turkish construction company. Located 20 km west of the capital, Tbilisi (population of around 4.7mn), Tbilisi Airport is Georgia’s largest and busiest airport, accounting for an overwhelming 98% of the country’s air traffic. TAV Georgia won the Tbilisi BOT tender held in September 2005 to build a new terminal at the airport. TAV Georgia completed the construction of the terminal at a cost of US$62mn and started operations in February 2007.
TAV Georgia also constructed the Batumi Airport terminal, which started operations in May 2007. Note that TAV Georgia is responsible for the airside and ground handling operations, as well as the terminal operations at Tbilisi and Batumi airports. TAV Georgia will also carry out all terminal and car park operations in addition to other airport activities, which include duty free, cargo, ground handling and catering services operations at these airports.
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DCF for TAV Georgia (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E # of int'l PAX (mn) 1.8 1.9 2.0 2.1 2.3 2.4 2.6 2.7 2.9 3.1 3.3 3.5 3.8 4.0 Total Revenues (€mn) 34.9 36.1 38.1 40.7 43.5 46.4 49.5 52.9 56.4 60.2 64.3 68.7 73.3 78.2 EBITDA 22.6 23.5 25.0 26.8 28.8 30.9 33.1 35.6 38.2 41.0 43.9 47.1 50.6 54.3 EBITDA Margin 65% 65% 66% 66% 66% 67% 67% 67% 68% 68% 68% 69% 69% 69% Tax -3.5 -3.7 -3.9 -4.2 -4.5 -4.9 -5.2 -5.7 -6.1 -6.6 -7.1 -7.6 -8.2 -8.8 Chg in WC 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Capex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 FCF 19.1 19.9 21.1 22.6 24.2 26.0 27.9 29.9 32.0 34.3 36.8 39.5 42.3 45.4 WACC 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% Dicount Factor 1.00 1.09 1.18 1.28 1.39 1.51 1.64 1.78 1.94 2.10 2.28 2.48 2.69 2.92 PV of FCF(2014-2027) 19 18 18 18 17 17 17 17 17 16 16 16 16 16 Sum of PV of FCF(2014-2027) 237 Terminal Value 0 Net Debt (as of 9M13) -4 Value of TAV Georgia (€ mn) 241 TAV Stake % 76% TAV Stake (€mn) 183 Source: Garanti Securities Monastir and Enfidha Airports - TAV Tunisia
TAV Airports won the BOT tender in Tunisia and will obtain the right to operate Monastir and Enfidha airports until May 2047. TAV runs its operations in Tunisia through its wholly-owned subsidiary, TAV Tunisia. Almost all passengers travelling through the Monastir Airport are international passengers, as the airport is located a touristic area of Tunisia. Enfidha Airport is located 50-60 km from Monastir.
According to the BOT agreement, TAV Tunisia will pay concession fees to the Tunisian Airport Authority over the BOT term and the concession fee rate will be subject to a linear increase from 2010, reaching 26% by the end of the BOT term.
DCF for TAV Tunisia (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E- 2047E # of int'l PAX (mn) 3.6 3.8 4.0 4.3 4.5 4.7 5.0 5.3 306.0 Total Revenues (mn) 56.2 59.4 68.7 72.6 76.7 81.1 85.7 90.6 5056.7 EBITDAR 31.8 34.5 42.2 45.5 48.9 52.5 56.3 60.4 3,876 EBITDAR Margin 57% 58% 61% 63% 64% 65% 66% 67% 77% EBITDA 24.7 26.7 33.0 35.4 38.0 40.6 43.4 46.4 2,767.8 EBITDA Margin 44% 45% 48% 49% 49% 50% 51% 51% 55% Tax -4.1 -4.3 -4.9 -5.2 -5.4 -5.7 -6.0 -6.3 -332.2 Chg in WC 0.0 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 -1.9 Capex -1.3 -1.4 -1.4 -1.4 -1.4 -1.4 -1.4 -1.4 -41.0 FCF 19.3 21.1 26.6 28.8 31.1 33.5 36.0 38.6 2,392.7 WACC 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% DiScount Factor 1.00 1.08 1.18 1.27 1.38 1.50 1.62 1.76 PV of FCF(2014-2047) 19 19 23 23 23 22 22 22 435.9 Sum of PV of FCF(2014-2047) 609 Terminal Value 0 Net Debt (as of 9M13) 345 Value of TAV Tunisia (€ mn) 264 TAV Stake % 67% TAV Stake (€mn) 177 Source: Garanti Securities
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Skopje and Ohrid Airports - TAV Macedonia
TAV Airports operates two airports in Macedonia; Skopje Alexander The Great Airport and Ohrid St.Paul The Apostle Airport. Macedonia is expected to become an EU member and we deem the EU Parliament’s decision to lift the visa requirements for Macedonians in 2009 to have been an important step.
The airports served 1mn passengers in 2013. TAV Airports is planning to boost passenger traffic in Macadonia with modernization projects which include technical infrastructure, greatly contributing to the commercial and tourism activities of Skopje and Macedonia. The St. Paul The Apostle Airport in Ohrid is to be operated by TAV Airports for a period of 20 Years. TAV Airports targets a combination of growth in passenger traffic and in the number of airlines using the airport through a series of modernization initiatives. Note that Ohrid is one of Macedonia’s prime tourist destinations, attracting 250,000 tourists per year, who come especially in the spring and summer months. This figure is expected to increase further in the coming years with the positive impact of the EU accession process.
DCF for TAV Macedonia (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E- 2030E # of PAX 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 23.5 Total Revenues (mn) 22.3 23.9 25.6 27.4 29.4 31.5 33.7 36.1 434.6 EBITDA 6.1 6.4 6.7 7.1 7.5 8.1 8.7 9.4 112.7 EBITDA Margin 27% 27% 26% 26% 26% 26% 26% 26% 26% EBITDAR 9.4 10.0 10.5 11.2 11.9 12.8 13.7 14.8 177.9 EBITDAR Margin 42% 42% 41% 41% 41% 41% 41% 41% 41% Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -6.3 Chg in WC 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.2 Capex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 FCF 6.1 6.4 6.7 7.1 7.5 8.0 8.6 9.3 106.1 WACC 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% Dicount Factor 1.00 1.07 1.14 1.22 1.30 1.39 1.48 1.59 PV of FCF(2014-2030) 6 6 6 6 6 6 6 6 48.1 Sum of PV of FCF(2014-2030) 95 Terminal Value 0 Net Debt (as of 9M13) 57 Value of TAV Macedonia (€ mn) 38 TAV Stake % 100% TAV Stake (€mn) 38 Source: Garanti Securities
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Medina Airport
A consortium of TAV Airports, the Al Rajhi Holding Group and the Saudi Oger Ltd. submitted the highest bid in the tender held by the Civil Aviation General Directorate (GACA) of the Kingdom of Saudi Arabia for the operation of Medina International Airport for a period of 25 years. The contract for the operation of Medina International Airport, as per the Build Transfer Operate model, was signed on October 29, 2011 between the consortium and the GACA.
Accordingly, the annual pax capacity of Medina Airport, currently 4mn, is to double to 8mn with the new terminal to be constructed by the first half of 2015 in a total planned investment of US$1bn. The airport’s new terminal building was commenced 1H12 and will be completed by 2015. Services shall continue to be provided through the existing terminal building until the new terminal building is completed. The service charge per passenger has been determined as 80 SAR (approximately US$21) for both incoming and outgoing international passengers throughout the operation period. A total of 54.5% of the annual turnover of the Medina Airport shall be paid as the concession lease amount to the local administration throughout the period which the airport operation rights continue, until the first half of 2037.
DCF for TAV Medina (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022-2037E # PAX (mn) 4.9 5.2 5.5 5.9 6.3 6.8 7.2 7.7 229.0 Total Revenues (mn) 106.2 125.7 132.5 141.6 151.4 186.1 198.9 212.6 9,161.2 EBITDAR 85.0 100.6 106.0 113.3 121.1 148.9 159.1 170.1 7,328.9 EBITDAR Margin 80% 80% 80% 80% 80% 80% 80% 80% 80% EBITDA 27.1 66.3 69.9 36.1 38.6 47.5 50.7 54.2 2336.1 EBITDA Margin 26% 53% 53% 26% 26% 26% 26% 26% 26% Tax 0.0 7.3 8.1 1.4 1.9 3.7 4.3 5.0 373.8 Chg in WC -1.1 -1.3 -1.3 -1.4 -1.5 -1.9 -2.0 -2.1 -91.6 Capex -307.7 -5.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -16.0 FCF -281.7 67.4 75.7 35.1 38.0 48.2 52.0 56.1 2,602.3 WACC 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% Dicount Factor 1.00 1.07 1.15 1.24 1.33 1.43 1.54 1.65 PV of FCF(2014-2037) -282 63 66 28 29 34 34 34 774 Sum of PV of FCF(2014-2037) 779 Terminal Value 0 Net Debt (as of 9M13) 116.0 Value of TAV Medina (€ mn) 663 TAV Stake % 33% TAV Stake (€mn) 219 Source: Garanti Securities
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Zagreb Airport
In December 2013, the consortium (in which TAV Airports holds a 15% stake in) took over operations at the relatively small Zagreb International Airport. The Consortium will incur capex until the end of 2016 as it increases capacity from 2mn to 5mn pax. The capacity will eventually increase to 8mn.
DCF for Zagreb International (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E-2042E Total Pax (mn) 2.5 2.7 2.8 2.9 3.1 3.2 3.3 3.5 118.8 Total Revenues (mn) 60.8 96.7 102.7 108.9 115.5 122.5 129.8 137.6 5436.9 EBITDAR 23.8 37.4 39.3 41.2 43.1 45.2 47.4 49.6 1935.5 EBITDAR Margin 39% 39% 38% 38% 37% 37% 36% 36% 36% EBITDA 21.5 35.0 36.7 38.5 40.3 42.2 44.2 46.2 1792.3 EBITDA Margin 35% 36% 36% 35% 35% 34% 34% 34% 33% Tax -4.8 -7.5 -7.9 -8.2 -8.6 -9.0 -9.5 -9.9 -362.8 Chg in WC 0.0 -0.4 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -2.9 Capex -108.9 -108.9 -108.9 0.0 0.0 0.0 0.0 0.0 0.0 FCF -92.1 -81.7 -80.1 30.2 31.6 33.1 34.6 36.2 1426.6 WACC 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% Discount Factor 1.00 1.08 1.16 1.25 1.34 1.45 1.56 1.68 PV of FCF(2014-2042) -92 -76 -69 24 24 23 22 22 369 Sum of PV of FCF(2014-2042) 246 Terminal Value 0 Net Debt 0 Value of Zagreb International (€ mn) 246 TAV Stake % 15% TAV Stake (€mn) 37 Source: Garanti Securities
Valuation of Services Operations
TAV Airports acquired 35% of HAVAS for EUR80mn in 2012 and increased its stake to 100%. HAVAS is Turkey’s first and oldest ground handling company. The company serves both scheduled and chartered flights in 23 airports. The Company provides passenger transport services between some of the airports and city centres. TAV Airports may offer HAVAS to the public once the profitability of the entity meets expectations. As of 9M13, HAVAS generated EUR185mn of revenue (up 15% YoY) and EUR34mn of EBITDA, implying a 19% EBITDA margin. HAVAS had a net debt position of EUR64mn as of 9M13.
The Company runs its Duty Free operations under the ATU umbrella, which is a 50/50 joint venture between TAV and Unifree (a Turkish retailer majority owned by Heinemann, a retailer involved in duty-free operations in Germany) operating as the sole operator of duty-free stores at TAV’s airports.
TAV Airports holds a 67% stake in BTA, which is the food and beverage operator at Istanbul Ataturk Airport (international and domestic terminals) as well as Ankara, Izmir, Tbilisi and Batumi, Monastir, Enfidha, Skopje and Ohrid airports. The Company operates the 131-room Istanbul Airport Hotel. BTA has a total seating capacity of around 12,500 at 146 locations.
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ATU
ATU was established as a joint venture between TAV Airports and Unifree. As of January 2011, it was the sole duty free operator at Istanbul, Izmir, Ankara airports in Turkey, Tbilisi and Batumi airports in Georgia, Enfidha airport in Tunisia, Skopje and Ohrid airports in Macedonia and Riga International Airport in Latvia. ATU, which is an enterprise constituting a good partnership collaboration model between TAV and Unifree commands large-scale operations, purchasing capacity and possesses an effective logistics network. ATU commenced operations in Riga International Airport (Latvia), in January 2011.
ATU DCF Summary (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Revenues 571.0 597.3 624.9 653.8 684.0 715.8 749.0 126.3 EBITDA 63.9 68.1 72.5 77.1 82.1 87.3 92.9 15.7 EBITDA Margin 11% 11% 12% 12% 12% 12% 12% 12% Capex -2.1 -2.1 -2.1 -2.1 -2.1 -2.2 -2.2 -2.2 Chg in WC -1.4 -1.5 -1.6 -1.6 -1.7 -1.8 -1.9 -0.3 Tax -12.6 -13.5 -14.3 -15.3 -16.2 -17.3 -18.4 -3.1 FCF 47.9 51.2 54.6 58.2 62.1 66.2 70.6 10.2 WACC 11% 11% 11% 11% 11% 11% 11% 11% Discount Factor 1.00 1.11 1.22 1.35 1.49 1.65 1.82 2.02 PV of FCF(2014-2021) 47.9 46.3 44.7 43.1 41.6 40.1 38.7 5.0 Sum of PV of FCF(2014-2021) 307.6 Terminal Grow th 1% Terminal Value 53.5 Net Debt (as of 9M13) 4 Value of ATU (€ mn) 357 TAV Stake % 50% TAV Stake (€mn) 179 Source: Garanti Securities
BTA
TAV Airports holds a 67% stake in BTA, which is the food and beverage operator at Istanbul Ataturk Airport (International and domestic terminals), Ankara, Izmir, Tbilisi and Batumi, Monastir, Enfidha and Skopje Airports. The Company operates the 131-room Istanbul Airport Hotel. Total seating capacity of BTA is around 13.500 at 145 points.
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TURKISH AVIATION SECTOR
BTA DCF Summary (€ mn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Revenues 144.6 153.0 161.9 171.4 181.4 192.0 203.3 75.3 EBITDA 14.5 15.3 16.2 17.1 18.1 19.2 20.3 7.5 EBITDA Margin 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Capex -2.6 -2.6 -2.6 -2.7 -2.7 -2.7 -2.7 -2.8 Chg in WC -0.4 -0.4 -0.4 -0.4 -0.5 -0.5 -0.5 -0.2 Tax -1.8 -1.9 -2.0 -2.1 -2.2 -2.4 -2.5 -0.9 FCF 9.7 10.4 11.2 12.0 12.8 13.7 14.6 3.7 WACC 11% 11% 11% 11% 11% 11% 11% 11% . Dicount Factor 1.00 1.11 1.22 1.35 1.49 1.65 1.82 2.02 PV of FCF(2014-2021) 9.7 9.4 9.1 8.9 8.6 8.3 8.0 1.8 Sum of PV of FCF(2014-2021) 63.9 Terminal Grow th 3% Terminal Value 24.8 Net Debt (as of 9M13) -1 Value of BTA (€ mn) 90 TAV Stake % 67% TAV Stake (€mn) 60 Source: Garanti Securities THE COMPANY PROFILE
TAV Airports Revenue Split by segment
9M12 9M13
14% 14% Duty Free Duty Free 7% 7% 32% 32% Ground Ground Handling Handling 26% Aviation 26% Aviation 20% 21%
Source: The Company data
EBITDA breakdown by segment (%)
9M12 9M13
Other, -1% HAVAS, 11% Other, 0% HAVAS, 9% BTA, 4% BTA, 3%
ATU, 8% ATU, 7% Istanbul Ataturk Airport, 52% Istanbul Other Other Ataturk airports, airports, Airport, 29% 28% 51%
Source: The Company data
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Please see the last page of this report for important disclosures. February 11, 2014 RESEARCH Aviation
TURKISH AVIATION SECTOR
Opex breakdown by segment (%)
9M12 9M13 Concession Concession rent, 9% Other, -1% rent, 11% Other, 0% Duty Free, 4% Duty Free, 3% D&A, 8% D&A, 7%
Services Catering, Services Catering, rendered, 52% rendered, 51% 29% 28%
Source: The Company data
TAV Airports Passenger Evolution
160 137 140 130 124 117 120 20% CAGR 2006-2013 112 106 101 100 84 80 72
53 60 48 41 42 40 30 23 20
0
2006 2007 2008 2009 2010 2011 2012 2013
2016E 2017E 2018E 2019E 2020E 2014E 2015E
Source: The Company, Garanti Securities
Revenue & EBITDA Development (EURmn)
1600 35.3% 40.0% 34.3% 33.1% 1400 1,473 35.0% 30.2% 29.2% 1,396 1200 30.0% 26.1% 27.0% 1,279 1000 22.5% 1099 25.0%
800 881 20.0% 15.2% 785 600 521 15.0% 640 478 7.2% 627 424 400 508 332 10.0% 257 402 212 141 167 200 77 5.0% 29 0 0.0% 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
Revenue (TLmn) EBITDA (TLmn) EBITDA margin (rhs)
Source: The Company, Garanti Securities
102
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TURKISH AVIATION SECTOR
Duty Free Spend per Pax (EUR)
17.5 17.1 17 16.6 16.5 16.5 16.3 16.1 16 15.9 16 15.8 15.7 15.5 15.1 14.9 15 14.8 14.7 14.5 14.6 14.5 14.5
14
13.5
13 2007 2008 2009 2010 2011 2012 9M12 9M13
ATU Average Istanbul
Source: The Company
Food & Beverage Spend per Pax (EUR)
2.5 2.1 2.0 2.0 1.8 1.6
1.5 1.3 1.3 1.3 1.2
1.0
0.5
0.0 2007 2008 2009 2010 2011 2012 9M12 9M13
Food & Beverage Spend per Pax (EUR)
Source: The Company ATU revenues (EURmn)
300
250 71 68 200 56 Q4 74 Q3 150 47 72 Q2 37 57 Q1 100 47 73 41 65 53 50 38 42 50 61 29 33 41 0 2009 2010 2011 2012 2013
Source: The Company, Garanti Securities, Q413 is our estimate
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TURKISH AVIATION SECTOR
# of flights served ('000)
350
300
250
200 9M12 150 9M13
100
50
0 HAVAS TGS HAVAS Europe Total
Source: The Company
TAV Passenger Figures('000) 2009 2010 2011 2012 2013 Istanbul Ataturk 29,813 32,144 37,395 45,092 51,321 Int'l 18,396 20,343 23,973 29,812 34,097 Domestic 11,417 11,801 13,422 15,280 17,224 Ankara Esenboga 6,084 7,764 8,485 9,273 10,928 Int'l 1,094 1,329 1,405 1,594 1,574 Domestic 4,990 6,435 7,080 7,679 9,354 Izmir Adnan Menderes 1,667 2,127 8,524 9,356 10,209 Int'l 2,398 2,411 2,467 Domestic 6,125 6,945 7,741 Gazipasa 80 363 Int'l 76 243 Domestic 4 120 Medinah 3,548 4,588 4,669 Tunisia 3,781 3,917 2,289 3,321 3,438 Georgia 772 910 1,191 1,388 1,643 Macedonia 636 730 838 914 1,067 TAV Total 42,118 47,593 52,597 71,526 83,638 Int'l 25,685 29,309 32,020 40,757 47,430 Domestic 16,433 18,284 20,577 30,769 36,208 Source: The Company
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Recommendation History-Turk Hava Yollari
Recommendation History-TAV Havalimanlari
Definition of Stock Ratings
OUTPERFORM (OP) The stock's return is expected to exceed the return of the BIST-100 by 2014-end.
MARKET PERFORM (MP) The stock's return is expected to be in line with the BIST-100 by 2014-end.
UNDERPERFORM (UP) The stock's return is expected to fall below the return of the BIST-100 by 2014-end. RESEARCH
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