A Bumpy Ride Ahead for Turkish Airlines and Turkey’s Economy

Alexandra de Cramer

AFP Photo: Ozan Kose

The Covid-19 pandemic has pushed the global aviation industry to the brink of collapse. In Germany, the government has had to extend national carrier Lufthansa a $10 billion rescue package, while British budget carrier Flybe and subsidiaries of Norwegian Air have filed for bankruptcy. Forecasts indicate the industry will face a 50 percent drop in revenue this year and the International Air Transport Association estimates that 32 million jobs are at risk in “the worst year in the history of aviation.”

Yet one airline apparently is bucking the trend. The chairman of Turkish Airlines, Ilker Ayci, has declared that Turkey’s national carrier would weather the crisis without any layoffs. Not only that, but there would be no job cuts for at least two years.

Turkish Airlines is not only the flag carrier of the country, but for the state, which holds a 49 percent stake in the company, it is also the engine of Ankara’s soft power projection. The prime minister, Recep Tayyip Erdogan, is also regarded as close to the airline. Ayci, for example, who had no aviation experience before being appointed chairman. His first job in 1994 was as advisor to the then mayor of Istanbul, Erdogan. Thus, more than anything else in the country, the airline’s fate and condition are seen as proxies for Turkey’s as a whole and for Erdogan. That may explain the desire to spin the airline’s conditions in a better light.

Three months of cancelled passenger flights have left just about every other airline in the world with no option but to let go of employees. Emirates Airlines, Etihad Airways and Qatar Airways – regional peers to Turkish Airlines – have all laid off staff. How has Turkish Airlines avoided that fate?

First, under the terms of a stimulus package introduced by the government on March 15, no company is allowed to cut any jobs before mid-July at the earliest. (So, yes, of course.) But Ayci is promising no job losses for two years, despite an 85 percent reduction in the airline’s traffic.

Here’s how it works. Many Turkish Airlines staff have been placed on reduced schedules, working anything from four to 12 days a month. That is a de facto cut in full-time equivalent staff, which has allowed the airline to shrink its monthly wage bill to $13 million from $172 million. In addition, employees over the age of 60 have been put on unpaid leave.

Ayci did warn that “certain sacrifices” would have to be made. He might have said, instead, “more sacrifices.” On April 5, the airline cancelled private health insurance for all 31,000 of its employees and their families – an act that the airline workers’ union called “a quick fix that creates long-term damage.”

Some savings have been achieved by selling off old planes and using empty passenger aircraft for cargo transport. There is also talk of delaying the delivery of 180 planes – originally due to arrive between 2020 and 2024 – and postponing their pre-delivery payments. But these measures alone are not enough to cover the unprecedented financial loss created by Covid-19.

The company spent heavily on the move to its new hub at Istanbul Airport in April 2019, and since then has had a 30 percent increase in its yearly expenditure because of it. It then lost $35 million in the first three months of this year through fuel-price hedges, as cash prices for fuel plunged below contracted costs.

In June, Moody’s downgraded Turkish Airlines’ rating to B3 – six notches below investment grade – from B2, and its probability of default rating to B3-PD from B2-PD. In the agency’s view, the negative outlook stems from the airline’s short-term debt of $1.4 billion and the absence of a “solid liquidity buffer.” The agency said: “[T]he reliance on short-term loans being rolled over and having uncommitted credit lines are weak sources of liquidity, and this creates greater uncertainty in the currently depressed macroeconomic environment and challenging industry outlook.”

Reuters reported that in a virtual press conference at the end of May, Ayci said passenger numbers were down 60 percent from initial expectations for the year. This is not a good sign for a brand that has predicated its business plans on an influx of passengers and on a rising number of destinations – both of which were the motivation behind the construction of the new and bigger hub.

So, then, might the travails of Turkish Airlines – so emblematic of the country – be a harbinger of further problems for the country? Indeed, so closely are the airline’s prospects identified with the state that they might serve as proxies for Turkey. With the country’s sovereign ratings at Moody’s and S&P already four notches below investment grade, get ready for a bumpy ride.

 

Alexandra de Cramer is a journalist based in Istanbul. She reported on the Arab Spring from Beirut as a Middle East correspondent for Milliyet newspaper. Her work ranges from current affairs to culture, and has been featured in Monocle, Courier Magazine, Maison Francaise and Istanbul Art News.