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Istanbul’s new airport was meant to benefit Turkey’s flag carrier, but it boosted its budget rival instead.
Pegasus Hava Tasimaciligi AS stock has outperformed Turk Hava Yollari AO, or Turkish Airlines as the company is known, by more than 95 percentage points this year. The divergence is being amplified by bets that it stands to gain amid setbacks that have plagued its rival, which is now flying primarily from a new airport 20 miles outside the city center.
Istanbul Airport — the new $11 billion Turkish Airlines hub opened in April on the foggy Black Sea coast — has been mired by reports of diverted flights, delays, and long taxi times on its runways that threaten to eat away at the carrier’s earnings. That’s been a boon for Pegasus, as passengers looking to avoid any inconvenience are now choosing Sabiha Gokcen International Airport, Istanbul’s second outlet on the Asian side of the city, where the company operates the bulk of its flights.
While the travails for Turkish Airlines are likely temporary, “Sabiha Gokcen’s strategic importance has increased,” said Behlul Katas, an analyst at Yatirim Finansman, an Istanbul-based broker, citing the distance that passengers have to travel to reach Istanbul Airport and concerns over the costs the flag carrier needs to assume at its new hub. He has an outperform rating on both Turkish Airlines and Pegasus stocks.
Representatives for Turkish Airlines and IGA, the joint venture that operates Istanbul Airport, did not immediately respond to requests for comment.
In the first five months through May, passenger traffic at Sabiha Gokcen rose 2 percent compared to the same period a year earlier while international passengers surged 19 percent, according to data from the Turkish airport authority. Traffic at Istanbul Airport and the retired Ataturk Airport combined fell 4 percent over the period, with international passengers rising a mere 0.3 percent .
The trend is as encouraging for Pegasus as it is ominous for Turkish Airlines. With a footprint larger than Manhattan, Istanbul Airport is designed to handle 90 million passengers a year by 2020 and is integral to Turkish Airlines’s bid for expansion. The company had plans to buy a majority stake in Sabiha Gokcen from Malaysia Airports Holdings Bhd earlier this year but dropped them.
Turkish Airlines is guiding for $14.1 billion in sales and 80 million passengers in 2019, according to a public filing in January.
For now though, disappointing first-quarter earnings are clouding the outlook for the company. Turkish Airlines reported a 1.25 billion liras ($210 million) loss, almost double the median estimate in a Bloomberg survey. If foreign inflows into the stock are anything to go by, investors are not hanging around for a rebound.
In May, offshore investors sold more Turkish Airlines shares than any other security on the benchmark Borsa Istanbul 100 Index, according to the latest data from the exchange. Meanwhile, inflows into Pegasus over the same period increased by $14 million.
Turkish Airlines stock has dropped 18 percent this year and was trading at 13.15 liras per share on Tuesday, having rebounded from a more than one-year low in May. Pegasus has rallied 79 percent over the period, to a five-year high of 40.98 liras per share.
Turkish Airlines has discounted the potential risks “perhaps more than any other in the market,” said Julian Rimmer, a trader at Investec Bank in London. He said the stock’s stellar performance last year aggravated its drop.
But for Ozgur Yasar Guyuldar, the head of global emerging markets sales at Raiffeisen Centrobank, the worst may be yet to come. Turkish Airlines “had to reduce volume during relocation which may negatively affect second quarter financials,” he said.
©2019 Bloomberg L.P.