REGULATION, LIBERALIZATION
AND
COMPETITION
IN THE
TURKISH DOMESTIC PASSENGER FLIGHTS MARKET
Project on Competitiveness, Investment Climate
And
The Role of Competition Policy in Turkey
July 2006
Turkish Competition Authority, Turkish Union of Chambers and Commodity
Exchanges and Foreign Investment Advisory Services of the World Bank Group
Project on “Competition Policy and the Impact of Investment Environment in
Turkey: Sectoral/Institutional and Legal Framework” financed by the Economic
Policy Research Institute TEPAV/EPRI.
1
TABLE OF CONTENTS
ACKNOWLEDGMENTS _________________________________________ 4
I. INTRODUCTION______________________________________________ 5
II. THE EU EXPERIENCE ________________________________________ 8
II.1. The Liberalization Process of the Air Transport Sector in the EU _____ 8
II.2. Community Regulation______________________________________ 9
III. THE AIR TRANSPORT SECTOR IN TURKEY_____________________ 14
III.1. Background and Historical Summary of the Sector ______________ 14
III.2. Public Authorities and Institutions ____________________________ 15
III.3. The Privatization Efforts ___________________________________ 16
IV. THE EFFECTS OF LIBERALIZATION IN THE TURKISH DOMESTIC
PASSENGER FLIGHTS MARKET ________________________________ 17
IV.1. AIRLINES______________________________________________
IV.1.1. Turkish Airlines Inc. ___________________________________
IV.1.2. Onur Air ____________________________________________
IV.1.3. FLY Air_____________________________________________
IV.1.4. Atlasjet Airlines ______________________________________
IV.1.5. Pegasus Airlines _____________________________________
17
23
24
25
25
26
IV.2. GROUND HANDLING ____________________________________ 27
IV.3. AIRPORTS_____________________________________________ 32
V. MAIN PROBLEMS OF THE INDUSTRY AND RECOMMENDATIONS FOR
IMPROVEMENTS OF THE COMPETITION IN THE SECTOR ___________ 35
V.1. POTENTIAL AND CURRENT ENTRY BARRIERS THAT LESSEN OR
PREVENT THE COMPETITION IN THE SECTOR __________________ 35
V.1.1. Legal and regulatory conditions for entry ___________________ 35
V.1.2. Reputation, Brand Identity and Switching Cost_______________ 36
V.1.3. Absence of Licensed Personnel __________________________ 36
V.2. MAIN PROBLEMS OF THE INDUSTRY_______________________
V.2.1 Slot Allocation ________________________________________
V.2.2. Government Support to Airlines __________________________
V.2.3. Airport Services and Aviation Charges _____________________
V.2.4. Ground Handling _____________________________________
V.2.5. Other Issues _________________________________________
37
37
38
39
41
41
V.3. RECOMMENDATIONS FOR IMPROVEMENTS OF THE
COMPETITION IN THE SECTOR _______________________________ 42
V.3.1. Airlines _____________________________________________ 42
V.3.2. Airports, Slots and Ground Handling_______________________ 46
VI. CONCLUSION _____________________________________________ 47
APENDIX 1: COMPETITION ANALYSIS ___________________________ 49
APENDIX 2: COMPETITIVITY ANALYSIS __________________________ 55
BIBLIOGRAPHY ______________________________________________ 62
2
TABLE OF FIGURES
Table-1: The number of domestic and international passengers
6
Table-2: The number of airline companies by years
18
Table-3: Turkish airline companies’ scope of license
18
Table-4: Total Number of Planes and Seat Capacities
19
Table-5: The number of domestic passengers carried by airline companies
20
Table-6: The number of domestic passengers and number of domestic flights
21
Table-7: The number of domestic passengers in major airports
22
Table-8: % change in the number of domestic passengers for each airport
23
Table-9: The tariff for A and C Group ground handling services licenses
28
Table-10: The tariff for B Group ground handling services licenses
29
Table-11: Prolongation fees for A and C Group ground handling services licenses
29
Table-12: Prolongation fees for B Group ground handling services licenses
30
Table-13: The licenses of Havas and Celebi
30
Table-14: Airline companies possessing B Group licenses
32
Table-15: The number of Airports in Turkey by years
33
Table-16: Airports in Turkey
34
Chart-1: The number of domestic an international passengers
6
Chart-2: Seat Capacities
20
Chart-3: Passenger and Plane Traffics in Domestic Lines
22
3
ACKNOWLEDGMENTS
We would like to thank, Director General of General Directorate of Civil
Aviation Topa Bilgettin TOKER, Acting Deputy Director General of Directorate
General of Civil Aviation Haydar YALÇIN, Vice President of Turkish Private
Sector Aviation Enterprises Association A. Adil SERIM, Commercial Executive
Vice President of Turkish Airlines Kadir Fazlı DANIŞMAN, Slot Coordination
Manager of Turkish Airlines Billur ATAGÜNDÜZ, General Coordinator of
Pegasus Airlines Cemalettin ÇELEBI, Assistant General Directors of MNG
Airlines Hakkı ÖZTEKIN and A. Sedat ÖZKAZANÇ, Vice President of Atlasjet
Airlines A. Murat ERSOY and Assistant General Manager of Fly Air Kaya
NOMALER for their contributions and cooperations in the framework of our
interviews during summer and fall of 2004. We would also like thank President
of TPAEA and General Manager of Onur Airlines Sahabettin BOLLUKCU,
General Manager of Pegasus Airlines Sertaç HAYBAT, Assisstant General
Manager of Fly Airlines Cengiz BORA, Assistant General Manager of Atlasjet
Airlines Batuhan KARATAŞ and Assistant General Manager of Turkish Airlines
Orhan SİVRİKAYA for their cooperations and contributions with the project
during July 2006. We would also like to express our special thanks to Prof. Dr.
Hasan ERSEL and Dr. Emre DELIVELI from TEPAV/EPRI and R. Shyam
KHEMANI from the World Bank for their valuable comments and contributions.
The views expressed in this paper are those of the authors, and do not
necessarily represent the views of the Turkish Competition Authority, Turkish
Union of Chambers and Commodity Exchanges and Foreign Investment
Advisory Services of the World Bank Group
4
REGULATION, LIBERALIZATION AND COMPETITION
IN THE TURKISH DOMESTIC PASSENGER FLIGHTS MARKET
I. INTRODUCTION
This paper, which is a part of the Project entitled “Competitiveness,
Attraction of Foreign Direct Investment and The Role of Competition Policy in
Turkey” that is pursued by the Association of Chambers and Exchanges of
Turkey, together with the World Bank and the Turkish Competition Authority,
attempts to analyze the regulation, liberalization and competition in the Turkish
domestic passenger flights market which has been liberalized recently, in
October 2003.
Although the market includes both the scheduled and charter flights, the
paper mainly focuses on the scheduled flights since there used to be charter
flights before the liberalization. The paper first gives a general overview about
the liberalization process of the air transport sector in the EU and the
Community Regulation. An analysis of the structure of the air transport sector in
Turkey, including a background and historical summary, the public authorities
and the privatisation efforts will be made in the next chapter. The following
chapter deals with the effects of liberalization in the Turkish domestic passenger
flights market. In this respect, the three main players of the sector, namely the
airlines, ground handling and airports will be analyzed in detail from a
competition perspective. The final part of the paper is devoted to the main
problems of the industry and recommendations for improvements of the
competition in the sector. In this chapter, the views of the reporters on the
issues that are hindering competition in the market as well as possible
regulatory actions that should be taken to increase competition in the market
will be given; in this respect, the potential and current entry barriers will be dealt
with as well as the definitions of the problems and recommendations for
improvements related with slot allocation, ground handling and airport usage. A
competition and competitivity analysis of the market based on Michael Porter1’s
“diamond” will be made in the appendix, analyzing entry barriers, rivalry
determinants, determinants of supplier power, determinants of substitution
threats, determinants of buyer power, threat of new entrants, bargaining power
of suppliers, threat of substitutes and bargaining power of buyers.
The liberalization of air travel is very important not only for the sector
itself but also for the economy as a whole. According to a study done in the
European Union by the EC in 20042, the transport sector generates 10% of EU
wealth measured by gross domestic product, equivalent of one trillion Euros a
year and it provides more than ten million jobs in the EU10. The airline sector
has a very important share in the whole transport sector and its share is also
getting more and more important as the speed and efficiency is becoming more
important, as well as the lower prices after the liberalization of the air market are
making the sector more attractive for consumers and businesses. The
liberalization of air travel has not only brought competition and lower fares but
also an increase of 30% in connections between member states since 1993.
1
2
“Competitive Advantage” by Michael Porter (1985), Free Press, New York (p.6)
Directorate-General for Energy and Transport, Report 2000-2004, p 8
5
The importance of liberalization and competition has long been
recognized in Turkey as well, and in fact the existing law was not enforcing a
monopolistic market, however the regulations had made the entry almost
impossible. The privatization efforts of Turkish Airlines had also shadowed the
importance of liberalization as priority was given to the former.
Excluding the charter flights, the Turkish domestic passenger flights
market was until very recently served only by Turkish Airlines (herein after
referred as TA). As of October 2003 the companies have started to provide
service in domestic routes, hence changing the market radically by introducing
competition into the market and significantly increasing the number of
passengers using air-transport. In order to provide a general view on the
market, the table and the chart are given below which demonstrate the total
number of domestic and international passengers by the end of 2005.
Table–1: The number of domestic and international passengers
The Number of Passengers
Domestic
International
Total
10.347.528
17.419.851
27.767.379
10.862.539
19.918.123
30.780.662
12.413.720
21.982.614
34.396.334
13.238.832
20.960.847
34.199.679
12.931.771
17.079.887
30.011.658
13.339.039
21.633.495
34.972.534
10.057.808
23.562.640
33.620.448
8.697.864
24.927.311
33.625.175
9.125.298
25.141.870
34.267.168
14.427.969
30.361.101
44.789.070
19.942.692
34.582.322
54.537.240
YEAR
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: SAA Statistics Yearbook 2005
As could be seen from the figures above, following the liberalization of
scheduled passenger flights in Turkey, the number of domestic passengers
increased significantly, i.e. approximately 10 million passengers, which means
an increase of 118 % in two years. An increase in the number of international
passengers has also been observed in the same term; however this increase
was limited to 37 %.
Chart–1: The number of domestic and international passengers by years
40.000.000
35.000.000
30.000.000
25.000.000
Domestic
20.000.000
International
15.000.000
10.000.000
5.000.000
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
6
This change in the relevant market will surely bring important
development effects, such as the increasing domestic trade as a result of faster
and safer movement of goods and services as well as foreign trade, however it
is too soon to examine these secondary effects. For the same reason, i.e. lack
of sufficient time frame, it has not been possible to make econometric analysis
in this study for there is no available data for the moment.
The airline industry transports passengers and goods within and across
national borders on a scheduled and non-scheduled basis. The scheduled
passenger transportation market has traditionally been a heavily regulated
market in most countries at both the domestic and international levels.
Domestically, entry into the air passenger business, initiating service on specific
routes, operating aircraft above given sizes, reducing or discontinuing services,
investing in airlines, establishing and applying various categories of passenger
fares have been subject to a detailed set of rules and regulations; international
regulations compound these domestic rules. They govern the conditions of
entry and ownership, the selection of operable destinations, and the freedoms
to set capacity and fares on international routes, which represent more than 6070 per cent of all passenger-kilometers performed in most countries, with the
exception of continental size countries3.
The policies and regulations which have governed the air transport
industry for several decades have various motivations (including safety, national
prestige, national defense, regional and urban development, environmental
sustainability, public service and other non-commercial objectives) specific to
each country. However there is growing consensus that unnecessarily
restrictive regulations may have led to significant losses of economic efficiency,
and thereby failure to secure low-cost air transportation to the largest possible
proportion of the population – the ultimate objective of air transport policies.
Recognizing these shortcomings, several OECD governments have initiated
reforms in the past two decades. Their aim was to improve efficiency and
reduce airfares by increasing competition, encouraging the rationalization of air
networks, and enhancing airline governance4.
In the last decade many economic studies and empirical research have
been done on airlines. The liberalization of airlines industry in many countries,
the effects of competition, the wave of airline mergers have lead to several
papers on the issue. Empirical studies were mainly done on US airlines
industry, shortly before and after domestic airline reforms in 1978 and later
looking at the economic implications of liberalization and enhanced competition
(Caves et al., 1984; Bailey et al., 1985; Liu and Lynk, 1999; Reed, 1999). U.S.
research also demonstrated that certain feared outcomes of liberalization -such as declines in safety levels, or deprivation of small communities of air
service -- did not materialize. However more recently similar studies have also
been done in other parts of the world, especially in OECD countries. In this
paper we largely benefited from those studies. (Gonenc and Nicoletti 2000,
Goldstein 1999, Høj, Kato, Pilat 1995).
3
Regulation, market structure and performance in air passenger transportation, OECD
Economics Department working paper no:254, Rauf Gonenc and Guiseppe Nicoletti
4
OECD ibid
7
The previous research studies has showed the special features of
competition in airlines industry such as, efficiency gains and fare changes that
followed liberalization. “The results have been less clear-cut outside of the U.S.
perhaps due to more limited liberalization and the presence of exogenous
factors damping competition - such as more intense airport congestion and
social and political constraints on airline restructuring (Marìn, 1998; Lapautre,
2000). Research also helped identify those structural factors such as airport
domination and market concentration which may temper the benefits of
reforms”5.
Gonenc and Nicoletti show in their study on the regulation, market
structure and performance in the air transport market in OECD countries that:
“At both the national and route level there is clear evidence that
productive efficiency and fares are affected by regulatory and market
arrangements. Overall efficiency and the rate of occupancy of aircraft
seats tend to increase and all categories of fares tend to decline as the
regulatory and market environment becomes friendlier to competition”
(p.6)
Liberalization has lowered prices significantly in the domestic passenger
flights market. Hence in the aftermath of liberalization of domestic air travel in
Turkey, we attempted to show the effects of opening up of the market not only
on new entrants but also on TA. Also we attempted to analyze the
competitiveness of the market not only from a purely economic analysis point of
view (as we were unable to use any econometric tools) but also by using a
‘business’ analysis tool, namely by using Michael Porter’s diamond.
II. THE EU EXPERIENCE
II.1. The Liberalization Process of the Air Transport Sector in the EU
The liberalization process of air traffic in the European Union has been a
much slower and progressive one compared to other liberalization processes
such as telecom, because of its unique and highly regulated nature, as well as
compared to the US liberalization of air traffic process which was a radical and
swift one6.
The European Community has adopted a series of liberalization
packages in the air transport sector in 1987, 1990 and 1992 respectively,
covering such matters as liberalization of traffic rights, pricing on those routes,
reservation systems, ground handling services and slot allocation rules7. As a
5
Gonenc and Nicoletti, OECD 2000
K. Button, K Johnson, 1998, Transportation Journal, pg.25
7
It should be noted that non-EU States of the European Economic Area (Iceland, Liechtenstein
and Norway) are treated in the same way as Member States, pursuant to Regulation 2407/92;
the Community acquis in the realm of air transport is applicable there by virtue of an agreement
amended on 21 March 1994. This is also the case for Switzerland, following the entry into force
on 1 June 2002 of the Agreement between the European Community and the Swiss
Confederation on Air Transport.
6
8
result of these liberalization measures, all traffic rights, including cabotage have
been liberalized since 1 April 1997, when the last package liberalizing air traffic
rights came into force. Moreover, a new Community agreement on air traffic
control services (the “Single European Sky”) was reached in December 1992.
In the EU, the member states regulated their own domestic aviation and
international air transportation was arranged via bilateral agreements between
states since the 1944 Chicago Convention. Unlike the US there has never been
a single regulatory body, such as the Civil Aeronautics Board (CAB)8, with
responsibility for international air transport within the EU. The bilateral air
service arrangements were generally restrictive and often allowed only one
airline from each country to operate a route (Button, Johnson 1998, p.28).
However, with the 1986 European Single Act, it was no more possible to carry
on the European Air Transportation System as it was. Single European Act has
provided free access to EU national markets and accordingly, competition rules
would have to be applied to prevent limitations on competition as well.
Member states have started their own domestic liberalization processes
individually and in different speeds and forms. “In the UK, were de facto
changes and did not entirely free the market, but saw the national regulatory
agency being more liberal in the allocation of licenses and in fare flexibility.
Other countries such as France, Spain, Italy and Germany were much less
inclined towards domestic liberalization. Reforms have gradually been
accompanied by greater private sector involvement in provision of aviation
services. In some instances (British Airways) there was complete privatization
of former state companies at a fairly early stage. More common (in Germany
and the Netherlands) has been a gradual selling-off of airlines.
From the mid-1980’s there were moves to liberalize bilateral agreements
between some members. This started with an agreement between the UK and
the Netherlands in 1984 relaxing rules on market entry, and, later on tariffs.
Subsequent agreements, particularly involving the UK, Germany, France and
Spain, all embodied various degrees of liberalization.” (Button and Johnson,
1998, p.27)
II.2. Community Regulation
According to Rome Treaty, the transportation sector was singled out for
special treatment. Regulation 17/629, adopted in 1962, implemented rules for
the enforcement of EC competition rules. However, the application of the
8
U.S. domestic aviation was also a very heavily regulated industry for a long time, from 1920’s
to 1970’s. However as early as 1976 as a result of some new legislation Civil Aeronautics
Board8 (CAB) began permitting discriminatory fare discounts and free access to selected routes,
and 1978 Airline Deregulation Act totally changed the regulation of domestic passenger air
transport (freight transport was deregulated in 1977). This was not an instant free market but
more of a timetable for fare and market entry regulations such that by January 1983 all fare and
entry regulations were eliminated (Button, Johnson 1998, p.26). The CAB was abolished in
1985, some required functions of which was delegated to other agencies.
9
The Council adopted a new Regulation implementing Articles 81 and 82 of the EC Treaty. This
regulation
replaces
Regulation
17/62
and
came
into
force
on
1.5.2004.
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on
competition laid down in Articles 81 and 82 of the Treaty.
9
Regulation was withdrawn from the transport sector some months later by
Regulation 141/6210.
There are no specific reasons stated in the Regulation for the exemption
given to the transport sector. In the preamble of the Regulation, it is stated that
“in pursuance of the common transport policy, account being taken of the
distinctive features of the transport sector, it may prove necessary to lay down
rules governing competition different from those laid down or to be laid down for
other sectors of the economy, and Regulation No 17 should not therefore apply
to transport”. In accordance, Article 1 of the Regulation indicates that;
“Regulation No 17 shall not apply to agreements, decisions or concerted
practices in the transport sector which have as their object or effect the fixing of
transport rates and conditions, the limitation or control of the supply of transport
or the sharing of transport markets; nor shall it apply to the abuse of a dominant
position, within the meaning of Article 86 of the Treaty, within the transport
market.”
Still, the Commission has stated that notwithstanding Regulation 141/62,
Regulation 17/62 still applies to activities that are ancillary to air transport. Such
ancillary activities include ground handling services, computer reservation
systems, and computerized air cargo information systems. However, it was
clear that the competition rules would not be able to be enforced effectively
without some measures of liberality been introduced first. In Nouvelles
Frontiéres11 case, the European Court of Justice (ECJ) definitively confirmed
that the competition rules of the EC Treaty applied to the air transport sector.
However, the Court held that implementing legislation was necessary in order to
apply Articles 81 and 82. As this legislation had not yet been adopted by the
Council, the Court ruled that therefore competition must be regulated by the
“transitional provisions” of Articles 84 and 85. The Nouvelles Frontiéres case
gave impulse to the Commission’s efforts to liberalize European air transport
10
Council Regulation No 141 of 26 November 1962 exempting transport from the application of
Council Regulation No 17 amended by Regulations Nos 165/65/EEC and 1002/67/EEC.
11
By five judgements of 2 March 1984 , received at the court on 17 August 1984 , the Tribunal
de Police de Paris (Paris Local Criminal Court) referred to the court a question on the
interpretation of certain provisions of the EEC Treaty for a preliminary ruling under Article 177 of
that Treaty in order to enable it to appraise the compatibility with those provisions of the
compulsory approval procedure laid down by French law for air tariffs. That question was raised
in several criminal proceedings against the executives of airlines and travel agencies who had
been charged with infringing Articles L 330-3, R 330-9 and R 330-15 of the French Civil Aviation
Code when selling air tickets by applying tariffs that had not been submitted to the minister for
civil aviation for approval or were different from the approved tariffs . In reply to the question
submitted to it by the Tribunal de Police, Paris, by judgement of 2 March 1984, the Court first of
all decided that, in the absence of any provision in the Treaty to the contrary, it must be
concluded that the rules in the treaty on competition, in particular Articles 85 to 90, are
applicable to transport and Article 84 of the Treaty cannot be interpreted as excluding air
transport from the general rules of the Treaty, including the competition rules and finally that it is
contrary to the obligations of the member states under Article 5 of the EEC Treaty, in
conjunction with Article 3 (f) and Article 85, in particular paragraph (1), of the EEC Treaty, to
approve air tariffs and thus to reinforce the effects thereof, where, in the absence of any rules
adopted by the Council in pursuance of Article 87, it has been found in accordance with the
forms and procedures laid down in Article 88 or article 89 (2) that those tariffs are the result of
an agreement, a decision by an association of undertakings, or a concerted practice contrary to
Article 85.
10
and to establish detailed rules for the application of Articles 81 and 82 in the air
transport sector.
In December 1987, the first package of liberalization measures was
adopted by the Council of Ministers. From a competition point of view the
essential element of the first package was the adoption of Regulation
3975/8712 that applied the competition rules of the EC Treaty to air transport
between Member States. However, the Regulation does not apply to air
transport between the EU and non Member States and so this remains subject
to Articles 84 and 85.
The first package of measures was followed in 1990 by a Second
Package and finally in 1992 by a Third Package. The “Third Liberalization
Movement” came completely into force in 1997 and increased the competition in
air transportation sector. This movement abolished the restrictions in routes,
ticket costs, flight frequencies and programs and allowed any airline company to
fly with any price and to anywhere inside the European Union.
The liberalization measures are an important part of the backdrop
against which the competition rules are applied in the air transport sector,
especially given Commission statements that the competition rules must be
used to secure and protect the increased opportunities made possible by
liberalization. It must be emphasized too that the measures adopted by the EU
to open up the market do not pre-empt the application of the competition rules
in the EC Treaty.
As opposed to the US, the EU recognized that some operations must be
exempted from the rules due to the economic situation of the airline industry,
taking into account that the air transport sector has to date been governed by a
network of international agreements, bilateral agreement between States and
bilateral and multilateral agreements between air carriers and thus, the changes
required to this international regulatory system to ensure increased competition
should be effected gradually so as to provide time for the air transport sector to
adapt. As a result, an enabling regulation was also adopted by the Council
giving the Commission the means to adopt block exemptions in the air transport
sector. Regulation 3976/8713 enables the European Commission to grant block
exemptions not only for agreements that relate to air transport services but also
12
Council Regulation (EEC) 3975/87 laying down the procedure for the application of the rules
on competition to undertakings in the air transport sector.
13
Council Regulation (EEC) No 3976/87 of 14 December 1987 on the application of Article
85(3) [now 81(3)] of the Treaty to certain categories of agreements and concerted practices in
the air transport sector. This Regulation applies to air transport between Community airports.
The Council, with Article 2 of the Regulation, gives authority to the Commission to grant
exemptions to agreements, decisions or concerted practices which have as their object any of
the following: a) joint planning and co-ordination of airline schedules, b) consultations on tariffs
for the carriage of passengers and baggage and of freight on scheduled air services, c) joint
operations on new less busy scheduled air services, d) slot allocation at airports and airport
scheduling; the Commission shall take care to ensure consistency with the Code of Conduct
adopted by the Council, and e) common purchase, development and operation of computer
reservation systems relating to timetabling, reservations and ticketing by air transport
undertakings; the Commission shall take care to ensure consistency with the Code of Conduct
adopted by the Council.
11
for those that relate directly to ancillary services. Regulation 1284/9114 provides
the Commission the authority to order a temporary relief against anticompetitive practices.
Following the implementation of the first package of liberalization
measures, a series of block exemptions were granted by Regulations such as
2671/88, 2673/88 and 3618/92 concerning joint planning, sharing of revenue,
consultation on tariffs, computer reservation systems and ground handling
services. Furthermore, Regulation 1617/9315 introduces more exceptions
pursuant to Article 81(3) concerning special provisions for joint planning and coordination of schedules, special provisions for joint operations, for consultations
on passenger and cargo tariffs, slot allocation and airport scheduling. It seems
that the introduction of exceptions goes on and on and undermines the
substance of Article 81 despite the fact that certain conditions for the application
of the exceptions are stated which might safeguard competition16.
The procedural framework within which competition law is enforced in the
air transport sector varies depending both on the exact nature of the services in
question and where such services are provided. There are three different
procedural frameworks in which competition law is applied in the air transport
sector: 1) Through the general implementing regulation, Regulation 17/62, as
far as services ancillary to air transport are concerned; 2) Through the limited
regime of Articles 84 and 85, as far as flights between the EU and non Member
States are concerned; and 3) Through the air transport implementing
regulations, Regulation 3975/87 and Regulation 3976/87 as far as flights
between EU airports are concerned.
The rules on state aid contained in Articles 87-89 are very important in
the context of air transport. For a long time these rules were not applied in the
air transport sector although the Commission had published guidelines on their
application as early as 1984 and it had been clear since the Nouvelles
Frontiéres decision in 1986 that the state aid rules applied to air transport. EU
air transport had been characterized by a high level of state intervention and
bilateralism. Therefore, there was arguably little point in applying the state aid
rules while the conditions of competition among airlines in other respects were
still so unequal. As they began to change though, so did the Commission’s
14
Council Regulation (EEC) No 1284/91 of 14 May 1991 amending Regulation (EEC) No
3975/87 laying down the procedure for the application of the rules on competition to
undertakings in the air transport sector.
15
Commission Regulation (EEC) No 1617/93 on the application of Article 85(3) [now 81(3)] of
the Treaty to certain categories of agreements and concerted practices concerning joint
planning and co-ordination of schedules, joint operations, consultations on passenger and cargo
tariffs on scheduled air services and slot allocation at airports, amended by Commission
Regulation (EC) No 1523/96 and by Commission Regulation (EC) No 1083/1999.
16
At the time of its adoption, four subject matters of air transport were covered by the
Commission Regulation 1617/9316, namely joint planning and coordination of schedules, joint
operations, consultations on passenger tariffs and slot allocation and airport scheduling. Since
its adoption, it was amended by Commission Regulations 1523/9616, 1083/199916,
1324/200116 and 1105/200216. These amendments have resulted in a significant narrowing of
the scope of the block exemptions granted under the Regulation 1617/93. Until 30 June 2005,
when the Regulation has expired, only two of the initial four block exemptions were in force,
namely consultations on passenger tariffs and slot allocation and airport scheduling. Currently,
there is no block exemption regulation in force for the air transport sector.
12
attitude to enforcement. Also, in the past serious political forces stood in the
way of proper application of the rules. The recent liberalization of EU Skies has
resulted in the disappearance of “flag carrier” status in relation to intra-EU
services and state-owned carriers are now required to compete on equal terms
with privately owned carriers. Given that a high number of airlines operating
within the EU are either wholly or partially owned by the state, state aid is an
issue of crucial importance: more so in the context of a liberalized market.
Since 1 May 2004, Council Regulation No 3975/87 is effectively repealed
with the exception of Article 6(3), which shall continue to apply to individual
exemption decisions adopted pursuant to Article 81(3) of the EC Treaty until
their date of expiry. The rules for the implementation of Articles 81 and 82 of the
EC Treaty are now set by Regulation 1/200317, which introduces as a central
feature the direct applicability of Article 81(3), thereby bringing an end to the
granting by the Commission of individual exemptions to undertakings.
However, Regulation 1/2003 does not modify the empowerments
received by the Commission to declare Article 81(1) of the Treaty inapplicable
to certain categories of agreements. Accordingly, where the Commission has
been empowered by a Council Regulation such as, for air transport, Regulation
3976/87, Article 81(3) exemptions may still be delivered in respect of certain
categories of agreements by means of the adoption of block exemption
regulations. However, Regulation 1/2003 introduces a new feature in respect
of block exemption regulations, which derives from the principle of shared
competencies between the Commission and national competition authorities:
the latter may, subject to the conditions laid down in Article 29(2), withdraw the
benefit of such block exemption regulations within the territory of their Member
State.
Finally, Council Regulation (EC) No 411/200418 of 26 February 2004
repealing Regulation (EEC) No 3975/87 and amending Regulations (EEC) No
3976/87 and (EC) No 1/2003, in connection with air transport between the
Community and third countries extended the scope of the Commission’s
investigation and enforcement powers with regard to infringements of Article 81
and 82 of the Treaty so as to include air transport between the Community and
third countries.
However competition as well as consumer rights concerns have led to
new studies in the EU, and new regulations on air passenger rights, computer
reservation systems (code sharing, franchising and interlining), new insurance
obligations to protect air passengers’ rights19.
17
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the
rules on competition laid down in Articles 81 and 82 of the Treaty, OJ L1, 4.1.2003, p. 1
18
OJ L68, 6.3.2004, p. 1
19
Latest regulation: 17 February 2005 No:261/2004ç OJ L046 on resevation systems, 889/2002
OJ L140 of 30.05.02 on responsability of airlines in the event of accident, No:785/2004ç OJ L
138 of 30.04.04 on insurance for passengers
13
III. THE AIR TRANSPORT SECTOR IN TURKEY
III.1. Background and Historical Summary of the Sector
The first aviation studies in Turkey dates back to 1912. In 1925, the
institutional foundation of the Turkish aviation has been laid by the
establishment of “Turkish Aeroplane Society” which would later be called as
“Turkish Aviation Institution”.
Turkey has ratified the 1944 Chicago Convention, which is the basic
document arranging the principles of civil aviation in an international basis and
determining the current rules of International Air Law, on 7 December 1945 with
the Law numbered 4749. In the Chicago Convention, as mentioned earlier, a
consensus could not be reached on commercial rights; therefore, it was a
necessity for the countries to arrange their commercial rights via mutual
agreements. Until today Turkey has signed 81 Mutual Air Transportation
Agreements.
The air transportation sector has been developed after the
implementation of the Civil Aviation Law20 (CAL) in 1983, and grew more rapidly
in the second half of 80’s. The main aim of the Law is to arrange the Turkish
civil aviation activities in accordance with the national interests and international
relations and applied to all the aviation activities of government along with
private institutions. CAL mainly includes clauses related with, the usage of
Turkish air space, the prohibitions and restrictions to planes, air vehicle
accidents, commercial air operations, airports, flight rules, civil aviation
personnel, passenger transportation, liabilities and penalties.
Especially in the 80’s, Turkish air transportation sector meant Turkish
Airlines, the national carrier and which was and is still the biggest airline
company in Turkey with scheduled and non-scheduled flights to 107
destinations at the total, 28 being domestic. In this period, the development of
Turkish Airlines’ fleet in the framework of a modernization and standardization
program, efforts on improvements in service standards and a tendency to
increase the number of international flights which are economically
advantageous, rather than domestic flights are observed. However, in the
international air transport, we have seen the creation and growth of a number of
private airline companies, which most of them were operating as charter
companies rather than scheduled flights. The main problems the private airline
companies faced with were, strains on operating capital, disadvantage of
operating with relatively old planes, insufficiency of care-repair and other
infrastructure means, difficulty of finding qualified staff and lack of support from
the governments.
At the end of 80’s and the beginning of 90’s, the investments were made
mostly on the improvement of the existing airports rather than constructing new
conventional ones. Along with these, the investments on air traffic control,
communication, navigation services and ground handling services have been
20
Turkish Civil Aviation Law, No: 2920 published in the Official Gazette, 19.10.1983/18196.
14
carried on. At the same period small airports have been constructed in various
places and most of the military airports have been opened to civil transportation.
It was observed that especially in Istanbul Ataturk Airport and Antalya, Ankara
Esenboga, Izmir Adnan Menderes and to some extent Dalaman Airports there
was a stable increase in total departing-arriving passengers and planes.
Until the first half of the 90’s, the sector experienced the same
development trend, but the Gulf Crisis and the following war, affected the sector
negatively. Especially with the war, the drastic increase in the insurance
premiums and the cancellation of flights and reservations caused the sector to
retrogress.
The first Turkish private airport application sample in the Turkish civil
aviation sector has been opened in May 31, 1998 in Antalya with a total
passenger capacity of 5 million, in the framework of “Build-Operate-Transfer”
(BOT) model. With the same model, a new terminal building has been built for
the Ataturk Airport, operated by the State Airport Authority, and opened in
January 3, 2000. Based on the success of these examples, other important
airports are also being modernized with the same BOT model i.e. Izmir and
Ankara Airports.
Turkey is currently a member of the International Civil Aviation
Organization (ICAO), European Organization for the Safety of Air Navigation
(EUROCONTROL), European Civil Aviation Conference (ECAC), Joint Aviation
Authorities (JAA) and has close contacts with EASA and USFAA.
III.2. Public Authorities and Institutions
The organizations and institutions related with air transportation sector in
Turkey are the Ministry of Transportation, Directorate General of Civil Aviation,
State Airport Authority, Directorate General for the Construction of Railways,
Seaports and Airports and Directorate General of State Meteorology.
The Directorate General of Civil Aviation (DGCA) is established under
the Ministry of Transportation in 1954 and reconstructed in 1987 parallel to the
rapid improvements in civil aviation all around the world.
DGCA, today, operates in the framework of the Turkish Civil Aviation
Law, 15 Regulations and 30 Aviation Directives which consist of more technical
matters and prepared according to the improvements in the international arena.
There will be a structural change in DGCA in the following days. This new
structure is essential for more effective implementation of international rules,
administrative and financial autonomy and facilitating recruitment of experts,
which is one of the main problems of DGCA.
The duties and responsibilities of DGCA determined by law and bylaws
are; the improvement of civil aviation rules, issuing of aviation personnel
licenses, licensing of all aviation activities, the co-ordination of navigation
facilities in the Turkish air zone, following up the international improvements,
supervising the application of international agreements, inspecting the accidents
15
of air vehicles, determining the basis of civil aviation education and training, cooperation in search and rescue facilities and auditing all civil aviation systems.
State Airport Authority (SAA), on the other hand, is responsible for
managing and controlling Turkish Airports and Air Zones and operates under
different names since 1933. SAA has been redefined as an autonomous State
Economic Enterprise in 1984. SAA has to function according to the international
civil aviation rules and standards, in this respect it is a member of the relevant
international institutions such as, ICAO, EUROCONTROL and Airports Council
International (ACI). Today, SAA has been organized in 27 airports, 16 open to
international lines and gives service to increasing number of native airline
companies and over 360 foreign commercial airline companies with 35 million
passengers.
One non-governmental institution should also be mentioned related with
the air transportation sector; Turkish Private Aviation Enterprises Association
(TPAEA), established in 1989 in Ankara. The aims of the association are, to
provide the best fulfilment of the technical, care, flight and ground security
services, to determine the common problems the Turkish registered enterprises
confront with, to interfere with the people or institutions in order to find solutions
to these problems, to provide co-ordination, to procure the equipment related
with the plane spare parts, and to make the necessary contracts in order to
work out the difficulties in importation and exportation of these equipments, to
present information and suggestions which could help the improvement of
Turkish civil aviation to the related official departments and to give
recommendations to its members in direction with the international
developments. To be a member of TPAEA, to make transportation is not a
must; any undertaking related with aviation -for example ground handling, care
and service, cargo and air-taxi can be a member. By 2006, TPAEA has 26
members21 representing a passenger capacity of 23857 and cargo capacity of
940530 kilograms, along with 120 passenger and 27 cargo planes.
III.3. The Privatization Efforts
With the “State’s withdrawal from commercial activities and return to its
fundamental duties” approach since 1986, “privatization” became an important
matter in Turkey as well. Some of the privatization activities comprising air
transportation sector in Turkey are as follows; 70 % of Plane Services Inc
(USAS) shares have been privatized by block selling method in 1989,
remaining 30% share has been privatized later in October 1993 by liquidation.
Airports Ground Handling Services Inc. (HAVAS) has been privatized by block
selling of the shares, 60 % in 1995 and 40% in 1998. Thus State has withdrawn
from both the catering and handling services. The State owned shares of 98,2%
in Turkish Airlines which is the national airlines and flag carrier for the Turkish
Republic, are in the extent of privatisation program since 1990. Even though the
21
ACT Airlines, Atlasjet Airlines, Corendon Airlines, Fly Air, Freebird Airlines, Interexpress
Airlines, Cyprus Turkish Airlines, Kuzu Airlines Cargo, MNG Airlines, Onur Air, Pegasus Airlines,
SAGA Airlines, Sky Airlines, Sun Express Airlines, UNSPED (UPS), World Focus Airlines,
Gozen Air Service, Akkurt Airlines, MNG Technics, Top Air Service, Celebi Air Service, Celebi
Domestic Service, HAVAS, Antalya Airport International Terminal Operations Co., HEAS and
TAV
16
privatisation efforts have been carried out after the privatisation of 1,8 % of
Turkish Airlines shares by liquidation in 1990, the efforts did not come out as
expected, due to the market conditions and the situation the company is in. In
this framework, the efforts of selling 20-30 % of Turkish Airlines shares could
not be realized on account of the global crises experienced by the domestic and
international money and capital markets. The efforts of selling 30 % of Turkish
Airlines shares still continue today.
The governments in all over the world support the privatisation of air
carriers in order to gain efficiency and effectiveness in a competitive
environment. The German government selling 36% of Lufthansa shares to
provide full privatisation for the company and the Estonian government’s
approval on the sale of 66% of the shares of national carrier Estonian Airlines to
Maersk Airlines which is a Danish airline company may be given as examples.
As the rest of the world, having an important share in the total investments in
Turkey, the air transportation is on top of the sectors requiring privatisation
processes, because of the insufficient endeavours of the state to provide
finance
IV. THE EFFECTS OF LIBERALIZATION IN THE TURKISH DOMESTIC
PASSENGER FLIGHTS MARKET
IV.1. AIRLINES
The liberalization of Turkish domestic passenger flights market has been
realized by a policy change of the Ministry of Transportation in October 2003.
Up to that date, there were no legal prohibitions for the private airline
companies to provide services in domestic lines. However, the state aviation
policy depended on the protection of Turkish Airlines from competitive pressure.
Therefore, the General Directorate of Civil Aviation abstained from granting
approval for the private airline companies’ tariffs on scheduled domestic flights.
Depending on a policy change initiated by the government, parallel to the
privatization efforts of TA, the market has been opened to competition in
October 2003. Before this policy change, the private enterprises could provide
services (charter and scheduled) in domestic lines only where Turkish Airlines
did not have flight or could not provide sufficient service. Since these lines were
not lucrative enough, the domestic passenger flights market did not attract
private airline company’s investments much; therefore their domestic services
were limited to a number of seasonal touristic flights.
With the liberalization, a number of existing private airline companies
having international flights (both charter and scheduled) has begun to provide
services in domestic lines as well, and a few new companies has been
established. The table below shows the number of airline companies which
have been given licence (passenger transportation, freight and cargo) by the
General Directorate of Civil Aviation by years.
17
Table-2: The number of airline companies by years
Years
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Total Number of Airline Companies
14
11
11
10
9
11
14
14
13
15
16
Source: DGCA Web Site
The table below shows all the airline companies operating in Turkey and
their licences obtained from the Directorate General of Civil Aviation, as of July
2006.
Table-3: Turkish airline companies’ scope of license
No
Name of the Company
1
Turkish Airlines
2
Sun Express Airlines
3
Pegasus Airlines
4
Onur Air
5
Cyprus Turkish
Airlines
MNG Airlines
6
7
Atlasjet Airlines
8
FLY Air
9
Freebird Airlines
10
Inter Express Air
Transport
11
SKY Airlines
12
World Focus Air
Transport
Kuzu Airlines Cargo
13
Scope of the License22
Scheduled and non-scheduled domestic and international
flights - passenger, freight, mail
Scheduled and non-scheduled domestic and international
flights - passenger, freight
Non-scheduled domestic and international flights passenger, freight
Scheduled and non-scheduled domestic and international
flights - passenger, freight, mail
Scheduled and non-scheduled domestic and international
flights - passenger, freight
Scheduled and non-scheduled domestic and international
flights - passenger, freight and cargo
Scheduled and non-scheduled domestic and international
flights - passenger, freight
Scheduled and non-scheduled domestic and international
flights - passenger, freight
Non-scheduled domestic and international flights passenger, freight
Non-scheduled domestic and international flights passenger, freight
Scheduled and non-scheduled domestic and international
flights - passenger, freight
Non-scheduled domestic and international flights passenger, freight
Non-scheduled domestic and international flights - cargo
22
There are three types of licences both for the domestic and international lines: passanger
transportation, freight transportation and cargo transportation. Passanger and freight
transportation licences are given together, because “freight” contains the luggages of
passengers and is carried in the trunk at the bottom of the plane. However, “cargo” is carried by
special planes constructed only for cargo carriage. No passengers could be carried with a cargo
plane. There are “combi” planes constructed to carry both cargos and passangers as well, but
there are no combi planes in Turkey.
18
Transport
Non-scheduled domestic and international flights passenger, cargo
Non-scheduled domestic and international flights Touristic Air Transport
15
passenger, freight
ACT Airlines
16
Non-scheduled domestic and international flights - cargo
Non-scheduled domestic and international flights IHY Izmir Airlines
17
passenger, freight
Non-scheduled domestic and international flights Tunca Airlines
18
passenger, freight
Non-scheduled domestic and international flights Tarhankule Airlines
19
passenger, freight
* Source: Directorate General of Civil Aviation DGCA23 website
** as of July 2006
14
Saga Air Transport
With the liberalization, an important development in number of planes
and seat capacity was realized by the private airline companies carrying
passengers in domestic and international lines. According to the General
Directorate of Civil Aviation statistics, the total number of planes in 2003 was
150 with a total seat capacity of 27.124. These numbers increased to 188
planes and 33.259 seat capacity by the end of 2004. It should be noted that
these numbers include TA planes and seat capacities as well. The numbers for
the end of 2005 and by July 2006 are given in the table below with details
according to the companies. Among these companies, only Turkish Airlines,
Onur Airlines, Atlasjet Airlines, Pegasus Airlines and Fly Airlines have
scheduled domestic flights by July 2006.
Table-4: Total Number of Planes and Seat Capacities
By the end of 2005
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
TURKISH AIRLINES
ONUR AIRLINES
ATLASJET AIRLINES
PEGASUS AIRLINES
MNG AIRLINES
FLY AIRLINES
SUNEXPRESS AIRLINES
CYPRUS TURKISH AIRLINES
SKY AIRLINES
SAGA AIR TRANSPORT
FREEBIRD AIRLINES
INTER EXPRESS AIRLINES
WORLD FOCUS AIRLINES
TOURISTIC AIR TRANSPORT
IHY IZMIR AIRLINES
TUNCA AIRLINES
TARHANKULE AIRLINES
TOTAL
By July 2006
Number
Seat
Number
Seat
of
Capacit
of Planes Capacity Planes
y
88
14.652
103
16.834
28
6.556
30
6.894
18
3.072
21
3.267
14
2.608
15
2.739
28
2.447
22
1.122
10
2.338
7
1.857
10
1.917
12
2.363
7
1.414
7
1.414
5
863
7
1.201
3
703
3
703
3
534
5
980
4
513
3
498
3
495
3
495
2
296
4
632
3
396
1
260
1
163
247
41.818
223
38.408
Source: DGCA Web Site
23
Directorate General of Civil Aviation www.shgm.gov.tr/doc/hyi.xls
19
The Chart below is derived from figures in Table-4 and displays the
distribution of seat capacity among the airline companies.
Chart-3: Seat Capacity
SUNEXPRESS AIRLINES
5%
TURKISH AIRLINES
39%
FLY AIRLINES
6%
MNG AIRLINES
6%
PEGASUS AIRLINES
7%
ATLASJET AIRLINES
8%
ONUR AIRLINES
17%
The table below shows the number of domestic passengers in 2003 and
2005 carried by the airline companies operating in Turkey. The first group of
airline companies namely, Turkish Airlines, Onur Airlines, Pegasus Airlines,
Atlasjet Airlines and Fly Airlines are providing scheduled domestic flights. The
second group of companies is operating on a charter basis. The table also
shows the % change in passenger numbers between these years.
Table-5: The number of domestic passengers carried by airline companies
2003
2005
% Change
TURKISH Airlines
ATLAS Airlines
ONUR Airlines
PEGASUS Airlines
FLY AIR
INTER Airlines
Cyprus Turkish Airlines
MNG Airlines
SAGA Airlines
SKY Airlines
SUNEXPRES Airlines
FREEBIRD Airlines
World Focus Airlines
Anatolian Airlines
CHARTER
SCHEDULED
TOTAL
8.850.123
15.385
106.877
10.695
69.241
12.291.620
2.909.096
4.136.878
125.943
399.747
38,9
18.808,7
3.770,7
1.077,6
477,3
564
1.571
9.857
6.421
15.843
28.934
9.787
4.769
1.114
41.494
301
3.167
6.787
16.836
4.940
-
745,6
-29,1
321,0
275.175
8.850.123
9.125.298
79.408
19.863.284
19.942.692
-71,1
124,4
118,5
-50,7
-57,2
-41,8
Source: SAA Statistics Yearbook 2005
20
As could be seen from the figures above, a total of 19.942.692
passengers have been carried in domestic lines in 2005; 19.863.284 of them
being scheduled. TA has carried 12.291.620 passengers and the remaining
7.651.072 passengers have been carried by private airline companies. The last
part of the table indicates that the market for the charter domestic flights in
Turkey has shrinked by 71%; whereas the market for scheduled domestic flights
has expanded by 124%.
The table below shows the total number of domestic passengers and
number of domestic flights by years, along with the % changes in these
quantities compared to the ones of the preceding year.
Table-6: The number of domestic passengers and number of domestic flights
Years
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
No. of Passengers
10.347.528
10.862.539
12.413.720
13.238.832
12.931.771
13.339.039
10.057.808
8.697.864
9.125.298
14.427.969
19.954.918
% Change
4,98
14,28
6,65
-2,32
3,15
-24,60
-13,52
4,91
58,11
38,31
No. of Flights
169.018
176.040
197.103
218.155
213.078
200.841
167.500
155.353
154.201
192.698
256.380
% Change
4,15
11,96
10,68
-2,33
-5,74
-16,60
-7,25
-0,74
24,97
33,05
Source: DGCA web site
Figures presented above indicate a major increase both in the number of
passengers and the number of flights. The 58% increase in the number of
passengers and app. 25% increase in the number of flights from 2003 to 2004
-the first year of liberalization in the Turkish domestic passenger flights marketis striking. The tendency of increase continued in the subsequent year with
ratios of 38% and 33% accordingly. The difference in % change for the number
of passengers and the number of flights indicate an improvement of capacity
usage in the sector. The charts below show the course of passenger and plane
traffics in domestic lines by years.
21
Chart-3: Passenger and Plane Traffics in Domestic Lines
Passenger Traffic
Plane Traffic
300.000
25.000.000
250.000
20.000.000
200.000
15.000.000
150.000
10.000.000
100.000
5.000.000
50.000
0
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: SAA Web Site
As could be expected, the airport usage has also increased in this
period, parallel to the number of passengers. TA has domestic flights for 27
cities in Turkey whereas its nearest competitors Onur Air and Atlasjet Air have
flights to 11 and 19 cities respectively. Other private airline companies have
fewer flights but they are increasing their destinations quite rapidly. Pegasus
Airlines and Fly Airlines are currently flying to 6 and 7 destinations in Turkey
respectively. The cities where TA confronts with competitor pressure are the
lines from Istanbul to mainly Antalya, Izmir, Bodrum, Adana, Van, Diyarbakır,
Trabzon and Kayseri.
The table below shows the number of domestic passengers in major
airports in Turkey. It comprises 17 of 34 airports to which commercial domestic
passenger flights are provided. The figures at the bottom of the table indicate
that these 17 airports cover approximately 98% of all domestic passengers.
Table-7: The number of domestic passengers in major airports
ATATURK
ESENBOGA
A.MENDERES
ANTALYA
DALAMAN
ADANA
TRABZON
MİLAS- BODRUM
DIYARBAKIR
ERZURUM
GAZIANTEP
KARS
KAYSERI
KONYA
MALATYA
SAMSUN-CARS.
2003
3.126.074
1.773.531
985.052
615.420
166.072
498.996
374.439
277.819
204.842
2004
5.430.925
2.141.047
1.403.331
1.092.858
189.877
805.105
718.735
395.365
483.354
2005
7.512.282
2.640.604
1.983.831
1.608.749
288.548
1.276.694
1.019.438
572.209
653.823
93.309
198.679
278.161
186.846
54.312
180.001
62.160
89.645
134.069
371.762
86.281
293.795
73.967
140.230
242.806
204.657
162.158
360.607
134.242
304.565
322.053
22
Van FERIT MELEN
TOTAL
YEAR TOTAL
142.791
8.965.378
9.125.298
160.917
14.229.034
14.427.969
291.743
19.614.364
19.942.692
Source: SAA 2003 and 2005 Statistical Yearbooks
Table-8 below is derived from the figures in Table-7. It demonstrates the
% change in the number of domestic passengers for each airport for the last
three years. As could easily be seen, there has been a tremendous increase in
the usage of airports nationwide.
Table-8: % change in the number of domestic passengers for each airport
AIRPORTS
ATATURK
ESENBOGA
A.MENDERES
ANTALYA
DALAMAN
ADANA
TRABZON
MILAS- BODRUM
DIYARBAKIR
ERZURUM
2003-2004
73,7
20,7
42,5
77,6
14,3
61,3
91,9
42,3
136,0
GAZIANTEP
KARS
KAYSERI
KONYA
MALATYA
SAMSUN-CARS.
VAN- FERIT MELEN
% Change
2004-2005
38,3
23,3
41,4
47,2
52,0
58,6
41,8
44,7
35,3
2003-2005
140,3
48,9
101,4
161,4
73,7
155,9
172,3
106,0
219,2
112,9
40,0
198,1
99,0
58,9
63,2
19,0
56,4
81,1
12,7
-44,9
87,9
22,7
81,5
117,2
32,6
81,3
9,5
198,6
100,3
116,0
239,7
140,2
104,3
The following part of the paper deals with corporate information for the
five airline companies currently providing services in the Turkish domestic
passenger flights market.
IV.1.1. Turkish Airlines Inc.
Turkish Airlines (TA) was established on May 20, 1933, in Ankara by Law
No. 2186, as a department of the Ministry of Defense as the State Airlines
Administration; in 1935, it was assigned to the Ministry of Public Works. In
1938, this entity was renamed the General Directorate of State Airlines. From
1939 onward, it operated as a department of the Ministry of Transportation.
In 1955, it was restructured by Law No.6623 as a private corporation
(state owned company incorporated) to be managed and operated under
private law. From then on, it operated as Turkish Airlines Inc.
23
As published in the Official Gazette No. 18570 on November 9, 1984,
Turkish Airlines was classified as a State Economic Enterprise by Statutory
Decree No. 233 concerning certain state institutions and enterprises.
According to Council of Ministers’ Decree No. 90/822, it was included
among the State Economic Enterprises to be privatized by Law No. 3291. The
Corporation’s new Articles of Association were approved by the Supreme
Planning Council on October 30, 1990.
The Turkish Airlines Corporation was redefined as a State Economic
Enterprise under the jurisdiction of the Privatisation Administration according to
Article 35 of Law No. 4046 concerning the Regulation of Privatisation
Procedures and the Amendment of Certain Statutory Decrees, published in the
Official Gazette dated 27 November 1994. According to article 20/a of the
aforementioned law, the Corporation’s articles of association were amended
with the approval of the Privatisation Administration dated December 5, 1996
and further amendments were made and approved by Decision No 33/953,
dated July 5, 2002, by the Capital Markets Board and re-approved by Decision
No 1006, dated November 8, 2002, by the Privatisation Administration. These
amendments were put into effect following the approval of the Extraordinary
General Assembly held on January 17, 2003.
By 25 June 2006, 49% of Turkish Airlines shares belong to the State, i.e.
The Privatisation Administration in order to be privatized, and the remaining
51% of the shares are offered to public.
By July 2006, Turkish Airlines has 103 planes with a total seat capacity
of 16.834. The company provides services to 27 destinations in domestic lines,
namely, Ankara, Adana, Izmir, Kayseri, Antalya, Bodrum, Diyarbakır, Dalaman,
Denizli, Erzurum, Gaziantep, Kars, Konya, Malatya, Samsun, Trabzon, Van,
Sivas, Istanbul, Adıyaman, Agrı, Batman, Erzincan, Elazığ, Kahramanmaraş,
Mardin and Muş.
IV.1.2. Onur Air
Onur Air was founded on April 14, 1992 and realized its first flight on May
14, 1992 with an Aircraft of type A-320 Airbus. Second aircraft was joined to the
fleet in July 1992, third one in December 1992, and fourth aircraft in April 1993.
In 1994, Ten Tour, a Turkish Tour Operator, acquired some of Onur Air’s
shares. With that new merging, Ten Tour gaining a considerable part of the
foreign exchange in the tourism sector between 1990 and 1995 by means of its
25 hotels with a bed capacity of 7000, it enhanced the passenger capacity of
Onur Air. In order to meet such increase in capacity, fifth and sixth aircrafts in
April 1995, and seventh aircraft in July 1995 was joined to the fleet. All such
aircraft were A-320, 2 more aircraft of the same type further joined as subcharter, thus in 1995 the fleet reached a seat capacity of 1566 on 9 aircrafts.
Meanwhile initial number of staff was reached to 512 when established it was
employed about 150.
In 1996, Onur Air was fully merged with Ten Tour and at the beginning of
the season the fleet reached a seat capacity of 3503 on 16 aircrafts. In this
24
process, Onur Air has become an activator of the Turkish economy and
business circles with its staff of 912.
In 1998 Onur Air was compelled to recess as most of the other airlines in
Turkey, due to the economical and social problems in Turkey as well as worldwide effected increasing crisis. The number of aircrafts on the fleet was reduced
to thirteen in 1998, and degraded to nine in 1999. Due to the measures taken,
the company survived from the crisis and re-started to grow in 2000. Upon
adding 2 A-300 to the fleet, seat capacity was reached of 2560 passengers on
11 aircrafts, and in November 2001, upon adding one more A-300 aircraft, seat
capacity was increased to 2883 on 12 aircrafts.
By July 2006, Onur Air has 30 planes with a total seat capacity of 6768
and a total of 1490 employees. The company has domestic flights from Istanbul
to 11 destinations, namely, Adana, Kayseri, Izmir, Antalya, Bodrum, Diyarbakır,
Erzurum, Gaziantep, Malatya, Samsun and Trabzon.
IV.1.3. FLY Air
Fly Air started its operations in 2002 organizing special charter and
scheduled flights for destinations in Europe, Asia, Africa and the domestic
market. In a short period of time in Turkey, Fly Air received a deserved
reputation among the locally financed private airway companies by reaching its
service quality target and increasing the number of its passengers, destinations,
personnel and fleet with very competitive low fares.
Fly Air Flight Management Group comprises of flight crew, dispatch and
office personnel. Fly Air is obliged to provide a system ensuring the adherence
to the rules and regulations of the International Civil Aviation Organization
(ICAO), Joint Aviation Authorities (JAA) and General Directorate of Turkish Civil
Aviation (GDCA).
Fly Air, provides service for nearly one million passengers a year. The
company flies to Holland, Belgium, Germany, France, Switzerland, Italy, Israel,
Iran, Syria, Armenia, Republic of Northern Cyprus, United Arab Emirates,
Pakistan, Sudan, Afghanistan, Egypt, Lebanon, Niger and Nigeria. With the
Airbus A300 fleet, Fly Air offers a wide range of cargo services as well.
With the liberalization of domestic passenger flights market, Fly Air
became the first private airline in Turkey to commence scheduled domestic
flights. Company’s operations started with Istanbul-Trabzon flight in October
2003. By July 2006, the company has 7 planes with a total seat capacity of
1857 and has domestic flights from Istanbul to 5 destinations, namely, Trabzon,
Adana, Mardin, Sanlıurfa and Isparta.
IV.1.4. Atlasjet Airlines
Atlasjet is established on March 14, 2001 by Öger Holding A.Ş., licensed
to carry out `Passenger and Cargo Transportation on Unscheduled Flights,
Domestic and International` and has carried out its first flight on June 1, 2001.
The flights have begun with 2 planes of the type Boeing B-757-200. In April
25
2004 the trusted leading companies of the tourism sector ETS Tur and Öger Tur
combined forces and Atlasjet went into a new structure of organization.
Atlasjet has international charter flights to certain cities in Germany,
Holland, Spain, Kazakhstan, France, Italy, Czech Republic, Greece, Hungary,
Denmark, Egypt and United Arab Emirates.
On June 14, 2004 the company is licensed by DGCA to carry out
scheduled flights as well and as of 01.07.2004 it started its scheduled domestic
flights. By July 2006 Atlasjet Airlines has domestic flights from to 19
destinations, namely Ankara, Antalya, Izmir, Bodrum, Tokat, Sanlıurfa, Uşak,
Mardin, Edremit, Adıyaman, Dalaman, Adana, Sivas, Trabzon, Malatya,
Erzincan, Konya, Kars and Siirt. The company has 21 planes (all leased) with a
total capacity of 3267 seats as of July 2006.
Atlas Jet is the first Turkish airline company that has started e-ticketing
and has invested USD 7 million to the e-ticket, e-systems and DCS (Direct
Control Systems) in four years. The company will also start selling tickets
through cellphones (with Turkcell), by putting the bill charges on the phone bill
and sending the PNR to the customer’s cellphone.
IV.1.5. Pegasus Airlines
Pegasus Airlines was established in 1990 as a joint venture between Aer
Lingus, Silkar Yatırım and Net Holding, head office being in Istanbul. Since its
first commercial flight in May 1990, from a fleet of two aircrafts, airline has
grown to a 15 aircraft fleet, which includes the very latest new generation
Boeing 737-800s with a total capacity of 2739 seats by July 2006.
Pegasus Airlines operates charter flights, from Turkey to 99 destinations
in 17 countries. Alongside the charter operations, Pegasus Airlines provides wet
lease to the airlines in need of extra capacity. Pegasus operations have been
certified by the Turkish Civil Aviation Authority as being in compliance with JAR145, JAR-OPS 1 and JAR- FCL. Pegasus constantly strives to maintain the
highest operational standards to ensure that its passengers have safe,
comfortable and on-time flights.
Besides maintenance services, Pegasus Airlines provides Crew Training,
Type Rating Training, Line Training, Dangerous Goods and CRM Training
(including CRM Instructor Training) to the other airlines of the sector.
In January 2005, ESAS Holding took over Pegasus Airlines entirely. With
the dynamism inspired by the new ownership, a self-vitalization process was
initiated. Pegasus Airlines started scheduled flights on domestic routes as of
November 1st, 2005. The company has domestic flights from Istanbul to 6
destinations, namely, Adana, Ankara, Trabzon, Antalya, Van and Diyarbakır.
26
IV.2. GROUND HANDLING
Today, there are only two companies namely, Havas and Celebi which
give ground handling services to third parties. There are also 18 representation,
surveillance and management companies, 2 catering companies and 2 plane
private security and supervision companies operating in the Turkish airports.
Turkey's first ground handling company, Havas, was founded by the
state in 1933 to provide airlines with ground facilities and food and drink
services. The company's catering services were separated and privatized under
the name of USAŞ in 1987, while the ground facilities remained functioning as
Havas Ground Handling Co. In April 1995, Havas's ground facilities were also
privatized as 60% share of the company.
Before privatisation, Havas used to function in Turkey's 7 major
international airports in Istanbul, Ankara, Izmir, Antalya, Adana, Trabzon and
Dalaman. Today, the company operates in 14 airports in Turkey. The amount of
work achieved in a short period after privatisation did not only have an impact
on the aviation sector but also on the business sector as a whole in Turkey,
therefore The Administration of Privatisation declared Havas one of the most
successful privatizations in Turkey in August 2000.
Celebi, established in 1958, is the first private ground handling company
giving all the ground handling services except for transportation between
airports and city terminals, which is a privilege for Havas only. In 1958, Celebi
used to give services only in Ankara, today it operates in 14 airports in, Adana,
Ankara, Antalya, Bodrum, Bursa, Corlu, Dalaman, Diyarbakır, Erzurum,
Istanbul, Izmir, Kayseri, Samsun and Trabzon. The estimated market share for
Celebi and Havas in the ground handling market is approximately 50% each.
Ground handling services are listed in the 5th article of ‘Ground Handling
Regulation’ (SHY-22) as follows; a) representation, b) passenger traffic, c)
freight control and communication, d) ramp, e) plane line care, f) flight
operation, g) transportation, h) catering, i) surveillance and direction, j) plane
private security service and supervision. Taking into consideration that these
services do not substitute each other, they should be regarded as separate
markets. Parallel to the European applications, the provisions of SHY 22 and
State Airports Authority (SAA) practices are directed towards giving separate
licenses to these services.
Today, operating the airports, air traffic control services, setting up flight
navigation systems are executed by SAA which owns all the airports in Turkey;
ground handling services on the other hand, are given by licensed private
sector enterprises.
As mentioned above, to operate in the ground handling services
market, a license needs to be taken from SAA. There are three groups of
licenses, namely A, B and C:
-
A group working license is given to private enterprises which are
organized in at least three airports open to international flights, either for
27
all the services listed in the 5th article of SHY-22 or at least for
passenger traffic, freight control and communication, ramp, cargo and
postal services, cleanness of planes, control of unit freighting equipment
services;
-
B group working license is given to air carriers which will give all or some
of the ground handling services listed in the 5th article of SHY-22 for
themselves only (self-handling);
-
C group working license is given to private enterprises which will give the
‘not compulsory’ services listed in the 5th article of SHY-22, which are;
representation, surveillance and management, plane private security
services and catering.
The tables below shows the price, the native ground handlers should pay for
the above mentioned licenses, according to the License Tariff, prepared in the
framework of the related articles of SHY-22.
Table-9: The tariff for A and C Group ground handling services licenses
Airports Ground Handling Services A and C Groups Working License Tariff (EUR)
Types of
Service
1
2
3
4
Passenger
Traffic
Freight
Ctrl. and
Commun.
Ramp
Ataturk
Antalya
A
1.500.00
0
200.000
B
1.000.00
0
150.000
4.500.00
0
45.000
Plane Line
Care
5 Flight
20.000
Operation
6 Transport
10.000
7 Catering
100.000
8 Surveil.
100.000
&Manag.
200.000
9 Plane Priv.
Sec.Serv.
&ControlIA
S
Source: SAA Tariff Booklet 24
24
A.Menderes
Dalaman
Bodrum
C
500.000
Esenbog
a
Adana
Trabzon
Other
Airports
D
250.000
F
50.000
G
1.000
100.000
50.000
10.000
1.000
3.000.00
0
30.000
1.500.000
750.000
100.000
1.000
15.000
7.500
1.000
500
15.000
10.000
5.000
1.000
500
7.500
75.000
75.000
5.000
50.000
50.000
5.000
50.000
50.000
2.000
20.000
20.000
1.000
1.000
1.000
150.000
100.000
100.000
40.000
1.000
Republic of Turkey Directorate of State Airports Administration Tariff Charges
28
Table-10: The tariff for B Group ground handling services licenses
Airports Ground Handling Services B Group Working License Tariff (EUR)
Types of
Service
Esenbog
a
Adana
Trabzon
Other
Airports
B
200.000
A.Menderes
Dalaman
Bodrum
C
100.000
D
50.000
F
10.000
G
200
40.000
30.000
20.000
10.000
2.000
200
900.000
600.000
300.000
150.000
20.000
200
Plane Line
9.000
Care
5 Flight
4.000
Operation
6 Transport
2.000
7 Catering
20.000
8 Plane Priv.
40.000
Sec. Serv
& Control
Source: SAA Tariff Booklet
6.000
3.000
1.500
200
100
3.000
2.000
1.000
200
100
1.500
15.000
30.000
1.000
10.000
20.000
1.000
10.000
20.000
400
4.000
8.000
200
200
200
1
2
3
Passenger
Traffic
Freight
Ctrl.
and
Commun.
Ramp
Ataturk
Antalya
A
300.000
4
Above mentioned A Group licenses are valid for two years and B Group
licenses for five years. After the expiration of these periods, a “prolongation fee”
must be paid in order to continue functioning. Table-11 shows the A and C
Group prolongation fees.
Table-11: Prolongation fees for A and C Group ground handling services licenses
Types of
Service
1
Ataturk
Antalya
A
B
Pass.
300.000
Traffic
40.000
2
Freight
Cntrl.
&
Commun.
3
Ramp
900.000
4
Plane Line
9.000
Care
5
Flight
4.000
Operation
6
Transport
2.000
7
Catering
20.000
8
Surveil. &
20.000
Manag.
40.000
9
Priv. Sec.
Serv.
&
Control
Source: SAA Tariff Booklet
200.000
Airports
A.Menderes
Esenboga
Dalaman
Bodrum
C
D
Euro
100.000
50.000
Adana
Trabzon
Other
Airports
E
F
10.000
200
30.000
20.000
10.000
2.000
200
600.000
6.000
300.000
3.000
150.000
1.500
20.000
200
200
100
3.000
2.000
1.000
200
100
1.500
15.000
15.000
1.000
10.000
10.000
1.000
10.000
10.000
400
4.000
4.000
200
200
200
30.000
20.000
20.000
8.000
200
29
Table-12 below shows the B Group working licenses prolongation fees
for international lines.
Table-12: Prolongation fees for B Group ground handling services licenses
Types
Service
1
2
3
4
of
Passenger
Traffic
Freight
Cntrl.
&
Comm.
Ramp
Atatürk
Antalya
A
B
Airports
A.Menderes
Esenboga
Dalaman
Bodrum
C
D
Euro
20.000
10.000
60.000
40.000
8.000
6.000
4.000
180.00
0
1.800
120.000
Plane Line
Care
5
Flight
800
Operation
6
Transport
400
7
Catering
4.000
8
Priv. Sec.
8.000
Serv. & Ctrl
Source: SAA Tariff Booklet
Adana
Trabzon
Other
Airports
E
F
2.000
40
2.000
400
40
60.000
30.000
4.000
40
1.200
600
300
40
20
600
400
200
40
20
300
3.000
6.000
200
2.000
4.000
200
2.000
4.000
80
800
1.600
40
40
40
The State Airports Authority gives the opportunity to pay the fees of B
and C group licenses in installments but not the fees of A group licenses.
Table-13 shows the licenses of the two ground handling companies,
namely Celebi and Havas provide, the types of services, the licenses include
and the airports the licenses are valid in.
Table-13: The licenses of Havas and Celebi
Name of the
Name of the Airport company
Type of Service
Esenboga
Havas
Transport
1. passenger traffic
Dalaman
Celebi
2. Freight control and communication
3. Ramp
1. passenger traffic
2. Freight control and communication
3. Ramp
Milas – Bodrum
Havas
4. Flight operation
5. Transportation
1. passenger traffic
Milas – Bodrum
Celebi
2. Freight control and communication
3. Ramp
1. Surveillance and management
2. passenger traffic
3. Freight control and communication
Ataturk
Havas
4. Ramp
5. Flight operation
6. Plane line care
License
Beginning
Date
05.04.1996
30.05.1997
09.06.1997
19.06.1997
26.09.1997
30
Adnan Menderes
Havas
Antalya
Havas
Dalaman
Havas
Esenboga
Havas
Havas
Ataturk
Celebi
Adnan Menderes
Celebi
Antalya
Celebi
Esenboga
Celebi
Esenboga
Celebi
Adana
Havas
Adana
Celebi
Trabzon
Havas
Ataturk
Adnan Menderes
Antalya
Source: DGCA website
Havas
Havas
Havas
1. Surveillance and management
2. passenger traffic
3. Freight control and communication
4. Ramp
1. Surveillance and management
2. passenger traffic
3. Freight control and communication
4. Ramp
1. Surveillance and management
2. passenger traffic
3. Freight control and communication
4. Ramp
1. Surveillance and management
2. passenger traffic
3. Freight control and communication
4. Ramp
Representation
1. passenger traffic
2. Freight control and communication
3. Ramp
1. passenger traffic
2. Freight control and communication
3. Ramp
1. passenger traffic
2. Freight control and communication
3. Ramp
1. passenger traffic
2. Freight control and communication
3. Ramp
Representation
1. passenger traffic
2. Freight control and communication
3. Ramp
4. Flight operation
1. passenger traffic
2. Freight control and communication
3. Ramp
1. passenger traffic
2. Freight control and communication
3. Ramp
4. Flight operation
Transportation
Transportation
Transportation
26.09.1997
26.09.1997
26.09.1997
26.09.1997
26.09.1997
01.10.1997
01.10.1997
01.10.1997
01.10.1997
01.10.1997
16.12.1997
17.12.1997
21.12.1997
26.03.1998
26.03.1998
26.03.1998
While examining the structure of the ground handling market, the B
Group licenses which give the opportunity for self-handling should be taken into
consideration as well. The table below shows the airline companies having B
Group licenses and the airports in which they are organized. These companies
have licenses for one or more of the services listed in the above mentioned 5th
article of SHY-22.
31
Table-14: Airline companies possessing B Group licenses
Name of the Enterprise
Turkish Airlines
Cyprus Turkish Airlines
Onur Airlines
Sun Airlines
Pegasus Airlines
Saudi Arabian Airlines
Iran Islamic Republic Airlines
Air France
Alitalia Italian Airlines
Lufthansa Airlines
British Airways PLC.
MNG Airlines
Swiss International Air Lines
Cukurova Airlines
Atlasjet Airlines
Source: DGCA website
The Number of Airports
Service is Given
21
5
1
1
3
1
1
1
1
1
1
2
1
1
1
Taking into consideration the fact that the airline companies having B
Group licenses -Turkish Airlines with the largest capacity included-, make self
handling for most of their flights, it could be argued that, although the airline
companies possessing B group licenses are not in direct competition with the
ones possessing A group licenses, they make a restrictive effect on the market.
IV.3. AIRPORTS
Along with the increase in the regional public budgets, the governments
began to perceive privatisation as an alternative to public expenditure.
Following the first privatisation in the world, the privatisation of “British Airport
Authority” in 1987 and the partial privatized Vienna Airport, other countries put
the privatisation of the airports in their agendas. In 1997, 12 airports in 5
countries; and in 1998 51 airports in 6 countries have been privatized. In the
light of European Union’s view on the privatisation of state enterprises in order
to provide full competition, the European Commission has approved the
privatisation process of the third biggest airport of Germany, Dusseldorf Airport,
in 1997.
According to the Turkish Regulation on Construction, Operation and
Certification of Airports published in the Official Gazette of 14 May 2002,
airports can be constructed and operated by state or public judicial entities and
real or private judicial persons. The pricelists for the use of airports, benefit from
the facilities and services are fixed by the operator of the airport and approved
by the Ministry of Transportation. The Table below gives the number of all the
airports in Turkey by years.
32
Table-15: The number of airports in Turkey
YEARS Open to only
Domestic Flights*
1999
27
2000
27
2001
30
2002
30
2003
30
2004
31
2005
31
Open to Domestic
& Int.n’l Flights*
20
21
20
21
22
21
20
Special Statute
Airports
19
19
18
17
13
12
11
Total No. of
Airports
66
67
68
68
65
64
62
* The airports with military protocol (permitted and free) included. The airports which are
temporarily close to plane traffic are included.
** By the end of 2005
*** Source DGCA web site, http://www.shgm.gov.tr/doc3/istatistik.xls
33
As to the State Airport Authority’s statistics, by the end of 2005, there are
34 airports active in Turkey, all of them owned by SAA. The table below shows
the airports, their category, operating year and the domestic and international
plane traffic (i.e. the no. of planes that took off and landed) by the end of 2005.
Table-16: Airports in Turkey
Airport
Ataturk/Istanbul
Esenboga/Ankara
A.Menderes/Izmir
Antalya
Dalaman
Adana
Trabzon
Milas-Bodrum
S.Demirel/Isparta
Nevsehir-Kap.
Adıyaman
Ağrı
Bursa-Yenisehir
Canakkale
Denizli-Cardak
Corlu
Diyarbakır
Elazıg
Erzincan
Erzurum
Gaziantep
K.Maras
Kars
Kayseri
Konya
Edremit-Korfez
Malatya
Mardin
Mus
Samsun
Sivas
Siirt
Sanlıurfa
Van Ferit Melen
TOTAL
Category
Civilian
Civ
Civ
Civ
Civ
Civ
Civ
Civ
Civ
Civ
Civ
Civ
Civ-Mil
Civ-Mil
Civ-Mil
Civ-Mil
Civ-Mil
Civ-Mil
Civ-Mil
Civ-Mil
Civ
Civ
Civ
Civ-Mil
Civ-Mil
Civ
Civ-Mil
Civ
Civ-Mil
Civ
Civ-Mil
Civ
Civ
Civ
Operating
Year
1953
1955
1987
1960
1981
1937
1957
1997
1997
1998
1998
1997
2000
1995
1991
1998
1952
1940
1988
1966
1976
1996
1988
1998
2000
1997
1941
1999
1992
1998
1957
1998
1988
1943
Plane Traffic
(Domestic)
92.867
40.954
23.171
19.971
6676
17.355
9.412
7.291
129
394
158
236
1.799
618
783
1.016
5.215
751
1.074
3.266
2.157
177
1512
3.336
2.234
780
3.587
536
330
3.064
672
250
681
4.350
256.802
Plane Traffic
(International)
126.251
12.674
13.112
84.606
18.046
4.212
2.153
12.247
31
90
0
0
209
8
5
682
173
0
0
202
56
0
0
1.360
274
0
4
0
0
855
0
0
0
35
277.285
Source: SAA Statistics Yearbook 2005
As could be seen from the table above the most intense traffic is in
Atatürk, Antalya, Esenboga, Adnan Menderes, Dalaman, Bodrum/Milas, Adana
and Trabzon Airports. According to the data given in the table, approximately 92
% of the total transportation –domestic and international- has been realized in
these 8 airports. Accordingly, the investments for the improvement of capacity
and service standards for these airports, preserve their precedence in the
sector, compared to construction of new airports.
34
V. MAIN PROBLEMS OF THE INDUSTRY AND RECOMMENDATIONS FOR
IMPROVEMENTS OF THE COMPETITION IN THE SECTOR
The most important factors expected to affect Turkish air transportation
sector are; population growth rate, demographic variables, GDP per capita, the
developments in the tourism sector and the reflections of the liberalization
movement experienced in Europe.
Turkey’s candidacy to European Union is expected to affect many factors
positively as well. Especially following the integration, the improvement in the
tourism sector would accelerate and the Turkish airline companies would obtain
more share from the increasing traffic. Along with these, it is strongly expected
that, it will help Turkish economy to revive, the business connections between
Europe and Turkey will increase in accordance and this will eventually increase
especially the business targeted passenger and cargo traffic. After the
liberalization measures, the most important development was the formation of
low cost airline companies. This situation activated not only the price sensitive
people traveling for vacation, but also the business market aiming to provide
savings for the companies.
V.1. POTENTIAL AND CURRENT ENTRY BARRIERS THAT LESSEN OR
PREVENT THE COMPETITION IN THE SECTOR
V.1.1. Legal and regulatory conditions for entry
The main legal arrangement regulating the Turkish domestic passenger
flights market is the “Regulation for Commercial Air Transportation Operators”
published in the Official Gazette dated 13 July 1992 with the last amendments
and modifications. The objective of the regulation is to arrange all the
commercial air transportation activities performed by public or private
undertakings to make scheduled or unscheduled flights to carry passengers,
freight and mail in response of a price inside Turkish air zone or between
Turkey and foreign countries.
•
According to the Article 16 of the Regulation, the operator must have
enough financial power depending on the quality and scale of the field of
activity. In this framework, the operators who will make scheduled or
unscheduled flights in domestic or international lines with planes having
100 or more seat capacity, must have at least one million US Dollars
capital per plane. This condition is not valid for those companies, where
51% of the capital is owned by public institutions.
•
Article 18 of the Regulation determines the minimum number of air
vehicles, operators must provide, depending on the field of activity.
According to this article, (a) the operators who will make scheduled
flights in domestic or international lines with planes having 100 or more
seat capacity, must have at least 5 planes either property or for rent. (b)
This minimum requirement is 2 planes for the ones who will make
unscheduled flights. (c) The companies who will make scheduled or
unscheduled flights only in domestic lines must have 2 planes as well.
35
•
If all the planes mentioned in (a) are rented, then the operator must give
a certain and indefinite bank guarantee letter of 3 million US Dollars; if
some are property, some are rented, then a bank guarantee letter of
250.000 USD is asked for each plane, not exceeding 1 million USD in
total. If all the planes are property, no bank guarantee is asked. For
clause (b), these figures are in order: 1.500 thousand USD, and 100
thousand USD for each plane not exceeding 500 thousand in total. And
finally for clause (c), the figures are in order: 250 thousand USD and 50
thousand per plane not exceeding 100 thousand USD in total.
These licensing and safety regulations are not perceived by the airline
companies as an important barrier since all of the current airlines have fulfilled
these criteria.
V.1.2. Reputation, Brand Identity and Switching Cost
Since the consumer behavior is sensitive to security matters, security
reputation is of great importance for brand identity in the passenger flights
sector. Up until today since the liberalization, the private sector airlines have not
encountered any security defect. Therefore, it should not be considered as a
barrier for new comers.
There is no important switching cost for individual customers, but we do
not have any indication that shows that TA customers have switched to other
airlines, since both TA and other airlines have increased their volumes. Tour
operators is another story, since two of the new entrants are owned by a Tour
Operator, their passengers can be considered “captive” consumers and the
switching cost is very high for those. If they do not want to fly with the airline of
the tour operator, they have to pay extra. In addition, other tour operator
companies that are not affiliated with an airline, they can choose the airline they
like, however since tour operators publish their advertisements quite in
advance, the switching cost might be quite high for those.
V.1.3. Absence of Licensed Personnel
In the airline industry the pilots, the hostesses/hosts and technical
maintenance personnel require special qualifications and education and can
only work with a license. However, there is no sufficient educational capacity to
fulfill the growing demand of the sector. Especially in the case of pilots, there is
only one graduate level school in Eskisehir which has only 9 graduates a year.
This may be assessed as an entry barrier. On the other hand, the possibility of
employing non resident personnel lessens the effect of this barrier.
36
V.2. MAIN PROBLEMS OF THE INDUSTRY
The interviews made with the executives of Turkish Airlines, Pegasus
Airlines, Onur Airlines, Atlasjet Airlines, MNG Airlines, Fly Airlines, The General
Directorate of Civil Aviation and the State Airport Authority during the summer
and fall of 2004 and July 2006 revealed the following outcomes:
V.2.1 Slot Allocation
The allocation and scheduling of slots (the scheduled time of arrival
and/or departure allocated to an aircraft movement on a specific date) constitute
one of the essential pillars of market access, and of effective competition
between airlines. The issue is crucial primarily at congested airports. Without
available slots, the benefits of liberalization are spread unevenly, and
competition is subject to distortions. Furthermore, the allocation of slots at
different times of day can also be a source of distortion of competition if certain
carriers, and the national airline in particular, are allocated the best slots in
terms of passenger demand. Any carrier depends on these essential
concessions in respect of both possibility of access to infrastructure and
equality of access.
Council Regulation (EEC) No. 95/93 of 18 January 1993 regulates slot
allocation. Under this Community Regulation, prior allocation of a slot is
required in order to land or take off at “fully co-ordinated” airports, i.e., at
airports where the level of saturation poses serious problems that cannot be
solved by other means. Slot allocation at congested airports must be based on
rules that are neutral, transparent and non-discriminatory.
Responsibility for the decision to co-ordinate an airport lies with the
Member States. Slots are allocated by an authority designated as the “coordinator”. All slots that are used properly (i.e., over at least 80% of the period
for which they are allocated) are automatically re-allocated to the carriers
operating them when they reapply for the following equivalent season (under
the principle of “grandfather rights” or “historic rights”). Lastly, available slots
(i.e., those that are given back by carriers, not re-allocated, or newly created)
are pooled and split evenly between new entrants (carriers new to an airport or
those deemed to have few slots) and incumbents. Regulation 95/93 also
stipulates that States may enact special measures to preserve adequate
domestic air services by allocating a number of slots to routes serving certain
regions25.
As for the slot allocation and airport scheduling in Turkey, there is a
directive issued by the General Directorate of Civil Aviation, the acting regulator
for the air transport sector, in August 28th 2005. The directive is prepared
largely according to the IATA principles and standards. With this legislation, a
Slot Commission has been constituted. The Commission functions under the
coordination of the Ministry of Transport and by the chairmanship of the General
Directorate of Civil Aviation
25
OECD Reviews of Regulatory Reform 2004
37
The Commission is formed by the representatives of State Airports
Authority Operational Slot Unit, Slot Coordination Unit, Turkish Private Aviation
Enterprises Association, the operator of the terminal in question, the airline
companies (including some foreign ones), representation and surveillance
companies and the ground handling companies. The Commission takes the
IATA criteria into account in slot allocation and airport scheduling.
Before the directive has been issued which is until August 2005, slot
allocation was provided by corresponding departments of Turkish Airlines and
State Airports Authority and no airline company could use historical rights other
than Turkish Airlines. This meant that TA had a noticeable effect on time slot
allocations and was problematic for private sector companies especially when
the fact that TA has grandfather rights on many profitable slots, is taken into
consideration. With this new directive however, the priorities of Turkish Airlines
has been removed, the rules of priority are established and for the 2006
summer term, supplied without discrimination. By summer 2007, these
companies will have the right to request historical slots as well.
However, the executives of the airline companies interviewed, stated that
even after this new directive, TA enjoys some privilages related with the slot
allocation and that Ankara-Istanbul line creates the biggest problem. As of July
2006, all the important time slots, such as early morning and late afternoon rush
hour which are used by business travelers from Istanbul for daily trips, are all
occupied by TA and no private airline company has been given a direct slot
between Ankara and Istanbul other than Turkish Airlines. Since Ankara-Istanbul
line is the busiest domestic line in Turkey, this is considered as a very important
competitive advantage for TA. However it was also stated that the slot allocation
in other lines are transparent and non-discriminatory, and no other unfair
distribution has been made by the Slot Coordination Committee after its
formation up-to-day.
Turkish Airlines also holds the historic rights, which give an airline
company rights on slots that it is historically using in a particular airport. The
historic rights clause significantly limits market access and institution of
effectively competitive conditions in the main coordinated airports. That gives
TA a very important competitive advantage over the new entrants, allowing it to
enjoy a substantial number of slots at choice times. As mentioned above, the
Ankara example is a clear demonstration of this fact. The mechanism of
allocating slots on the basis of historic rights—which also aggravates
congestion and which many governments view as a means of satisfying
carriers’ need to recoup their very heavy investments and maintain jobs—
reduces competition as compared with what might transpire if all slots were
allotted on a non-discriminatory basis.
V.2.2. Government Support to Airlines
Government aid to airlines—be it direct or indirect—can distort the
market and harm the recipients’ current and potential competitors, and
ultimately the traveling public. In many cases, these subsidies are explicit and
direct, but in others they take the form of indirect and cross-subsidies.
Community law on State aid (Articles 92 and 93 of the EC Treaty) are also
38
applied to airlines. .A Communication sets forth Community policy regarding
State aid in the aviation sector. These measures are not compatible with the
Treaty unless they correspond to one of the exemptions provided for by
Community law. Nevertheless, whether or not they are compatible with
European law, subsidies can distort competition and therefore prevent the
market from operating properly, as it might also be a major problem in
liberalization of Turkish air transportation market.
A distinction must be made between two main types of government aid:
first, the aid authorized under Article 92, paragraph 3 of the Treaty and Article
61, paragraph 3 of the Agreement on the European Economic Area; and
second, aid in connection with public service obligations in respect of domestic
services under Article 4 of Regulation 2408/92. Observation of the facts shows
that there is relatively wide-scale use of direct and indirect government aid, and
also that the distortion of competition caused by this aid is detrimental to
competing carriers and to the public.
As of 25 June 2006, %49 of Turkish Airlines shares is owned by Turkish
State, i.e. the Privatisation Authority in order to be privatized; and the remaining
51% shares are offered to public. At the moment there is no evidence that TA is
enjoying a direct state aid. So that it is declared that TA used its own financial
resources in the purchase of 51 new airplanes recently. On the other hand,
executives in the sector stated that TA is enjoying preferable credit interest
rates, because of low credit risk due to state shareholdership. Compared to the
company’s on hand fleet, purchasing of 51 new planes is a very big increase in
TA’s service capacity. This could be seen as a strategic barrier to entry or a
deterrent tactic against competitive conduct of private sector companies.
Another quasi state aid expressed also by the executives is that the TA
could delay or avoid the payments charged by the State Airports Authority,
especially resulting from the usage of national air space. When taken into
account that these charges constitute a considerable portion of the flight costs,
it creates a competitive advantage for the TA.
V.2.3. Airport Services and Aviation Charges
Almost all of the airports in Turkey are owned and operated by SAA with
the exception of Istanbul and Antalya airports which are operated by private
companies in the BOT format. Most of the airports in the eastern regions of
Turkey suffer from insufficient infrastructure, e.g. lack of parking fields, service
buildings for passengers which restrict the market growth. Nevertheless this
problem seems likely to be solved by mutual or multilateral agreements
between private airline companies concerning slot allocation matters aiming the
effective usage of airport facilities to meet the demand, stipulated that the
Turkish Competition Authority would give an exemption to these agreements.
The fees for airport usage, charged by State Airport Authority are
assessed to be too high for new entrants. There are 25 Tariffs issued by the
State Airports Authority. The ones that are directly related with the airline
companies, most being compulsory are given below. The rest of the charges
39
are directed either to the staff working in the airline and ground handling
companies or the passengers.
Airports Charges
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
International landing, parking and approach tariff
Domestic landing and parking tariff
Safety precautions against aircraft fire tariff
Passenger service tariff
Follow-me service tariff
Terminal service tariff
Ground handling working licenses tariff
Place allocation tariff
Electricity, water, hot water, steam and cooling the cold storages tariff
Check-in and transit desk tariff
Communication systems tariff
Usage of flight information systems monitors tariff
Walkie-talkie tariffs
Transfer of fuel tariff
AIS publications tariff
Trunk wireless tariff
Conference room and reception desk tariff
Flight information systems advertisement tariff
Although charges in principle must be proportional to cost, there is no
transparency in how charges are determined, and the SAA does not claim that
fact either. According to the “International Landing, Parking and Approach
Tariff” of State Airport Authority, landing and parking fees are applicable
according to the maximum take-off weight of the aircraft as indicated in its
registry; fractions of a ton are to be rounded off. The same applies to domestic
flights as well. The tariff which contains the charges for the use of airport
facilities and services given to passengers when they are leaving or traveling in
Turkey, is made based on Load and Trim Sheet and on other official documents
and this passenger service charge that should be paid to SAA is included in
passenger’s ticket fare. The tariff which contains the charges for the terminal
services presented to an aircraft docking to the bridge at the terminal buildings
and the airports operated by SAA, are applied according to the maximum takeoff weight of aircraft as indicated in their Registry. Fractions of take off weights
are to be rounded off 1000 kg. There are a number of tariffs issued by SAA like
the ones mentioned above, however none of them explain the relationship
between the cost and the charges.
One other problem expressed by the executives of the airline companies
interviewed is the SAA’s abovementioned charges being collected in foreign
currency. Especially in domestic lines, the money charged for the tickets is in
Turkish Lira, however, the airline companies must pay the charge for the airport
services to SAA in Euros. The representatives of the sector rightfully express
the need to change the currency to Turkish Lira, since they face great losses
due to currency change in a country where floating exchange rate is carried out.
40
V.2.4. Ground Handling
Ground handling services are vital to the success of air transport
services and make an essential contribution to the efficient use of air transport
infrastructure. A carrier’s competitiveness depends on speed, quality and cost
of ground services, as well as on non-discriminatory access to them. Only an
open and competitive market can prevent carriers—and ultimately
passengers—from being cheated by low-quality services provided at noncompetitive prices26.
Ground handling services in Turkey are discussed in detail above. The
duopolistic structure of Turkish ground handling services may impede the
success of new entrants. The licensing procedure seems to form an effective
barrier to entry to this sector, and in turn may effect the competition in airline
industry.
Council Directive 96/67 of 15 October 1996 on the liberalization of the
ground handling market at Community airports (hereinafter “Directive 96/67”)
was enacted to liberalize access to the ground handling market, and to enable
carriers to engage in self-handling. The Directive lays down minimal standards
for the liberalization of this market. For certain ground services, Member States
may limit the number of carriers authorized to engage in self-handling. By virtue
of this Directive, the Member States may impose quantitative restrictions for
safety or capacity purposes. It should be pointed out that the Commission has
initiated a process of revising this Directive and should make proposals in this
regard by the end of 200327. In the process of bringing Turkey’s laws and
regulations in line with the EU ones, it should be expected that ground handling
regulation may change as well.
V.2.5. Other Issues
26
27
•
DGCA is hardly to be considered as capable of providing and
implementing the needed objective, non discriminatory industry related
secondary legislation, because of its state dependent structure and lack
of staff.
•
TA has the control over technical maintenance infrastructure for
airplanes. Most of the private sector companies are customers of TA in
this respect, which could dilute the competitive conduct of these
companies.
OECD report ibid.
OECD report ibid.
41
V.3. RECOMMENDATIONS FOR IMPROVEMENTS OF THE COMPETITION
IN THE SECTOR
The liberalization and deregulation, in fact re-regulation of airlines
industry for it is an industry that has to have quite a few regulations for safety
and other reasons, should be done in a fast, coherent and well-coordinated
manner. For this reason a single authority can be set-up to do the job properly.
Moreover, a single authority will not only help the existing carriers to address
their problems to a single source, obey to single source and see more clearly
the specifics of the market such as its rules and regulations, but will also help
encouraging entry by new carriers, domestic and foreign.
Competition rules should be fully exercised with the exceptions that may
help the entry and development of the industry. Nevertheless, there should be a
very fine balance in rules and regulations of the industry as too off-hands
approach may lead to several problems not only in safety but also in fares,
schedules and service offerings of the carriers, on the other hand too much
government involvement in pricing and capacity decisions may cause a reverse
effect that stifle airline efficiency, innovation and competition. Thus a single
agency can be more attuned to handle these complex issues.
The rules, laws and regulations that govern the industry for the last fifty
years should be up-dated and revised to adapt to new facts of the industry.
This new body can be set up under the Ministry of Transportation whilst an
independent body, like other regulatory agencies. This would also help the
privatization process of Turkish Airlines.
In the section below, we listed some brief and segment specific
recommendations that we believe may help the entry and competition as well as
competitivity in the sector.
V.3.1. Airlines
•
The privatization of Turkish Airlines is the most important issue for the
sector. The privatization would not only help to foster competition but
also would help Turkish Airlines itself by the transformation of a state
owned company to a privately owned and run, efficient and profitable
company. It would also help regulators and competition agencies to take
their decisions more freely, and apply the competition rules more
effectively.
•
The accounting transparency of TA should be achieved to prevent any
possible anti-competitive state subsidy or cross-subsidy.
•
Alliances: In order to succeed the private airlines should have very strong
finances and should be able to optimize on their flights, and increase the
efficiency of the operations. Also network economies of scale were
thought to be very limited in airlines capable of supporting more than two
or three flights a day (Høj, Kato, Pilat 1995). However more recent
42
studies have shown otherwise (Pustay, 198528) One way of doing that
may be the formation of alliances with foreign carriers. Although they
have never been exercised, the airline companies have the opportunity
both for code-sharing and strategic alliances. According to the General
Directorate of Civil Aviation, there is no judicial infrastructure for code
sharing and strategic alliances, it is all up to the companies to use these
opportunities or not.
Airline alliances can be done on many different areas, Federal Aviation
Administration in USA has defines them; “a merging of resources,
operations, or financial interests between (one) entity and (another)
entity. This entity could be an air carrier or a repair station and could
involve the sharing of parts or the utilization of mechanics, pilots, and
flight attendants” (FAA 1995). Alliances can include code-sharing
agreements, marketing arrangements, procurement policies, system
commonality, and interchanges of flight crew personnel and aircraft. On
less complex alliances may consist of only frequent flyer mileage
agreements and a few other amenities such as passenger through
check-in29.
Although this paper is written to look into ways of increasing competition
in the airline sector, we believe the important issue here is to increase
competitiveness first. Alliances are usually seen as competition
decreasing undertakings for they may increase concentration in the
industry. However, Turkish domestic passenger flights market is a very
young sector, where the players would need all possible tools to increase
their strength and airline alliances which do not result in merging of two
firms but only merging of forces on specific issues would be
advantageous for the competitiveness of the sector over all. They are
also very effective to increase market coverage or to gain entry to
otherwise difficult market segments.
Some special exemptions from competition inspection can be granted for
these types of alliances encouraging firms into sharing some of their
resources to gain competitive advantage. As the anti-trust immunity
given to some airlines in USA and Europe. However it is a very delicate
subject, these alliances as they can be pro-competitive for small,
financially weak operators, they can also be anti-competitive if performed
between horizontally competing airlines or potential competitors.
As mentioned above, these alliances do not have to be purely between
domestic firms but also between foreign airline companies and Turkish
companies. Barriers to entry for foreign firms, into the domestic airline
industry although not clearly stated by laws and regulations exist for
scheduled flights. Government can encourage foreign airlines into
entering alliances with Turkish firms in domestic airline sector by easing
investment and foreign ownership regulations. Such alliances would give
Turkish airline firms the necessary financial power and know-how not
only to help companies themselves but also to develop the sector overall.
28
29
M. W. Pustay, Airline Competition and Network Effects, Transportation Journal 2002
S. A. Vander Kraats, Gaining a competitive edge through airline alliances, 2000.
43
Economies of scope are always very important for airlines30.Code
sharing is also a type of alliance that is proven to be very beneficial and
effective in the airline industry. FAA defines the term code sharing as “(A)
marketing arrangement that permits… a carrier to sell service under its
name and airline designator code when the service is provided in whole
or part by another air carrier” (FAA, 1995). (Vander Kraats 2000)
describes code sharing as a simple “marketing arrangement” aimed at
benefiting both participants economically without the complexity of an
alliance. Interlining is another similar concept, where two airlines
establish joint fares and coordinated flight schedules, but each “retains
its own identity, and flight segments are clearly labeled as to which
carrier is providing the service” (O’Connor, 1995). “Code sharing differs
by having a single ticket issued which may reflect a single carrier through
to the final destination; however, the actual passage may involve two or
more different airlines.” (Kraats, 2000).
There have been a lot of literature and court cases on these alliances.
Most recently the European Commission although not forbidding code
sharing alliances have published a new memo, that would protect
passengers against the potential harmful effects of code sharing
alliances, such as the lack of information that is given to passengers on
which airline they will be flying on, the prices etc..
“Alliances involving code-sharing are in many respects the most
controversial. They have the potential to be pro-competitive –they
can create new service, improve existing service, lower costs and
increase efficiency, all the benefit of the raveling public. Code
sharing agreements also have the potential to be anticompetitive.
They can result in market allocation, capacity limitations, higher
fares, or foreclosure of rivals from markets, all to the injury of
consumers. The ability to distinguish the latter from the former is
crucial for aviation policy makers and anti-trust enforcement
authorities.31”
Code sharing agreements should be taken on a case by case basis as
they can be both pro and anti-competitive. In Turkish domestic airline
market, there are no regulations that prevent code sharing
arrangements. However these arrangements not between the existing
players but maybe with some strong foreign airline companies to serve
their passengers on domestic flights can be beneficial for the growth of
these young airlines. Moreover, code sharing for routes that are not
served before, (or only served by TA) and have a very small probability
to be served in the near future by more than one company because of its
small volume of passenger traffic can be good candidates for procompetitive alliances.
30
“there are substantial economies of scope and revenue related to the ability of an airline to
connect flights. This happens typically through hub-and-spoke operations (predominant in the
United States), through code-sharing and the operation of computer reservation systems (CRS)
between airlines. “ p.21. Høj, Kato, Pilat 1995
31
J.I. Klein Assistant Attorney General, Testimony before the Committee on Commerce,
Science and Transportation, United States Senate, 1999
44
•
There are no judicial impediments against the foreign airline companies
to make flights in Turkish domestic lines. However, taking into
consideration the Chicago Convention which says, every country has
sovereignty over its own air space, Turkey did not give permission to any
foreign airline company for domestic flights so far. As far as we have
been informed by the DGCA, no foreign companies have applied for
domestic flights license up to now.
•
Private airlines are having difficulty in finding qualified personnel. Hiring
foreign nationals is used by the companies as an option, since it is not
prohibited by any regulation. Still, courses in Universities or special
high—schools (professional education schools or technical schools) or
specials schools can be opened to help creating qualified work force for
the airlines. These schools can be funded by the government as the
education is traditionally on the shoulders of the state, but also they can
be funded by founds created by private airlines as they will be the sole
beneficiaries of these schools or courses.
•
Creation of regional airlines, defined as “local carriers using small
turboprop aircraft (up to fifty cabin seats) and operating short- and
medium-haul routes up to 500 km….In the context of total air transport
market the regional airlines operate non-subsidized routes in
communities where the trunk operators cannot guarantee sufficient
passenger traffic to justify the use of large jet airliners.” by J.
Ludvigsen32.. The experience in other countries (Ludvigsen discusses
Norwegian airlines) shows that although small airlines may suffer some
new market difficulties in areas such setting the capacity and flight
frequency, the general outcome is such that first small communities
where there were no service before was served through the network of
infra and intra-regional airlines, second there was a dramatic increase in
passenger traffic thanks to the existence of important unmet demand in
these markets.
As Ludvigsen reports, in Norway, the costs of establishing these new
services to new areas were borne partly by the airlines and partly by
municipalities. Thus, the Treasury was not burdened by upgrading
secondary airports nor by supporting loss-making carriers.
The same example can be implemented in Turkey which is a big country
with many not previously served areas where the demand is not high
enough for big carriers to enter. The creation of these airlines may in fact
further the development of bigger airlines by connecting the passengers
of these small communities to bigger airports. “The interregional airlines
in fact generated substantial amounts of genuinely new traffic from
communities which had hitherto been deprived of the convenience of air
transport.” Some investment incentives can be given to encourage the
creation of regional airlines. Also some regulatory incentives can also be
given to promote the building and/or upgrading of airports in these areas
by private regional airline companies.
32
J. Ludvigsen, 1993
45
V.3.2. Airports, Slots and Ground Handling
33
•
The infrastructural improvement of airports is crucial for the success of
domestic flights. The current airports are not sufficient in terms of space
and equipment. The runways are in some cases too short for big
aircrafts to land or take-off, the security equipment is not adequate, and
the terminal buildings are too small to accommodate airline companies
(to have their sales and check-in desks). Privatization of airports can
provide a solution for this problem. The BOT model seems to be working
well in the two airports (terminals) that are built by this model, presently
there are two more airports that are being built (modernized) by this
model, this number should be increased. More favorable conditions can
be given by the State for the airports which are less profitable to
encourage investors.
•
Istanbul Atatürk airport is the busiest airport of the country and there are
almost no slots left for new flights. A new airport has been built and
opened (Sabiha Gökçen Airport) at the Asian side of Istanbul. However
the transportation facilities are not adequate to this airport, the public
transport is almost impossible, and even with cars, it is located after the
toll gates on the high way. Some incentives should be given to airlines to
use this airport, and transportation to the airport should be ameliorated. If
necessary measures are taken, some of the airline companies would
move their hub to Sabiha Gökcen Airport and this would ease the traffic
in Ataturk Airport, opening rooms for new slots eventually.
•
After September 11 many countries have supported their airlines by
subsidies. The recent increase in fuel prices has affected the airlines and
their profitability. The new entrants are keeping the prices low to
encourage air transport in a country where domestic air transport has not
been developed, so there may be subsidies for new entrants. For
example there may be a small tax advantage for companies that are
carrying tourists domestically. Turkey is quite a big country an incentive
of that sort may serve two purposes, helping airline as well as tourism
industries.
•
Slot allocation is also a very important issue. Slots are scarce resources
in economics terms, i.e. only available in a limited quantity. An
independent, fair and efficient slot allocation is essential. The current Slot
Commission should allocate slots on a neutral, transparent and nondiscriminatory basis. To achieve optimal allocation of a scarce resource,
one solution might be to abolish the historic rights clause and put all
available slots up for auction. To price slots on the basis of supply and
demand (with higher charges at peak times) would also lead to a more
rational allocation of this scarce resource33.
•
The aviation charges should be cost-based and encouraging.
•
The licensing of ground handling services should be revised to allow
more operators.
OECD Report ibid. 2004
46
VI. CONCLUSION
Turkish Domestic Passenger Flights Market has entered a new era of
liberalization, privatization and competition. The early results of this new era are
very optimistic. However there is much room for progress. One of the main
questions in liberalization of Turkish domestic passenger flights market is that;
“should it be an incremental or in other words slow and progressive
liberalization as was the case in the EU or more of a radical “trend-break” one
as in the US?”. In our opinion it should be a very fast and effective liberalization
process coupled with the privatization of Turkish Airlines for several reasons.
First, in the pre-membership to the EU period Turkey has to adopt all the
necessary EU regulations and deregulations in a very short period to be able to
prepare its market and industries to the EU entry. Second, air transport both for
passenger and freight, is very important as an infrastructure for a country’s
economic development. Liberalization experiences in other countries clearly
showed the benefits of this process by lowered prices and increased capacity,
quality and airline network coverage. In deed, in the short period that private
entry to domestic air transport was liberalized in Turkey, prices have fallen in
some cases up to 70%, market volume has increased more than 60% and
service to new airports and routes have already started and increasing by the
day. Privatization of Turkish Airlines will also certainly speed up this process,
and ameliorate the competition conditions in the sector.
We have listed our humble recommendations based on our surveys,
analysis and interviews with the industry players. Surely there must be quite a
few possible improvements that we have omitted, and there are a lot of things to
be done for a fully competitive sector in world standards. However, the industry
is certainly on the right path and more competition is needed for the well-being
of not only the industry itself, but also the consumers and Turkey’s economy,
but this does not mean a totally free of regulation industry, not only for safety
but also for quality of service. Turkey has the advantage of benefiting from other
country’s experiences, competition may in some cases lead to complex booking
restrictions, varying and sometimes high fares, crammed planes and airports
and delays as reported by Meyer and Menzies about US air passenger
services34.
“Open frontiers and affordable transport have given Europeans
unprecedented levels of personal mobility… But today’s transport patterns and
growth rates are unsustainable35”. The European Commission recently
published a memo and white paper on protecting air passenger against these
potential difficulties, the new measures will protect air passengers on issues
such as: compensation and assistance to passengers in the event of delay or
cancellation, mandatory insurance system, the continuity of passengers’ rights
from one operator to another across transport modes etc.
More competition is always desirable as long as its benefits such as
lower prices, more flights are coupled with increased quality and services. A
competitive airline sector has a many secondary benefits as well, such as
increased tourism (both revenues and investment), faster movement of goods
34
35
J.R. Meyer, T.R. Menzies, 1999
Europa: Overwiews of the European Union activities, Trasnport, December 2004
47
and services that result in increased trade not only domestically but also
between the small cities (that are now connected to big cities) and exporting
and importing countries.
The competition rules and regulations as well as sector specific
regulations are the guardians of these developments.
48
APPENDIX 1
COMPETITION ANALYSIS
1. MARKET DEFINITION
Given its nature, market definition in the airline transport sector is a
complicated one. In the past cases that have been analyzed by the competition
authorities, there have been quite a few different approaches. As in this report,
we are mostly interested in European Commissions perceptive firstly here
below we have given examples of European Commissions past decisions on
the market definition issue.
1.1. The Relevant Market
In the Air France/KLM Case36, the Commission determined three
different market definitions for scheduled air transport of passengers, as given
below:
1.1.1. Point of origin / point of destination (O&D) pairs vs. network market
definition
In the air transport sector, the Commission has found that the relevant
product market for passenger air transport services should be defined on the
basis of the point of origin / point of destination; (O&D) pair approach. According
to this approach, every combination of a point of origin and a point of
destination should be considered to be a separate market from the customer's
viewpoint, since from a demand substitution point a customer would not
substitute a different destination than she wants to go because of its price or
quality. To establish whether an O&D pair forms a relevant product market, the
Commission considers the different possibilities offered to consumers to travel
between these two points. The Commission will not only consider the direct
flights between the two airports concerned, but also other transport alternatives
to the extent that they are substitutable to these direct flights. These alternatives
may include direct flights between other airports which have overlapping
catchment areas with the airports concerned at each end (airport substitution),
indirect flights between the airports concerned, or other means of transport such
as road, train or sea (inter-modal substitution). Whether one of those
alternatives is substitutable to the direct route depends on a multiplicity of
factors, such as the overall travel time, frequency of services and the price of
the different alternatives. This can only be decided on a route-by-route basis.
During the market investigation some network competitors have
contested the traditional O&D approach and have suggested that network
competition should instead be considered. As network carriers operate a huband-spoke37 system and because of the increasing size and scope of airline
36
Air France/KLM Case, Case No Comp/M.3280
A hub is a central airport that flights are routed through, and spokes are the routes that planes
take out of the hub airport. The system can be described as feeding smaller capacity flights into
37
49
alliances, such competitors submit that competition occurs on a network basis.
In their view, the O&D approach fails to capture the nature and the extent of
such competition.
The reference to network competition represents a supply side
perspective and follows the business model of network carriers rather than the
customer needs. Arguably, the network approach is normally of little relevance
to the individual consumer. If confronted with high prices due to a monopoly on
a particular O&D pair, a passenger may find little comfort in the fact that airlines
compete world-wide in the development of their respective networks. Moreover,
network carriers only represent one, if important, part of the industry. The
market investigation has shown that low cost point-to-point operators and many
regional carriers instead tend to agree with the O&D approach.
The Commission therefore maintains that consumers wishing to travel
from a point of origin to a specific point of destination will consider the various
possibilities to travel to the point of destination. Hence, consumers will take into
account the network aspects such as for example frequent flyer programs only
to the extent that airlines or alliances serve the O&D pair between which they
wish to travel.
Some competitors have further suggested that corporate customers are
increasingly considering contracting with airlines on the basis of the geographic
coverage of their network (including those of their partners). Unlike an individual
consumer, such corporate customers therefore would follow rather the network
than the O&D approach. Typically, corporate agreements provide for a general
discount on prices when flying with an airline/alliance network. The discount
often depends on the customer overall travel expenditure.
The market investigation has shown that most corporate customers deal
with more than one company or alliance and that they do not conclude
exclusive contracts. The reason seems to be that no single airline (or alliance)
could yet offer a complete world- wide coverage. Thus, even if a large number
of customers may have, from the corporations point of view, a preference for a
corporate contract their employees traveling needs are still point-to-point. This
is consistent also with the Commission’s view in the United Airlines/US
Airways38 decision.
a central hub somewhere, where passengers can be decanted into larger aircraft that then flown
to their final destination. It is invented by American Airlines and today adopted by other major
carriers. This system is cheaper to run than direct city-to-city flights because you need fewer
aircraft. However, it has disadvantages, too. The first is that the hub cities get terribly
overcrowded from the sheer volume of traffic, meaning delays. The other problem is also
related to traffic, but caused by airline scheduling practices. A large number of flights will be
scheduled to depart at a very popular time (such as 8am for business travellers). This sells
more seats, but the airport can really only clear about 8 flights for takeoff within 40 minutes of
that departure time. The delays this causes are called "push-back time" by the airlines, and
blamed on Traffic Control.
38
United Airlines/US Airways, Case M.2041
50
As most corporate customers conclude such contracts with several
airlines/alliances, whenever flying on a specific O&D pair, among other
elements, they will consider the prices charged on this particular route and the
overall discount. The more advantageous the latter is and the better the
carrier’s network covers the customer’s travel needs, the more likely it is that
the corporate customer remains with one carrier / alliance. In that case the
customer’s choice is determined by network competition and not by competition
on individual city pairs. In this regard, the market investigation has shown a
mixed result. In their choice of an airline, some corporate customers give more
importance to the fare level while others give priority to the overall discounts
offered.
For these reasons it is concluded that demand substitution justifies the
O&D approach in defining the relevant market. However, in the case of
corporate customers it is recognized that demand is driven both by network
effects as well as O&D considerations.
Supply side considerations instead play an important role when
considering the competitive constraint which individual carriers may exert on a
certain market. The hub-and-spoke system determines the network carriers’
decision to operate (or not) a passenger air transport service on a particular
O&D pair. Network airlines concentrate traffic into a specific hub and disperse
passengers via connection to numerous spokes. This increases the freight
factor of aircrafts and allows airlines to exploit economy of density. They
normally refrain from entering city pairs which are not connected to their
respective hubs. At the same time the concentration on their hubs reinforces
their position at these airports which often makes entry of competing airlines
more difficult.
Consequently, the Commission although has accepted the importance of
network competition especially for corporate customers, as a general rule
Commission has taken the O&D approach as the relevant market.
1.1.2. Time-sensitive vs. non-time sensitive passengers
In scheduled flights, the tickets are sold by the related airline company or
the authorized agents to the ones that would benefit from the service, namely
the passengers, and the time of the flight stays constant. In scheduled flights,
even if the plane is not full, the flight is realized due to reliability, continuity and
maintenance of the acquired rights. This system aims a passenger profile
consisting of especially businessmen who do not have flexibility in time.
In charter flights on the other hand, passengers who do not have time
limitations are being carried. The charter airlines market is defined in
Commission’s Westdeutsche Landesbank/ Carlson/Thomas Cook Decision39.
According to this definition, charter airlines exist primarily to serve tour
operators, particularly in the most popular sectors of the foreign holiday market.
Charter airlines operate between the country of origin and the airports closest to
major holiday destinations. The choice of routes and the frequency of flights are
39
Westdeutsche Landesbank/ Carlson/Thomas Cook Decision, Case No IV/M.1341
51
dictated by demand from tour operators. Charter airlines will change flying
patterns to reflect changes in demand for foreign package holidays to particular
destinations. Charter airlines generally expect a tour operator to buy blocks of
seats for at least a holiday season. The risk of plane’s not being full is
undertaken by the tour operator. As a result they are irregular, seasonal flights.
The Commission has found that passengers traveling on unrestricted
tickets (time- sensitive passengers with a need for flexibility) may be in a
different market from passengers with restricted tickets (non-time sensitive),
which are more interested in the price than the frequency and accept longer
journey times. Some competitors have suggested that this difference no longer
reflect the requirements of passengers and the commercial policy of the airlines.
However, customers and travel agents have confirmed the importance for
certain travellers (mainly business passengers) to the possibility to modify their
tickets and return as soon as possible to their point of origin, preferably within
the day if a short-haul route (this requirement does not, obviously, exclude that
these customers are also -more and more, as argued by many respondents price-sensitive). Time-sensitive passengers have therefore different
requirements than non time sensitive ones and normally will only choose to fly
airlines offering a high number of frequencies in a given O&D pair and the
possibility to use unrestricted tickets. Therefore, the Commission further divided
the market to two distinct markets such as time sensitive and non time sensitive
passengers markets.
1.1.3. Substitutability of indirect flight with direct flights on short-haul
routes and long haul routes
In the past, the Commission has considered that on short-haul city pairs
indirect flights do not provide a significant competitive constraint on direct
services. However, this has to be examined on a case-by-case basis. In
exceptional circumstances, indirect flights could exert a certain competitive
constraint over direct flights. This is the case of some of the routes affected by
the present transaction where a significant number of time-sensitive passengers
even prefer the indirect service over the direct one. This is due to the
inadequacy of the direct flight to meet the specific requirements of time
sensitive passengers, namely a high number of frequencies allowing the
completion of a roundtrip in a day.
In the United/US Airways40 decision, the Commission found that on longhaul flights, such as transatlantic services, indirect flights are at a lower
disadvantage than on short-and-medium-haul services because intermediate
stops have a lower relative impact on total elapsed time as the total trip duration
increases. The Commission concluded that indirect flights may constitute a
competitive alternative to non-stop services if they are marketed as connecting
flights on the city pair on computer reservation systems, are operated on a daily
basis and cause only a limited extension of the trip (150 minutes waiting time).
In recent transatlantic alliance decisions, the Commission followed a similar
approach and concluded that indirect flights, under certain conditions, appear to
exert a sufficient competitive constraint on non-stop long haul services. The
40
See footnote 12 above
52
degree to which an indirect flight is substitutable should be considered on a
route-by-route basis.
During the course of the market investigation some corporate customers
indicated that only services with a connection time of a maximum of 120
minutes fully constitute competitive alternatives to direct non-stop flights.
However, corporate customers are only one customer group and, according to
the market investigation, probably the most time-sensitive one. Other customer
groups can accept longer connection times. Moreover, other elements brought
by the market investigation mitigate this suggestion since, on long haul routes,
the dividing line between time sensitive passengers and non time sensitive
passengers has become less clear. As was reported by several parties an
increasing number of time-sensitive passengers appear to have become more
price sensitive. In particular an increasing number of undertakings require their
employees to take the most economical flights, including indirect flights,
irrespective of total flight duration or longer connecting times. It is therefore still
considered that the availability of flights with a maximum connection time of 150
minutes exert sufficient competitive constraint on long-haul direct flights.
In light of the above, it is concluded that, on the long haul routes
considered in this investigation, competitive indirect flights can be generally
seen as a suitable alternative to non-stop services. Those competitive indirect
flights are therefore included in the markets for the provision of scheduled air
services for passengers on transatlantic city-pairs concerned.
The Commission, in its Singapore Airlines/Virgin Atlantic Case41 and
Marine-Wendel/SairGroup/AOM Case42 states that the definition of the relevant
market in air transport is generally made on the basis of a route or a bundle of
routes. The substitutability between routes depends on a number of factors,
such as the distance between the point of origin and the point of destination, the
distance between the different airports situated on each side of the route and
the number of frequencies available on each route.
In its KLM/Alitalia Case43, the Commission, as in the Air France/KLM
Case , considered that, air transport services are normally offered to two
distinct clusters of customers, time-sensitive and non time sensitive
passengers. However this distinction has not proved decisive in the
Commission assessment of O&D pair constitute the relevant product market.
44
When it is the air transportation sector in question, as could be
concluded from the above mentioned information, market definition is a
complicated subject matter. The relevant market may consist of all the
transportation means that are operating between a city pair or all the city pairs
that a network operates, or even if only an O&D pair is considered, the market
may be divided in time sensitive versus non time sensitive passengers.
Considering that The Turkish Competition Law stems from the European model,
it would be appropriate to anticipate that the Turkish Competition Authority
41
Singapore Airlines/Virgin Atlantic Case, Case No Comp.M.1885
Marine-Wendel/SairGroup/AOM Case, Case No IV/M.1494
43
KLM/Alitalia Case, Case No Comp/JV.19
44
See footnote 10 above
42
53
(TCA) would respect the above mentioned criterion considered by the
Commission, in defining the market.
In TA Pooling Case45, The TCA examined the request for individual
exemption for the pooling agreement signed among Turkish Airlines, Israel
Airlines, Kingdom of Jordan Airlines and Egypt Airlines. In its decision, the
Authority determined the relevant market as scheduled and non scheduled air
transportation market.
In the TPAEA Case46, an investigation has been carried out about the
Turkish Private Aviation Enterprises Association, claimed to be fixing minimum
prices for its members. In this Case, as for the relevant market, The Authority
differentiated between first, domestic and international lines, and second
scheduled and non-scheduled flights market.
1.2. The Geographic Market
The city pair definition is also used in geographic market definition. As in
the product market this geographic market can be limited to one city pair or may
be extended to include all the destinations where a network operates. The same
principle, holds for geographic market definition, that as far as the demand
substitution is concerned about the geographic market consists of O&D pair.
The definition of geographic market could be explained by the concept of
“city-pair”. City-pair is the line which, the city of departure is the starting point
and the city of arrival is the end point. So the geographic market can be defined
as the flight lines including the cities in or out of Turkey, where the flight has
been realized.
45
46
TA Pooling Case, Turkish Competition Authority, 13.02.2001, No: 01-08/73-21
TPAEA Case, Turkish Competition Authority, 17.07.2001, No: 01-33/329-93
54
APPENDIX 2
COMPETITIVITY ANALYSIS
In this section, Michael Porter47’s “diamond” will be used to show the
elements of industry structure. Charter flights are not in the market yet, so only
the scheduled flights are taken into consideration in this analysis.
Entry Barriers
Ground
Handling,
Catering,
Fuel,
Airplane
Producers,
Airports,
Maintenance
Service
Provider
(TA)
Scheduled
Domestic Flight
Providers
Threat
of
New
Entrants
Bargaining
Power of
Suppliers
Determinants of
Supplier Power
Bargaining
Power of
Buyers
Turkish
Airlines
Individual
passengers,
travel
agencies,
other airline
companies
for
connecting
flights.
Intensity of
Rivalry
Threat of
Substitutes
Determinants of
Buyer Power
Intermodal competition bus
companies, railroad, charter
Determinants of
Substitution Threat
47
“Competitive Advantage” by Michael Porter (1985), Free Press, New York (p.6)
55
1. ENTRY BARRIERS
Inflexible supply requirement
The scheduled airlines can not change their supply capacity easily
according to demand conditions as a scheduled flight once published should
continue throughout the pre-determined period.
Licensing and safety regulations
It has not been mentioned as an important barrier since all of the current
airlines have easily fulfilled the criteria.
Brand identity
Brand identity is important while the industry is one where the security
reputation is very important.
Switching cost
There is no important switching cost for individual customers, but for tour
operators who have already published their advertisements, their might be
some.
Capital requirement
Very high as the price of main capital good (airplane) is very high
although airlines have to use highly qualified personal which increases labor
costs. Fortunately, leasing and hiring could be considered as alternative
sources of capital.
Legal infrastructure
The main legal arrangement regulating the Turkish domestic passenger
flights market is the “Regulation for Commercial Air Transportation Operators”
published in the Official Gazette dated 13 July 1992 with the last amendments
and modifications.
The objective of the regulation is to arrange all the commercial air
transportation activities performed by public or private undertakings to make
scheduled or unscheduled flights to carry passengers, freight and mail in
response of a price inside Turkish air zone or between Turkey and foreign
countries.
According to the Article 16 of the Regulation, the operator must have
enough financial power depending on the quality and scale of the field of
activity. In this framework, the operators who will make scheduled or
unscheduled flights in domestic or international lines with planes having 100 or
more seat capacity, must have at least one million US Dollars capital per plane.
This condition is not valid for those companies, where 51% of the capital is
owned by public institutions.
Article 18 of the Regulation determines the minimum number of air
vehicles, operators must provide, depending on the field of activity. According to
this article, (a) the operators who will make scheduled flights in domestic or
international lines with planes having 100 or more seat capacity, must have at
least 5 planes either property or for rent. (b) This minimum requirement is 2
planes for the ones who will make unscheduled flights. (c) The companies who
56
will make scheduled or unscheduled flights only in domestic lines must have 2
planes as well.
If all the planes mentioned in (a) are rented, then the operator must give
a certain and indefinite bank guarantee letter of 3 million US Dollars; if some are
property, some are rented, then a bank guarantee letter of 250.000 USD is
asked for each plane, not exceeding 1 million USD in total. If all the planes are
property, no bank guarantee is asked. For clause (b), these figures are in order:
1.500 thousand USD, and 100 thousand USD for each plane not exceeding 500
thousand in total. And finally for clause (c), the figures are in order: 250
thousand USD and 50 thousand per plane not exceeding 100 thousand USD in
total.
II. RIVALRY DETERMINANTS
Industry growth
As could be seen from Table-4, with the opening of domestic lines to
competition, a market growth of 2.172.182 passenger has been created in the
time period between November 2003 and July 2004. This market did not exist
before, because in the same period TA has carried 1.029.343 more passengers
compared to the previous year. This means that the new entrants have not
created a decrease in TA’s passenger potential. In other words, the market has
not been only reallocated but at the same time, a net growth in the market has
been experienced.
Fixed Cost / Value added cost
Offices, in the cities where they are serving. Fixed airport usage cost. Airplane
maintenance costs.
Intermittent over capacity
The cost of airplane flying with one passenger or full is the same. Although the
cost of airline companies for hiring stuff for ground services and technical
services decline rapidly as the number of flight from or to the same airport
increase.
Product differences
The slots (time and flight) constitute an important product difference especially
for time sensitive passengers. In-flight service can be seen as a product
difference however in the domestic market since it is mainly short haul flights
this has not been mentioned as an important issue.
Brand identity
As it is mentioned before brand identity may play an important role as safety
reputation of an airline is important.
Switching cost
There no important switching cost for individual customers but for tour
operators who have already published their advertisements, their might be
some.
57
Concentration
It is a concentrated industry in nature since there are not too many
undertakings. Too much competition on some specific routes and not enough
competition on others may cause problems.
Diversity of competitors
It may be divers in other countries like US where on the same O&D pair very
different operators such as big network operators and small regional operators
compete. But in Turkey there is no such distinction.
Exit Barriers
There are no sunk costs as the airplanes which constitute the major portion of
the cost can be easily resold. License fee can be considered as a sunk cost
however, compared to the scale of the industry this is not considered as a
major issue.
III. DETERMINANTS OF SUPPLIER POWER
Differentiation of inputs
Unfortunately the most important two inputs which are ground handling and
technical maintenance lack competition. The former characterizes as a duopoly
and the latter as a monopoly. Thus, there is no differentiation of inputs
especially for the entrant. Where as the dominant incumbent not only owns the
monopoly technical maintenance provider but also has the license two self
handling. Because of the low level of possible differentiation of inputs there is a
little room for price or quality differentiation.
Switching costs of suppliers and firms in the industry
Again, because of the lack of the different suppliers there is no room for
switching. However the switching cost from one duopoly provider to the other at
times may artificially be increased as a result of duopolistic peace between the
two duopolistic providers.
Presence of substitute inputs
Because of the regulatory entry barriers, substitute inputs are not available.
There is a possibility of self handling. However, the very high capital
requirement and sunk costs made this option undesirable for relatively small
fleets of entrance.
Supplier concentration
It is very high.
Importance of volume to supplier
There is no volume discounts.
Impact of inputs on cost or differentiation
There would be an important impact, if there was room for differentiation of
inputs.
58
Threat of forward integration relative to threat of backward integration by
firms in the industry
Treat of backward integration is greater as self handling is a possible option for
airline companies. However this does not mean that forward integration is not
possible.
IV. DETERMINANTS OF SUBSTITUTION THREATS
Relative price performance of substitutes
The most important substitute for domestic air travel in Turkey is upper
segment bus companies. Their relative price performance is very high, as a
result of fierce competition in the bus market.
Switching cost
The most important switching cost between land and air transport is the time
factor, especially for time sensitive customer segment.
Buyer propensity to substitute
For time sensitive high income level customers the propensity is low. Price is a
very important factor especially for long haul travel where passengers have
showed a cleat preference for air travel as the price of airlines approached price
of buses. In addition, because of the low road safety in Turkey customers tend
to substitute air travel to land.
V. DETERMINANTS OF BUYER POWER
Bargaining leverage
Buyer Concentration vs. firm concentration
There is no buyer concentration
Buyer volume
Potentially, there is a very high buyer volume as Turkey is a big country with
high population. However, since the low prices in the domestic air travel have
only been introduced with the entry of new companies, people are slowly
getting used to air travel. But the figures have showed that only one year after
the entry buyer volume has increased buy 60 %.
Buyer switching costs relative to firms switching costs
Buyer switching cost is very low especially for individual passengers.
Buyer information
This is not a problem as it is not any information sensitive sector.
Ability to backward integration
This is an important issue as the big tour operators tend to either their own
airline company or prefer to charter their own planes.
Pull-through
It is a possibility to cancel reservations however airline companies try to protect
them selves buy charging cancellation fees. In times of natural disaster or war,
this might create a big problem as big volumes of buyers may pull – through.
Price Sensitivity
59
Price / Total Purchases
Although the introduction of low price domestic flights has dramatically
increased the number of passengers, because it is a very new market we do
not have price sensitivity (elasticity data).
Product differences
New city pairs introduced buy new entrants have created new products where
before all passengers had to use TA Hub and spoke system.
Brand identity
The brand identity is important for airline sector. However, in Turkey the low
prices introduced by new entrants have showed that even totally unknown
brand have attracted customers. That showed that price sensitivity is more
important than brand identity.
Impact on quality / performance
For time sensitive passengers performance issues such as delays may be more
important than price however we do not have available data to analyze this
impact.
Buyer profit
For big tour operators profit margins of having it on airline company or exclusive
big volume deals are high. This may affect their choice of company. Travel
agencies in Turkey usually both sell big tours and individual airline tickets. The
volume discounts they make buy one may be used to cross subsidize the other.
Decision makers incentives
Travel agencies tend to make exclusive deals or work as the agencies of
specific airline companies. In which case they affect the choice of airline
company.
VI. THREAT OF NEW ENTRANTS
Despite the existence of entry barriers that are mentioned before there is a
threat of new entrants as there are other companies who had already acquired
a license and made necessary investments. This threat seems to affect industry
in a positive way where the new entrants are keeping the prices low and
incumbent is entering buy increasing its capacity buy acquiring 51 new
airplanes.
VII. BARGAINING POWER OF SUPPLIERS
Although the duopoly situation of ground handling and the monopoly of
technical maintenance are not desirable market structures, the existing industry
players do not seem to be negatively influenced. Although the concentrated
suppliers do possess a bargaining power, in the growing market the entry of
new players triggered a fierce competition between the two, which in turn
prevented the suppliers to abuse their power.
VIII. THREAT OF SUBSTITUTES
Although for non time-sensitive low income passengers the buses are still
preferred substitutes, the time disadvantage of bus companies lower that threat.
Other transport means such as trains and sea travel are relatively
underdeveloped. Thus are not adequate substitutes in Turkey.
60
IX. BARGAINING POWER OF BUYERS
Travel agencies and tour operators do possess bargaining power. However,
this fact at moment is not negatively influencing the industry. However, industry
players who are either vertical integrated or who have organic ties with the tour
operators do have an advantage over the other players.
The last point to mention about this Regulation is the necessity to get approval
from the Ministry of Transportation for the pricelists and timetables.
Absolute Cost Advantages
Learning curves
There is no big proprietary learning curve however, because of the
specific nature of the airline industry there are some unique advantages of
being in the market a long time such as historical slot rights granted to Turkish
Airlines.
Access to necessary inputs
Turkish Airlines has a very important advantage as all the technical
maintenance services are being provided by the company. Turkish airlines
although has a greater access to qualified personal, as being state owned
company it can offer better job prospect. airline industry has a very unique
nature where an airline can fly to an existing and active airport. And there are
capacity restraints in airports not only in terms of allocated slots but although in
terms of desk and service space in the terminal buildings.
Capital financing advantage
Turkish Airlines has the government financing in guarantee and therefore
does not have to make Eurocontrol fees immediately, which constitute a very
big item.
Access to distribution
It has not been stated as a hinder.
Government policy
Although the governments policy is to increase the competition in the
sector, because of the state of nature of Turkish airlines it may be seen as a
barrier. Government policy indirectly affects the industry as the licensing
conditions for ground handling impedes competition in that sector as well as the
airport usage problems.
Expected retaliation
Existing dominant operator Turkish Airlines has many means to retaliate
which from slot allocation that is currently under the control of Turkish airlines to
lower the prices on the routes that are serviced by competitors and cross
subsidies it by the routes that are not serviced.
61
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