THY Turkish Airlines is set to split its $4 billion fleet renewal between Boeing and Airbus equipment in a political move designed to aid Turkey's entry to the European Union.
The airline announced plans to replace its short and medium-haul fleet in January and competition between the manufacturers has been heightened by a wide acceptance that the airline cannot finance the scale of the commitments on a purely commercial basis. However, the interest from financiers in the deal - one of the largest of the year - reflects the overheating of the aircraft finance market.
THY, which moved into profit in 1996 for the first time in nine years, aims to replace 28 737-400s and two 737-500s leased from Gecas and ILFC. Seven A310s acquired on finance leases in the mid-1980s are also scheduled to be replaced. Though the airline and manufacturers decline to comment on speculation, informed sources believe THY has opted to take 25 737-800s (with 25 options) from the US manufacturer and seven A330-200s from Airbus. The split follows intense lobbying from both manufacturers.
Boeing had emerged as favourite to take the entire order with a mix of B737s and B777s, but Airbus' late charge is believed to be due to Turkey's attempts to give itself leverage to join the European Union. Though the country has a customs agreement with the EU, full entry remains blocked by concerns over its human rights record and opposition from neighbouring Greece.
The key question among bankers is how THY plans to fund the switch from leasing to on balance-sheet funding. 'People have been surprised by the scale of their ambitions given the parlous state of the Turkish economy,' notes one London-based financier. The government has already indicated that, unlike earlier orders, it will not guarantee the financing. 'The lion's share will go to whichever manufacturer is willing to underwrite the financing,' he adds.
THY, which is 98.2 per cent state-owned, reported a net profit of L4,358 billion (US$34 million) for the year to 31 December 1996 after a L366 billion loss the previous year. Gross revenues almost doubled to L103 trillion, but discounted for inflation the rise was only 8 per cent.
The airline is due to receive its fifth A340 in late April on operating lease from ILFC - the first four were financed with export credit guarantees. However, while European export credit agencies are still officially offering cover for Turkish risk they are unwilling to add to their existing portfolio. No application has been made to US Eximbank but soundings suggest that Exim will guarantee Boeing's order.
The Turkish authorities will seek an offset agreement for any Boeing equipment covering up to 50 per cent of the cost. The government has also indicated it will sell an additional 18 per cent of THY's share capital to add to the 1.2 per cent already traded on the Istanbul stock exchange. THY appears to be heading in the right direction after restructuring its network last year - its routes to Turkish-speaking central Asian republics are proving a valuable source of premium traffic, though yields are coming under pressure from Lufthansa and British Airways.
But there is concern that it may overstretch itself with plans to add more non-stop destinations with the A340s, including Chicago, Beijing and Jakarta. The airline, which has so far shunned the alliance merry-go-round, is currently in talks with Japan Airlines and Korean Air.
Source: Airline Business
