Turkey currency volatility could help boost inbound tourism, but local crisis could escalate into a global crisis

The Turkish aviation market has been starting to show signs of recovery following its dip in 2016, but increased diplomatic tensions with the US and a renewed focus on Turkey’s heavy reliance on capital inflows has seen a marked decline in the value of Turkey’s lira (TRY) currency – it lost a quarter of its value against USD between 8-Aug-2018 and 13-Aug-2018, before starting to rally. This may support inbound tourism flows but will add to upward pressure on US dollar-denominated airline costs such as jet fuel.


Summary:

  • Increased diplomatic tensions with the US and renewed focus on Turkey’s heavy reliance on capital inflows has seen a marked decline in value of Turkey’s lira currency;
  • Analysts believe that with the fall in the value of the lira making it harder for companies to service their foreign currency debt, it may be difficult for Turkey to avoid a recession;
  • Turkey has been witnessing a tourism upturn – after a -30.1% decline in 2016 arrivals were up +27.8% last year and +30.4% in H1 2018;
  • IATA says “worry is that contagion will see the crisis in Turkey spread to other vulnerable economies,”and local crisis could result in global repercussions.

Analysts believe that with the fall in the value of the lira making it harder for companies to service their foreign currency debt, it may be difficult for Turkey to avoid a recession. Clearly an economic downturn in Turkey is not going to be good news for origin-destination air passenger demand to, from and within the country, but could the global network operations of Turkish Airlines and to a lesser extent the regional hub activities of Pegasus Airlines help limit the impact.

For a start, it remains unclear how large the shock to the Turkish economy will be, or how long it will last, but IATA highlights in an analyst note ‘How worried should we be about Turkey?’ fundamentally, the impact that any economic disruption will have on air passenger traffic depends on how sensitive passenger demand is to changes in incomes.

For developing countries IATA estimates that a 1% reduction in incomes will typically reduce air passenger demand by around 1.8% and warns that any recession in Turkey – perhaps on a similar scale to that seen in 2009 – could see passenger numbers fall in annual terms in the coming years.

This will be a big blow to a market that had returned to growth in spectacular style over the past 18 months. A 27.8% growth in tourism arrivals in 2017 followed a 30.1% decline the year earlier, and over the first half of the year levels were up a further 30.4% versus the same period last year. This would have put the market back onto the growth trajectory seen prior to its political tensions and terrorist activity.

CHART – The decline in arrivals to Turkey in 2016 is clear to see with annual visitors falling to levels last seen in the late 2000sSource: CAPA – Centre for Aviation and Turkey Ministry of Culture and Tourism

IATA says that “so long as the economic crisis remains confined largely to Turkey, the corresponding impact on global passenger demand is also likely to be relatively small.” After all, despite strong growth over much of the past decade, Turkey is still just the 16th largest passenger market in the world, accounting for around 1.7% of global origin-destination air passengers. But, the “worry is that contagion will see the crisis in Turkey spread to other vulnerable economies,” warns IATA.

A recent study from CAPA – Centre for Aviation adds further insight on the subject and suggests that the slumping lira “isn’t all bad news”. The ‘Turkish Airlines & Pegasus: the slumping lira isn’t all bad news’ report from the trusted source of market intelligence highlights that the two airlines’ currency exposure is complex with both having significant costs and revenues in USD and EUR in addition to those in the local currency.

CAPA notes both airlines reported 1H2018 financial results as the currency crisis was unfolding, but Pegasus still maintained its EBITDAR margin guidance for the year and Turkish Airlines actually increased its guidance. It says the different mix of revenues and costs in these currencies for each airline is such that a weaker TRY may be better for Turkish Airlines than for Pegasus.

It will not be until we start to see traffic figures for Aug-2018 that we will see any first indicators of the currency impact on demand. The weaker TRY means that products and services sold in Turkey in the local currency, including tourist services, are cheaper to inbound travellers; this should increase demand for travel to the country. But, as CAPA warns, political stability and security are important to tourists and inbound demand could perhaps be adversely affected.

But overall, in the short term at least, the steep weakening of the TRY is attracting media attention in all of Turkey’s tourist origin markets, “so there could be good news for both of Turkey’s airlines as tourists from the harder currency markets are attracted,” it adds.