In recent days, we all live and breathe the loss of value of the Turkish lira. We feel the effects of the uncontrolled depreciation of our currency against all foreign currencies at every point of our lives. Needless to say, this negative picture also affects our travel and transportation habits severely. While it has been difficult to get out of the city for about 2 years due to the pandemic, when we look at the devaluation of our domestic currency against foreign currencies, we can say that it has almost become a dream to go abroad. When calculating our budget for visas, airfare, accommodation and food, multiplying the figures by 15-20 is pretty scary.
So, how will the foreign exchange appreciation in our country affect the aviation industry, where almost all costs are indexed to the US Dollar? What awaits us and our airlines next?
Reducing Costs or Increasing Revenue is the Sine Qua Non!
Since airline companies export services, they are directly exposed to all kinds of effects related to international trade. As liberalization in global aviation markets increases, it becomes even more challenging for airlines competing with other countries' airlines, especially on international routes.
Actions to be taken by an airline in order to compete with another country's airline are quite clear. Companies have to reduce their costs or increase their revenues compared to their competitors. Accordingly, one of the key factors of competitive power for airlines is the exchange rate condition in their countries.
Expences of Companies are in US Dollars!
Airlines pay millions of dollars to buy or lease aircraft. They buy the fuel to fly these aircraft with dollars. They insure these aircraft by paying tens of thousands of dollars. They pay the fees of the airports where they conduct flights and all the services they receive in dollars. They also spend dollars for the regular maintenance of their aircraft and the supply of spare parts. In brief, almost all expense items of airlines are in dollars.
How do Airlines Generate Revenue?
In return, companies only generate revenue by passengers and cargo transport. In addition to the fee for the seat that airlines sell to fly their passengers, aside from the cargo being transported, they have some extra income, which we call beyond-the-fare income and which is also mostly derived from the passengers. The money we pay for seat selection at check-in, the extras we pay when we exceed the limit given to us for luggage, the money we pay for using various services such as food and beverage on the plane and for the internet constitute the ancillary income of the companies.
In addition, they receive commissions on items such as contracted hotels, car rental and travel insurance. Sales made with frequent flyer miles and points and revenues from some transactions made with the company's co-branded credit cards with a bank are also the revenue channels of the airlines. All kinds of advertisements that may be placed on or off the aircraft, advertisements in magazines onboard, in the private passenger lounges of the airline and in all communication channels of the company are among the ancillary income sources of the airlines. In short, humans are the basis of the main and ancillary income sources of airlines. So the more people fly, the more revenue the companies generate. The airlines index all their income items to dollars in order to make the payments that need to be made in dollars, which I mentioned at the beginning.
How do FX Changes Affect Airlines?
Airlines are affected by changes in exchange rates in three different ways: supply, demand and financial effects.
Number of Passangers Will Change With FX Fluctions
The higher the exchange rates in a country, the harder it gets for the citizens of that country to travel by plane. A TL-based pricing is applied for domestic flight tickets. Since almost all of the expenses of airlines were in foreign currency, they already could not make a profit on domestic flights. However, due to this uncontrolled increase in foreign exchange rates, we will see price gouging over ticket prices in the coming days.
Since the ticket prices on international flights have already been indexed to the US dollar for a long period of time, they have already risen. If you want, you can search for a ticket price for an international destination that you fly frequently for a few months later. You can’t believe your eyes when you see the prices.
At this point, perhaps the only thing that strengthens the hand of the airlines is the arrival of more passengers from abroad due to the increase in foreign exchange rates and accordingly the country's getting cheaper. However, if we take into account the course of the pandemic and our country’s general situation under current conditions, the validity of this plan is uncertain.
Airlines have to work on new strategies to rebalance supply and demand due to the change in passenger demand. Companies will try to look for ways to attract foreign passengers instead of domestic passengers who will become disinterested as ticket prices increase. Therefore, the first method that comes to mind may be to make plenty of advertising and promotion abroad. But of course, the US dollar will again be needed to run such campaigns. A vicious circle…
Capital Structure of Companies is Quite Critical
Changes in exchange rates secondly affect airlines over their capital structure. The size of this effect is directly related to the currencies in which companies borrow and in which currencies they invest. Long-term, permanent and large-scale changes in exchange rates directly concern all investment decisions of companies, especially aircraft purchases, route and fleet planning.
Sharp increases in exchange rates cause excessive fall of total asset and market values of companies in the US dollar terms, and likewise lead to increase in their debts. Therefore, the financial accounts of companies that have already been hit hard by the pandemic may also shake the companies to their foundations. This may turn our airline companies into a commercial commodity that can be purchased at a low price by their global competitors. Rumors may even restart for the sales of Turkish Airlines to Qatar Airways or other global competitors, which have been claimed for a long time and denied many times.
Input Costs of Airlines Will Rise!
As a final point, changes in exchange rates can also affect the prices companies pay for inputs, weakening competitiveness. The fact that competitors pay much lower prices for the same inputs creates a negative competitive effect for our companies. This may cause our airlines to lose their shares in markets in which they are strong.
Revenues and Expences Are In Us Dollar Terms!
Airlines, due to the nature of the industry, have to index their revenues and expenses to the US dollar. The balance between dollar revenues and dollar expenses is of vital importance. If a company has a dollar deficit, it becomes almost impossible to cover this deficit with the local currency, in countries like ours with high exchange rates. In the long term, this may lead to credit utilization with high interest rates, downsizing, selling of the business and, worst of all, filing bankruptcy. It is quite difficult to manage such turmoil and develop a long-term strategy in markets where exchange rates are aggressively rising against the local currency.
Airway Becoming No Longer Public’s Way!
To summarize, the rapid depreciation of our currency against exchange rates, while seriously refraining us from the pleasure of air travel makes it quite difficult for our companies to survive financially. All other stakeholders of the sector, from airport operators to ground handling services, from parts suppliers to pilot candidates, are also affected by this negative situation. It is for sure that in the near future, we will remember the phrase “airway is public’s way” with a bitter smile when we think of our past travels...