US embassy cable - 03ANKARA1913

UNCLAS SECTION 01 OF 02 ANKARA 001913 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB, EB/IFD/OMA/TRA, EUR/SE, 
ROME FOR FAA, PARIS FOR TSA, 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND BIRDSEY 
 
 
E.O. 12958: N/A 
TAGS: ASEC, EAIR, ECON, EFIN, PREL, TU 
SUBJECT: THY PRIVATIZATION:  ON TRACK...FOR NOW 
 
REF: ANKARA 1203 
 
 
1.  (SBU) SUMMARY:  Turkish Airlines (THY - Turk Hava 
Yollari) is scheduled for tender in the third quarter 2003, 
and the GOT official heading THY privatization said that 
plans are on schedule.  THY has managed, largely through 
timely sales of old planes, to remain profitable in bad times 
generally for the airline industry.  However, THY officials 
have commented to us privately that, following a profitable 
2002, sales are expected to drop in 2003.  They add that a 
successful privatization this year will be difficult. END 
SUMMARY. 
 
 
Plans on Schedule 
----------------- 
 
 
2.  (SBU) Ali Guner Tekin, the Privatization Administration 
(PA) official in charge of the THY sale, told us March 7 that 
the lead-up to war was hurting THY's revenue stream and may 
cause problems for the scheduled privatization process.  "If 
it is a long war, it will affect this privatization 
strongly," Tekin said.  He feels, however, that the Iraq 
conflict will likely be short and cause minimal, if any, 
delays. 
 
 
3.  (SBU) In the next few months, Tekin plans to hire a 
consultant to assess the current investor climate, set up a 
value assessment committee, and establish a tender commission 
(chaired by THY's Vice President).  The tender commission 
will be responsible for advertising the technical 
specifications of THY aircraft and aircraft parts.  In the 
third quarter of 2003, the PA will give a public offering for 
15-25 percent of the company followed by a block sale of a 
minimum 51 percent, and another public offering for the 
remainder of the company.  Tekin hopes to finalize the sale 
by early 2004.  Press sources estimate THY's value in 2001 
was USD $2-3 billion. 
 
 
4. (SBU) Bidders will have to meet a number of requirements: 
no more than 40 percent of THY can be foreign owned; a 
majority of the company's capital assets must be held in 
Turkey; and a majority of its board must be Turkish. PA is 
trying to find interested investors in Turkey as well as in 
Turkish expat communities in Europe.  The articles dictate 
that the GOT hold at least one share - the "golden share" - 
reserving the GOT the right to block any future merger 
decisions taken by the new THY management.  Speaking of all 
the conditions that need to be met, Tekin said the right 
bidder will not necessarily be the highest bidder.  "We're 
looking for a suitable candidate for our daughter," he said. 
"It doesn't have to be rich but it sure needs to be decent." 
. 
THY Remains Profitable in a Struggling Industry 
--------------------------------------------- -- 
 
 
5.  (SBU) Taken into the privatization portfolio in August 
1990, THY has undergone two previous iterations of 
privatization efforts gone awry.  In 1991, privatization was 
halted when war with Iraq broke out and, in early 2001, plans 
were again delayed due to the GOT financial crisis. 
Following that crisis, the GOT loosened price and regulatory 
controls on THY flights, allowing it to reduce or eliminate 
unprofitable flight routes, lay off 1,500 workers, sell 
excess aircraft, and pare down in-flight meals.  In addition, 
THY was fortunate to receive $20 million from the Government 
of Iran for the sale of several Airbuses one week prior to 
September 11, 2001. 
 
 
6.  (SBU) This increased autonomy and revenue helped THY 
manage the post 9/11 storm that hit the aviation industry. 
In 2002, a year in which many airlines struggled and two 
European flag carriers went bankrupt, THY had it's most 
profitable year since 1996 ($107 million in profits).  In 
2001, THY sales were $1.4 billion; in only the first nine 
months of 2002, sales were $1.2 billion.  (Because THY is the 
largest foreign currency earner in the Turkish economy, it's 
revenues are an important mechanism in protecting the Turkish 
lira from depreciation.) 
 
 
Threat of War Hurting Sales 
--------------------------- 
7.  (SBU) Head of Marketing for Turkish Airlines Guliz Ozturk 
told us in late February that THY expected a significant 
decrease in international and domestic operations in the 
event of a war in Iraq (reftel).  Ozturk said THY has already 
cut back on its flights to the Far East, and she anticipated 
a significant drop in bookings on THY's European flights.  In 
addition, Ozturk said THY was also concerned about its 
domestic operations to eastern and southeastern Turkey, 
noting that it would be difficult, if not impossible, to keep 
aircraft and crews in these cities once an operation began. 
8.  (SBU) COMMENT:  In light of these difficulties, one THY 
executive was doubtful that the airline could be successfully 
privatized this year.  Although Tekin appears to be genuinely 
committed to completing the sale of THY by early 2004, he may 
be overly optimistic on the timing. 
PEARSON