Tav Airport Holdings

1. Executive Summary

TAV Airports Holding has proven to be a very resilient company over the years thanks to its diversified portfolio of businesses. Nonetheless, TAV’s failure to win the auction for the rights to build and operate the third airport in Istanbul could eventually put them out of business. This new airport was meant to replace Ataturk Airport, which produced 43% of company’s total revenues, and will be positioned to be the fourth largest in the world upon competition in 2021. Shareholders immediately reacted negatively to the decision not to continue bidding, causing share prices to decline by 7.3%. Once the new airport is built, TAV will lose its presence in Istanbul along with 43% of its revenues. The company must find a new growth strategy that will not just compensate for the revenue loss but will also retain their presence in Istanbul, a prime location in continuous growth, helping them this way maintain their reputation. The only option that can help them remain in Istanbul would be to target the Sabiha Gokcen Airport on the Asian side of the country. This decision would improve their market positions, ensure they don’t lose their footprint in this growing market and be perceived positively by shareholders based on past reactions.

1. External Analysis

A. Environmental situation and trends

The political environment was stable yet highly regulated for airlines. More and more airports were being privatized, creating opportunities for companies like TAV. Companies are consolidating and working together like TAV and Airports de Paris (ADP), this is being recognized as a monopolistic trend making regulations stricter in an attempt to protect customer’s rights and ensure their safety. Furthermore, with there being more competition in the industry (low-cost carriers), passengers are in a position where they can push for lower prices and better service. The millennial generation’s arrival into the consumer class has resulted in major social changes, more importantly in terms of service, where customers have become much more demanding. Therefore, to meet the increasing demands of this segment, airlines have to stabilize their costs.

The customer profile has changed with there being more economically minded driving passenger, forcing airline competition based on price. Additionally, increases in oil price and labor related costs are slowing down airline growth. On the other hand however, new technology is helping reduce airplane’s fuel consumption and cost of operations.
In hopes to keep up with customers’ demands for lower prices and better services airlines are adapting the latest technology to improve customers’ in-flight experiences; however the standard airport experience continues to be frustrating for most. Customers want better experiences and entertainment and have many options to choose from. This a very important trend that TAV has been focusing on, enhancing the customer airport experience to increase the number of travelers at the airport and maximize their spending during their stay.

Improvements in technology have also improved international communication for businesses, reducing the amount of travel for business class passengers. The arrival of social media enables customers with the tools to make their concerns heard by many and to directly impact how other customers perceive the company. Moreover, it gives companies the tools to better understand customer’s needs and work to meet their expectations.

Turkey was a known territory for TAV, on top of being one of the fastest growing markets in Europe, projecting a continuous growth of 9-11% in the next years. They are in a favorable geographical position, being proximate to Europe, the Middle East, Africa and in the case of the Sabiha Gokcen airport Asia. The country has had some trouble over the years such as earthquakes and financial crisis yet has proven to be a resilient market that continued to grow despite the setbacks. They are the second largest country and the 6th largest economy in Europe, making them an ideal target based on many external factors.

The US was unknown territory for TAV. After the events of September 11th there was political unrest related to the Afghanistan war and acts of terrorism. The economy was still recovering from the recession, yet by the end of 2013 the US had not yet recovered and unemployment rates remained high. Economic recession forced consumers to be more price sensitive while terrorism threats created fear of flying for many, resulting in a reduction of travelers. Population growth was slightly above Europe’s but lower than Asia, and their geographic position is not favorable as a global hub. Moreover, US airports are structured differently than anywhere else around the world, designating gates or terminals for specific airlines. This structure would not be favorable for TAV’s vertically integrated operations as it limits customers to one specific area or terminal, limiting their overall consumption.  

B. Industry/competitor analysis

        Currently most of TAV’s counterparts have state involvement and are bound by foreign ownership limits. This will change in the future as more and more airports are being privatized and given as concessions to build operate and transfer.

TAV’s vertically integrated structure is new to the industry, most competitors are very active in the airport and terminal management is not yet highly involved in the airport services. Thanks to TAV’s success it can be expected for others to follow their business strategy. The market is an attractive one for double digits growth; as airports are being privatized, companies like TAV are trying to capture a piece of the pie, however just like in real, some state locations are worth more than others.

                Airports holding companies do not have any hard assets, their main asset is people and they invest in them. The company needs to invest in full training as it is nearly impossible to find employees with prior related experience. While no hard assets are needed, new entrants would need a high initial investment to cover the construction costs until reimbursed, hiring and training new staff and paying for the lease. In order to be profitable in this business knowledge is a key success factor to be resilient to all the external factors that affect revenue. For this reason, the threat of new entrants to the industry is rather low; on the other hand, those existing competitors are trying to secure high volume locations to boost their growth.