Friday, 12 August 2011

Interview: Serhan Ulga, Pegasus CFO

Pegasus negotiating massive order to triple fleet size

Turkish low-cost carrier Pegasus Airlines is negotiating with Boeing and Airbus over an order totalling more than 100 aircraft, CFO Serhan Ulga has revealed to Aviation Exchange. The airline, which currently has a fleet of 39 mostly Boeing aircraft, hopes to reach an agreement by the end of the year. It has not yet decided whether to select one manufacturer or place a split order for jets.

"We are in the negotiation process for a big order with both manufacturers," Ulga told this news service. "We are seriously considering the best alternative. We'll go with whatever is the best economic equity value for our entire order."

Pegasus announced last month that it was delaying its planned IPO until early 2012 due to depressed airline valuations. Ulga said the global financial crisis had seen multiples fall "from 7.5 or 8x EBITDAR to 4.5x on a good day," prompting management to push back the launch schedule until after its December results. Allowing for a 135-day lockdown period, that makes April 2012 the earliest Pegasus can go to market.

"We think highly of our business model and are not ready to short-change it just for the sake of an IPO," Ulga emphasised. "We just need to see the dust settle down and then we'll re-test the multiples and take it from there."

The airline has taken delivery of 10 Boeing 737-800s this year, according to data from Ascend Online, including six sale and leasebacks with GECAS running for eight years. The other four aircraft were financed by JP Morgan with US Ex-Im backed debt, which has also been secured for two further NG deliveries in December and another six in 2012. However, Ulga said he expects the airline to diversify financing once the new terms of the Aviation Sector of Understanding (ASU) come into effect.

"Those deliveries are grandfathered, so they protect the previous ASU economics in terms of the exposure fee and the commitment fee," the CFO noted. "That gives us a very good cost baseline for financing those, but the jury's still out in terms of the exact pricing [beyond 2012]." Precise cost implications will depend on variables such as Moody's grading of Turkey, he added, which makes "financing for the 'New World' more opaque".

Ulga said Pegasus had been close to using commercial debt for the current round of deliveries, having negotiated with banks which were reportedly keen to enter the Turkish market. "But we didn't pursue them because they weren't able to cover all of the deliveries for this tranche," he recalled. The CFO acknowledged that even under new ASU rules Ex-Im debt may be "marginally" more competitive, but he nonetheless said the airline is committed to diversifying its funding channels.

"What we have done this year will be a good reflection of what we'll be doing again [next year], because we're going to have to rely more on sale-leasebacks and commercial debt from 2013 onwards," Ulga confirmed.

Pegasus currently has a fleet of 39 aircraft, comprising five Airbus A320-family jets, three 737 Classics and 31 737NGs. The fleet will rise to 40 by the end of the year – after two new arrivals and the re-delivery of one aircraft – followed by six deliveries in 2012, four in 2013, and two each in 2014 and 2015. Pegasus is also engaged with the dry lease market with a view to boosting capacity in the short-term.