Turbulence ahead for Kazakh carrier Air Astana

By bne IntelliNews September 25, 2008

Clare Nuttall in Almaty -

The jet-set lifestyles of Kazakhstan's newly rich helped Air Astana achieve record growth in 2007. Since then, rising fuel costs and global economic uncertainty have caused the Kazakh carrier to cut its profit forecast for this year and forced it to adopt a more cautious expansion strategy.

In 2007, Air Astana, a joint venture between Kazakh state holding company Samruk and BAE Systems, increased its revenues by around 48%. This year, as the international economic crisis takes its toll on the airline industry, a considerable slowdown in revenue growth is expected, though annual revenues are still expected to grow from $530m in 2007 to $700m-750m in 2008. Air Astana has also halved its 2008 profit forecasts to around $46m, due to high fuel costs and "shrinking global demand," vice-president Askhat Beisembayev told journalists.

Air Astana is in a difficult position, since the domestic market in Kazakhstan is heavily regulated and so it's unable to raise prices sufficiently to offset its increase in expenses. "Rising fuel prices have affected us very badly because we are not allowed to impose surcharges on domestic routes, which account for almost 70% of our network. For international flights, we managed to raise the fuel surcharge to some extent but again it doesn't cover our full costs, which have more than doubled," vice-president Ashendra Liyanage said in an interview with bne.

Meanwhile, stiff competition on international routes from carriers like Asiana, British Midland, KLM, Lufthansa, Transaero and Turkish Airlines has prevented the company from raising international prices to a large extent. "We currently have quite a lot of strong competition, and our competitors do not have domestic restrictions on fuel surcharges as we do. So although everyone is suffering, we are in a uniquely difficult position," according to Liyanage.

However, Air Astana still plans to carry out its long-term $1.445bn expansion programme confirmed at the end of last year. This will see the company's fleet grow from the current 21 aeroplanes to 63 by 2022. An IPO at some point in the future has not been ruled out, but the firm has no immediate plans to do so, instead it's planning to finance 15% of its expansion from its own fund and the remaining 85% from borrowed monies, the company's president Peter Foster has said.

To Bangkok and beyond

Air Astana started as a domestic operator before moving into the international market. It owes its rapid growth to a combination of factors - its status as the only international standard domestic carrier in Kazakhstan, heavy investment in marketing and consumer service, and the Kazakhs' increasing propensity to travel.

When the company launched its international operations, flights to Moscow and Germany accounted for the lion's share of its operations. Most journeys were either business related or to visit relatives abroad. Today, the pattern has shifted fundamentally as disposable incomes have increased.

While Moscow remains Air Astana's most popular destination, with 21 flights a week, the airline now serves cities including Delhi, Dubai and Bangkok. "Kazakhstanis are looking for new holiday destinations. People who used to holiday in Antalya now go down to Southeast Asia," says Liyanage. "We have seen strong growth in demand for flights to Dubai and Bangkok. By contrast, inward traffic is still dominated by family visits and business travel. There are not many inbound tourists because we don't have a proper tourism infrastructure here."

Later this year, Air Astana is planning to increase the frequency of its flights on the Astana-Dubai, Astana-Frankfurt and Almaty-Bangkok routes, and is considering opening up new routes to Munich, Baku, Urumchi and possibly Hong Kong. However, due to concerns over rising fuel prices, it has only made a definite commitment to opening one new route before the end of this year - between Almaty and the Kyrgyz capital Bishkek. "In the current situation, we are being very careful and prudent about how we grow," says Liyanage.

In 2002, when Air Astana was launched, jokes about "Aeroflop" and other CIS airlines were still common. The company has invested heavily in international marketing, not just to get brand recognition, but to emphasize that it operates to western standards. "We have done a lot of marketing on that front to emphasize that we offer western standards, our fleet is entirely western planes - from Boeing, Airbus and Fokker - and our crews are trained in Europe," explains Liyanage. "There are still some people who have a negative view, but that is diminishing very fast."

On the services side, Air Astana has invested in new menus, in-flight entertainment and launched a frequent flyer programme, the Nomad Club, in 2007. On May 31, it announced that it had made a transfer to 100% electronic ticketing, which will slash processing costs by up to 90% and improve the level of service for its customers.

While becoming a paperless airline was a big step for Air Astana, pioneering e-ticketing in the Kazakh market meant that as well as investing in its own systems, it also had to provide new equipment to airports in Kazakhstan without the ability to handle electronic tickets. It has hit a similar problem in its plans for transit routes. "90% of our routes - both within Kazakhstan and internationally - are point to point," says Liyanage. "With the exception of Astana International airport, the infrastructure for transit passengers isn't there. The Bishkek-Almaty route is our first stab at doing a real transit run since many people travel from Bishkek to Almaty by road to connect to flights to international destinations." If this proves a success, Air Astana may offer more transit routes, but airport infrastructure will need to catch up with the airline if it or its competitors are to manage this on a larger scale.

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Turbulence ahead for Kazakh carrier Air Astana

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