Kazakhstan's Tian Shan mountain range has witnessed a number of the country's state carriers come to grief beneath its jagged slopes. Yet, while the challenges associated with operating an airline in a Central Asian, former Soviet republic proved insurmountable for some, it is an environment in which Air Astana has flourished.
Since its maiden flight in May 2002, the company has skillfully charted a course through complex bureaucracy, as well as a European blacklist on Kazakhstan carriers, to record a net margin of 13.5%, the 15th highest of any airline in 2010.
Tasked with nurturing the fledgling airline's growth in 2005, Air Astana's president Peter Foster has seen it firmly established as one of Central Asia's two dominant carriers, while delivering profit margins many other chief executives can only dream of. He presides over an airline that has become the national flag carrier and whose fleet has expanded from three leased Boeing 737-800s to 26 aircraft. An expansion plan up to 2020 is expected to include an order for three Boeing 787-8s, with purchase rights for three more. With 70% of Air Astana's revenue derived from Kazakhstan, the airline's future looks equally positive with the nation's average annual growth forecast by the Economist Intelligence Unit to accelerate to 4.4% from 2011-20.
Yet Air Astana's future expansion will remain consistent with the approach that has already proved to deliver success according to Foster. "We're not size freaks, we don't believe we need to be a great big, all-singing all-dancing unit in order to play our part on the world stage. We are a Central Asian carrier fundamentally," he explains. Foster says that Air Astana does not intend to compete with the giants of Asia and the Middle East: "We do not see ourselves as a becoming a mega carrier that's throwing its hat into the big east-west traffic movements." Instead, Foster says that the airline will grow its business organically to serve the needs of the regional market and will not outpace the growth of the region.
Foster says that as long as the economics and politics are stabilised in some of the counties to the south of Kazakhstan, the country, and in turn Air Astana, will grow very strongly in the next 10-15 years.
The fleet will be expanded in 2012 by the purchase of two Embraer 190s, plus two more on operating leases, and six Airbus A320 family aircraft to be delivered over 2012 and 2013. It has also budgeted for the purchase of another Boeing 757. The Embraers will replace some of Air Astana's six Fokker 50s on short routes, while it is also eyeing new-build Boeing 767s to replace its existing 757 and 767 fleet prior to the arrival of the Boeing 787s. The first of these is due in 2017.
"The 757 is a crucial aircraft for us because being located equidistant between Asia and Europe we have a lot of long routes, so we need an aircraft with the legs of a 757 and the capacity of a 757," says Foster. He explains that "a larger aircraft at the moment is too big for us as the market remains relatively small. Our big issue is how do we replace these 757s in this interim period before 2019. We have a proposal out to both Boeing and Airbus as we're looking at the A330 and the 767, which has had a new lease of life...even though the technology might not be the youngest in the industry, it would work very well for us."
Financial success has enabled Air Astana to move away from operating leases and to purchase aircraft, which is a strategic priority for the Kazakhstan government that does not wish to be reliant on leased aircraft. Foster says that a forthcoming IPO is unlikely to generate enough money to fund the purchases and says that the aircraft acquisition is going to be primarily funded through debt. However, he hopes that a second listing in Hong Kong or London "within a relatively short period of time will place a good value on the airline and will enable us to raise money for new aircraft in capital markets".
Air Astana is not part of an alliance, and Foster feels the airline would currently stand to lose more than it would gain from joining one of the major groupings. "Because we're in this rather unique part of the world which is largely virgin territory, we don't have any desperate strategic need from a local competitive prospective. We don't really have any local competitors of the type of airline we are, therefore, at this particular point in time, we don't feel the need to limit ourselves to any particular alliance," he says. Instead, Foster prefers for Air Astana to "work tactically" with codeshare partners such as Asiana, KLM and Etihad, while expanding commercial agreements with Lufthansa, Cathay Pacific, Malaysia Airlines and others.
The carrier launched flights in late 2002, the result of a joint venture, unusually involving an aircraft manufacturer, BAE Systems. Kazakhstan president, Nursultan Nazarbayev, turned to BAE and its then chairman Sir Richard Evans when looking for a partner for the start-up of Air Astana 10 years ago. BAE Systems had been targeting the region for potential infrastructure and defence opportunities.
While the airline's rapid expansion and profit margins are impressive enough, these accomplishments are made all the more so when the failures of Kazakhstan's previous flag carriers are remembered.
The main reason Foster gives as why Air Astana has been successful where both Kazakhstan Airways, the former Kazakh division of Aeroflot, and Air Kazakhstan failed is its corporate governance.
"The only way that Air Astana can be successful is by being financially independent, and the only way we can do so is if we operate on very clear strict commercial principals," he says. Requiring no subsidy from the government, Foster says Air Astana is able to run its affairs as a private corporation with staff rewarded accordingly. He says this has enabled the airline to attract the talent it requires to be successful.
"I have worked for airlines that are pure and simple state industries that are reliant on government subsidies, and you just cannot retain those disciplines in organisations of that nature. It's just impossible," Foster says.
Foster believes that independence from state control is of crucial importance in a region where large organisations had become "vast bureaucracies of micro management".
"There is a bureaucratic framework that continues to exist in this part of the world which is something inherited from the Soviet Union," he says. "That framework is characterised by a large number of controlling bodies such as financial police and state prosecutor offices. These can be difficult to manage and deal with."
A traditional view in the region of airlines as extensions of ministries and governments has also led to friction, particularly before the creation of the Samruk-Kazyna National Welfare Fund. The fund holds the government's stakes in Air Astana in addition to other state companies and retains Sir Richard Evans as an independent director.
"You can imagine the degree of resistance from the various ministries who suddenly found what they regarded as their industries being removed and placed into a corporate holding company," says Foster. At certain times the airline found itself under pressure "to do certain things, with particular routes, take particular aircraft, hire particular people, but we have always resisted that and resisted that, very very firmly," says Foster.
A refusal to let terms be dictated to it characterises not only Air Astana's dealings with government bodies but with the aviation establishment. The airline won an injunction over Amadeus early in 2011 to reinstate a contract terminated by the GDS provider after the two sides had failed to reach agreement on a replacement pact and Amadeus withdrew its service in January.
Explaining why Air Astana decided to take on Amadeus, Foster says: "Amadeus had a very good run in this market, but we felt that market share and the profitability they'd been able to derive from this market was very much on the back of what we had achieved as the dominant carrier, particularly on domestic services, and we felt that status should be reflected in the fee structure."
The move paid off and Foster says the new fee structure agreed with Amadeus has delivered "very significant savings to us, which couldn't have come at a better time with the oil price rises".
He is also keen to stress the efforts made by Kazakhstan's government to liberalise its economic system and business environment: "There have been enormous strides taken in this country to attract foreign investment and to set up a framework for economic and business legislation that is more akin to the west than the former Soviet Union."
Despite this progress, Foster feels that the Soviet legacy could still pose a threat to Air Astana. "There is one significant issue that's taking place in this region and that's the customs union, which is an attempt to create an economic space along similar lines to the European Union, consisting of former republics of the Soviet Union," he says. Although Foster feels this would provide opportunity, he says that such a union would inevitably be dominated by Russia. Highlighting the threats this economic space could hold for Air Astana he says: "There must be a level playing field in terms of state support and subsidisation. We are a small airline that lives entirely within our own means with no subsidy, and we have to make our way through our own commercial abilities. We would not be in a position in the context of an economic union to compete with a vast and very heavily subsidised airline that was given complete access to our market. Our biggest single issue is the danger of one of the big union carriers being given free and unfettered access to our markets without the commercial discipline on which we have to operate."
While Air Astana must wait to see how this situation develops, the airline is able to engage another cloud on its horizon more proactively, the issue of the European Union blacklist on Kazakhstan carriers. The ban was put in place after an ICAO audit in April 2009 highlighted glaring deficiencies in the regulatory framework of the country's Civil Aviation Committee (CAC).
Air Astana averted the fate of its fellow national carriers due to an air operator's certificate and oversight provided by the Aruba Department of Civil Aviation. In addition, the carrier's maintenance and engineering is carried out in accordance with EASA Part 145 certification and is audited twice-yearly by the UK CAA.
Under the conditions of its reprieve, Air Astana was prevented from opening new routes and frequencies to Europe, but due to timing, Foster says that the impact on the airline has been relatively low. "This all happened in mid-2009 in the middle of the recession. We had no plan to increase European services in any case at that time. Since then, we probably would have added the odd service here and there to Frankfurt or Amsterdam, but we wouldn't have done anything major in Europe in any event.
"China, Thailand, Malaysia, the Philippines and Hong Kong are our major growth markets. The European ban is unfortunate and disappointing, but commercially, our focus in any event wouldn't have been on it."
However, Foster feels the issue remains a Sword of Damocles and says Kazakhstan has to get off the blacklist as soon as possible.
To this effect, Foster says that together with other Kazakh carriers, Air Astana has set up the Association of Kazakhstan Airlines (AKA). "This will be used to fund a foreign regularity authority, preferably European, to provide consultancy for the establishment of procedures, recruitment and skills that will enable the CAC and the agency to have their expertise taking us up to the level that will be acceptable to ICAO," he says.
Foster is unsure whether this will happen in time for the next ICAO audit in March 2012. "I think realistically there's going to be more time required, but hopefully the CAC will be able to demonstrate that there has been sufficient progress by next March so that a clear process of removal from those restrictions can be established," he says. In a best case scenario, he feels this could happen by the end of 2012.
While other airline chiefs might look enviously upon Foster's situation at the head of such a success story, Foster admits his decision to join Air Astana caused "some fairly serious raised eyebrows" from his former colleagues at Cathay Pacific and elsewhere. "No one had really heard of Kazakhstan and certainly no one had heard of Air Astana," he says. Six years on it is very doubtful anybody still questions the wisdom of that decision.
Source: Air Transport Intelligence news
