Why building an intricate network is not smooth as silk

Ralph Ahearn takes a flight across the Gulf and looks at an airline with an altogether different business plan that seems to be working.

You would think that an airline with its hub located on the ancient Silk Road would naturally follow a network model linking East and West, rather like the Gulf carriers to the south. The reality of Air Astana – national carrier of Kazakhstan – could not be further from that model.

Where the Gulf airlines such as Emirates, Qatar Airways and Etihad, have adopted a “build it and they will come” approach, throwing capacity at world-spanning networks, Air Astana’s model is as intricate as the patterns found in one of the region’s famed silk carpets.

Since it’s formation in May, 2002, the airline has been painstakingly developing routes across central Asia, linking cities like Novosibirsk and Tashkent with its main hub at Almaty and secondary hubs in the Kazakhstan capital Astana and in Atyrau. Beyond the central Asian region, it has carefully chosen destinations in the Middle East, Europe and the Far East, including Dubai, London, Amsterdam, Beijing and – most recently – Kuala Lumpur.

It’s a “softly softly” approach to route development and growth, incremental and understated but in a quite different way as fascinating as anything the Gulf has to offer.

Despite often huge challenges – from the global financial crisis and exchange rate issues to a highly demanding operational environment – Air Astana has made a profit every year since launch and the end of 2009 was set to see its best ever year, with profits expected to double.

“Revenues will be 15 per cent lower but all the indications are that 2009 will be our best ever year,” said Air Astana president Peter Foster, who was speaking towards the end of last year. “We are heading for a spectacularly successful year, by far our best ever.”

The airline was able to achieve this largely because the world economic crisis hit Kazakhstan a year earlier than other countries.

“We responded very early, in September 2007,” said Foster. “We put in place a significant range of cost-cutting measures in early 2008 based on a 12-point plan. So, when global traffic collapsed in October 2008 we had everything in position, having already cut costs.”

However, Foster is not sanguine about the immediate future.

“We have had a brilliant 2009, but now we have squeezed every cent on cost and clearly we cannot sustain that into 2010. We are not optimistic that revenue is showing any signs of a dramatic recovery.

“It would be nice to say that, having got over the recession we can take full advantage of the restructuring we went through, but unfortunately we cannot do that. At this point, we see no reason to anticipate a significant passenger or freight upturn in the early part of 2010.”

The economy is not the only critical issue facing the Air Astana management team. Last year the airline was the only Kazakhstan carrier to escape a blanket ban by the European Union on the country’s carriers operating into EU members’ airspace and there are fears that it could still be caught up in a wider ban.

“This is almost existential,” said Foster. “The EU action was based on International Civil Aviation Organization (ICAO) data. That demands a response from the Kazakhstan Aviation Committee (CAC) within a given timeframe or the consequences could be far more serious. We are spending a huge amount of time, money and management effort helping the committee to improve its procedures in order to address the ICAO findings.

“It is logical that as a major international player we provide as much support to the CAC as possible. Failure to comply could result in a blanket ban by ICAO (on Kazakhstan airlines), which we could be caught up in. But things are moving.”

Air Astana is a joint venture between the Kazakhstan sovereign wealth fund Samruk-Kazyna, which owns 51 per cent, and BAE Systems with the rest. It was established following the collapse of Kazakhstan Airlines.

From the outset, Air Astana followed a very clear strategy, acquiring a fleet of young, Western aircraft, choosing its routes very carefully and operating to Western standards – it is the only airline in Kazakhstan with European Aviation Safety Agency (EASA) Part 145 aircraft maintenance certification and one of only six Commonwealth of Independent States (CIS) airlines admitted to the register of the International Air Transport Association (IATA) Operational Safety Audit (IOSA) without restrictions.

At present, the fleet totals 21 aircraft: four Boeing 757s, two Boeing 767s, seven Airbus A320s, two A321s and one A319, and five Fokker 50s.

Air Astana had gone down the leasing route until, in 2008, it announced an order for six A320s, due for delivery in 2012-2013. It also plans to lease two Embraer 190LR regional jets, thus adding a new type to its fleet.

While many airlines seek to rationalise the number of aircraft they have in their fleets, Air Astana sees fleet diversity as a key to developing routes.

Ibrahim Canliel, vice president, marketing and sales, said: “The Embraers are coming in in 2011 and it is a new type for us. They are complementing rather than replacing the Fokker 50s. It will enable us to right size some of the routes, filling a gap in terms of seats between the Fokker and the A320. The ability to fine tune our capacity is very important as we develop our routes.”

To understand Air Astana’s strategy, you need to look at both the geography and recent history of Kazakhstan, as well as the country’s economy. It’s a huge country – the ninth largest in the world – but has a population of only 16 million.

The country has been independent since 1991 when the Soviet Union was dissolved. Of the CIS that emerged, Kazakhstan’s economy has performed the best as the country begins to leverage its fabulous horde of oil, gas and mineral wealth.

All have a bearing on Air Astana’s strategy, particularly the population issue, according to Canliel.

For instance, the airline operates only aircraft configured in business and economy classes. “When you talk about a population of 16 million, the number of passengers does not justify a three-cabin configuration,” said Canliel.

It was also the population issue that led to the strategy of “extending” the borders of Kazakhstan into neighbouring CIS states and even China, according to Peter Foster.

“We took a surrogate market strategy,” he said. “We hope that we can demonstrate with our operation that this was a valid position. We have embraced all the countries and borders nearest to us. By looking at our market in that way, we jump from a population of 16 million to 60 million people who live in that zone. This was the strategy pursued by Cathay Pacific and Singapore Airlines.”

That embraces southern Russia (Novosibirsk), Uzbekistan (Bishkek), China (Urumchi) and Azerbaijan (Baku). The feeder routes plug passengers into the Almaty or Astana hubs for onward long-distance journies. More are in the pipeline.

Ibrahim Canliel said: “In our model we are definitely looking at direct point-to-point traffic. If there is no point-to-point traffic and the feeder model is not effective, we would not operate a route. We have no ambitions to carry passengers from Australia to London.

“We are looking to become the leading carrier in central Asia, not another one in the East-West market where there are already too many players.”

He added: “A passenger from Novosibirsk can save six or seven hours by flying to Astana rather than Moscow for their onward flight. From Biskek, we have a wide mix of people going on to Korea, Istanbul or Delhi.”

How are the CIS neighbours taking the strategy?

“In Russia we are still a small player but as we grow, in time they may oppose us. But in Kirgizstan people really welcome us because there is very little other service. Our vision for Central Asia means that we are in a unique position as a company to operate an airline to European standards. If I look at our neighbours, there are not many people who can say the same.

“Our strategy has been successful for us and I think in the market we are more welcome than opposed.”

Air Astana currently operates a domestic network of 44 routes, split 50-50 between domestic and international routes. The fleet will grow from the present 21 aircraft to 28 by 2013 and that is expected to double by 2022.

The cautious approach will continue, said Peter Foster. Air Astana will continue to develop its network in what he calls the “near abroad” echoing the words of former Russian president Vladimir Putin. New long-haul routes are not likely in the present economic environment and when they start again they are likely to be “mostly in Asia”. There may be a new European route, either to serve the gas and oil industry or in eastern Europe. Air Astana “sees no reason” for a second Middle East route, although the Dubai service may grow further.

In the longer-term, a service to the United States is “not out of the question” but current constraints on long-haul equipment rule it out in the short term. Which brought the conversation to the fate of the Memorandum of Understanding (MoU) Air Astana had with Boeing for the 787 (three orders and three options). Essentially the aircraft is now so delayed that the airline is unable to incorporate it into its planning.

Said Foster: “The MoU is not suspended but simply inactive. It is inert. Both Boeing and Airbus want to talk to us but frankly it is not clear what about. All discussions are driven by them. However, we do not see the value of discussions at this stage because the timeframes now being talked about mean we simply cannot plan that far ahead.”

The future, he said, will be more of the same: steady, organic, incremental growth.

“We will continue to do what we do now, building a wider and denser network. We will stick to our strategy that saw us through 2002 – 2007 when all growth was cautious. We have always taken a very cautious approach to high growth.”

It would sound dull, if it wasn’t so interesting.