Case Study

The
Air
Conundrum:

Astana

Why some state owned flag carrier thrive

while most struggle?

Prepared for:
Mr. Sheikh Morshed Jahan, Associate Professor
Course Instructor: Business Strategy
Course Code: W501

Prepared by:
Tanvir Ahmed Khan Tanu (ZR-06)

Institute of Business Administration (IBA), University of Dhaka

January 27, 2014

This case explores the unusual success of Air Astana which has emerged as an unlikely airline success
story in an often forgotten region of the world. The Kazakhstani flag carrier, which was only
established 10 years ago, has quickly positioned itself as the leading carrier of Central Asia, a fastgrowing and increasingly important emerging market. Air Astana is now looking to cash in on this
position with an IPO, which should provide the capital required to pursue further rapid growth in its
second decade.
Airlines like Air Astana present an enigma in an industry where global trend has been deregulation
and privatization; which follows in response to poor performance by state owned airlines. The case
invites readers to discuss, reflect and ponder on the endogenous and exogenous variables and
strategies that set Air Astana apart from its failing flag carrier counterparts.

1 INTRODUCING AIR ASTANA

The 2013 World Airline Awards named Air Astana the Best Airline in Central Asia and India for the
second consecutive year. The ceremony held at the 50 th Paris Air Show also awarded Air Astana as the
Best Staff Service Airline in Central Asia and India. The national flag carrier of Kazakhstan also
happens to be the only airline in Eastern Europe and CIS region to achieve and maintain a 4 star
carrier rating by skytrax.
Air Astana is the principal airline and flag carrier for the Republic of Kazakhstan, one of the worlds
fastest growing economies. It was incorporated in 2001 and its maiden flight, attended by President
Nursultan Nazarbayev, was on May 15 2002.
Today the airline operates a fleet of 25 Western aircraft and close to 63 domestic and international
routes. Its passengers are served by more than 3,500 highly qualied staff headed by Peter Foster, an
airline executive with more than 30 years management experience. Air Astana recently placed an
order for purchasing Boeing 787, Boeing 767, Airbus A320 and Embraer 190 family aircraft that will
further expand the fleet up to 34 aircraft by 2016 and up to 43 aircraft by 2020.
Air Astana is based in Almaty, Kazakhstan. It operates scheduled domestic and international services
on 63 routes from its main hub, Almaty International Airport, and from its 2 secondary hubs, Astana
International Airport and Atyrau Airport. It is a joint venture between Kazakhstan's sovereign wealth
fund Samruk-Kazyna (51%), and BAE Systems PLC, a UK based defense, security and aerospace
company (49%).

Figure 1: Air Astana Ownership

BAE Systems PLC (Private); 49%

Samruk-Kazyna (State); 51%

2 AN UNLIKELY SUCCESS STORY

Air Astana was described by the Centre for Asia Pacific Aviation in January 2012 as having
performed better in its rst decade than just about any other start-up carrier (CAPA, Airline
Analysis, 9 January 2012). Yet its origins represent one of the more intriguing and unlikely stories to
have emerged from the airline industry in recent times. When Kazakhstan's head of state,
President Nursultan Nazarbayev requested Sir Richard Evans, chairman of BAE Systems to acquire
49% share of Astana air, originally conceived as purely domestic airline, he reluctantly agreed. The
intention was to facilitate an air radar contract BAE Systems was then negotiation with the
Government of Kazakhstan. However, the radar contract never materialized, and subsequent senior
management changes and strategic reviews at BAE Systems led to the closure of its offices in
Kazakhstan. Additionally, notwithstanding the support of Nazarbayev and a number of close
advisors, the start-up, initially seen as a foreign entity, was confronted with immediate and vocal
opposition from many elements of Kazakhstan's media and political establishment.
In spite of these gloomy auguries the airline took off on the charge.
Under its rst operational president, former British Airways executive Lloyd Paxton (there had been a
brace of short-lived pre-operational incumbents), it leased its rst 3 Boeing 737s from International
Lease Finance Corporation (ILFC) and commenced Commercial operations on 15 May 2002. In late
2002 Fokker 50s were leased from Aircraft Finance Trading BV (AFT) and 3 Boeing 757s from Pegasus
Leasing Corp. It declared a net prot in 2003, its rst full year of operations. Upon the bankruptcy of
the previous flag carrier Air Kazakhstan in February 2004, it moved quickly to expand from its
domestic network to key international routes to Dubai, Istanbul, Moscow and Beijing, followed
by Frankfurt and London.
Early growth pains and disagreements over fleet plans and hub strategy led to tensions between the
shareholders and a management change in autumn 2005. Peter Foster, a former executive of Cathay
Pacic Airways who had led the rehabilitation team at Philippine Airlines in 1999 before a spell as
CEO at Royal Brunei Airlines, was appointed as the airline's president on 1 October 2005. Long-term
development plans and management structures were established that have remained largely
unchanged since then. The airline has been consistently protable and was listed in the top 20 most

protable airlines in terms of net margin in the world for the years 2010, 2011, and 2012, according to
Airline Business and Air Finance Journal.
In an article on BAE Systems' offset programs (10/10/13) the Financial Times states, BAEs 49 per
cent stake in Kazakhstans Air Astana became one of the companys highest-yielding investments. Yet
the irony of it is that BAE systems only acquired Astana Air as a means to an end.

Conventional wisdom dictates that stability, management continuity and a harmonious

relationship between equity holders are all precursors to business success. Hence, the
success of Air Astana amid chaos, conflict and management changes raises questions
about everything we thought we knew!

3 AIR ASTANAS WINNING STRATEGY

Air Astana has built on its
geographical
strength
by
expanding its network to cover
all key cities of the region with
short haul flights.

In Central Asia and Caucasus Air Astana offers services to

Bishkek (Kyrgyzstan), Tashkent (Uzbekistan), Baku
(Azerbaijan) both from Almaty and Astana. Services to
Dushanbe (Tajikistan), Tbilisi (Georgia) are currently
offered from Almaty and will be extended from Astana
starting IATA Summer 2014 navigation season. Air Astana
closed its last gap in the region in 2013 by launching
services to Kiev (Ukraine) both from Almaty and Astana
with 8 flights per week.

In Russia the number of weekly services on the Astana - Moscow route was increased up to 9 flights a
week, and Almaty - Moscow flights up to 16 in 2013. The airline operates 54 weekly services on 11
routes to Russia: Almaty - Moscow, Astana - Moscow, Almaty - St. Petersburg performed by Airbus
A320 and Astana - Novosibirsk, Astana - Yekaterinburg, Astana - Omsk, Astana - St. Petersburg,
Almaty - Kazan, Almaty - Samara, Atyrau - Moscow, Astana - Orenburg performed by Embraer 190.
While many people are aware that Kazakhstan is located
in the territory of the ex-USSR, it is only a few that are
aware of its close vicinity with China. Kazakhstan
neighbors China through its South East border with a
flight time of less than one and a half hours to Urumqi
and under ve hours to Beijing. The close vicinity of Air
Astanas hubs allows for competitive regional operations
to China. The fact that not a single European, Middle
Eastern carrier is operating to Urumqi, provides a strong
competitive edge for Air Astana. The Western hub of
China is served both from Almaty and Astana with 11
services per week, offering connectivity to its entire CIS
network as well as Kuala Lumpur, Bangkok, Delhi,
Istanbul, Frankfurt and others.

The close vicinity of Air Astanas

hubs allows for competitive
regional operations to China. The
fact that not a single European,
Middle Eastern carrier is operating
to Urumqi (China), provides a
strong competitive edge for Air
Astana

Air Astana has only one other European destination, London, which is served from Almaty. In Indian
Subcontract, Delhi is the only current destination served.
Despite the limited frequencies and often long connection times to regional international destinations,
Air Astana has been able to turn Almaty into a Central Asian hub because passengers have little
choice. Competition on more city pairs, including from Gulf carriers, will gradually increase. But this
will not occur overnight and Air Astanas network in Central Asia will remain unmatched and
become stronger as most routes are upgraded to daily.
Air Astana also has smaller hubs in the capital Astana and in the western city of Atyrau. The
countrys vast geography requires multiple hubs, making it unlikely Air Astana will move to
consolidate at its Almaty headquarters. Astana, located near the Russian border, serves as a smaller
transit point for destinations in southern Russia as well as Frankfurt. Atyrau is primarily a domestic
hub for western Kazakhstan, an expansive, relatively unpopulated area rich in resources including oil.
But Atyrau is also the transit point for Air Astanas Amsterdam service, a lucrative route used by oil

companies from Europe and North America that do business in western Kazakhstan. In addition,
Istanbul is served from all three of Air Astanas hubs.

The daily services to Beijing connect with the entire CIS network as well as European network such as
Frankfurt, Istanbul and particularly London.
Figure 2: Air Astana Annual Traffic 2002 - 2012

Figure 3: Air Astana Annual Revenue 2002 - 2012

Figure 4: Route map from Astana

Figure 5: Route map from Almaty

Figure 6: Latest Data on Online Performance of Air Astana

4 OVERRIDING COMPETITION
Air Astana technically competes against 36 other Kazakhstani carriers in its home market, where it
faces competition at all 23 of its domestic destinations. But as the only Kazakhstani carrier operating a
Western fleet and holding IOSA certication, it is uniquely positioned to benet from the overseas
interest the countrys rapidly growing economy has started to attract. For many passengers, Air
Astana is viewed as the only option within Kazakhstan where air travel is a necessity given it is a
vast country the size of Australia with a limited road network and excruciatingly slow trains as well
as in the greater Central Asia region.
According to IATA data, Kazakhstans market consisted of 4.9 million passengers in 2011, including
2.2 million domestic and 2.7 international passengers. Air Astana transported just over three million
passengers in 2011, giving it about a 60% share of the worlds fastest growing market.
Air Astana currently accounts for about 64% of Kazakhstans domestic market, according to the
carriers own gures. It currently accounts for 51% of seat capacity in Kazakhstans international
market, according to Innovata data.

Figure 7: Air Astana Competition Dynamics

Air Astana was quick to recognize the potential of the Kazakhstani market and the need for a carrier
operating to international standards. Its May-2002 launch brought, for the rst time, an airline with a

Western fleet (initially B737s) and Western management to the domestic market. After flag carrier Air
Kazakhstan collapsed in 2004, Air Astana began taking over international routes. An ambitious
expansion program was launched in 2006, led by industry veteran Peter Foster, the former Cathay
Pacic, Philippine Airlines and Royal Brunei executive who has been at the helm of Air Astana since
2005. Air Astanas fleet and network has slowly but steadily expanded over the last ve years,
reaching 26 aircraft and 54 destinations as of Dec-2011.
Mr. Foster saw the opportunity to pursue growth in the surrounding region and exploit the fact
Central Asias other flag carriers were predominantly small airlines not yet operating to international
standards. Although the richest country in the region, Kazakhstan is a small market of only 16 million
people. But within 250 miles of Kazakhstans borders there is a lucrative catchment area of 60 million.
Kazakhstans eclectic mix of neighbors which includes the former Soviet states of Azerbaijan,
Kyrgyzstan, Uzbekistan, Turkmenistan and Georgia, as well as southeastern Russia and the far west
portion of China have only limited service from Western or Western-style carriers. Weve been able
to develop an effective hub and spoke network from this region to Astana and Almaty and onto our
intercontinental network, Mr. Foster explains

Within 250 miles of Kazakhstans borders there is a lucrative catchment area of 60

million. Kazakhstans eclectic mix of neighbors which includes the former Soviet states
of Azerbaijan, Kyrgyzstan, Uzbekistan, Turkmenistan and Georgia, as well as
southeastern Russia and the far west portion of China have only limited service from
Western or Western-style carriers, an opportunity Air Astana capitalized to the fullest!
The Air Astana strategy is very similar to the one used over the past decade by Royal Jordanian,
which has successfully developed Amman into a hub for the Levant a region which like Central Asia
has traditionally featured small and weak flag carriers. In adopting its new Levant strategy, Royal
Jordanian pulled out of the Europe-Asia long-haul connection market in favour of more protable
long-haul to short-haul and short-haul to short-haul connections. Air Astana is similarly not
interested in turning Almaty or Astana into a bridge linking Asia and Europe, although its two main
hubs are perfectly positioned halfway between the two continents. Instead Air Astana sees a more
protable niche offering short-haul to short-haul and short-haul to long-haul connections that exploit
its market-leading position in Central Asia.

5 AND MILES TO GO BEFORE I SLEEP

Air Astana is planning to focus on further expansion of its short-haul international network in 2013 as
it looks to leverage its position as the strongest carrier in the fast-growing Kazakhstan market and the
Central Asia region. Air Astana plans to add capacity on several regional routes, most of which it has
launched over the last two years as part of its extended home market strategy, while launching service
to Kiev in the Ukraine and potentially Sochi or Ufa in Russia.
Air Astana will take a hiatus in growing its long-haul network after signicant expansion over the last
six months, including the launch of services to Hong Kong and Ho Chi Minh. The carrier, which
enjoyed its 10th consecutive year of protability in 2012 and ended the year with a respectable albeit
reduced prot margin of about 6%, plans to resume long-haul expansion in 2014.

For now the opportunities regionally and domestically are too big to pass up. Kazakhstan is projected
by IATA to be the worlds fastest growing passenger market over the next ve years. Central Asia, a
region bereft of IOSA-certied carriers, also has emerged as a major growth market that Air Astana is
uniquely positioned to exploit.
IATA in its 2012 to 2016 passenger traffic forecast that was released in Dec-2012, projects 20.3% annual
growth for Kazakhstans international market and 22.5% growth for the countrys domestic market.
This makes Kazakhstan the fastest growing market in the world, both in terms of domestic and
international traffic, by a wide margin.
Another Central Asian country, Uzbekistan, was identied by IATA as the second fastest
international market with projected annual growth of 11.1%. A third Central Asian
country, Azerbaijan, also made IATAs top 10 fastest growing international market list with projected
annual growth of 8.9%. Two countries in the wider CIS region also made the list Russia (with
growth of 8.4%) and the Ukraine (with growth of 8.8%).
These gures hardly come as a surprise to Air Astana, which has been riding Kazakhstans rapid
growth for several years. The flag carrier, which launched services in 2002, has seen its traffic more
than double over the last six years from 1.5 million in 2006 to an estimated 3.3 million in 2012.
Revenues have increased at a similar clip, more than tripling since 2005. Revenues grew about 12% in
2012 while passenger traffic grew about 9%, according to preliminary gures.
While Air Astana has benetted signicantly from Kazakhstans rapid growth, particularly
domestically where it allocates about 55% of its seat capacity, the carrier has been working during the
last two years on building its position to exploit the growth in all of Central Asia and parts of the CIS.
Kazakhstan is well positioned geographically, located in the north end of Central Asia and just south
of Russia. This puts its Almaty and Astana hubs in perfect position to connect Central Asia as well
Russia.
As its main long-haul hub of Almaty is located in the far eastern corner of Kazakhstan, Air Astana is
also well positioned to tap into the fast-growing market connecting the Far East, including
neighboring China, with Central Asia. Almaty also happens to be located almost exactly halfway
between Europe and Far East but Air Astana has no intentions of entering the highly competitive
Asia-Europe market as it is much more protable offering short-haul to short-haul and long-haul to
short-haul connections that exploit the carriers unmatched strength in its home region.
Air Astana has seen its transit business grow from virtually zero a few years ago to accounting for
20% of its passenger traffic in 2012. The carrier expects further rapid growth in transit traffic as it
continues to build up its regional network from both of its hubs. Air Astana CEO Peter Foster told
CAPA that the carrier aims to serve all its regional destinations daily from both Almaty and Astana
within two years while also launching a few new regional destinations.
Currently all of Air Astanas regional destinations are served less than daily, providing less than ideal
connection options particularly for the carriers main client base business passengers. Air Astana has
so far gotten by without offering the most convenient schedules as it is the only decent option for
many city pairs. But it recognizes it will need to thicken out its schedule as more airlines expand
across Central Asia and the CIS.

6 AIR ASTANAS CORPORATE GOVERNANCE & HR

The Board of Directors is the governing body of Air Astana JSC responsible for developing the
Companys strategy, general management of its activities and control over the activity of the Executive
Body. The Board of Directors performs its functions in accordance with the Charter, the Corporate
Governance Code and other internal documents of the Company.
The Board of Directors of Air Astana JSC consists of six members who are elected by the General
Meeting of Shareholders by cumulative vote. The Board of Directors consists of two members who are
nominated by the Samruk-Kazyna National Welfare Fund JSC, two members who are nominated by
BAE Systems (Kazakhstan) Limited and two independent directors.
Members of the Board of Directors of Air Astana
Nurzhan Baidauletov, Chairman of the Board of Directors; Managing Director of SamrukKazyna National Welfare Fund JSC
Azat Bekturov, Member of the Board of Directors; Vice Minister of Transport and
Communications of the Republic of Kazakhstan;
Nigel Bradley, Member of the Board of Directors; Commercial and Procurement Director,
Programmes & Support and International, BAE Systems
David Cole, Member of the Board of Directors; Finance Director, International Operating
Group, BAE Systems (Operations) Ltd
Dmitriy Larionov, Independent Director
Lord Thomas Alexander Hesketh, Independent Director
Air Astana views corporate governance as a means of increasing the effectiveness of the activities of
the Company, strengthening its reputation and decreasing costs of raising capital by the Company.
The system of corporate governance of the Company is improving and developing on a constant basis
to ensure a higher degree of transparency in the Companys governance and to conrm the
Companys unfailing preparedness to observe due corporate governance standards.

Figure 8: Corporate Governance Structure of Air Astana

Air Astana numbers more than 4,000 people. Despite the fact that the company directly hires staff for
international offices, most of the employees are citizens of Kazakhstan. It employs 320 pilots, about a
third of whom are non-Kazakhstan nationals recruited principally in Europe. In 2012 company has
introduced a general management training program at Craneld University, England. The airlines
cabin crew consists of over 1,100 flight attendants with the citizenship of Kazakhstan, most of them
are women. Its management is a combination of Kazakhstan and foreign nationals.

Figure 9: Peter Foster, CEO, Air Astana

It was agreed from the outset that the airline would be run according to best commercial and

operational principles and we havent deviated from that. Peter Foster, Air Astana CEO