Kazak government creates expected air transport company in an effort to improve sector

Published: 1/11/2000

As expected, the Kazakhstan government has finally created the single air company that Serik Burkitbaev, the Minister of Transport and Communications announced in March 1999, in an effort to make the national carrier Air Kazakhstan and air transport in Kazakhstan more viable. Air Kazakhstan emerged from the bankruptcy of the Kazakhstan Airways in 1996. The new single holding company, Air Kazakhstan Group includes Air Kazakhstan, Irtysh Avia (Pavlodar), Almaty Airport, Atyrau Aue Zholy, ATMA-Atyrau Airport and Transportation, and Kazaeronavigatsia (the National Air Traffic Control Company) according to Alexander Krinichansky, President of the new group. The group will lease part of the property belonging to the Kazaeronavigation company. The new entity is 100% state-owned and its formation is intended to address the financial difficulties facing the air transport sector in the region, through gaining economies of scale and hopefully access to finance. Air Kazakhstan, in particular, has been struggling with a combination of lack of funding and the problems of an ageing fleet, largely inherited from Aeroflot. The fleet, made up of 63 planes including two Airbuses and a Boeing 737, is reported to require extensive overhauling. The devaluation of the Kazkhstani tenge, by some 30%, in April 1999, dealt it a further blow. In autumn 1999, government officials voiced concern over the safety of the fleet and the company"s future. This latest development suggests that the notion of finding a strategic investor as a solution for Air Kazakhstan has been abandoned. The new group will also have an extraordinarily large workforce, which will exceed the Air Kazakhstan"s 30,000 people reported at the end of 1998. According to Krinichansky, the new group will have around 16-17 operational aircraft immediately at its disposal, including the A-310s acquired in November 1999 and a Boeing 737-200, which he thought would meet the airline"s short-term requirements. It plans to lease another Boeing in February and will undertake a technical review of the fleet over the next month, which is likely to reveal that the majority of the fleet are at the end of their statutory operational lives and not in flyable condition. The group will then probably choose to lease rather than purchase additional aircraft given financial constraints and the need for flexibility, although the response from leasing companies to proposals from Air Kazakhstan earlier this year received a lukewarm response even for used 737s. Krinichansky added that a single air transportation schedule would be drawn up, with a single standard for aircraft maintenance. He estimated that Air Kazakhstan Group would account for some 60% of domestic transportation and said that the intention of the government was to make air travel more affordable for Kazaks. Krinichansky further commented that the group"s total debt, amounting to some $25-30m, was “not too bad". Adding that the new holding company would need to earn at least $30m per year in order to be viable in the future. He was however, confident that the new terminal at Almaty Airport would meet projected demand over the next 15 years. The current size of the domestic market according to Krinichansky is estimated to be $120m. Given the current costs of purchasing and operating even Russian aircraft of around $10m for a Tu-154M combined with operating costs of $2-3m per year, the 52 air companies operating in Kazakhstan are unlikely to ever operate profitably and the fragmentation of the market has left the domestic air transport market under developed. Whether the state will achieve its upgrading and efficiciency goals by creating an old fashioned state aviation enterprise, we will have to wait and see, but a market share of 60% does not suggest that Kazakhstan will be seeing radical air transport changes in the short term. Also the government"s suggestion that capital raising will be easier for the unified entity and for those offering products and services for aircraft and for ground equipment, which all require upgrading according to reports, is probably true, but will probably require the government to give sovereign guarantees for the new entity, similar to the $200m promised to Air Kazakhstan by the government in March 1999 for new aircraft. . Associated articles: www.concise.org. 8th March 1999, 4th January 2000

Article ID: 1299