Disputes with Air Kazakstan over aircraft and debt repayment

Published: 7/12/2000

After the bankruptcy of Kazakhstan Airways (NAAK Kazakhstan Aue Zholy) in 1996 and the illegal absorption of its assets into the newly created Air Kazakhstan, without the transfer of the liabilities of the new company, there is now considerable dissatisfaction on the part of the creditors of the rump of the airline currently under extended administration. This had led to ongoing court proceedings in an effort to realise some repayment of debts through recovery of some of the assets of the airline, namely three aircraft. Recent reports from Kazakhstan suggest that the Kazak Supreme Court has found in favour of the creditors and said that the aircraft belonged to the airline and its creditors and could not be transferred illegally. This has sparked the personal intervention of Kazakhstan's President Nazarbayev, who is reported to have instructed Alexander Krinichansky , President of Air Kazakhstan, to begin discussions with Kazakhstan Airways' creditors including employees and make a proposal for settling the debts. These debts exclude those incurred when the airline was in temporary management after being declared bankrupt under Bakhytzhan Aidarkhanov (previous reported in Concise as Idarkhov), its temporary manager. It is speculated that with this proposed settlement, it is unlikely that the government will release the aircraft to Kazakhstan Aue Zholy. Air Kazakhstan is also demanding that as part of a settlement, the company is finally bankrupted after 27 months in administration, well over the normal period of 15 months. Aidarkhanov has led an aggressive campaign to have the assets returned to his bankrupt charge and also to get the acquiring company to accept responsibility for the airline's debts, including the cost of a crash of a Kazakhstan Aue Zholy aircraft near Delhi. Krinichansky however, argues that the debts incurred as a result of the crashed aircraft, which flew under the Kazakhstan Aue Zholy flag, have no connection with Air Kazakhstan and has no relevance to the issue of the three transferred aircraft. The Supreme Court has not agreed on the latter case and has rejected Krinichansky's request that the company be folded without further extensions to its temporary management. In addition, Aidarkhanov has further accused the management of Air Kazakhstan of selling one of the aircraft, a Tu-154M, to an offshore company based in Liechtenstein, for what Aidarkhanov describes as 'next to nothing'. Krinichansky argues however, that the deal was one undertaken by his predecessor and the low price of the aircraft sale reflected the value of two engines involved in the overall deal, a stance supported by the Prosecutor's Office that has investigated the deal. Other accusations of undue influence by airline consultants Simat, Helliesen & Eichner, Inc. (SH&E) on Air Kazakhstan have also been refuted on the basis that they have not been actively involved with the airline for two years when their management contract expired, although warm relations between the management and the consultancy are reported to continue. The plan proposed by the consultancy, which has been adopted in part by the by the new management as the basis of the restructuring plan currently in place, is predicated on Air Kazakhstan retaining a monopoly of its small market for 7-9 years according to SH&E. Interestingly in the view of Kostas Botev of SH&E, the manager of their Kazak programme in 1996 and 1997, the programme was probably most effectively run by Orient Eagle, an airline then controlled by Alexander Krinichansky, the current General Director of Air Kazakhstan Group . The consultancy advised against making large commitments for new aircraft, particularly wide bodies, a route the airline initially followed but with the change of government the decision was made to acquire A-310s from Swissair. This was despite advice that the limited capital available to the airline was needed to build what was effectively a start-up requiring an almost complete investment programme from the ground up, particularly in ticketing and booking infrastructure. The motivation for the purchases according to sources, was less motivated by economics than by the fact that airlines of other countries in the region were making similar purchases. The airline and the government were also advised that they should enforce the scheduled flight rights of the flag carrier against those of the country's numerous charter carriers. SH&E believed they were undermining the value of the airline to investors, as they encroached on Air Kazakhstan's monopoly by starting scheduled flights, the rights to which, were Air Kazakhstan's only real asset. The control of the charterers activities has however, proved to be difficult for the authorities although they have recently sought to clamp down. Krinichansky has stated that the airline broke even in May 2000, reflecting the extensive restructuring of the state carrier. The company however, remains burdened with debt, which is now reported to be $48m, little of which has been repaid. The airline's management remains confident that the improved performance will bring the debt down and free the airline's assets, which were collateralised under the previous management. Repayment schedules have however; been settled with a number of the banks and only the negotiations with Kazkommertsbank remain to be concluded according to reports. The actual size of the outstanding debt appears to be the subject of some debate. In December 1999, Krinichansky stated that the group debt was no more than $25-30m, in response to an accusation from Aidarkhanov that it exceeded $100m. The major creditor of the airline remains Almaty Airport, its major operating base and additional debts remain outstanding to other ATC operators, airlines and Russian aerospace companies for aircraft maintenance. Debts are reported to relate to late payments on the leases of the A-310s acquired by the airline in November 1999. The Ministry of Transport and Communications, which signed sovereign guarantees on the leases, has said that the debts will be paid by relatively cash-rich ATC company Kazaeronavigatsiya, part of the Air Kazakhstan Group, a technique used in the past to pay other airline debts. Krinichansky says that the airline itself could have paid the debt within 18 months, but cannot afford to lose the aircraft. According to Krinichansky, he has leased his Boeing 737-200 at a cost of 15-20% below that of Ukrainian carrier Aerosvit, although why this carrier is used a comparison is unexplained. The third 737 is due to be delivered this summer and the airline potentially believes that they could be operating five or six 737s by the end of 2001. Commenting on routes, Krinishansky has said that the relationship with Tranaero, while not an alliance, has enabled the airline to reach load factors of 80% on the Moscow-Almaty route and what is described as 'interesting traffic' on its routes to South East Asia. The discussions about a relationship with Aeroflot, which failed earlier this year, have been replaced, according to Krishinishansky, with a desire on the part of Aeroflot to aggressively take shares, citing price dumping on the route to Bishkek as being evidence of this strategy. Krinishansky argues that Aeroflot, unable to compete in the west, is now focusing its efforts on the Russian and CIS markets, which curiously is a fairly accurate rendition of the airline's recently announced strategy. The failed Aeroflot relationship and what is seen as Kazakhstan's weak political bargaining position is seen as hindering the airline's access to Moscow and they claim promised slots at Shermetyevo-2 have not been forthcoming. For the future funding of the growth of the airline, Krishinishansky said in a recent newspapaer report that he favoured privatisation of up to 60% of the airline to an outside strategic investor with an interest in Kazak aviation. Without that financing, he accepts it will be difficult for the airline to compete. Efforts to find such an investor to date have come to nothing despite discussions with Swissair, the leading contender. Krishinishansky is now of the view that the investor may come from Israel or Taiwan. To date no official announcements have been, but there are reports of an EBRD-funded feasibility project. In the view of Kostov Botov of SH&E, given sufficient independence from government intervention and a couple of years, the airline could be an attractive investment for a potential strategic investor given the position of Almaty and the development of regional traffic linked through a partnership into longer haul routes.

Article ID: 1938