It would appear that having deftly disposed of half of the almost bankrupt
Air Kazakhstan with losses after the first nine months of 2000 of $25m, to its
principle creditor, in a deal that swapped 50% of the airline's equity for debts
estimated to be over $20m.Air Kazakhstan Group is feeling flushed with success
and feels a new lease on life. This newfound confidence was reflected in an
interview with the President of Air Kazakhstan Group Alexander Krinichansky
on the 17th November 2000, when he confirmed that the struggling airline would
replace their Russian fleet with leased Western aircraft over a period of time.
Krinichansky said that during the last three weeks, Air Kazakhstan had concluded
agreements for the lease of an additional Boeing-737-200 and that the aircraft
was expected to be delivered by early December, replacing the Tu-154B within
the airline's 27 aircraft fleet, of which 15 are reported to be operational.
During 2000, the airline has taken an operating lease on another 737-200 adding
to the one aircraft already in service. According to Krinichansky, the airline
is also discussing the possible lease a larger Western aircraft for longer haul
routes, which would either be a A-310 or potentially B-757 and would be delivered
prior to March 2001, followed by a fourth 737-200 in H1 2001. It is unclear
who will provide the lease of the aircraft, but as General Electric Capital
Aviation Services (GEAC) leases two of the three Boeings already delivered,
they are considered to have an advantageous position; although talks have taken
place recently with Boeing, who currently lease two A-310s to the carrier.
At the recent negotiations relating to the acquisition of new aircraft with
Boeing, it has been reported that Boeing expressed a preference for leases to
be guaranteed by the airline's new partner Kazkommertsnbank rather than the
sovereign guarantees that have been provided in the past by the Kazak government
on previous deals with Boeing involving the leasing of two aging ex Swissair
A-310's. The bank under the terms of the debt swap agreement is required to
restructure the airline's outstanding $8m of debts over a five year period and
invest $10m additional equity into the airline to restructure the airline, which
given its reported 2000 employees offers considerable scope for improvement.
The first step may be to replace the A-310s, which are reported to have had
a poor maintenance record and to be operating with substantial losses, although
some consider estimates of $5m in 1999 too high. .
Given the historical record of the airline on lease payments for aircraft,
Kazkommertsnbank's undertaking of the guarantee shows considerable confidence
on the part of the bank, although their long association with the airline should
make them aware of any risks. The airline's situation is however, said business
situation is however, reported to have improved under Krinitchansky during the
last year; despite the dramatic year on year declines in traffic. The new president
through Air Kazakhstan Group bringing is reported to have brought considerable
improvements in both the management of the airline and the relations between
the airline and its lessors. The latter seeing payments at least made, if not
always on time. Lessors have also been prepared to "normalize" certain terms
such as deposits according to Doug Winter of GECAS. With the airline only having
to provide 3-4 month of lease payments as a security; terms in line with second
line carriers in Western Europe, but also reflecting the age of the aircraft
being delivered to Air Kazakhstan. Operational lease periods appear to be currently
running between 3-5 years and the range of lease costs ranging between $90,000-$110,000
for late vintage B737-200's according to sources. There remains one outstanding
lease problem with the airline's first Boeing 737-200, which is reported to
be approaching arbitration after the aircraft spent a great deal of time on
the ground for unscheduled maintenance in the period after delivery resulting
in a number of missed lease payments.
The recent troubled times at Air Kazakhstan cannot have been made any easier
by the plan to create a new state owned airline operating out of the country's
capital Astana. According to Karim Masimov, Minister of Transport and Communications,
the new airline Kazakhstan Airlines, has been established as a successor to
Tselina Air Company. Whether this airline will actually emerge is treated with
caution by some commentators, who see the task as being "challenging" given
conditions within the market and the airline's base in the remote capital city.
In the last week another carrier also appears to have emerged in the turbulent
Kazak air transport market with Air Kazakhstan Group's loss of control of a
number of assets to Kaztransoil, the state oil company. Losses including Atyrau
Airport and the airline based at the airport Air Atyrau. The transferred assets
will now be incorporated into the Kaztransoil subsidiary Euro-Asia Air, which
operates a fleet of 30 helicopters according to reports and was profitable in
the first nine months of 2000. The moves at Atyrau largely seem to have been
motivated by what the government sees as the need for the rapid air transport
development of the western part of the country for the benefit of the oil industry.
The impacts of these changes in the Kazakhstan air transport market are difficult
to interpret in the short term. Many observers are extremely sceptical of the
ability of the virtual start ups to "compete" in a liberalized market and see
the changes as being largely politically motivated. Highlighted by the focus
on two key areas of political interest in the country, air services to the new
capital Astana and the air support for the economically and politically important
oil industry, rather than a real effort to restructure the sector. therefore
appears to be of the view, that they pose little competitive threat to the national
carrier. They do however highlight that those running and regulating the industry
are not necessarily speaking with one voice and the emasculated elements of
the government aviation agencies are not unhappy about taking pot shots at Air
Kazakhstan Group and nostalgically hark back to a period of stability widely
seen by those outside the country as being chaotic; culminating in a period
of decision making limbo prior to the formation of the new Air Kazakhstan Group
earlier this year.
Since the establishment of the new holding under Krinitchansky, the feeling
among those involved in dealing with the airline, is that it has adopted a more
realistic attitude to the operation and development of the airline. An approach
focussed on the building of a reliable fleet made up, not of new aircraft, but
of older and therefore with lower capital cost, aircraft. Abandoning the early
plans for fleets of new aircraft simply unsustainable in the near future in
the Kazak market. The task for the airline will however, be a challenging one,
but in the words of one executive "things cannot get much worse…but we are still
waiting for the better".
Future plans
During a recent visit to the UK Kazak President Nursultan Nazarbayev took the
opportunity to open discussions with BAE Systems and sign a Memorandum of Understanding
covering according to BAE Systems, rather ambiguously, the framework and timetable
of future discussions. For the Kazaks the discussions appear to have centred
on two areas:
- The provision of assistance in the development of a regulatory environment
similar to that of the UK's CAA
- The establishment of two companies to provide maintenance and overhaul facilities
and a leasing venture
BAE Systems are however, reluctant to be drawn on the specifics of the discussion
other than to comment that they see the relationship as a potentially fruitful
one and they believe that the Kazak's potentially could require the company's
regional jets.
Accompanying the Kazak President to the UK, Masimov suggested that the UK competitive
environment could be replicated in Kazakhstan, with competition between airlines
benefiting Kazak passengers in a "liberalised" market. A more liberal approach
to the market has however not been the mark of the Kazak market to date were
the "regulation " of a group of charter carriers seeking to operate scheduled
routes has been strongly objected too on the basis that it challenges the monopoly
of state owned carriers.
