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 KAZAKHSTAN International Business Magazine №2, 2007
 Civil Aviation: Takeoff or Letdown?
ARCHIVE
Civil Aviation: Takeoff or Letdown?
 
By Sergey Smirnov
 
The Kazakh government is planning to invest 124 billion tenge in a national programme to develop civil aviation in 2006-2008. According to officials, it will help to make the branch competitive; however, its present state raises doubts that a rapid advance is possible.
 
At present, civil aviation in Kazakhstan comprises 77 organisations including the national Kazaeronavigatsia, 54 airlines, and 22 airports, of which 16 serve domestic and international flights. The volumes of air freight (Chart 1), passenger transportation (Chart 2), and air service revenue (Chart 3) are increasing. In 2006, the number of passengers totalled 1.9 million, passenger transportation increased by 12%, and air freight amounted to 46.33 million tonnes per kilometre. The analysis of airports’ activity shows the annual average increase of passenger traffic by 10% (Table 1). So long as current trends continue, the volume of passenger transportation by Kazakh airlines is forecasted to double by 2009. Thus, according to statistics, Kazakh civil aviation is growing in leaps and bounds.
 
Jurassic Fleet
 
Notwithstanding the inspiring statistics, civil aviation still faces certain problems apparent to everyone who uses air services. A rush of complaints from passengers has even reached the parliament. Customers’ dissatisfaction is mainly caused by regular flight delays, extremely low level of service in the airports and on board of the so-called “flying dinosaurs”. Physical depreciation and obsolescence of the aircraft strikes the eye – the average age of 1-3 class carriers is 26-27, so their operational life is almost over.
 
According to the results of the state aircraft inspection carried out by the Ministry of Transport and Communications’ Civil Aviation Committee, the level of operability is only 60%! It means that the technical state of half of the fleet (which includes 611 airplanes and 107 helicopters) does not meet safety requirements. The crafts require urgent renovation or substitution with new aerotechnics. As per the data provided by the Ministry of Transport and Communications, on 1 April 2006 operation of 206 aircraft and 76 helicopters was suspended for various reasons following only one inspection.
 
Nevertheless, some airlines manage to obtain permits to extend the life of aircraft from design bureaus (“on commercial basis”) and receive airworthiness certificates. It has not been until recently that the Ministry of Transport and Communications has forbidden the registration of foreign aircraft with an age of over 20 years.
 
At present, the third class fleet comprises 83 airplanes (such as An-24 and Yak-40) for domestic flights. In the course of the “cleanup”, it is planned to reduce this to eight by 2008, and to terminate their exploitation completely by 2010. However these measures can bring about a failure to meet passenger demand, as the regions’ development is encouraging domestic air transportation. The question is how to substitute the outdated aerotechnics?
 
According to the Civil Aviation Committee (CAC), Kazakh air fleet should have at least 40 craft of 1-3 class by 2008. However, new airplanes, such as Airbus, cost about $250-300m. The price of a 50-seat airplane, such as Embraer, RJ or CRJ is $15-17m, a 70-seat airplane about $20m.
 
Having compared these figures with local airlines’ financial abilities, we can definitely conclude that they will be able to substitute their aerotechnics only with imported “second-hand” craft and only on terms of operating lease. 
 
In this context another problem appears. The majority of domestic aircraft does not meet international requirements in noise level, environmental safety, and navigation accuracy, therefore, they are unsuitable for international flights. The decrease of transportation profitability resulting in the loss of market (and not only the international one) is a direct consequence of aircraft deterioration.
 
In addition to deterioration, there are also problems such as inefficient pricing policy, poor instrumentation, and the obsolete infrastructure of many airports. Kazakhstan is planning to enter the WTO soon, and it means opening our airspace for international carriers. As far as the quality of service and level of safety are concerned, Kazakh airlines bear no comparison with world air companies. It means that Kazakh carriers have almost no time left to “gain competitive altitude”.
 
Skeleton in the Cupboard
 
The long-term efforts aimed at reformation of the branch have failed to create competition in air transportation so far. For example, Air Astana has exclusive rights for domestic and international flights. Its share is 75% in domestic and 33% in international transportation. This protectionism has an obvious explanation: 51% of its shares belong to the Kazakh government and 49% to BAE Systems Ltd. The company serves 20 international and 27 domestic flights, and operates on its own and leased aircraft. Occasionally its flights are served by foreign and domestic airlines such as Atlas Jet, Omni Air, Irbis, Atyrau Auye Zholy, Sayakhat, Tulpar Avia, and SCAT, – the second largest airline in Kazakhstan.
 
Air Astana operates foreign aircraft such as Boeing-757-200, Boeing-737-700 (800), ?-320 and Fokker-50 (it is worth noting that the latter’s manufacturer and the main spare parts supplier went bankrupt about ten years ago). The airline leased four new passenger aircraft in 2006, and it is planning to obtain six more this year. Among them are wide-boy Boeing-767 as well as medium-range airliners. At present the airline’s fleet includes 18 aircrafts, and by 2015 it plans to expand it to 35.
 
However, Air Astana has skeletons in its cupboard too. During its inspection, the Accounts Committee for control over execution of the national budget made a conclusion that Air Astana used the funds and assets inefficiently and unreasonably.
 
For example, “five Fokker-50 airplanes leased in 2004 have been used for 17 years already and have fully recompensed their cost”. The Accounts Committee pointed out that, following the stakeholders’ decision, the dividends of net profit had not been paid in the national budget during 2003-2005, although the state has the control stock.
 
It has been found that over the five years, the airline has purchased no aircraft, but leased them from BAE Systems Ltd instead. Moreover, quoting the head of Samruk Mr Sauat Mynbayev, “at present, the airlines’ foreign shareholder objects the purchase of new aircraft”. According to the CAC, “all the Air Astana’s craft are registered with the Aruba Ministry of Transport and Tourism’s Civil Aviation Department”.
 
Aruba is one of the Leeward Islands (the Lesser Antilles) in the Caribbean Sea. Being the realm of the Netherlands, it is an offshore zone with its tax, customs, investment and other privileges
 
Thus, the national airline operates aircraft from a foreign country, which has certain implications. For example, the Dutch offshore ensures the company’s capitalisation decreases and also secures the British shareholder’s security from any actions of the Kazakh side.
 
The unwillingness of the foreign shareholder to develop the company can be understood in the context of the BA? Systems’ main interest in Kazakhstan, as described by Russky Focus. It was a contract to supply airspace radars and defence systems. Establishment of the new airline was something like a “contract supplement”. A considerable decrease in amount of orders later on caused alienation of the British side from the project that does not produce any significant dividends.  
 
Will Kazakh Pilots Be Included in the Endangered-species List?
 
According to experts, soon there will be no qualified pilots left in the country. While the USSR used to have a public order for training of aircraft pilots and technicians, there is no such practice in Kazakhstan. As a result, flying schools have to operate on self-supporting basis. If they were fortunate, their graduates learned to fly “pterosaurs” like An-2 or Yak-40, otherwise, they never piloted at all. Such “training” results in various emergencies. According to the head of the CAC’s State Air Inspectorate Mr Amantai Zholdybayev, nine out of 15 flight incidents in 2005 were due to the crews’ fault. Therefore, even if the air fleet is upgraded, civil aviation of Kazakhstan is about to break down unless the staff problem is solved.
 
During the USSR, pilots were trained in the Aktyubinsk Flying School, but it has been redirected for military air forces. Civil pilots are currently trained in the Civil Aviation Academy, but they do not receive the International JAR certificate required by European aviation regulations to fly foreign aircraft. In fact, the only plane they can pilot is an An-2! Even in order to fly a Tu-134, they need to pass pilot transition training in Russia.
 
It would be helpful to reorganise the Civil Aviation Academy into an aviation centre securing specialists in different fields of the branch. However, it will take considerable time to update training methods and facilities, and also to retrain the Academy teachers in civil aviation centres abroad.
 
Another solution was offered by the Ministry of Transport and Communications – to establish a civil department within the Aktyubinsk Military Aviation Institute. This would create an expected 30 JAR certified pilots and 30 JAR certified engineers as graduates.
 
According to the head of CAC Mr Yerlan Koshanov, there is an opportunity for novice pilots to raise their qualification under the Bolashak scholarship programme. However, this possibility is still vague, since the Bolashak register of qualifications does not include “pilots”.
 
The lack of air personnel became obvious several years ago, when Air Kazakhstan and Irtysh Avia were dissolved. Many experienced pilots who had lost their jobs now fly airplanes in the UAE, Africa, and India. And they are not likely to feel sorry about it.
 
The staff problem is urgent for aircraft technicians as well. Most of them were trained in the USSR period. Thus, the civil aviation of independent Kazakhstan is based on professionals from the old regime, but who is going to replace them?
 
Is It About the Fuel?
 
The majority of Kazakhstan’s population cannot afford to travel by air. Due to the gap between per capita income and cost of flights, international as well as domestic flights are unavailable to most people. In response to the complaints on exorbitant ticket price (that corresponds neither to the state of aircrafts nor to the level of service on board), airlines mention the high cost of aviation fuel in Kazakh airports. Taking into account the high fuel consumption by uneconomical airplanes, we can say that this factor has a considerable influence on the flight cost.
 
While the production cost of Kazakh aviation fuel is about $630/tonne, its price in Astana airport is $853, Almaty $802, Atyrau $801, Uralsk $735, and Zhezkazgan $900. In the CIS region, only Baku has a comparable price – $865/tonne. The cost of aviation fuel in Moscow is about $800, in Bishkek $715, Ufa $678, Homyel’ $600, and Ashgabat $500. As for the non-CIS countries, the average price for a tonne of aviation fuel in Sharm al-Sheikh is $781, Beijing $730, Ankara $670, Tel Aviv $670, and Riga $661.
 
In spite of the abundant oil resources, the volume of aviation fuel produced in Kazakhstan is insufficient, the rest is imported (basically from Russia). According to the Ministry of Transport and Communications, Kazakh oil refineries produced 270,000 tonnes of aviation fuel in 2006, and 130,000 tonnes more were purchased from Russia. By 2010, the local oil refineries are expected to produce 770,000 tonnes of fuel and therefore to cover the national requirements. Nevertheless, airlines believe that these efforts will not help to decrease ticket costs, since the fuel pricing policy is set by airports.
 
There is an obvious solution – to launch a regulated open trade of aviation fuel with governmental support to ensure price stabilisation at a reasonable level. Measures should be taken to subsidise fuel costs of domestic airlines that serve socially important but unprofitable local flights. This practice is common in European countries that have settlements in remote areas. Otherwise the forecasted increase of fuel prices (along with low paying capacity of the population) will lead the local airlines to bankruptcy with negative impact on the national economy and security.
 
Airports Need Investment
 
As mentioned above, Kazakhstan has 22 airports, of which 14 accept international flights. Meanwhile only five of them (those in Astana, Almaty, Atyrau, Aktobe, and Pavlodar) meet the requirement of the International Air Transport Association. Therefore, modernisation of airports is one of the basic steps to promote competitiveness of civil aviation in Kazakhstan. With the help of the $25m EBRD loan, a new flight strip was built in Atyrau airport in 2003-2005. In 2005, reconstruction of the flight strip in Aktobe airport was finished; the project required about 3 billion tenge from the national budget. Construction of the new airport in Astana consisting of 33 facilities to the total cost of $216m was over the same year. Similar building activities are being finalised in Shymkent and are planned in Aktau, Kostanay, and Kzylorda. 
 
Meanwhile, airports, particularly the regional ones suffer from low-level technical equipment produced mainly in the 1970s-1980s. Due to insufficient funding, the reconstruction schedules and planned maintenance of flight strips, aprons, and perimeter gates are disregarded. As is known, once some of the airports were privatised or entrusted to private management. However, time showed that private owners not always were good managers. For example, the physical assets of Taraz, Petropavlovsk, Balkhash, and Kokshetau airports have not been invested in for many years, and their deterioration is about 40-50%. The CAC is planning to initiate legislative measures, including the temporary management regime, that would influence such airport owners.
 
The concept of hub airports was chosen as a basis for improvement of the local airport infrastructure. Three hubs are being created for the major international flights: in Astana (the capital), Almaty (the financial centre), and Atyrau (the oil centre). These cities will have air links with the regional centres to ensure suitable connections of local and international flights. According to the Ministry of Transport and Communications, about 53 billion tenge have already been spent on the development of the airports’ ground infrastructure. Officials believe that international flights to the USA, European Union, and South-East Asia can be served from other cities in Kazakhstan. In the long term, it will promote the whole network of flights Europe–Kazakhstan–Asia and a considerable increase in passenger traffic.
 
The development of a national hub network should be motivated not only by political and technical necessity, but also by its economic feasibility. The future hubs will be able to attract airlines and pay their way only if accompanied by high-quality related services (hotels, tourist and cargo transportation, etc.).
 
As is known, one of the main weaknesses of Kazakh airports is the monopoly in provision of ground and terminal services and refuelling. Meanwhile the airport charges and rates do not correspond to the quality of services. The high prices of airport services occasionally make foreign companies use airports in neighbouring countries. For example, the servicing of a Boeing-757 in Kazakh airports costs up to 400,000 tenge, while in Russia it is no more than 200,000 tenge, and in Uzbekistan 157,000 tenge.
 
It is worth noting that the total cost of airport infrastructure modernisation planned is about 45 billion tenge, and these expenses will be partially covered through charges and rates. Thus, a half of Kazakh airports plan to increase service charges by 50% over the next three years. If this happens, there will be no need to ask what countries international airlines will choose for refuelling on their way from Europe to Asia and back.
 
Common Sense Suggestions
 
Several steps can be taken to promote the efficient development of civil aviation in Kazakhstan. Firstly, a unified and transparent national scale of airport rates and charges should be developed, its prices corresponding to the level and quality of services provided. Secondly, the government should adopt and implement measures including economic incentives and administrative influence to consolidate the sector. Thirdly, the vagueness of powers and areas of responsibility of governing bodies in charge of the branch should be eliminated. Without effective management it will be impossible to overcome the crisis of civil aviation, airport services, and the air traffic organisation system.
 


Table of contents
Where Does the Brand Start?  Yevgeniy Zharkin 
Atlas Copco. Growth Strategy  Hans Hedensjö 
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3





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