Featureinterview
Airline title here
Qazaqs social service
Martin Rivers speaks to the CEO of Kazakhstans government-owned airline,
Qazar Air, about flying above economic turbulence, a popular social mandate
and the quest for profitability
L
ooking back, 2015 seems like an unfortunate
The airline deploys three
Bombardier Dash 8 Q400s time to have launched an airline in Kazakhstan,
(photo: Qazaq Air) the central Asian nation whose economy relies
heavily on commodity earnings.
The collapse in oil prices from $115 per barrel in
mid-2014 to $30 in early 2016 had a crippling effect
on the former Soviet Republic, choking off both
domestic spending and foreign investment. While
the government responded prudently by floating its
currency, a subsequent halving of the value of the
Tenge (the local currency) only heaped more
pressure on Kazakh workers and businesses.
48 / Low Cost & Regional Airline Business
Having launched operations at the height of the
crisis, there was little chance that Qazaq Air would
enjoy the smooth entry into service its management
originally hoped for.
However, Chief Executive Officer Blair Pollock is
quick to find a silver lining, arguing that headwinds
create opportunities for ambitious startups, particularly
state-owned ones that have a political mandate to
drive long-term development.
We talk about the recession and the bad economic
environment, but actually if youre going to start a
business thats quite a good time to do it,
www.lowcostandregional.com / July 2017
 Airline interview

Pollock tells Low Cost & Regional Airline Business. In

terms of recruiting people, in terms of having access
to available capacityits not a bad time to grow a
business. When things are booming in Kazakhstan
you just cant get anyone to work for you.
Economic conditions are now stabilising, with
oil prices edging up to $55 and the Tenge clawing
back 20% of its value since early 2016. Though by
no means signalling a sustained recovery, these
indicators have convinced many that Kazakhstan
is back on its feet.
Russias return to growth late last year capping
seven consecutive quarters of contraction gives
further cause for optimism. Kazakhstans economic
prospects are inexorably tied to its northern
neighbour. Weve definitely seen a pickup,
Pollock insists.
Were seeing announcements on increased
spending from the oil majors in Kazakhstan. With
commodity prices recovering were seeing investors
coming back to town. Financiers are flying to Astana.
Of course, if you ask people in the street, its still
pretty tough. With devaluation, theyre experiencing
inflation and static wages. But actually, the big picture
in Kazakhstan is encouraging.
Qazaq Air presently deploys three Bombardier
Dash 8 Q400 turboprops from its south-eastern base
of Almaty the largest city in Kazakhstan and, until
1997, its capital.
The airlines route network comprises non-stop
flights to four domestic points: new capital Astana,
Kostanay and Pavlodar in the north; plus, Shymkent
in the south. Connecting services also operate
through Shymkent to the west of the vast country,
linking first with Aktobe and then Atyrau and Orl. is jointly owned by sovereign wealth fund Samruk-
Pullock says load factors
As of March, Shymkent further gained a non-stop Kazyna and BAE Systems. From its privileged position, are steadily improving as
connection with Astana. Air Astana led efforts to improve safety standards awareness of the brand grows
(photo: Qazaq Air)
Flights had been operated to Semey in the across the country, eventually convincing Brussels
north-east, but were suspended in February to allow to revoke the blacklisting last year.
for runway work. Aktau, Kyzylorda and Taldykorgan It is a legacy that Qazaq Air, itself fully-owned by
are also no longer served. Samruk-Kazyna, wants to share and advance over
While many of these destinations will be the coming years.
unfamiliar to readers, focusing on domestic points When I was hired, the main objective was to start
is a strategic necessity for management. Kazakhstan a domestic carrier to link the commercial centres
has suffered from poor air connectivity ever since the of this huge country, connecting some of the more
collapse of the Soviet Union in 1991 spelled the end remote cities and regions so that they benefit from
of subsidies for domestic routes. In the absence of the economic growth that Kazakhstan has benefited
state-funded services, some crucial air links were from, Pollock explains. The second key objective was
abandoned while others were taken over by airlines to set proper international safety standards, so we
with patchy safety records. would be really doing what Air Astana has done over
Poor compliance became such a concern that, in the last 15 years bringing international standards
2009, the European Union banned almost all Kazakh of aviation and best practice to this market.
carriers from its skies. Qazaq Air was started to be a government-
The lone exception to the EU ban was Air Astana, financed organisation which would lead this in
Kazakhstans post-independence flag-carrier, which the domestic market, and therefore enable f

July 2017 / www.lowcostandregional.com Low Cost & Regional Airline Business / 49

Featureinterview
Airline title here
the government to tighten regulations and ensure
Two more Q400s are
expected to join the fleet compliance by other carriers. And, of course,
(photo: Bombardier) Qazaq Air would be here to take up any slack that
may appear as a result of that.
Pollock admits that the economic downturn has
had financial consequences for the airline. As well as
reducing overall demand and spending power in the
country, currency depreciation pushed up Qazaq Airs
dollar-denominated costs. Its ability to pass on those
costs to customers is reasonably strong in oil markets
like Atyrau-Aktobe, but weak in routes dominated
by VFR (Visiting Friends and Relatives) traffic like
Almaty-Shymkent.
Despite this, load factors are steadily improving
as awareness of the brand grows. Seat occupancy
rates nearly doubled year-on-year in January to
reach 60.3%.
Social mandate
Qazaq Airs strong social objective has also won popular
support, ensuring that both the travelling public and
the government see immediate benefits from the
states investment. One of the great things is were
actually opening routes that were operated before
independence, Pollock stresses. Before independence
there was far more aviation in Kazakhstan than there is
today. When we opened up from Shymkent to Pavlodar,
that route hadnt been operated in 20 years.
With Air Astana posting its 13th consecutive profit
last year, Samruk-Kazyna has clear expectations that
50 / Low Cost & Regional Airline Business
Qazaq Air will become a self-sustaining entity. But the
sovereign wealth fund is realistic about the challenges
facing regional airlines in general and Kazakh businesses
in particular.
Near-term profitability is thus considered unlikely
given the companys startup costs and focus on thin
routes. Instead, Pollock has been tasked with delivering
visibility on profits through steady improvements to
the KPMG-audited accounts.
That should in turn allow Samruk-Kazyna to court
a strategic investor, bringing the airline under a
broader privatisation programme that has already
seen more than 120 state-owned companies sold
by the government.
Samruk-Kazyna does not wish to be a sort of holding
company for airlines or any business really. Its objective
is to hold, develop, support, nurture businesses and
then sell them, Pollock affirms. Profitability for an
airline in the environment that were in would be a
stretch within two years itll be longer. But itll be in
a reasonable timeframe. And when we get there, we
will have started an airline which will have great value
to the country.
Building the scale and efficiency of the fleet is
now a top priority for management as they seek
pathways to profitability.
The airline currently flies an average of just
5.42 hours per day due to the risk of AOG incidents.
Stretching asset utilisation any higher would
expose the network to severe disruption when
www.lowcostandregional.com / July 2017

unforeseen maintenance problems arise a
common occurrence in Kazakhstan due to the
countrys extreme weather conditions. Qazaq Air
is particularly at risk of knock-on disruption because
of the high preponderance of multi-stop flights in
its network.
The arrival of two more Q400s one in
November and another in early 2018 should
push utilisation rates above seven hours per day,
dramatically boosting efficiency while also
lifting revenues.
Taking both units on finance lease will also
reduce expenses and secure a better return on
equity. The existing three aircraft were delivered
on operating leases, meaning that they remain
off-balance-sheet and will be returned to lessors
at the end of their leases.
When asked about this shift in finance strategy,
Pollock says both his shareholder and his customers
needed time to familiarise themselves with the
Q400 an aircraft that has never before been
operated in Kazakhstan.
Weve launched the Q400 here. There was not
one single pilot resident in Kazakhstan that had
ever flown this aircraft type, he explains. For locals
here the only aircraft theyve seen similar to it is
the Antonov 24, which is a completely different
experience. Its an aircraft from the 1950s. So, when
they come on the Q400 theyre absolutely astounded
by how comfortable it is, and we have just gained
traction from that.
Now we have 16 Kazakh pilots under type
conversion. Weve proven the Q400 to be very
effective in this country, and as a result of that we
have the confidence to get aircraft on finance lease.
There is no shortage of markets to deploy the new
aircraft to, with Taraz and Zhezkazgan shouting at us
loudest for flight connections. Atyrau is also being
eyed up as a second base to grow connectivity in
the west, while frequencies on several existing
routes could be increased.
Infrastructure hurdles
However, sub-standard infrastructure and safety
compliance remains a concern elsewhere.
Balkhash city (500km west of the Chinese border)
is one troubling example. Despite receiving
assurances from one corporate customer that it
would buy seats on every flight we operate [to
Balkhash], even if they dont have their employees
on it, Qazaq Air has no plans to serve the city. That
is because the airline registers its aircraft in Aruba
and so complies with EASA rules for airworthiness
something that precludes serving airports which
fall short of ICAO standards.
July 2017 / www.lowcostandregional.com
Airline interview
Now we have 16 Kazakh pilots under type
conversion. Weve proven the Q400 to be
very effective in this country, and as a result
of that we have the confidence to get aircraft
on finance lease
Blair Pollock, Qazaq Air
Our safety and quality department has three
ICAO-trained auditors who do audits of the airports,
Pollock notes. Balkhash is, Im afraid, a long way off,
even though wed love to go there.
Turning to route development outside of
Kazakhstan, he confirms that southern Russia will
likely be targeted in the future.
Other central Asian points may also be considered,
with Bishkek in the Kyrgyz Republic considered
particularly attractive due to its proximity to Almaty.
The two cities are about half-an-hours flying time
from each other, making turboprops more efficient
than the small jets currently deployed by Air Astana.
But Almaty, too, needs investment before reaching
its full potential. It is extraordinary to say that Qazaq
Air, a 100%-government-owned airline, is unable
to get a slot before nine oclock in the morning at
Almaty Airport, Pollock complains.
I accept that were the new kids on the block, and
there are operators who have been here for a long
time. But I would like to see a more transparent and
orderly distribution of the slots[Expansion] could
also be achieved by having the confidence to allow a
greater number of aircraft movements per hour. If they
had as many landings and take offs as Gatwick, another
Qazaq Air launched
single-runway airport, we would have enough operations in 2015
capacity for everyone. f (photo: Bombardier)
Low Cost & Regional Airline Business / 51
Featureinterview
Airline title here
Though infrastructure constraints are a recurring
theme in Kazakhstan, Pollock heaps praise on the
government for its multibillion dollar Nurly Zhol
(Shining Path) programme an economic stimulus
plan to develop several sectors, including air
transport. Astana, Taraz and Shymkent are among
the cities benefiting from aviation investment.
He also reserves kind words for Air Astana,
describing the flag-carrier as a valued partner
despite the head-to-head competition it poses
on four routes.
They are our competitors. But as a sort of sister
airline under the same shareholder they have also
been a tremendous support, he says.
They offered us access to advice and resources
and people to help us during the launch phase. All
five of my first senior managers responsible for key
areas in the business came from Air Astana. Our aircraft
are registered in the same country as Air Astana. They
have been a big help to us on those issues, and also
on procurement. We buy fuel at a similar price to Air
Air Astana is both a Astana, which is amazing being a small operator.
competitor and a
sister airline Pollock insists that Qazaq Air plays a complementary
(photo: Air Astana) role to Air Astana by providing it with feed from
52 / Low Cost & Regional Airline Business
neglected social routes. He is hoping to sign
codeshares after completing an IOSA safety audit
later this year.
Peter Foster, Air Astanas President and Chief
Executive Officer, is equally cordial, saying that the
Q400s plug a hole left by the withdrawal of the
flag-carriers Fokker 50s in 2012. The smallest aircraft
in Air Astanas fleet is now the 97-seat Embraer
E190 nine of which are deployed domestically and
internationally. Foster is evaluating the E-Jet E2 and
Bombardier C Series as potential successors, but he
does not rule out eventually ceding all regional-aircraft
services to Qazaq Air.
Over time weve sort of got out of the social routes,
Foster explains. Theres a limit to the number of fleet
types one wants.
The issue now is whether we can use larger aircraft
on [the remaining] small routes, and by doing so
have the benefits of economies of scale. These small
markets are growing, every one of them. If theyre not
growing, then were not going to bother carrying on
with themand if they do have growth prospects, that
logically moves them towards mid-range narrowbody
at some point.
www.lowcostandregional.com / July 2017