Peter Foster, President
Almaty, 23rd March 2013
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To misquote an old sporting cliché, 2012 was a year of two halves. The first half was seriously affected by sluggish demand and high fuel prices, causing year on year profit for the period to drop by 80%, in contrast to the second half which was our best on record, driven by demand recovery, non-fuel savings and greater efficiency of aircraft and crew utilisation. The full year net profit of $61.1 million was identical to that of 2011, marginally ahead of budget and in our view a good result given the pressures on the industry from high fuel prices and weak demand in Europe. Routes to and from the European Union make up 18% of the airline’s international capacity. Total airline revenues grew 15% to $875.5 million on capacity growth of 11%. We carried 3.3 million passengers, an increase of 10%. Whilst net margin slipped from 8 to 7%, it is likely that we will continue to place amongst the world’s 20 most profitable airlines, as we have for both 2010 and 2011. In summary we remain in our 10th full year a high growth, full service, consistently profitable airline, a rare combination in recent times.
It is important to stress the value of the work of the cost reduction committee in achieving this result. The CRC met weekly from early February and was able to identify and implement savings in fuel management and consumption, IT services, operating lease charges and recoveries, travel agency commissions and other areas of operational and fixed cost. Therefore in spite of fuel expenses exceeding budget by $45 million, all but $14m of that over-expenditure was saved in other areas.
One area in which no attempt was made to save cost was that of service to customers. Lie-flat seats in the business class of the second of our 2 Boeing 767s were retrofitted resulting in a consistent business class product across the entire Boeing 757/767 fleet. The KCTV personal entertainment system was upgraded from Bluebox to Ipad 3 with greater programme capacity and better video and audio quality. Higher quality wines, spirits and fruit juices were introduced across all routes together with new menus and a more flexible meal service on long-haul night flights. Stylish new uniforms for cabin and ground staff were introduced late in the year and work started on the airline’s own Business Class lounge at Astana Airport. The results were recognized by Skytrax, who upgraded us to 4 star status and whose respondents awarded us “Best Airline, Central Asia and India”. Air Astana is to date the only airline in the CIS and Eastern Europe to have achieved 4 stars. Hardware is only part of the story and I would like to acknowledge our flight, ground and support crews, cabin engineers and cleaners and many others, for their hard work and attention to the detail of high quality service delivery.
As mentioned earlier we remain in stockmarket parlance a growth story. Although the actual number of aircraft in the fleet grew by just one to 26, an important shift in short haul capacity took place with the retirement of the Fokker 50 turboprops and their replacement by Embraer 190 regional jets. At year end the E190 fleet stood at 6 aircraft and in early 2013 a 7th was delivered. Its range, capacity and passenger comfort has enabled us to further develop our “extended home market” strategy by starting new routes from Astana to Baku, Omsk, St Petersburg, Tashkent and Tbilisi and from Almaty to Kazan, and to increase capacity on existing domestic and international routes. Route growth was not limited to the region as we introduced flights from Astana to Beijing and Almaty to Hong Kong and to Ho Chi Minh City, via an expanded service to Bangkok. Against this backdrop of growth it is disappointing to report that we have had to drop all flights to the cities of Uralsk and Petropavlovsk because of defective runways at their airports.
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A major shift in aircraft portfolio strategy took place in 2012. For the first time we took delivery of owned as opposed to operating leased aircraft, with the first of 2 E190s and the first 2 of 6 Airbus 320 family aircraft purchased via a combination of cash and export credit guaranteed finance. We placed an order with Boeing for 3 767-300ER and 3 787-8 aircraft for delivery from late 2013 through 2019. In sum the total aircraft order is well in excess of $1 billion, the largest civil aircraft order in Kazakhstan’s history. All the new aircraft will be funded through cash and aircraft finance markets without any state or shareholder funds or guarantees. The new aircraft are rapidly propelling us up fleet age rankings. The average aircraft age is now 7.4 years and set to further improve, reducing carbon emissions and increasing reliability.
We continue to innovate in both front and back offices. An airline’s website is now its shop window and we have continued to improve access, content and functionality. In addition to an increasing number of direct ticket sales most customer needs, from check-in to flight information, hotel and car rental bookings and the purchase of travel insurance can now be done online in several languages. Behind the scenes we have continued to introduce or improve a variety of systems covering fuel management and flight plan optimisation, aircraft parts management and an electronic flight bag and digital library, transforming on-board documentation and the way we communicate with pilots in the air.
Operational safety continues to be our first priority. The airline’s Safety Audit of Foreign Aircraft (SAFA) performance continued to trend at a low level of findings at all foreign airports to which we operate. This was a major factor in the EU Air Safety Committee’s decision in November to amend and improve the terms of our operation to Europe under Annex B, imposed after the Kazakhstan CAC failed its ICAO audit in 2009. We renewed our EASA (EU) 145 maintenance licence for the 10th consecutive year after the annual inspection by the UK’s Civil Aviation Authority and added to the number of EASA-certified workshops at our Almaty Centre 5 base. Our pilots continue to receive the highest standard of recurrent training at EASA-accredited facilities and our cadet pilot throughput increased at the Florida Institute of Technology, the Aerosim Academy (USA) and the Atlantic Flight Training Academy (Ireland). Our quality assurance and corporate safety staff continue to contribute not just to Air Astana’s safety but also to that of the industry in general, through their Flight Safety Foundation and IATA accreditations. We are now an approved auditor for IATA’s Safety Audit of Ground Operations, and our ISAGO–qualified auditors are regularly assigned by IATA to audit airports both in and outside Kazakhstan.
In conclusion 2012, the year in which we celebrated our 10th birthday, was another busy and successful one. I would like to thank all of my 3900 colleagues, our shareholders Samruk-Kazyna and BAE Systems, our stakeholders in government and elsewhere and of course our customers, for their continued and steadfast support and loyalty. For all of the uncertainties facing the airline industry, Kazakhstan remains a great place to do business and an exciting place in which to live and work, and we all look forward to meeting and overcoming the challenges of our second decade.
Almaty, 23rd March 2013
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It is important to stress the value of the work of the cost reduction committee in achieving this result. The CRC met weekly from early February and was able to identify and implement savings in fuel management and consumption, IT services, operating lease charges and recoveries, travel agency commissions and other areas of operational and fixed cost. Therefore in spite of fuel expenses exceeding budget by $45 million, all but $14m of that over-expenditure was saved in other areas.
One area in which no attempt was made to save cost was that of service to customers. Lie-flat seats in the business class of the second of our 2 Boeing 767s were retrofitted resulting in a consistent business class product across the entire Boeing 757/767 fleet. The KCTV personal entertainment system was upgraded from Bluebox to Ipad 3 with greater programme capacity and better video and audio quality. Higher quality wines, spirits and fruit juices were introduced across all routes together with new menus and a more flexible meal service on long-haul night flights. Stylish new uniforms for cabin and ground staff were introduced late in the year and work started on the airline’s own Business Class lounge at Astana Airport. The results were recognized by Skytrax, who upgraded us to 4 star status and whose respondents awarded us “Best Airline, Central Asia and India”. Air Astana is to date the only airline in the CIS and Eastern Europe to have achieved 4 stars. Hardware is only part of the story and I would like to acknowledge our flight, ground and support crews, cabin engineers and cleaners and many others, for their hard work and attention to the detail of high quality service delivery.
As mentioned earlier we remain in stockmarket parlance a growth story. Although the actual number of aircraft in the fleet grew by just one to 26, an important shift in short haul capacity took place with the retirement of the Fokker 50 turboprops and their replacement by Embraer 190 regional jets. At year end the E190 fleet stood at 6 aircraft and in early 2013 a 7th was delivered. Its range, capacity and passenger comfort has enabled us to further develop our “extended home market” strategy by starting new routes from Astana to Baku, Omsk, St Petersburg, Tashkent and Tbilisi and from Almaty to Kazan, and to increase capacity on existing domestic and international routes. Route growth was not limited to the region as we introduced flights from Astana to Beijing and Almaty to Hong Kong and to Ho Chi Minh City, via an expanded service to Bangkok. Against this backdrop of growth it is disappointing to report that we have had to drop all flights to the cities of Uralsk and Petropavlovsk because of defective runways at their airports.
We continue to innovate in both front and back offices. An airline’s website is now its shop window and we have continued to improve access, content and functionality. In addition to an increasing number of direct ticket sales most customer needs, from check-in to flight information, hotel and car rental bookings and the purchase of travel insurance can now be done online in several languages. Behind the scenes we have continued to introduce or improve a variety of systems covering fuel management and flight plan optimisation, aircraft parts management and an electronic flight bag and digital library, transforming on-board documentation and the way we communicate with pilots in the air.
Operational safety continues to be our first priority. The airline’s Safety Audit of Foreign Aircraft (SAFA) performance continued to trend at a low level of findings at all foreign airports to which we operate. This was a major factor in the EU Air Safety Committee’s decision in November to amend and improve the terms of our operation to Europe under Annex B, imposed after the Kazakhstan CAC failed its ICAO audit in 2009. We renewed our EASA (EU) 145 maintenance licence for the 10th consecutive year after the annual inspection by the UK’s Civil Aviation Authority and added to the number of EASA-certified workshops at our Almaty Centre 5 base. Our pilots continue to receive the highest standard of recurrent training at EASA-accredited facilities and our cadet pilot throughput increased at the Florida Institute of Technology, the Aerosim Academy (USA) and the Atlantic Flight Training Academy (Ireland). Our quality assurance and corporate safety staff continue to contribute not just to Air Astana’s safety but also to that of the industry in general, through their Flight Safety Foundation and IATA accreditations. We are now an approved auditor for IATA’s Safety Audit of Ground Operations, and our ISAGO–qualified auditors are regularly assigned by IATA to audit airports both in and outside Kazakhstan.
In conclusion 2012, the year in which we celebrated our 10th birthday, was another busy and successful one. I would like to thank all of my 3900 colleagues, our shareholders Samruk-Kazyna and BAE Systems, our stakeholders in government and elsewhere and of course our customers, for their continued and steadfast support and loyalty. For all of the uncertainties facing the airline industry, Kazakhstan remains a great place to do business and an exciting place in which to live and work, and we all look forward to meeting and overcoming the challenges of our second decade.
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