Chairman’s Statement
2018 was a year in which Air Astana showed its calibre and resilience, as well as its ability to evolve and expand.
Strengthening our position
as the leading airline
in Central Asia

2018 was a year in which Air Astana showed its calibre and resilience, as well as its ability to evolve and expand. Despite the tough trading conditions experienced across the airline sector, we remained profitable. This is testament to our efficient operating structure, the quality of our fleet and the careful management of our capacity and our route networks. At the same time, we took the opportunity to consider the future and take significant steps that will position us well for the next decade across the region.

The airline recorded a 3% increase in passenger traffic in 2018, to 4.32 million passengers, with international transit traffic contributing significantly with an increase of 48% year-on-year. Transit passengers accounted for 32% of our international traffic, which reflects the growing importance of Kazakhstan’s location, right at the geographic heart of Eurasia and within close proximity to the burgeoning air transport markets of China, India and Russia.

Air Astana has a clear edge when it comes to serving Kazakhstan and capturing the high growth markets that surround it. We do so by carrying passengers in the latest, most modern, fuel efficient aircraft. We provide value for money, high levels of comfort and market leading levels of punctuality. We continue to be well recognised in the industry for these qualities. In 2018, we were named the Best Airline in Central Asia and India by Skytrax for the seventh consecutive year, we were winners at the TripAdvisor 2018 Travellers’ Choice Awards and we received a Five-Star Airline rating at the 2018 APEX Awards. A particular highlight though has to be the position the airline now holds in the punctuality league tables, having been ranked as the 12th most punctual mainline airline globally, and 7th in the Asia Pacific region. This is a tremendous reflection of the dedication of our management and operational teams.

Such high levels of operational performance enable us to grow. They enable us to confidently expand into new routes and gain the trust of other key airline partners by completing important codesharing agreements. In 2018, we bolstered capacity by 5% as a result of the introduction of three new routes to Frankfurt, Kazan and Tyumen, with additional frequencies added from Astana to Moscow, London Heathrow, Omsk, Dubai, and Delhi; and from Almaty to Dushanbe, Hong Kong, Seoul and Bishkek. Additional services were also added to St. Petersburg, Bangkok, Tashkent and Kiev. In March, Cathay Pacific joined Air Astana as 11th key codeshare partner, offering passengers convenient connections when travelling on to Asia and Australia via Hong Kong.

Local traffic between these markets is expanding, though from a low base. Transit traffic remains our fastest-growing segment, as Kazakhstan is well placed to attract traffic between China, Europe and Russia. To meet this demand, we are growing our fleet, and in 2018 we welcomed the third new A321neo aircraft into our fleet as part of a total order for 17 aircraft. We also took delivery of an Embraer E190-E2, the first of its kind to be delivered to an airline in the CIS, with more scheduled for delivery in 2019. By 2026, we are planning to have grown our fleet to more than 60 aircraft, made up of the most fuel-efficient narrow body aircraft on the market and capable of reaching all of our destinations.

Our achievements in 2018 and ongoing aspirations do not stop there. During the second half of the year, the Board supported the Management Team’s steps to update our existing strategy and fill the obvious gap for a low-cost carrier (LCC) in Central Asia. In November, we announced the launch of FlyArystan, an LCC that will operate alongside Air Astana’s existing operations. The Kazakh domestic air travel market is growing, but with only approximately 10% of the existing population flying domestically according to our own data, there is significant scope to stimulate the market. We believe the LCC pricing model will be attractive to the large percentage of the region’s population that have still not flown, which will drive considerable growth for us. Whilst its initial focus will be domestic, we would anticipate expanding its reach into neighbouring Central Asian markets which do not have local LCC services. Given that we have been able to run a full-service airline at LCC-equivalent costs for a number of years, we fully expect the venture to be a tremendous success.

It is clear therefore that we must scale operations up for a high level of growth. In early 2018, we commissioned our own Technical Centre at Astana Airport, the first of its kind in Central Asia, to enable us to maintain our own fleet and provide services for third party airlines flying to Kazakhstan. The facility has been further bolstered with the addition of a new School of Aviation Mechanics. This is a clear reflection of the significant level of investment Air Astana is making in selecting Kazakhstan’s brightest graduates, providing them with world-class training and potential careers. As well as producing leading technicians, we also envisage a need to train approximately 200 new pilots to satisfy Air Astana’s combined needs over the coming years, the majority of whom will be recruited from Kazakhstan and trained in international aviation schools. To meet this need, Air Astana has set-up an Ab-initio programme that allows recruits with no flying experience to become fully trained pilots according to international best practice. This will require a sustained campaign, improving the awareness of school leavers of this excellent opportunity.

We have 178 cadets that are already flying as Captains and First Officers on A320, B767 and E190 aircraft, and we have more trainees in the pipeline.

We are very proud of our contribution to the Kazakh economy and to our society as a whole. Our broader CSR efforts are covered on page 26 of this report and I would also like to point you to page 50, where I summarise in detail how we have enhanced our governance procedures during 2018, as we strive to meet international benchmarks for corporate governance.

Finally, I would like to extend my thanks to our close-knit management and operational teams. We had a successful 2018 thanks to good corporate planning and high levels of operating efficiency. Plans are now in motion for a successful period to 2026 and beyond and we look forward to sharing our success with you.

Yours faithfully,
Nurzhan Baidauletov
Chairman of the Board of Directors
President and CEO’s Statement
We are looking to convert Air Astana’s deserved reputation for high quality service into a better share of business-class and less price-sensitive travel, and to develop a significant share of low yield price-sensitive business through FlyArystan. This latter task also presents us with an opportunity to grow domestic and regional air travel from a low base.
Maintaining our
strong reputation
for excellence

In 2018, we preserved profitability despite unprecedented industry headwinds. Air Astana’s net profit fell by 86% to USD 5.35 million. Total revenue grew by 10% to USD 840.86 million against capacity growth of 5%, whilst total cost grew by 14%. The airline carried 4.32 million passengers, an increase of 3%.

That 2018 was a difficult year mainly as a result of increased jet fuel cost, which was 26% higher than 2017 despite modest capacity growth. There is little that airlines can do in the face of oil and fuel price rises since fuel represents approximately 30% of expenditure, by far the largest cost element. Fuel price hedging, as the industry has frequently experienced in recent years, is an inherently risky exercise and in any event in our case, 70% of fuel is purchased for use in Kazakhstan where there is no formula linking fuel to the price of oil, therefore hedging is not an option. Non-fuel expenditure continued to be effectively controlled resulting in a highly competitive overall unit cost of 5.6 US cents per Available Seat Kilometre, among the lowest in the industry. The other major difficulty in 2018 was the continued problems with Pratt & Whitney’s Geared Turbo Fan engines, which power the Airbus neo fleet. Engine replacements and in-flight shutdowns far in excess of acceptable norms inconvenienced customers, disrupted the schedule and caused us to lose revenue because of further delivery delays of new aircraft.

Traditionally Air Astana has derived some benefit from a higher oil price because its effect on the local economy, to a large extent dependent on oil revenues, has been to boost spending and investment. This held true for the first 8 months of year in which revenue grew by 14%. However, sales fell away badly from September in our largest markets of Kazakhstan and Russia, and flattened in China. Kazakhstan and Russia suffered from lower consumer spending due to further currency weakness and a shift to lower cost travel options for those continuing to travel. This was a key factor in our decision to launch a low cost airline, about which more to follow. Key market weakness was partially offset by continued sales growth in India, Turkey, Uzbekistan and Hong Kong. Transit business – so-called 6th freedom traffic – grew strongly for the sixth successive year, by 48%, to approximately 722,769 passengers. This segment now accounts for one third of international business, from close to zero in 2012. The flip side to 6th freedom traffic is that it is generally low yield and exposed to far greater competition, as most of the world’s full service airlines compete fiercely in the major long-haul international markets of East Asia, Europe, Russia, India and North America. However, with our robust cost structure and regional knowledge, we believe we have a significant opportunity to leverage such business in the under-served Central Asian market in the medium to long term.

For the first time in the airline’s 16-year history the number of passengers carried on domestic routes within Kazakhstan fell. Although the total domestic market grew slightly, Air Astana’s market share fell to 45%. This is a reflection of the low fares on offer from three domestic competitors, which incidentally makes Kazakhstan one of world’s most competitive air transport markets given its relatively small population. Therefore, in late 2018 we decided to launch a separate low cost subsidiary, FlyArystan, which will initially be a division of Air Astana until early 2020 at the latest, when it will become a separate (though wholly-owned) entity for both safety and commercial reasons. FlyArystan is expected to commence operations on domestic routes in May 2019 with a fleet of Airbus A320 aircraft, initially taken from Air Astana and configured to 180 economy class seats. It will replicate the classic low cost airline model which has been so successful in most of the world’s travel markets over the past 15 years.

The airline continued to prioritise operational reliability and high quality customer service. We were awarded Skytrax’ Best Airline, Central Asia and India for the seventh successive year, and were awarded a Regional Asia Airline Winner’s medal by Trip Advisor, in addition to several other awards in Russia and Central Asia. Our punctuality record of 86% was slightly higher than 2017 and again placed us at the upper end of the global league table.

As we look ahead to 2019, the key challenge is to grow revenue in weak domestic and regional markets and with clear signs that global air travel growth is beginning to slow, despite more bullish long-term traffic projections. Therefore we look, on the one hand, to convert Air Astana’s deserved reputation for high quality service into a better share of business-class and less-price sensitive travel, and on the other, to develop a significant share of low yield price-sensitive business through FlyArystan. This latter task also presents us with an opportunity to grow domestic and regional air travel from a low base relative to countries and regions of similar size and income levels.

I would like as ever to take this opportunity to thank our Shareholders Samruk Kazyna and BAE Systems, my dedicated and hardworking colleagues, and our loyal customers for their continued support in a challenging year.

Yours sincerely,
Peter Foster
President and CEO