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27 Apr, 2009

“Better To Be Lucky Than Good,” Says Air Astana CEO

ALMATY — Bad bets made on hedging the price of fuel have cost many global airlines dearly but the Kazakhstan national airline, Air Astana freely credits the “luck” of bureaucratic, tax and legal considerations for staving off what would have been a financial disaster.

“It’s better to be lucky than good,” says the airline’s President Peter Foster, in announcing a small profit of US$2.3 million for March 2009 compared to the loss of $0.5M in March’08. Even though the impact of the global financial crisis and the February 2009 devaluation of the Kazakh currency, the tenge, meant losses in both January and February, the airline still claims an overall profit in the first quarter.

Mr Foster indicated that the situation could have been worse had the airline rushed like other airlines to hedge the price of fuel early.

When the price of oil was soaring, he said, the banks were “throwing themselves at us to hedge. Many said they (the airlines) were all doing it.”

However, due to legal, tax and bureaucratic constraints at both the government and airline levels, “it all took time. By the time we really wanted to hedge, the oil price had peaked and was coming down. The longer this went on, the fuel price kept going down. We were professional in hedging without ever doing it.”

According to VP Finance Mr Akshat Beisenbayev, the airline’s first hedging deal was only signed on 15 April 2009 with Citibank. It is limited to 75% of the planned fuel consumption in the first year, 50% in the second and 25% in the third. Very specifically, says Mr Beisenbayev, “No speculative trading in derivatives is permitted.”

Asked if he felt in hindsight that the banks had been giving bad, self-serving advice, Mr Foster said, “They were aggressive in pushing their product. They just pushed it in a way which involved speculative elements.”

He said Air Astana had seen this crisis coming. “The crisis came early to Kazakhstan in the form of the real estate crisis. There is a lot of real estate activity in this country which got affected when the sub-prime crisis hit the U.S. We then put in a whole range of cost saving measures to scale back the network and the plan. Then we got hit by the fuel increases in June, July August of last year.”

Mr Beisenbayev added that another saving grace has been that Air Astana is a “debt-free” airline. All the aircraft, for example, are on operating leases. Another firm policy is to change the auditors every three years.

Although the airline is not under any financial pressure now, it will be as of mid-2010 when it will need to arrange financing for the pre-delivery payment on new aircraft.

The 21-aircraft fleet is to grow to 23 when it takes delivery of three Brazilian-made Embraer 190s and cut back on some of its short-range Airbus aircraft, the main workhorse. Air Astana will become the first airline in Asia to operate the Embraer 190.

Said Mr Foster, “Our international routes have been very hard hit, so we have no need (at the moment) for new long haul aircraft. The Embraer will have 22 seats less than the A319 but deliver enormous savings in operational costs and fuel consumption.”

He said the airline’s future growth strategy will concentrate on cities in South and Southeastern Russian region. “This we regard as our surrogate home market and this will be the focus of our expansion. Then we will develop a very unique position in the market that no airline can match.”

Mr Foster said that’s when Air Astana will be better placed to decide whether it wants to join a global airline alliance.

In a separate interview, Mr. Azat Bekturov, Kazakhstan’s Vice-Minister of Transport and Communications, has called for a “time-out” on open-skies policies which he said can be detrimental to the survival of airlines from developing countries.

Mr Bekturov was speaking in the context of an open skies agreement that Kazakhstan has with the UAE. Although it seemed to be a good idea at the time, Mr Bekturov said that in hindsight Kazakhstan regretted signing the agreement and that it would not repeat the mistake.

The minister said the fragility of the current operating environment had strengthened the case for open sky policies to be reviewed. “We are a young state. We have other responsibilities like cross-subsidising the non-profitable routes that have to be flown by Air Astana for the sake of national cohesiveness.”

He said Kazakhstan was the world’s ninth largest country but had only one city with over 1 million people. It is still recovering from the collapse of communism and faces many development decisions. At the same time, it gets hit by the same external shocks which affect airlines worldwide.

“Such circumstances have only made a stronger case against open skies.”

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