04-Jun-2018 8:26 AM

Kazakhstan-Europe aviation: Air Astana's new routes and upgrades

Analysis

Kazakhstan's Air Astana has launched two routes to Germany over the past year, made possible by a new partnership with Lufthansa. Air Astana will operate four Kazakhstan-Germany routes in summer 2018 and Lufthansa will operate a fifth route.

Air Astana is also upgrading its Astana-London Heathrow service to daily in Jun-2018. London has been a highly successful market in the past three years, enabling Air Astana to expand from only three to (now) seven frequencies.

Air Astana also serves Amsterdam and Paris, and will have 26 weekly flights to Western Europe in summer 2018, compared to only 16 four years ago. Air Astana and its partner Lufthansa are now the only airlines operating nonstop flights from Kazakhstan to Western Europe, but several Eastern European airlines compete aggressively in this market with a one-stop product.

Summary

Air Astana has increased capacity to Europe by more than 10% over the past year, and by nearly 30% over the past two years.
Western Europe is a much smaller market from Kazakhstan than Eastern Europe, but has been growing rapidly.
Air Astana has gradually added capacity to London over the past few years and will serve Heathrow daily for the first time in Jun-2018.
Air Astana has launched two new routes to Germany over the past year, following the implementation of a new codeshare partnership with Lufthansa.

Air Astana's Europe capacity increases by 30% in only two years

Air Astana will have over 22,000 weekly one-way seats to Europe in Jul-2018 and Aug-2018, according to CAPA and OAG data. This represents a more than 10% increase compared with the peak summer months in 2017, and a nearly 30% increase compared with the same period of 2016.

Air Astana weekly one-way seat capacity to Europe: Sep-2011 to Sep-2018

Total Kazakhstan-Europe capacity has increased only marginally over the past year but is up significantly since 2016. Air Astana's will account for approximately a 41% share of Kazakhstan-Europe seat capacity during the peak period this summer, compared to a 38% share a year ago. However, its share was close to 40% in summer 2016.

There are 14 European airlines serving Kazakhstan in summer 2018. All but one of these airlines are from Eastern Europe.

Air Astana and partner Lufthansa dominate Kazakhstan-Western Europe market

Lufthansa is the only Western European airline serving Kazakhstan after the suspension of services from KLM, which operated a circle routing combining Almaty and Astana until Oct-2017. Lufthansa and Air Astana are now close partners - the two began codesharing in Mar-2017 - so effectively there is only one non-stop competitor in the Kazakhstan-Western Europe market.

Lufthansa currently operates three weekly A330-300 frequencies between Almaty and Frankfurt, a route Air Astana does not operate. Air Astana currently operates one daily 757-200 flight from the capital Astana to Frankfurt, two weekly A321 flights from Atyrau in western Kazakhstan to Frankfurt, and one weekly A320 flight from Oral in northwest Kazakhstan to Frankfurt. It also operates two weekly seasonal flights from Kostany in northern Kazakhstan to Hannover during the peak summer months.

Lufthansa and Air Astana codeshare on the trunk routes between Frankfurt and Kazakhstan. Air Astana also now uses Lufthansa to provide connections to offline destinations in Europe and beyond.

Air Astana adds two Germany routes in less than a year

Air Astana launched Oral-Frankfurt in Jun-2017 and Atyrau-Frankfurt in late Mar-2018. Neither route would have been made possible without the partnership with Lufthansa.

Both new routes are business focused, while Kostany-Hannover, which Air Astana has operated on a seasonal basis for several years, caters to ethnic traffic.

The new Atyrau-Frankfurt flight is aimed mainly at business passengers in the hydrocarbon industry. Air Astana also links Atyrau and Amsterdam with four weekly A321 flights. This route similarly caters to high-yielding business passengers heading to or from resource-rich western Kazakhstan.

Air Astana continues to expand partnership with KLM

Air Astana has a long-standing partnership with KLM, enabling it to sell flights beyond Amsterdam to other points in Europe and beyond. Amsterdam-Houston is a particularly important connection, given the business traffic between Houston and Atyrau, although Air Astana is also now able to offer Houston via Frankfurt.

While it seems the new Atyrau-Frankfurt route highlights the growing importance of the Lufthansa partnership, Air Astana continues to expand its relationship with KLM. In Mar-2018 Air Astana added its code to five additional routes operated by KLM within Europe, and KLM added its code to Air Astana's Amsterdam-Atyrau service.

By putting its code on Air Astana's Amsterdam service, KLM is able to maintain a presence in Kazakhstan, an important business market. KLM was originally planning to resume its own service to Almaty and Astana in summer 2018 but decided in late 2017 to cancel the route entirely, likely leading to the decision to expand the codeshare with Air Astana.

Air Astana offers quick connections from Atyrau to Almaty and Astana. While a one-stop product is not ideal, KLM was already serving half its Kazakhstan passengers with a one-stop product due to the circle routing. (KLM's Kazakhstan service operated Amsterdam-Astana-Almaty-Amsterdam or Amsterdam-Almaty-Astana-Amsterdam depending on the day.)

Paris route improves but does not grow

Oral-Frankfurt and Atyrau-Frankfurt are Air Astana's first new routes to Western Europe since it launched Astana-Paris in 2015. Air Astana has since operated the Astana-Paris route using 757s with two to three weekly frequencies, depending on the time of year.

Astana-Paris has not been the strongest of routes, but has improved since Air Astana began codesharing with Air France in 2016. Paris does particularly well in the summer months, driven by strong demand for destinations beyond Astana that include China and Thailand.

Air Astana has no near term plans to add capacity to Paris. However, its overall strategy is to focus on adding frequencies to existing long haul destinations rather than launching new destinations.

Air Astana upgrades London to daily

London Heathrow is a long-standing destination for Air Astana (along with Amsterdam and Frankfurt) but was initially operated from Almaty. In late 2013 Air Astana began stopping some of its London flights in Astana and in 2014 began operating all its London flights direct from Astana.

Astana-London flights quickly proved to be more successful than the Almaty-London flights, which were stuck at two weekly frequencies for several years. Air Astana added a third weekly Astana-London flight in Jun-2014, a fourth frequency in Jun-2016, and a fifth frequency in Jun-2017. In late Feb-2018 it announced the upgrade of Astana-London from 1-Jun-2018.

Air Astana's London service was consistently unprofitable for more than a decade, before turning the corner in 2015. British Airways' suspension of services from London to Almaty - a route it inherited from the acquisition of bmi - clearly helped, since it left Air Astana as the only nonstop operator in the Kazakhstan-UK market. However, the switch from Almaty to Astana was a bigger factor in improving Air Astana's financial performance in the London market.

By operating the route from Astana, costs were reduced (Astana-London is a shorter flight than Almaty-London) and the average yield increased significantly. Astana-London has more business traffic while Almaty-London is more leisure focused. The Almaty-London market also has more one-stop competition than Astana-London.

Air Astana's Western Europe operation reaches 26 weekly flights

The upcoming upgrade of Astana-London to daily and the recent launch of Atyrau-Frankfurt will give Air Astana a record 26 weekly flights to Western Europe this summer. Four years ago, in summer 2014, Air Astana had only 16 weekly flights to Western Europe.

Air Astana weekly one-way frequencies to Western Europe: Sep-2011 to Aug-2018

Sixth freedom traffic has helped Air Astana expand in Europe. Sixth freedom passengers now account for nearly 40% of Air Astana's total international passenger traffic, compared to virtually zero four years ago.

However, sixth freedom traffic is generally a bigger contributor to Eastern Europe routes than Western Europe routes. Air Astana relies heavily on sixth freedom traffic in the Paris market, with connections from China being particularly critical. However, London relies almost entirely on local traffic, with Kazakhstan point of sale particularly strong.

Frankfurt has some sixth freedom traffic, including a segment from China. However Frankfurt, and particularly Amsterdam, generally rely on local traffic and traffic that is connecting beyond Amsterdam or Frankfurt but originating or heading to Kazakhstan.

The Kazakhstan-Eastern Europe market is much more competitive and larger. This market consists of several short haul routes, generally to Russia and other CIS countries, as well as medium haul flights deeper into Europe. Air Astana's shortest flight to Eastern Europe is less than two hours, whereas all its routes to Western Europe are at least four hours.

Air Astana faces growing one-stop competition

Several airlines offer one-stop connections from Kazakhstan to Western Europe, providing Air Astana and partner Lufthansa ample competition, although they are no other nonstop operators.

Airlines from Russia, Turkey and Ukraine have been aggressive competitors in the Kazakhstan-Western Europe market for several years. Aeroflot, S7, Turkish Airlines and Ukraine International Airlines are all among the five largest foreign airlines serving Kazakhstan. They all serve multiple cities in Kazakhstan and offer one-stop connections to a wide variety of destinations in Western Europe.

Finnair, LOT Polish Airlines and the Hungary-based LCC Wizz Air entered the market in 2017. Wizz now operates two weekly year-round flights to Astana and LOT operates three to four flights to Astana (depending on the time of year). Finnair is only serving Astana with two weekly seasonal flights that operate between June and August.

Latvia's airBaltic also launched three weekly flights to Almaty on 29-Apr-2018, providing new competition in the Almaty-Europe market. While airBaltic, Finnair and LOT are not LCCs, they are generally considered low fare airlines and focus heavily on sixth freedom traffic.

Partnerships are vital as competition intensifies

Intense one-stop competition makes it hard for Air Astana to expand its network in Western Europe.

However, Air Astana has the opportunity to continue expanding in Amsterdam, Frankfurt, London and Paris. Maintaining close ties with Air France-KLM and Lufthansa, two of Europe's leading airline groups, is a key driver for further growth in Amsterdam, Frankfurt and Paris.

In London, Air Astana has successfully developed a daily service without the need for any local partners. London is a strong local market, and could potentially support even more capacity through the pursuit of more sixth freedom traffic.