09-Jan-2012 8:12 PM

Kazakhstan’s Air Astana poised to complete several milestones in 2012 including IPO

Analysis

Air Astana is opening a new chapter in its short but so far highly successful history as the Kazakhstani carrier approaches its second decade. Air Astana, which launched services in May-2002, is now preparing for an initial public offering which should generate capital to support further rapid growth. The IPO and 10th anniversary are two of several potential milestones for the carrier in 2012. This year Air Astana will likely place its first ever widebody aircraft orders, converting an earlier letter of intent (LoI) for Boeing 787s and purchasing 767-300ERs. The carrier also plans to take delivery of its first owned aircraft this year and aims to join before the end of 2012 the Association of Asia Pacific Airlines (AAPA).

Air Astana is now relatively small by global standards, operating a fleet of only 26 aircraft (24 narrowbodies and two widebodies, all of which are leased) to 54 destinations. But it has emerged as a leading carrier in the increasingly important emerging market of Central Asia, an enviable position it now seeks to capitalise on as Kazakhstan's largest city, Almaty, is developed into a hub for the region.

Summary

Air Astana is preparing for an initial public offering (IPO) to generate capital for further growth.
The airline has been profitable every year since 2003, with high net profit margins.
Air Astana is the leading carrier in Central Asia and aims to develop Almaty into a regional hub.
The carrier plans to expand its fleet with widebody aircraft orders and aims to join the Association of Asia Pacific Airlines (AAPA).
Air Astana has emerged as the preferred carrier in Central Asia and has gradually expanded its international network.
The airline faces challenges such as increased competition, infrastructure limitations, and potential restrictions on European expansion.

Financially, Air Astana has performed better in its first decade than just about any other start-up carrier. Air Astana has been in the black every year since 2003, racking up about USD300 million in profits since its launch. Air Astana in recent years has had one of the highest net profit margins in the industry, including 12% in 2010 and 9% through the first three quarters of 2011.

Air Astana after tax profit/loss: 2002 to Jan-Sep-2011

The carrier's steady profitability and domination of a growing market with limited competition and virtually no LCC penetration should ensure a successful privatisation even in challenging global market conditions. The airline, which is now jointly owned by the Kazakhstani Government's investment arm and BAE Systems, is aiming for an initial listing on the Kazakhstan Stock Exchange followed by a potential secondary listing in Hong Kong or London.

Air Astana's early success can be partially credited to its fortuitous timing of launching following Sep-2001, when aircraft lease rates plummeted, and just as the Kazakhstan economy was on the cusp of booming. The successful first decade can also be credited to the foresight by the carrier's initial management team in recognising the need for a Kazakhstani carrier operating to international standards. Air Astana's launch brought for the first time an airline with a Western fleet (initially 737s) and Western management to Kazakhstan's extremely fragmented domestic market.

Air Astana stands out in crowded domestic market

While there has been considerable consolidation in Kazakhstan over the last decade, Air Astana still competes against 36 other Kazakhstani carriers in its home market. It doesn't enjoy monopoly status at a single one of its 23 domestic destinations. But as the only Kazakhstani carrier operating an entirely Western fleet and holding IOSA certification, Air Astana is viewed by many passengers as the only option within Kazakhstan, where air travel is a necessity given its vast size (twice the size of US state Alaska, or twice the combined size of France, Germany and Spain) with a limited road network and excruciatingly slow trains. With a 68% share of the Kazakhstan airline market, Air Astana is uniquely positioned to benefit from the growing overseas interest the country's rapidly growing economy is now attracting.

Air Astana international vs domestic capacity share: 09-Jan-2012 to 15-Jan-2012

Seats	ASKs

Air Astana also has gradually emerged as the preferred carrier in the greater Central Asia region. After Air Kazakhstan went bust in 2004, Air Astana began taking over the former flag carrier's international routes. An ambitious expansion programme was launched in 2006, led by industry veteran Peter Foster, the former Cathay Pacific, Philippines Airlines and Royal Brunei executive who has been at the helm of Air Astana since 2005. Air Astana's international network has since grown steadily and now includes 31 destinations.

Mr Foster saw the opportunity to pursue growth in the surrounding region and exploit the fact that Central Asia's other flag carriers were predominately small airlines not yet operating to international standards. While the richest country in the region, Kazakhstan is a small market of only 16 million people. But, as Mr Foster points out, within 250 miles of Kazakhstan's borders there is a lucrative catchment area of 60 million.

Kazakhstan's eclectic mix of neighbours - which include the former Soviet states of Azerbaijan, Kyrgyzstan, Uzbekistan, Turkmenistan and Georgia as well as southeastern Russia and the far west portion of China - have only limited service from Western or Western-style carriers. "We've been able to develop an effective hub and spoke network from this region to Astana and Almaty and onto our intercontinental network," Mr Foster explains.

Air Astana route map from Almaty

Air Astana follows similar strategy to Royal Jordanian

The Air Astana strategy is very similar to the strategy used over the last decade by Royal Jordanian, which has successfully developed Amman into a hub for the Levant, a region, which like Central Asia, has traditionally featured small and weak flag carriers. In adopting its new Levant strategy, Royal Jordanian pulled out of the Europe-Asia long-haul connection market in favour of more profitable long-haul to short-haul and short-haul to short-haul connections. Air Astana is similarly uninterested in turning Almaty or Astana into a bridge linking Asia and Europe although its two main hubs are perfectly positioned halfway between the two continents. Instead, Air Astana sees a more profitable niche offering short-haul to short-haul and short-haul to long-haul connections that exploit its leading market position in Central Asia.

Royal Jordanian cashed in on its unique network strategy in late 2007, when it became the first Middle Eastern flag carrier to complete an IPO. Air Astana is now poised to become the first publicly traded flag carrier from Central Asia. It is no coincidence Air Astana and Royal Jordanian are now discussing a codeshare partnership which would link their complementary networks.

While Air Astana has worked hard over the last few years at marketing itself as the preferred business carrier for the entire Central Asia region, only 20% of its traffic currently transits. Mr Foster expects this figure will gradually grow and potentially reach 30% as Almaty's tiny airport terminal, which currently has a very limited transit facility, expands and as Air Astana builds up its Central Asia network.

E190s allow Air Astana to expand regional international network

Air Astana's short-haul international network (flights up to four hours) now only includes seven destinations from Almaty: Baku in Azerbaijan; Bishkek in Kyrgyzstan; Dushanabe in Tajikistan; Tashkent in Uzbekistan; Tbilisi in Georgia; Urumqi in western China; and Samara in Russia. None of these destinations are currently served daily but frequency will increase and new regional international destinations will be added as Air Astana expands its new fleet of Embraer E190s. The carrier added the type in 2Q2011 to accelerate expansion within Central Asia, where thin and relatively long regional routes are prevalent.

Air Astana currently operates three E190s in dual-class configuration with 98 seats and three more of the type will be delivered in 2012. The E190s are also being used domestically and will allow Air Astana to phase out its fleet of six Fokker 50 turboprops by early 2013, at which point the carrier expects all the airports it serves will be upgraded to accommodate jets. Air Astana looked at acquiring new turboprops to replace the Fokker 50s but Mr Foster says the carrier concluded it was more economical to "misuse regional jets on domestic routes". Air Astana currently uses the turboprops on several domestic routes and to link Astana with Novosibirsk and Yekaterinburg in nearby Russia.

While the E190 has taken over most regional international flights, some destinations (primarily Tashkent and Urumqi) are currently served with larger A320s. Air Astana currently operates 10 A320 family aircraft and will expand this fleet to 13 aircraft over the next 15 months. The A320s are primarily used on its medium-haul Russian routes, Moscow and St Petersburg, as well as medium-haul routes to Turkey, India and the Middle East.

Moscow is Air Astana's largest international destination and Astana-Moscow is the carrier's largest international route and second largest overall route (after Almaty-Astana). There are currently no short-haul routes among Air Astana's top 10 international routes by capacity (seats).

Air Astana top 10 international routes (seats per week): 09-Sep-2011 to 15-Sep-2011

Despite the limited frequencies and often long connection times to regional international destinations, Air Astana has been able to turn Almaty into a Central Asian hub because passengers have little choice. Competition on more city pairs, including from Gulf carriers, will gradually increase. But this will not occur overnight and Air Astana's network in Central Asia will remain unmatched and become stronger as most routes are upgraded to daily.

Air Astana will continue to operate three hubs

In addition to its main hub at Almaty, Air Astana has smaller hubs in the capital Astana and in the western city of Atyrau. The country's vast geography requires multiple hubs, making is unlikely Air Astana will move to consolidate at its Almaty headquarters. Mr Foster says the Almaty hub now accounts for about 50% of Air Astana's traffic.

Almaty now features in seven of Air Astana's 10 largest domestic routes by available seats and in six of the carrier's 10 largest international routes. Almaty-Astana, which is served several times per day including with aircraft from Air Astana's long-haul fleet, is by far the carrier's largest route (both international and domestic).

Air Astana top 10 domestic routes by seats: 09-Jan-2012 to 15-Jan-2012

Astana, located near the Russian border, serves as the main hub for passengers heading to or from southeast Russia. Novosibirsk and Yekaterinburg in Russia as well as Frankfurt are currently only served non-stop from Astana. Air Astana also links Astana with Abu Dhabi, Antalya, Istanbul, Moscow and Urumqi (these destinations are also served from Almaty).

Air Astana route map from Astana hub

Atyrau is primarily a domestic hub for western Kazakhstan, a vast, relatively unpopulated area rich in resources including oil. But Atyrau is also the transit point for Air Astana's Amsterdam service, a lucrative route used by oil companies from Europe and North America that do business in western Kazakhstan. Atyrau and another Western Kazakhstani city, Aktau, are also served by Air Astana from Istanbul.

Air Astana route map from Atyrau mini-hub

Air Astana only serves one Western European destination from Almaty - London Heathrow. The carrier is currently prohibited from pursuing European expansion due to Kazakhstan's inclusion on the EU blacklist. Air Astana was the only Kazakhstani carrier that was able to get an exemption from the EU after Kazakhstan was put on the blacklist following a 2009 audit by ICAO but the exemption only allows the carrier to maintain its existing schedule and network.

A new audit is scheduled for 1H2012 but Mr Foster is not confident the Kazakhstani civil aviation authorities will be able to demonstrate sufficient improvements to be removed from the list. "We can't be assured we'd be off [in 2012]," he says. "Once you are on the EU blacklist it takes a lot to get off it."

Air Astana pursues rapid expansion in Asia as EU expansion remains prohibited

The blacklist, which frustratingly for Mr Foster is completely out of Air Astana's control because it is purely a government-to-government-issue, has forced the carrier to look east. But this has not set back Air Astana's expansion because its growth markets are increasingly in Asia.

In 2011, Air Astana saw by far the fastest growth in Asia, outpacing relatively flat demand in its European markets. "Our primarily focus in terms of long-haul is Southeast and Northeast Asia," Mr Foster says.

Also in Asia, Air Astana plans to pursue growth in the Indian subcontinent using its A320 fleet. Air Astana only now serves one destination in the Indian subcontinent, Delhi, which was upgraded in late 2011 to four weekly flights. Mr Foster says Colombo was initially included in the carrier's 2012 network plan but the carrier may not go forward with launching flights to Sri Lanka for now because the Sri Lankan Government is implementing a stricter visa regime. But he adds, "certainly the Indian subcontinent is a region of development" and "we do see a lot of potential from the Indian subcontinent".

Asia currently only accounts for 12% of Air Astana's total revenues, compared to 18% for Europe. The remaining 70% of revenues is generated locally in Kazakhstan, including across the domestic network which still accounts for 64% of Air Astana's passengers. But the Asian revenues are growing the fastest as business traffic and migrant worker traffic from Asian countries expands at a rapid clip. "The fastest growing markets by a long margin are Asian markets," Mr Foster says, pointing to Air Astana's services to Malaysia, Thailand, South Korea and China as well as offline markets such as Australia and the Philippines.

Air Astana to launch Hong Kong and Ho Chi Minh in 2012

Air Astana's long-haul Asian network now consists of Bangkok, Beijing, Kuala Lumpur and Seoul. Hong Kong is scheduled to be launched in Feb-2012 with two weekly flights which Mr Foster expects will quickly be upgraded to three weekly frequencies.

Mr Foster says Hong Kong is potentially a big market for both the business and leisure sectors. On the business side, there is a large and growing investment in Kazakhstan from Hong Kong companies and several Kazakhstani companies, including Air Astana, will likely be listed on the Hong Kong Stock Exchange over the next few years. On the leisure side, Hong Kong and nearby Macau is a big attraction for Kazakhstanis. Connection traffic in Hong Kong will also be pursued as a partnership with Mr Foster's long-time buddies at Cathay is envisioned. "The whole Pearl River Delta is interesting to us," Mr Foster says. "Macau is going to be huge."

Air Astana also plans to launch charter service to Ho Chi Minh in Oct-2012 with the expectation that scheduled flights to the Vietnamese city will be added later. Mr Foster points out that Bangkok and Kuala Lumpur were also started as charters geared toward Kazakhstan's outbound leisure market. Both Southeast Asian destinations quickly were upgraded to scheduled flights and have been highly successful. Air Astana increased in late 2011 its Bangkok service to five weekly flights, which Mr Foster intends to eventually upgrade to daily, and Kuala Lumpur was just increased to three weekly flights.

Air Astana is also aiming to significantly increase its China operation during 2012 from 10 to 28 weekly flights as business ties between the two countries increases, leading to increased Chinese investment in Kazakhstan's fast-growing economy. Beijing, which is served with 757s, will increase from five to 14 weekly flights as two existing frequencies are added to the existing five times per week route from Almaty and a new daily route from Astana is launched. Urumqi, which is now served with three weekly flights from Almaty and two weekly flights from Astana using A320s, will be upgraded to daily from both hubs.

Southeast, Northeast and South Asia routes now account for 24% of Air Astana's total international capacity (seats), compared to 57% for Europe, while regional routes within Central Asia only account for 8%. But the portion of capacity directed to Asia - Central Asia and Southeast, Northeast and South Asia - is expected to increase significantly and steadily.

Air Astana international capacity seats by region: 09-Jan-2012 to 15-Jan-2012

Air Astana is uniquely positioned to cash in on the growing economic ties between East Asia and Central Asia. Traditionally the economies of most Central Asian countries have been linked with Russia and Europe. But in recent years, the ties with Asia have expanded significantly, particularly China.

Air Astana seeks membership in AAPA

Recognising its future is to the east, Air Astana has applied for membership in AAPA. The Kuala Lumpur-based association, which until 1996 was known as the Orient Airlines Association, currently has 15 members from Southeast and Northeast Asia. It previously had members from Australasia but has never included any carriers from Central or South Asia. AAPA is now considering amending its by-laws to incorporate both the Indian subcontinent (South Asia) and Central Asia, making it possible for Air Astana to join.

The upcoming launch of Hong Kong services and recent capacity expansion to Bangkok and Kuala Lumpur is made possible by the acquisition of a fifth 757-200, which entered service in Dec-2011 and will contribute to an anticipated 15% increase in system-wide capacity for 2012. Air Astana also operates long-haul flights with two 767-300ERs.

Air Astana fleet: 09-Jan-2012

Aircraft	In service	On order
Total:	26	12
Airbus A319-130	1	0
Airbus A320-230	7	4
Airbus A321-230	2	2
Boeing 757-200	5	0
Boeing 767-300ER	2	0
Boeing 787-8*	0	3
Embraer 190	3	3
Fokker 50	6	0

The carrier during 2011 retrofitted its entire 757/767 fleet with new semi lie-flat seats in business class. Air Astana views the retrofit, which did not result in any changes in the economy cabin, as an interim solution because it plans to replace its entire 757/767 fleet with new 767-300ERs in the 2014 to 2016 time frame.

Air Astana plans to purchase six new 767s

Air Astana is expected to place in 2012 an order for six new 767-300ERs for delivery from late 2013. Four options will be part of the planned deal and will likely be exercised later for growth.

A330-200s have also been evaluated by Air Astana but are considered too large for most of the carrier's long-haul routes. Replacing 166-seat 757s with 223-seat 767s is the most feasible option because it would result in feasible capacity growth of 34% on the carrier's 757 routes (assuming the same number of frequencies). Mr Foster does not view the 767 as outdated technology, saying the aircraft when equipped with winglets is fairly fuel efficient. He also points out the relatively low capital cost of 767s offsets the higher operating costs compared with newer generation aircraft.

Mr Foster says the 757 for now is the perfect aircraft for Air Astana because its international network consists primarily of long thin routes "but we can't run it forever". Mr Foster says the A321neo is not an option for replacing 757s because the A321neo will lack the range to serve Western Europe, North Asia or Southeast Asia from Almaty. All these routes are now just within the range of the 757 as Almaty is geographically positioned roughly equidistant to all three regions.

Air Astana may acquire additional E190s

Air Astana may also place new narrowbody orders in 2012. The carrier will likely acquire additional E190s for delivery in 2013 to 2015 as it looks to pursue further expansion within Central Asia. The last of the six E190s Air Astana is now committed to acquiring will be delivered by the end of this year. But the carrier's five-year fleet plan envisions having a fleet of 12 regional jets by the end of 2015.

Air Astana is already committed to purchasing six additional A320 family aircraft, which will all be delivered in 4Q2012 and 1Q2013 (three of which will replace existing A320 family aircraft that are coming off lease and three of which will be used for growth). But the carrier has not yet made a decision on its long-term narrowbody fleet. Air Astana late last year began evaluating A320neos, which would be a logical acquisition given the aircraft would allow a smooth transition from its current fleet of A320s. The new 737 MAX would also be a possibility because Air Astana's narrowbody fleet is small enough to easily transition from Airbus to Boeing.

With Boeing, Air Astana already has an outstanding LoI for three 787s plus three options. Mr Foster says the 787s are now expected to be delivered in 2019 and are envisioned as growth aircraft for the end of this decade. The LoI, which dates back to 2008, will likely be converted to a firm order in 2012, potentially at the same time the expected order for 767-300ERs is placed.

Mr Foster says the 787s could potentially be used to launch flights to the US. Flights to the US west coast and Houston, which is now a strong offline market due to oil industry connections, are both long-term possibilities.

Planned and potential future fleet growth for Air Astana

Type	Number	Remarks
A320/A321	6	Already on firm order. Three will replace existing A320s coming off lease and three will provide growth. Delivery of all six aircraft scheduled for between Nov-2012 and Mar-2013.
A320neo	TBD	Began evaluation of A320neo in late 2011. Could be used for growth and replacements starting end of this decade.
767-300ER	6 firm, 4 options	Order likely to be placed in 2012 with deliveries starting in late 2013.
787	3 firm, 3 option	2008 LoI likely to be converted to firm order in 2012, delivery from 2019.
E190	3+	Has three more on order (including one more leased aircraft), for fleet of six, but envisions regional fleet of 12 aircraft by 2015.

Air Astana plans to grow owned fleet

The 767-300ERs and 787s, and potentially additional E190s and A320neos, will be funded from proceeds from the upcoming IPO. Air Astana has traditionally leased all its aircraft but in future plans to own about 40% of its fleet. The carrier's first owned aircraft will be delivered later this year. By the end of 1Q2013, the carrier will have eight owned aircraft in its fleet: two E190s and six A320/A321s. The IPO will help fund some of these deliveries as well as the much higher value orders that will likely be placed this year.

While Air Astana's capacity will grow by 15% in 2012, Mr Foster expects annual growth over the next several years to average 7% to 8%. This could prove to be a conservative figure given Kazakhstan's booming economy, which grew by about 7% in 2011 and is projected to grow another 6% in 2012, and Air Astana's strong position in Central Asia, where economic growth is also expected to be faster than the global average. Air Astana's transit traffic is currently growing even faster than local traffic.

But as it enters its second decade, the carrier also faces several challenges which threaten to curtail its growth. Almaty Airport, which is owned and operated by a private Kazakhstani group, is already operating above capacity and has been very slow to invest in expansion despite its high charges. The tiny existing terminal only has four gates, forcing most Air Astana aircraft to be parked at remote stands during peak periods. It also lacks a proper transit facility and a proper business class lounge (the international terminal has only one small outdated lounge for all carriers including Air Astana).

Almaty Airport fails to keep up with Air Astana growth

Air Astana needs a significantly bigger terminal to support its current hub. Air Astana only has two schedule banks and ideally would continue to expand these banks to minimise connection times. Mr Foster says currently 17 of the carrier's aircraft converge in Almaty during the early morning and it is now impossible to add any flights to this important bank. "It's vital for us that the airport be expanded and the transit facility is part of that," he says.

Air Astana has been pushing for expansion at Almaty for several years. Mr Foster is hopeful that construction will finally start during 2012 on a terminal expansion that will include a new transit facility and at least two additional gates (the carrier is lobbying for four additional gates but the project will likely only initially include two gates). Mr Foster says the medium-term solution for Almaty is a new terminal and the long-term solution would be a completely new airport.

A new airport, which would likely be located about 50km south of the city, would have the added benefit of being outside Almaty's fog zone. There is space to potentially expand the existing airport, which is located near the city centre, but the area is prone to fog from the end of November to mid-March. The fog is particularly bad in January and February, leading to frequent closures that can sometimes last for days.

The Astana Airport, where a spacious modern new terminal opened in 2005 as part of an ambitious master plan that has rapidly transformed the small but fast-growing city since it became the capital in 1997, offers Air Astana an intriguing alternative. But with Almaty being the country's commercial centre and now accounting for approximately half of Air Astana's total capacity, moving the main hub is not really an alternative. As it is located in the east of Kazakhstan, Almaty is also best positioned for Asia traffic, which is expected to continue recording much faster growth than European traffic, which could more feasibly be accommodated at Air Astana's other hubs.

Other long-term risks include the potential of continued restrictions on European expansion and political instability that could result from any change at the top as the same party has been in power since Kazakhstan's independence in 1991. Manpower issues, particularly a potential pilot shortage, also threaten to limit Air Astana's growth. But unlike the other issues, this is under Air Astana's control.

Air Astana has launched a pilot cadet programme which Mr Foster says will allow the carrier to keep its costs under control and decrease its dependence on the world market for pilots. Air Astana now has about 100 foreign pilots and 200 local pilots. The carrier is also investing heavily in maintenance with a programme to train local engineers and a new hangar in Almaty will allow the carrier to start in-sourcing by the end of 2012 some of its heavy checks. It is also planning to open a hangar in Astana, giving it an option for future maintenance expansion should expansion in Almaty continue to prove difficult.

Air Astana to face increased competition

Air Astana will also face the challenge of increased competition in its second decade as more carriers aim to capitalise on the growth in Central Asia. Kazakhstan is currently served by about 24 international carriers, which combined account for just over half of total international capacity in the country.

Russia's Transaero and Ukrainian carrier Aerosvit are currently the largest international carriers serving Kazakhstan and have even more capacity to/from the country than SCAT, which is Kazakhstan's second largest airline and is primarily a domestic operator. Aerosvit and Transaero both serve several cities in Kazakhstan.

Kazakhstan international capacity share by carrier (seats per week): 09-Jan-2012 to 15-Jan-2012

Top 20 airlines in Kazakhstan international market (seats per week): 09-Jan-2012 to 15-Jan-2012

Three major European flag carriers - Turkish Airlines, Lufthansa and KLM - are the third, fourth and fifth largest foreign carriers, respectively, serving Kazakhstan. The country is also served by Austrian Airlines and bmi as well as two Chinese carriers - China Southern and Hainan. But only one Gulf carrier, Etihad, currently serves Kazakhstan.

More competition from Middle Eastern carriers is inevitable, including Emirates and Qatar Airways. Emirates and its low-cost sister carrier Flydubai are keen to serve Almaty but Dubai-based carriers have so far been unable to secure traffic rights for Almaty, leading to a squabble that forced Air Astana to move in 4Q2010 all its Dubai flights to Abu Dhabi.

More competition from low-cost carriers is also inevitable. Kazakhstan is now only served by one low-cost carrier, Air Arabia, which operates six weekly flights to Almaty from its Sharjah hub. Turkish low-cost carrier Pegasus, however, plans to launch services later this month to Almtaty from Istanbul.

Kazakhstan international capacity by airline type (seats per week): 09-Jan-2012 to 15-Jan-2012

Air Astana realises that competition will increase in its second decade as foreign carriers and potentially other Western-style start-ups become enticed by the region's fast-growing economies. But Air Astana should also soon be at the maturity level and the size to be able to defend its home turf against even large aggressive competitors such as Emirates.

"The timing of our start-up was impeccable and we had a long period of time where we pretty much had it [the Kazakhstan market] to ourselves. That put us obviously in a very strong position. The challenge now is to consolidate and grow on that in an environment that inevitably will be much more competitive," Mr Foster says. "We know we can't expect to continue to enjoy the same kind of market dominance in domestic and regional international routes that we did in the early days."

Within the Central Asia region, Mr Foster considers Uzbekistan Airways the only other sizeable carrier. Uzbekistan Airways currently operates a fleet of about 50 aircraft including about 30 Western-built aircraft. Uzbekistan Airways currently has slightly more international capacity than Air Astana, according to data from Innovata.

Azerbaijan Airlines is the third largest international carrier in the region but is about 40% smaller than Air Astana, based on international capacity. All the carriers from the other Central Asian countries - Afghanistan, Georgia, Kyrgyzstan, Tajikistan and Turkmenistan - have tiny international operations that are less than half the size of Air Astana's.

Air Astana eager to partner with several airlines

Air Astana has shrewdly developed alliances with several key carriers from outside the region, providing a cushion as competition in Central Asia intensifies. Air Astana now codeshares with a handful of carriers including Asiana, Austrian, Etihad, KLM and Rossiya and has strong interlines with local carriers in almost all of the international markets it serves.

KLM and Asiana offer Air Astana important offline access to the US with KLM's Amsterdam-Houston connection particularly important for oil industry customers. Etihad is probably Air Astana's largest single partner as Abu Dhabi, which the carrier now serves from both Almaty and Astana, is used as the main transit point for offline destinations in the Middle East, Africa and parts of Europe. Almaty-Abu Dhabi is Air Astana's second largest international route by capacity (seats) and Etihad also serves both Almaty and Astana.

Mr Foster says Air Astana is "very happy" with its relationship with Etihad but would like to further expand its offline presence in the Middle East and North Africa through a new partnership with Royal Jordanian. "We are very much looking to fly to Amman - not because of Amman itself but because of Royal Jordanian, who we have had some very good meetings with," Mr Foster says. "Royal Jordanian has a very good network throughout the Middle East. They have a good albeit small hub."

Mr Foster adds that unlike Etihad, Royal Jordanian also serves Israel. Kazakhstan now has a substantial Jewish community but there are currently no quick connections between Almaty and Israel. Air Astana is not looking at launching any new destinations in the Middle East or North Africa besides Amman and sees a combination of Amman and Abu Dhabi as ideal connection points to the rest of the region.

Air Astana's unusual network makes it an attractive partner to virtually every airline, particularly premium carriers (Air Astana is primarily a business carrier although some destinations such as Bangkok also have large and growing outbound leisure demand). Without any other suitable global alliance members in Central Asia, Air Astana is in a covetable position to work with members from all three major alliances as airlines from throughout the world look to tap into Central Asia's growth.

All three global alliances are now represented in Kazakhstan. Star currently is the biggest alliance in the country as it has five members serving Almaty and/or Astana (Turkish and Lufthansa serves both cities; bmi and Asiana serve Almaty; and Austrian serves Astana).

Kazakhstan international market share by alliance (seats per week): 09-Jan-2012 to 15-Jan-2012

Mr Foster says the carrier is open to potentially joining a global alliance but acknowledges its best option may be to remain non-aligned. "We are in such a strong position in this region we don't have to be part of an alliance," he says. "If we did join an alliance it would limit our options in other areas. Carriers want to work with us because we are strong in this region."

Air Astana has bright outlook as IPO beckons

Overall, Air Astana is in an enviable position as it enters its second decade. Competition in Kazakhstan and Central Asia will increase but the carrier will retain its strong position in the region. Rapid economic growth in Kazakhstan will benefit several carriers but Air Astana will almost certainly benefit the most.

The upcoming IPO should give Air Astana the cash to pursue further rapid growth in its second decade and keep up with competitors. As one of the new country's brightest stars, Air Astana has been included in the first group of government companies being prepared for IPOs. "We have a very good profitability and growth story. That has put us into the first wave of IPOs," Mr Foster says.

He calls the initial offering a "peoples' IPO" as "the government is very keen for the local population to participate". But a second future listing is likely in London or Hong Kong. Air Astana has already started attending investor conferences overseas, where Mr Foster says interest has been strong.

Kazakhstan itself is a booming market and a remarkable success story as the country, which before the fall of the Soviet Union was the second poorest state in the CIS, is now the richest country in the region on a per capita GDP basis. The early success of Air Astana is very much a reflection of Kazakhstan's success. But Air Astana's has not been successful purely because of its booming home market and impeccably timed launch. The carrier's unique network strategy, high standards and strong management team have been critical ingredients to its highly successful first decade. The second decade will have its challenges but the foundation is there for more success and growth as well as global recognition.

Background information

Air Astana passenger traffic: 2002 to Jan-Sep-2011

Air Astana revenues: 2002 to Jan-Sep-2011