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Uzbekistan Airways SWOT: opportunities and challenges after reforms

Uzbekistan has emerged as an aviation market with huge potential, since president Shavkat Mirziyoyev took over two years ago following the death of the long-standing Soviet style dictator Islam Karimov. Uzbekistan has since embarked on a major reform path which has opened up tourism and is leading to a major restructuring of the air transport sector.

Uzbekistan is now focusing heavily on tourism, which has already experienced a more than doubling of visitor numbers over the past two years, and the country has put in place a new much less restrictive visa policy that should help drive further rapid growth. New policies aimed at encouraging growth in aviation have also been introduced, ushering in a new more liberal operating environment that should attract more foreign airlines and privately owned start-ups.

For the government-owned flag carrier, Uzbekistan Airways, the reforms create a more challenging environment of intense competition and an end to protectionism.

The airline is being separated from airports and other areas as Uzbekistan finally abandons the Soviet-style vertical structure in which the airline company controls virtually every facet of air transport, which has enabled cross-subsidisation with profits from monopolies in the airport and airspace sectors covering losses at the airline. The upside for Uzbekistan Airlines is that after a restructuring it should emerge as a leaner, more efficient airline with a strong position in a fast growing market on the cusp of a tourism boom.

Summary 

  • Strengths: dominant position in a fast growing market with huge tourism potential; subsidiary companies, and cargo.
  • Weaknesses: limited frequencies; domestic market requirement and partnerships.
  • Opportunities: transit traffic; fleet renewal, expansion and simplification, and product improvements.
  • Threat: new local competitors as Uzbekistan restructures its aviation sector; increased foreign airline competition, and LCCs.

UZBEKISTAN AIRWAYS' STRENGTHS

1. Dominant position in a fast growing market with huge tourism potential 

Uzbekistan Airways is Uzbekistan’s only airline, giving it 100% share of the domestic market and a leading position in the international market. The airline currently accounts for approximately 60% of international seat capacity to/from Uzbekistan.

As Uzbekistan opens up and promotes tourism, Uzbekistan Airways is poised to benefit. Uzbekistan Airways has typically relied mainly on outbound and local traffic, but a boom in tourism has created a much larger inbound market and has also stimulated domestic demand. 

Visitor numbers to Uzbekistan reached approximately 5 million in 2018, compared to only 2 million (approximately) in 2016. The government projects that visitor numbers will exceed 9 million by 2026.

Visitor numbers started increasing in 2H2017, boosted by the first wave of visa and economic reforms – including a devaluation of the local currency, which made Uzbekistan a bargain for overseas visitors and abolished the black market. More significant reforms were introduced in 2018, leading to a huge spike in visitor numbers this summer. 

In Feb-2018 Uzbekistan introduced visa-free policies for seven countries – Malaysia, Indonesia, Israel, Japan, Singapore, South Korea and Turkey. Uzbekistan Airways operates scheduled services to Malaysia, Israel, Singapore, South Korea and Turkey and has regular charters to Japan. France, which Uzbekistan Airways also serves, was added to the visa-free list in Oct-2018.

Turkey and South Korea are Uzbekistan Airways’ second and third largest markets. Russia, its largest market, was already visa-free, along with other CIS countries (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan and Ukraine). Uzbekistan Airways serves six of the original 11 other CIS countries – Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan

Uzbekistan also introduced an e-visa system in Jul-2018, which has made it significantly easier and less costly for citizens of more than 50 countries to get visas. At the same time, Uzbekistan introduced a free five-day transit visa for passengers from more than 100 countries, supporting Uzbekistan Airways’ objective of attracting more sixth freedom traffic. Located on the ancient Silk Road and boasting five UNESCO world heritage sites, Uzbekistan has huge tourism potential – both for stopovers and as a destination itself. 

The visa reforms and associated growth in visitor numbers have already led to a spike in traffic for Uzbekistan Airways. The airline reached the 3 million annual passengers milestone for the first time on 17-Dec-2018 and ended 2018 with 3.1 million passengers, consisting of over 2.2 million international, 500,000 domestic and 300,000 transit. Passenger traffic increased by approximately 20% compared to 2017, with double digit growth across all segments (local international, domestic and transit). The growth in 2018 comes after several years of flat traffic.

Uzbekistan Airways expects another year of double digit growth in 2019, with a projected 3.5 million passengers. This is clearly a good time to be an airline based in Uzbekistan.

2. Subsidiary companies – maintenance and flight training 

Uzbekistan Airways has several subsidiary companies, which enjoy a dominant position in the local market. 

Some of the subsidiaries such as ground handling and catering could face future challenges as they potentially lose their monopoly status. However, other subsidiaries such as aircraft maintenance and flight training are well positioned, given the anticipated growth in demand for the services they provide.

Uzbekistan Airways Technics is one of the leading MRO providers in Central Asia and the CIS. It has heavy maintenance capabilities with international certification for the A320 family, 757, 767 and 787

A centre for aircraft component repairs was opened in 2016 and a composite repair facility in 2014. A new hangar was also opened in 2016 following the delivery of the first 787. Uzbekistan Airways Technics is preparing to add 737 capability in 2019, although its parent has no plans for operating the type.

In addition to performing in-house checks, Uzbekistan Airways has several third-party customers, including Aeroflot, Air Italy, Air Manas, Air Astana, Icelandair, S7 Airlines, Tajik Air, Turkish Airlines, Turkmenistan Airlines, Ural Airlines and UTair. Uzbekistan Airways should be able to continue expanding its third party business as it invests in new capabilities and facilities. Uzbekistan Airways Technics is in the process of gaining financial independence as part of the group’s overall restructuring, which should improve the MRO firm’s efficiency and ability to attract outside work. 

Uzbekistan Airways also has a growing training business. The Uzbekistan Airways Training Centre has full flight simulators for A320s and 767s and is planning to add a full flight simulator for the 787. The simulators are used by Uzbekistan Airways, as well as third party customers.

As the fleet grows rapidly in the CIS region Uzbekistan Airways is well positioned as a maintenance and flight training supplier. Airbus recently updated the CIS portion of its Global Market Forecast and is now expecting the number of commercial aircraft with at least 100 seats to double over the next 20 years: from 857 to more than 1,700 in 2037. 

3. Cargo

Uzbekistan Airways has had a strong cargo operation for several years, resulting in a diversified revenue stream.

The airline carried 36,000 tonnes of cargo in 2017, an estimated 40,000 tonnes in 2018 and a projected 48,000 tonnes in 2019. 

Uzbekistan Airways has operated two 767 freighters since 2014, when it converted two of its passenger aircraft. It has also previously operated Russian-model freighters. 

Uzbekistan Airways has had a joint venture cargo venture terminal with Korean Air since 2010 at the secondary city of Navoi. Korean, one of the world’s largest cargo airlines, has since used Navoi International Airport as a transit point for freighters operating between Asia and Europe. The facility consists of the largest freighter apron in Central Asia, two warehouses and a handling facility capable of processing 300 tonnes of cargo per day.

Uzbekistan Airways took over full management of Navoi’s cargo facility in Aug-2018. In addition to catering to air cargo the facility has intermodal capabilities, with direct rail and road access.

The local air cargo market is relatively limited, but Uzbekistan’s location on the old Silk Road positions Navoi and other Uzbekistani airports well for transit traffic. Uzbekistan Airways carried an estimated 28,000 tonnes of transit cargo in 2018.

UZBEKISTAN AIRWAYS' WEAKNESSES

1. Limited frequencies 

Uzbekistan Airways has a large international network, operating 63 international routes from nine Uzbekistan airports to 44 international destinations (based on OAG schedules for the week commencing 3-Dec-2018). This can be viewed as a strength, since Uzbekistan Airways has more international destinations than any airline in Central Asia

However, 59 of the 63 international routes are served less than daily. Several major destinations are only served twice per week, including Beijing, Frankfurt, Kuala Lumpur, London, Mumbai, New York and Singapore. Milan, Rome and Paris are currently only served once per week (a higher, but still small, number of frequencies operate during summer).

A staggering 35, or 56%, of all the airline's international routes are served with only one or two weekly flights. 

Uzbekistan Airways number of international routes served by weekly frequencies: Dec-2018

The current operation is highly inefficient. Low frequency routes are costly to operate and make it difficult to attract business passengers. Uzbekistan Airways is aiming to grow transit traffic but on many of the targeted sixth freedom city pairs it offers only one or two options per week, which limits its ability to compete against other network airlines.

Uzbekistan Airways would be better off focusing on serving a smaller number of international destinations with a higher number of frequencies. 

Uzbekistan Airways would also be better off operating international services from fewer airports in Uzbekistan. Offering international flights from eight regional airports in addition to its hub at Tashkent does not make sense. 

The current set-up at regional airports is inefficient because infrastructure has to be in place to support only a few flights per week. Uzbekistan Airways now manages all of Uzbekistan’s airports as part of its unusually wide portfolio. These airports are unprofitable from both an airport and airline perspective.

2. Domestic market requirement 

Domestic air fares in Uzbekistan are extremely low, making it impossible for Uzbekistan Airways to be profitable in the domestic market.

Uzbekistan Airways essentially has a social obligation, since its domestic fares are set by the government. Even tourists are able to access the very low fares.

The cost of the domestic operation is relatively high due to the use of large aircraft and a relatively infrequent service. Uzbekistan Airways operates domestic flights with a mix of A320s, 757s and 767s. Even smaller markets have to be served with A320s, following the phase-out of 50-seat turboprops in 2018. 

There are 11 airports in Uzbekistan with scheduled domestic services. However, seven of these airports are not even served every day (less than seven domestic weekly frequencies). The Uzbekistan Airways domestic operation is essentially cross-subsidised using profits from other areas of the business. 

Uzbekistan Airways has to compete against high speed rail (HSR) on three of its main domestic routes – Tashkent to Samarkand, Bukhara and Qarshi.

The HSR line initially opened in 2011, connecting Tashkent and Uzbekistan’s second largest city Samarkand in two hours. From Samarkand extensions to Bukhara and Qarshi were completed in 2016, reducing travel time from Tashkent to Bukhara and Qarshi to less than four hours. 

An extension of the HSR line from Bukhara to Urgench is now under construction and is nearly completed.  However, the journey from Tashkent to Urgench will take about six hours, making air travel a more convenient option. 

Urgench is the gateway for the ancient UNESCO historical town of Khiva. Samarkand and Bukhara are also UNESCO heritage sites and are on the typical Silk Road tourism itinerary. Uzbekistan Airways operates one to two daily flights from Tashkent to Bukhara, Samarkand and Urgench. It also has direct flights from Bukhara to Urgench that cater mainly to tourists and will be impacted by the opening of the HSR extension. 

Following recent upgrade work and electrification, there is also now a relatively fast train from Tashkent to the Fergana Valley, which has impacted demand for air travel between the capital and three regional airports. Uzbekistan is now upgrading the train line to Termez in the south, which will impact yet another domestic air route.

Train travel in Uzbekistan, including the HSR link, is highly subsidised, resulting in extremely low fares. There are limited HSR trains, which is an advantage for Uzbekistan Airways as currently HSR capacity fails to meet demand.

However, Uzbekistan plans to add HSR trains, which will further impact demand for domestic air travel – particularly if the HSR fares remain extremely low. Due to the growth in tourism (most visitors travel around Uzbekistan to see the various Silk Road sights), the domestic air market would be growing rapidly if it were not for the HSR expansion. 

While Uzbekistan is relatively vast, it is not nearly as big as Kazakhstan and therefore trains are sufficient to connect most cities. Of the main cities, Nukus in the west is the furthest from Tashkent but is still relatively close, at approximately 1,100km.

Ideally, Uzbekistan Airways would suspend most of its domestic routes and only operate services that can be profitable. However, the government is unlikely to adopt such a liberal policy for the domestic market in the near term. Uzbekistan Airways may be forced to continue operating to smaller regional airports – with both domestic and international services – despite the bleak prospects for profitability. 

3. Partnerships

Uzbekistan Airways currently has eight codeshare partners – airBaltic, Alitalia, Belavia, Korean Air, Malaysia Airlines, S7 Airlines, Turkish Airlines and Ural Airlines – however these codeshares cover a limited number of routes. Uzbekistan Airways currently has less than 10 offline destinations (as the codeshares are mainly on shared routes from Tashkent). 

Uzbekistan Airways also does not have any airline partners in its frequent flyer programme, UZAirPlus. Although its members can accrue points on codeshare flights operated by partners, there is no mechanism for redeeming flights on any of the partners, which limits the value of the overall programme.

Over the past year Uzbekistan Airways has been working on a new partnership with Kazakhstan’s Air Astana, which would be its first partner within Central Asia. Air Astana could potentially become its biggest partner, creating a powerful combination as Air Astana and Uzbekistan Airways are the two largest airlines in Central Asia. A partnership would facilitate tourists visiting Uzbekistan and neighbouring Kazakhstan on a single itinerary.

However, Uzbekistan Airways has been very slow in following through with Air Astana since the partnership was first announced more than a year ago. While it seems the codeshare will finally be implemented in 2019, the partnership may turn out to be relatively limited.

Demand for Silk Road tourism is increasing rapidly and tourists are generally keen to visit multiple ancient Silk Road sights in multiple countries. However, connectivity within the region is relatively poor. Uzbekistan Airways should be doing more to improve regional connectivity – by launching more regional international routes connecting historical sites and by forging partnerships with other airlines in Silk Road countries. For now, this is a major weakness as it limits Uzbekistan Airways' opportunity to exploit Silk Road opportunities fully. 

UZBEKISTAN AIRWAYS' OPPORTUNITIES

1. Transit traffic

Uzbekistan Airways expects to handle approximately 300,000 transit passengers in 2018, representing a 62% increase compared to the 187,000 transit passengers carried in 2017. The airline aims to increase its transit traffic by another 17% in 2019, to 350,000.

For years Uzbekistan Airways has relied heavily on transit traffic on some routes, particularly Amritsar in India. However, the airline is starting to target a wider array of new city pairs. Network expansion and frequency increases over the past couple of years have opened up more opportunities for sixth freedom traffic. Some new routes, such as Mumbai, were launched specifically for transit traffic.

In early Nov-2018 Mumbai became Uzbekistan Airways’ third destination in India after Amritsar and Delhi. Elsewhere in South Asia, Uzbekistan Airways launched Lahore, its only destination in Pakistan, in 2017 and aims to launch services to Dhaka in Bangladesh in 2019. 

Sixth freedom traffic is critical for its existing and planned South Asian routes. Several of its European routes also have a large proportion of transit traffic, mainly from India.

Tashkent is geographically well positioned for sixth freedom traffic, given its central location halfway between Asia and Europe. However, even with the recent increase, transit passengers account for only 14% of Uzbekistan Airways’ total international traffic. 

While the airline could potentially increase its transit component to 20% or even 30%, it is not about to become a major network airline. Uzbekistan Airways is mainly focused on growing the inbound segment as tourism grows while targeting selected sixth freedom traffic, with a focus on niche markets and relatively underserved city pairs.

For example, Uzbekistan Airways believes it can increase New York to daily by focusing on connectivity within the Central Asia region. Uzbekistan Airways is the only airline from Central Asia operating to New York or to any destination in North America. It launched services to New York in 2017 and currently operates two to three weekly flights on the route (depending on the time of year).

2. Fleet renewal, expansion and simplification

Uzbekistan Airways has taken major steps over the past few years to modernise and simplify its fleet but still has significant work to pursue in these areas.

The airline currently operates 23 passenger aircraft, consisting of 14 narrowbodies (nine A320s and five 757s) and nine widebodies (six 767s and three 787s). It also operates two 767 freighters.

Uzbekistan Airways fleet summary: as of Dec-2018


Aircraft
In service In storage On order (confirmed) On order (unconfirmed)
Airbus A320-200 9 0 0 0
Airbus A320-200neo 0 0 0 3
Boeing 757-200 5 0 0 0
Boeing 767-300ER 6 0 0 0
Boeing 767-300ER(BCF) 2 0 0 0
Boeing 787-8 3 0 3 0
British Aerospace BAE146-RJ85 0 3 0 0
Ilyushin IL-114-100 0 6 0 0
Total: 25 9 3 3

The average age of the fleet is now 10 years, which is still relatively high but is a significant improvement compared to a few years ago, when Uzbekistan Airways still operated several ageing Russian types. 

Uzbekistan Airways average fleet age by aircraft type: as of Dec-2018


Source: CAPA Fleet Database. 

The last Russian aircraft was phased out in May-2018 when the last Ilyushin Il-114 turboprop was removed from service. The fleet consisted of seven aircraft types two years ago as at the time Uzbekistan Airways also operated Ilyushin Il-76 freighters and BAe 146 regional jets. By transitioning to the current four types the fleet has been simplified, resulting in efficiency and product improvements. 

The airline’s fleet size has shrunk over the past few years. However, it was able to maintain flat capacity from 2012 to 2017 and resume capacity growth in 2018. ASKs increased nearly 30% in 2018 and seat capacity has increased by nearly 20%, according to CAPA and OAG data.

Uzbekistan Airways ASKs: 2012 to 2018

The delivery of 787s, which are used more and are bigger than the aircraft that were phased out, has enabled the airline to maintain, and now grow, capacity despite operating a smaller fleet overall. Uzbekistan Airways took delivery of its first two 787-8s in 2H2016. It added another 787-8 in 2018, bringing down the average age of its fleet.

Uzbekistan Airways has not reduced its 767 fleet, which it has operated since 1996, while taking the initial four 787s. However, it intends to start phasing out 767s as more 787s are delivered. 

The airline plans to increase its 787 fleet to eight aircraft by the end of 2021 (although Boeing has not yet listed all these aircraft under its order book). It is likely that Uzbekistan Airways will ultimately acquire more than the eight 787s now planned to support a plan to phase the 767 fleet out eventually.

Four of its six passenger 767s are relatively young as they were delivered in 2012 and 2013, whereas the other two are of a much older vintage, having been built in 2003 and 2004. Uzbekistan Airways may replace the two older aircraft with 787s in 2019. 

The oldest aircraft remaining in Uzbekistan Airways’ fleet are the five 757s, all of which were manufactured in 1999 (making them nearly 20 years old). Uzbekistan Airways is planning to retire its 757 fleet over the next couple of years as it takes delivery of new A320neo family aircraft, resulting in a further significant reduction in its average fleet age. 

In Jun-2018 the airline announced a commitment for two A320neos for delivery in late 2018. The delivery of these aircraft, which will be configured with 12 business and 138 economy seats, has since been pushed back to early 2019. Uzbekistan Airways has since committed to a third A320neo for delivery in 2021 (although it has not yet been formally announced), and has been negotiating for A321neos. 

Uzbekistan Airways has been evaluating both the A321neo and the A321neoLR. The A321neoLR has the range of a 757 and has been acquired by Air Astana as a 757 replacement. 

The phase-out of the 757s, and later the 767s, will give Uzbekistan Airways just two aircraft types (A320s and 787s), resulting in a simple and efficient fleet. 

The airline will likely keep its A320ceos for short haul routes while the A320neos and A321neos are used on medium haul services now flown with 757s (and in some cases with 767s). All of its A320ceos were delivered in 2011, making them relatively young. Uzbekistan Airways is planning to transfer some of these aircraft to its new LCC operation.

3. Product improvements

Uzbekistan Airways has the opportunity to improve its product and product consistency significantly as the fleet is renewed.

The airline now has an extremely inconsistent product for medium and long haul flights, with six configurations. 

Even on the new 787, Uzbekistan Airways has two configurations and products. The first two aircraft have 24 business and 246 economy seats, whereas the aircraft received in 2018 have 24 business class seats (with an improved spec) and 222 economy seats.

Uzbekistan Airways also has two configurations on the 767 and the 757, resulting in a highly inconsistent product for its medium haul network. Two of the 757s have 26 business and 158 economy seats, while the other three have 22 business and 168 economy.

The airline’s two older 767s have 18 business class seats in 2x2x2 configuration, whereas the four newer aircraft have 15 improved (but still not lie-flat) business class seats in a 2x1x2 configuration. There are 246 economy class seats on the older 767s, compared to 232 on the newer aircraft. 

Only the 787 has lie-flat seats in business, but the seat has not received positive reviews and Uzbekistan Airways’ premium service is generally below average. The airline has lots of room for improvement to both its hard and soft product. 

Uzbekistan Airways committed in 2018 to improving its IFE product by selecting Panasonic to supply its X Series IFEC system for the 787 and A320neo. Future 787s and A320neos will feature the product and existing 787s will be retrofitted. 

Uzbekistan Airways’ A320neo will have the same configuration as all of its A320ceos (138 economy and 12 business), but the new IFE will result in a significantly better product. The A320ceos do not have seatback IFE; they only have drop down screens in both the economy and business cabins.

Uzbekistan Airways also does not have seatback IFE on its 757s. The 767s have seatback IFE but the content is relatively limited. As these aircraft are replaced with 787s and A320neo family aircraft Uzbekistan Airways should be able to improve its inflight product significantly.

Uzbekistan Airways also has the opportunity to improve the product at its Tashkent hub. Its business class lounge at Tashkent is one of the best in the region (it is essentially a separate terminal with dedicated check-in, baggage area and immigration). However, the airport outside the lounge is subpar and has very limited facilities. There is a very limited number of shops and restaurants and the airport’s aerobridges are not being used; passengers are bused to the aircraft instead. 

Uzbekistan Airways particularly needs to improve its transit product if it is to succeed at attracting more sixth freedom passengers.

UZBEKISTAN AIRWAYS' THREATS

1. New local competitors as Uzbekistan restructures its aviation sector 

Protectionist policies have historically limited competition in Uzbekistan. However, Uzbekistan Airways will likely lose its status as Uzbekistan’s only local airline within the next few years.

Several private sector investors have been considering launching new airlines in Uzbekistan. A new airline application has not yet been submitted to Uzbekistan aviation authorities, but within the next year it is likely that at least one group will start the formal process of starting a new airline.

The Uzbekistan government is now in the process of reforming its aviation sector, which should make it easier for new entrants. Until now the entire sector has been controlled by Uzbekistan Airways, following an archaic structure that dates back to the Soviet era. All of Uzbekistan’s airports are under the airline company, as well as the only ground handling provider and the air navigation service provider. Even the civil aviation authority is essentially an arm of the airline. 

Obviously such a structure does not provide an ideal environment for a start-up. Under the existing structure any new airline, if approved, would have to contract Uzbekistan Airways to provide practically all services, limiting the start-up’s ability to have a low enough cost base to be viable.

Uzbekistan is now planning to transfer management of airports to a newly established airport company. Management of Uzbekistan’s air navigation services provider is also being transferred. New policies are being implemented to establish more favourable business conditions for potential airline start-ups and new providers of commercial aviation services.

Uzbekistan is making the right moves in reforming and opening up its aviation sector as it will boost the country’s overall economy and help support tourism aspirations. However, the reforms will clearly impact Uzbekistan Airways as it loses some profitable areas of its business and as new local competitors are effectively able to enter the market. Uzbekistan Airways will need to pursue its own restructuring to reduce costs and improve efficiency.

2. Increased foreign competition

The reforms will also lead to significantly more competition from foreign airlines.

Uzbekistan is currently served by 16 foreign airlines (based on OAG schedule data for the week commencing 10-Dec-2018) but there is limited competition outside the core Uzbekistan-Russia market. Of the 16 foreign airlines, eight (half of them) are Russian.

Uzbekistan Airways has approximately a 60% share of total international seat capacity in Uzbekistan. However, its capacity share to Russia is approximately 50% whereas its capacity share to non-Russian markets is more than 70%.

Russia accounts for more than half of total international seat capacity to/from Uzbekistan. There are 57 routes linking 10 airports in Uzbekistan with Russia. At least one Russian carrier serves every Uzbekistani airport. Uzbekistan Airways also serves Russia (mainly Moscow) from most of Uzbekistan’s regional airports. However, Russian airlines have more routes overall (Uzbekistan Airways has 33 Russian routes).

Although Russia is a big market, it is very competitive and fares are generally low. Uzbekistan Airways struggles to turn a profit in the Russian market and is hoping to improve its competitive position by launching an LCC brand, which will focus on the Russian market. However, competition will likely continue to intensify over the next few years, with more services from Russian airlines, including Aeroflot's LCC subsidiary Pobeda

Excluding Russia, Uzbekistan has 31 international routes. Uzbekistan Airways competes on 29 of these routes, giving it a very strong position in the non-Russian market. 

Uzbekistan is relatively underserved by foreign airlines when Russia is excluded. This will change as tourism in Uzbekistan grows rapidly and as the market reforms.

Foreign airlines have, until now, been reluctant to serve Uzbekistan partially because of very high airport and handling costs. Uzbekistan Airways has been using its monopoly status (as the airport operator and only ground handler) to charge exorbitant rates. When a new independent airport company takes over Tashkent and the regional airports (some of which could privatised) a more reasonable operating environment for foreign airlines should emerge. 

Uzbekistan is not currently served by a single airline from the Middle East. Flydubai will likely become the first airline from the Middle East to operate scheduled services to Tashkent and could also serve a few of the secondary cities. As an LCC with strong network traffic (due to its tie-up with its sister airline Emirates), flydubai could significantly shake up the competitive dynamics of the Uzbekistan market. 

Other airlines from the Middle East, particularly Qatar Airways, as well as European airlines will also likely enter, attracted by surging demand (Europe is a large source market for Uzbekistan’s tourism industry) and a friendlier airport environment. 

Uzbekistan weekly international seat capacity by airline: 10-Dec-2018 to 16-Dec-2018

Rank Airline Country 

IATA

code

Total Capacity share
1 Uzbekistan Airways Uzbekistan  HY 71,058 59.4%
2 Ural Airlines Russia U6 11,352 9.5%
3 Aeroflot Russia SU 7,070 5.9%
4 Turkish Airlines Turkey  TK 5,334 4.5%
5 S7 Airlines Russia S7 5,296 4.4%
6 UTair Aviation Russia UT 4,796 4.0%
7 Nordwind Airlines Russia N4 3,780 3.2%
8 Air Astana Kazakhstan  KC 2,972 2.5%
9 Asiana Airlines South Korea OZ 1,722 1.4%
10 China Southern Airlines China CZ 1,712 1.4%
11 Korean Air South Korea KE 1,308 1.1%
12 Red Wings Russia WZ 880 0.7%
13 Somon Air Tajikistan  SZ 596 0.5%
14 Kam Air Afghanistan  RQ 554 0.5%
15 Azerbaijan Airlines Azerbaijan  J2 424 0.4%
16 IrAero Russia IO 392 0.3%
17 Yakutia Airlines Russia  R3 340 0.3%

3. Low cost airlines 

At the moment, Uzbekistan is not served by an LCC. This will change as foreign LCCs enter the market and (potentially) a privately owned local LCC launches operations.

As discussed in the previous two sections, flydubai and Pobeda are likely to serve Uzbekistan. Other foreign LCCs that could serve Uzbekistan include Air Arabia and Wizz Air.

As CAPA highlighted in a Nov-2018 analysis report, Uzbekistan Airways is planning to launch an LCC brand in 2019 using A320s that will be retrofitted from dual class 150-seat to single class 180-seat configuration.

See related report: Air Astana and Uzbekistan Airways add LCC brands

The new, not yet named, LCC brand is intended for secondary Russian routes. Uzbekistan Airways struggles to make a profit on these routes and is hoping that by reducing costs and providing a basic service it will make the routes more viable. Fares on these routes are very low and cannot easily be increased, given the type of traffic (mainly labour traffic that will opt for long surface journeys if fares are higher) and the competition.

While there are no plans to use the new LCC brand on other routes for now, having an LCC could prove useful as competition intensifies on the non-Russian routes. However, Uzbekistan Airways will need to embrace the LCC model more fully in order to compete with foreign LCCs.

The anticipated reduction in costs for the LCC is mainly being generated from the increase in seat density. Most of Uzbekistan Airways’ other costs will simply be passed to the LCC, since the LCC will not be a separate airline or company. 

To compete effectively Uzbekistan Airways will need to come up with a sounder dual brand model. It will also need to pursue significant improvements in its product and service.

The airline is at an important juncture as reforms in Uzbekistan create huge challenges. When the recently announced air transport reforms are implemented the competition will intensify, and Uzbekistan Airways will no longer be able to cross-subsidise the airline with profits generated from monopolistic airports or the air navigation service provider.

However, at the same time there are also huge opportunities in the Uzbekistan market. With the right strategy, a restructured Uzbekistan Airways could grow rapidly and profitably. 

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