CEO Interview with Air Astana, President & CEO, Peter Foster

Transcript

Richard Maslen:

Hi, I'm Richard Maslen, and welcome to this latest session in the September 2021 edition of CAPA Live. Over the next 30 minutes or so we'll be looking more closely at an airline group that has proven that with the right dynamics and strategy you can operate profitably in 2021. I'm talking about Air Astana Group, which brings together the Kazakhstan flag carrier Air Astana, a joint venture between the government Wealth Fund and BAE systems, and its low-cost operation FlyArystan, which was among perhaps the number one fastest growing airline in the world in 2020. The group recently announced and registered a net profit of 4.9 million US dollars for the first six months of 2021, recovering from a loss of 66.2 million for the same period the previous year. Passengers carried increased almost three million of which 2.5 million were carried on domestic routes. Being located in the world's largest landlocked country, and the ninth largest country in the world, has provided the basis for the group's success. The strong market growth and the preference for air travel over longer rail journeys have transformed travelling Kazakhstan while still under the clouds of COVID.

I'm delighted to be joined by Peter Foster, president and CEO of Air Astana Group, who's been driving the growth of the airline for more than 15 years and seeing the birth of the low-cost brand, having previously held senior roles at Cathay Pacific, Philippine Airlines, and Royal Brunei Airlines. Welcome to CAPA Live, Peter.

Peter Foster:

Thank you, Rich. Nice to be here.

Richard Maslen:

Firstly, congratulations on the strong first half performance. Perhaps you can provide us with some insight into the pillars of that good, strong results.

Peter Foster:

Thanks, Rich. Traditionally, the first half is a weak part of the year for Air Astana. So even in a very good year, we wouldn't expect to make any money really in the first half. So it hasn't been a good performance. I think really the key has been several factors. The first thing, obviously, is that we were able to not only survive last year without any government or shareholder bailouts, but we also were able to start... We were cash neutral from about August of last year, so this time last year, and from that point it's been a steady progression upwards. A lot of that was due to the fact that we took a lot of cost out of the business. We early retired the 757 fleet and the Embraer 190 fleet, replaced the 757s with the 321LR, which, of course, is a very efficient aircraft.

But in terms of the market, so a lot of cost came out of the business, which gave us a good platform, if you like, to redesign the strategy. But the strategy really can be summarised in three ways. Domestic, as you've mentioned, has been very strong. The Kazakhstan market for the first six months of 2021 grew 37% compared to the first six months of 2019. Obviously, we can forget 2020. But comparing it with the first six months of 2019, we grew 37%. Of course, I think the global figure was minus 25. So we're probably, I think, the fastest growing domestic market in the world. As you've mentioned in your introduction, that's to a large extent driven by the fact the country is very large. People were reluctant to take long train journeys. But as you also mentioned, our low-cost airline FlyArystan, which is primarily, though not exclusively, primarily domestic, has done extremely well indeed. So that was the first point.

The second point is that we've done pretty well on our regional routes. That's primarily been driven by the fact that frequency has been restricted by the government, obviously, to prevent the spread of COVID. But what that's meant is that on those routes that we have operated within the region, Moscow, Tashkent, Kiev, Bishkek, and so forth, the demand-supply imbalance has been drastic, which has meant there's been very high demand for those routes, and therefore very high load factors and yields, even though capacity on international is down by 45%. Again, compared with that first six months of 2019, yield and load factors very strong. And, finally, we have seen a huge demand for what we call leisure, lifestyle routes.

We call them lifestyle routes rather than simply leisure routes, because I think, as a lot of airlines have noticed, there's been a big change in the market, where traditionally people would go to holiday destinations in peak holiday periods, what we've seen is far more people going to destinations which are agreeable holiday places to go to, but outside of holiday periods, going for extended periods of time, running their businesses online, in some cases educating their children online. And so that has very much, if you like, flattened the curve of the old peaks and troughs of leisure destinations. So we've launched a lot. We've launched the Maldives, Sri Lanka, Hurghada on the Red Sea. We've operated, obviously, continue to operate to Antalya and Bodrum in Turkey. Montenegro is a route that we launched. It's done very, very well. So those three things, really, domestic regional capacity [inaudible 00:06:02], and therefore high load factor and high yield, and lifestyle routes. Those are the three, if you like, main commercial legs on which we've redesigned the strategy.

Richard Maslen:

What's obviously quite clear with what you've explained there is you've had to pivot quite quickly and change how you're looking at your network, how you're looking at operating. How important, as an airline CEO, is it to make those decisions quickly, promptly, and drive through with them?

Peter Foster:

Well, of course, we're not a large airline. We're just in the process of receiving our 38th aircraft. So 38 aircraft, obviously, it's easier to manage an airline of that size, five-and-a-half thousand people, 5,000 people, roughly, than it is a much larger organisation. As I've mentioned, we have one or two structural things going in our favour with the domestic network, as I mentioned, and with the partially open regional network as well, which a lot of airlines, certainly in this part of the world, have not had. So we have had some favourable circumstances. But I think really the key is the attention to detail of crisis management. We've been holding daily, regular meetings with the entire management team since the crisis started, so we have been able to make decisions very quickly.

My management team and I have really been in this industry for a very long time. I've been at the airline for 16 years, but some of the senior managers have been there longer than me, right since the start of the airline 20 years ago. So we all know each other very well. I think when you have a very settled team of that nature, it is much quicker to take decisions, really. There's a lot of trust in the team and a lot of mutual respect and the ability to lead people just to get on with it, knowing that they're going to make the right decisions.

Richard Maslen:

It's quite hard at the moment. So to talk about things with COVID still being a major concern in many parts of the world, perhaps it helps us to understand things by knowing a little bit more of how Kazakhstan has been impacted by COVID, and just give us an understanding of where you currently are in terms of vaccinations and controlling the pandemic.

Peter Foster:

Yeah, sure. We've had a trajectory that's been similar to the rest of the world, I guess. Hopefully, touch wood, we seem to be coming out of a third wave at the moment. The population of Kazakhstan is about 20 million, so it's a relatively small population across a vast, expansive territory. We are tracking at about four-and-half to 5,000 new cases a day of COVID, but that was as high as close to 9,000 a few weeks ago. That's similar, slightly less, actually, than it was in October, November of last year and then again summer of last year. So we're sort of in a third wave, I guess. Our government is very much... Clearly, there's been too... Well, there's been many approaches, of course, by many governments for COVID. But, broadly, one can summarise that, I guess, the European-US approach has been to try and somehow balance virus control with keeping the economy open, certainly the latter in the last few months. Some Asian countries and Australia and New Zealand have adopted a zero-COVID strategy.

Our government has tended towards the European-American model. There have been lockdowns. There continue to be restrictions. It's taken very seriously, of course, by the government. But at the same time, there has been attempt to keep air travel going, keep business flowing, keep the economy working. So it's been a balance. We think that balance has been pretty well maintained. There's been a huge push from the government side on vaccines. Most people here are getting the Sputnik vaccine, including myself. In Air Astana, we've now got about 86% who've had at least the first vaccine and 73% of our employees who've had both vaccines. So we're making good progress. We haven't made it compulsory. We've done our best to try and do this through persuasion, in [inaudible 00:10:50] persuasion and argument and the whole rationality of the virus and of virus control and the vaccine. We think that's been successful. We think the country has moved along pretty well with this. So, I guess, it would be completely foolish, and it would make myself a hostage to fortune, to say that we are through and beyond it. That's obviously absolutely not the case. But I think the approach has been pragmatic and sensible and is, to some extent, I think, finding that balance, which is what they set out to do.

Richard Maslen:

In the last CAPA Live, the topic was talking about low-cost carriers and full-service models, looking at which would fit better in the recovery process. Air Astana Group now has its fingers in both pies now. You have your full-service airline. You have your low-cost operation. That has really supported you over the last year, as you've highlighted in the performance. How do you see that moving forward? And do you think that you're in the best position as you are? Because a lot of people would argue that may be a low-cost carrier within a full-service group isn't perhaps the best way of doing business.

Peter Foster:

There are many examples of success and failure with the model in general, and, as you say, with the dual model in a traditionally full-service carrier. We got to this decision in about three years ago. The reason we came to this decision, of course, is because we've seen our domestic market share slide from around 75%, 80% nearly, in 2011 to less than 45% in 2018, because carriers had come along with a much cheaper model and taking on market share based on price. We knew we had to do something. We thought about the idea that some airlines have done of just having a chunk of seats, if you like, at the back of the aircraft on the mainline carrier and sell those cheaply, have almost like an insurgent low-cost airline in a full-service airline.

But when we looked around, we thought that we didn't see any examples of whether it really worked. It seemed to us that the danger of that was that you wouldn't really end up with a low-cost product for the seat that you wanted to sell at a low fare and you would devalue the full-service brand by trying to introduce this low-cost element into it. So we thought that we have to go the full hog on this and set up a genuine low-cost. Really, FlyArystan is a real ultra low-cost airline. It's absolutely not a hybrid. We have followed the ultra low-cost model pioneered by the likes of Ryanair and Wizz Air and so forth, and with its own management team. And it has worked very well for us. We didn't realise when we launched it in May of 2019 just how crucial it would be in recovering from the pandemic because who would have known what was going to happen.

But with the benefit of hindsight, the timing was extraordinarily fortuitous, because to have a low-cost airline, as we all know, and history tells us, if we look at previous recessions in the late '90s, 2001, 2002, 2008, 2009, if we look at previous recessions, we see that low-cost airlines always emerge faster and stronger. I guess, for the simple reason that the low-cost model enables low fares. There's huge amounts of pent-up demand combined with depressed consumer power because of a recession. It's evident that there's a demand for travel at low fares and therefore low-cost airlines always do well after recessions. That's exactly what we have found. The demand for FlyArystan has been phenomenal. This year it's growing at more than a thousand percent. It's gone from two aircraft to 10 aircraft in the midst of the worst recession in the entire industry. And we've just [inaudible 00:15:16] for seven more aircraft. So it's going great [inaudible 00:15:20].

Richard Maslen:

It's a positive story. Too much over the last couple of years we've not had a lot of positive stories, so it's really encouraging to hear that. Obviously, the airline has now started flying international as well as domestic, I understand.

Peter Foster:

Yes. The intention was always to get FlyArystan to fly international. In domestic, the law here in Kazakhstan is that domestic airfares are charged in the local currency, the tenge, and the tenge has since 2015, generally speaking, been depreciating against the dollar. Whereas, international fares, both out of the country and obviously into the country, we can charge in hard currency, be it dollars or euros, generally. So, obviously, it was important to start operating routes in what we call hard currency routes. So, yes, FlyArystan started recently fly to Turkey, to Georgia, to Russia, to some Red Sea destinations, and we've got more planned. The object was always to have FlyArystan go regional at the earliest opportunity. And that's exactly what we're doing. We're launching Sharjah, in fact, in a few weeks' time. That was in the plan, and it's going according to that plan.

Richard Maslen:

Now, obviously, that allows you to focus hard on Air Astana being a full-service quality product, serving a lot of the main markets, serving long-haul as well. How important is it to distinguish between the two airlines and being able to offer these two different brands to the two different types of travellers?

Peter Foster:

Well, as I mentioned, I think it's absolutely fundamental. A low-cost airline has to be a genuine low-cost airline. Hybrids don't work. And a full-service airline has to be a high-quality product in today's... especially a small full-service airline like ours. It has to be able to compete with a very high-quality product. So we keep the brands entirely separately. In fact, we rarely talk about the brands as being part of the same group at all, really. And I believe [inaudible 00:17:42]. There's a huge number of people here in Kazakhstan who don't know that there is any link between the two. We don't try and hide that, if you like, but it's not something that we make a big deal of. I guess, in the same way that when we were looking at various models, we saw the Qantas-Jetstar model, which obviously has worked very well with two completely separate independent brands operating independently, albeit under the same shareholding structure. That's the model we've tried to follow.

So as far as Air Astana is concerned, obviously, as I mentioned, we have upgraded the product significantly by retiring the 757s. They did a great job for us for many, many years, but it was time that they went. Their replacement, which is the 321LR, is just a terrific aircraft. Not only is it extremely efficient and it's got half the fuel burn and therefore half the CO2 emissions, but also it's a fantastic product. It's got a superb business class or [inaudible 00:18:52] and a great economy class. It's been extremely well received by our customers. So, yeah, the key for Air Astana is to focus on quality.

Richard Maslen:

Now, that brings us nicely onto this month's topic, which is the environment. Obviously, airlines and the industry as a whole is working really hard to minimise the impact of this operation. Unfortunately, it can't be helped. There will always be an emissions level with travel. A modern fleet, you have one of the youngest fleets in the world if you take the FlyArystan aircraft out and just look at Air Astana alone. That seems to be the way most airlines are going. But what other ways are you looking to ensure that you meet this need to be a sustainable environmental business?

Peter Foster:

Well, we're a executive committee member of the AAPA, and obviously that is looking at adopting a common position for net zero emissions. I don't wish to preempt my colleagues in the AAPA, or Subhas, from any statements that he will make shortly, but I think there will soon be a joint commitment to net zero by a particular date. I guess, that will be forthcoming pretty soon from the AAPA. So we're examining all the ways that we might get there. Obviously, biofuels are, as we all know, highly complicated and highly expensive, and at the moment the refineries in Kazakhstan have got no plans to start producing that in any significant quantity.

That said, the government here is also making a commitment, if you like, to net zero and is serious about it. Notwithstanding the fact that obviously we are, amongst other things, an oil and gas producer, the government is serious about that. So I can't give you a specific answer, Richard, as to how we're going to get there or indeed when we're going to get there, but what I can absolutely assure you is that it's something that we are taking very seriously. We will be making an announcement shortly, again, together with our AAPA partners and in accordance with the government's clear aspiration to play its part in what is obviously a hugely important challenge but also obligation for and to the industry.

Richard Maslen:

Now, obviously, the world is a different place now than it was just 18 months ago. We look very differently on life. We've seen things very differently. From your customer perspective and travellers, what changes have you noted over the pandemic of their requirements, the use of technology, how they're adapting and how you as a business need to adapt to their needs?

Peter Foster:

Well, I think, as I mentioned, one of the surprising and unexpected consequences has been this huge growth in this so-called lifestyle travel with people just regarding themselves as being more mobile. That sounds rather ironic in a world where people have been so restricted. But I think here in Kazakhstan... and I read that it's a trend in other countries too... here in Kazakhstan, people, when they can travel, attempt to take the view that, look, the technology allows us to lead our lives and run our lives differently to that which we've done in the past, and that is a huge surprise to us. It's almost a wave, really, if you like, that we've been trying to surf ever since the back end of last year, we think quite successfully so far. So that is a significant and, as I say, unexpected development.

I think, in terms of people's travel needs, there's been a collective learning process on behalf of both the industry and the industry's customer base as to how to conduct oneself in a high virus risk environment in which we all live. I think we've been very encouraged by the response of our customer base here to the COVID protocols that we've obviously had to put into the product, which are complicated and disruptive and often very difficult to implement, both by the airlines themselves and observation by customers, particularly on long flights. Trying to keep a family of small children in line and staying seated, wearing face masks, over a five or six-hour flight to the Aegean Coast or the Red Sea is not easy.

But we've been hugely encouraged by how people have reacted to those and how the vast majority of people have behaved and indeed continue to behave extremely responsibly. Of course, unfortunately, one always gets the odd exception to that. I guess, we will have to deal with that and continue to do so. But generally speaking, that people have approached these new restrictions, if you like, which is what they are, in an extremely responsible and cooperative way, just as they did 20 years ago when the [inaudible 00:25:11] of new security restrictions were brought in, in the wake of the events 20 years ago. So people do adapt and people are, generally speaking, highly responsible.

Richard Maslen:

Now, you are one, I think I'm right in saying [inaudible 00:25:23] that you are one of the strongest airlines in Central Asia. I think, from an outside point of view, other airlines and other businesses will look closely and think, well, actually, Air Astana is an airline that we need to work with and provides us with a coverage in an area where a lot of other big airlines do not have such a big presence. You've tried to keep away from being courted too much by alliances and focused on partnerships. Is that still going to be the case moving forward? And what's your view on alliances? Because there's lots of thoughts about perhaps they don't have the value that they once had when they were launched.

Peter Foster:

The answer to the first part of that question, Richard, we will continue to have key relationships with airlines on a bilateral, individual, route-by-route basis. We've had some tremendously strong and successful relationships over the years. Of course, one of the reasons why we've not entered an alliance is because those relationships have often been with carriers from competing alliances. For example, we've had, and continue to have, an excellent relationship with Lufthansa to and from Germany and beyond, but at the same time we have a very strong relationship with S7 to Moscow Domodedovo and beyond. But, of course, obviously, they're in competing alliances. There are many other examples of that.

So, for us, a single alliance and the restrictions or the limitations that that would bring just wouldn't work for us, because, as you say, we're really the only significant airline or major airline in Central Asia that operates on a strictly commercial basis, really, without a major government involvement. Therefore, obviously, in order to exploit that we need to work across a range of different international [inaudible 00:27:31]. To restrict ourselves to one alliance or to the partners of one particular alliance, therefore, just wouldn't work for us. But I think, in general, it's going to be very interesting, I think, to see. Because, as we all know, post COVID, some airlines are going to emerge in pretty strong shape and a lot of airlines are going to emerge very weak.

Those airlines that survive in that latter category will probably rely on state support for many, many, many years. With state support, of course, comes state control, and with state control, generally speaking, comes practises that are not conducive to the best interests of either shareholders or customers. That's just the way it is, and it has always been the case. It's not exclusively the case, but, generally speaking, that's been the case. You're going to have a lot of very different looking airlines in any particular alliance, all with very different priorities. So I would imagine that the alliances are going to have to adapt quite radically to accommodate what are going to be, I suspect, very different airline and very different management models as we go forward in this post COVID world.

Richard Maslen:

Unfortunately, we're running out of time. These sessions fly past, unfortunately. Before we leave, I'd just like to ask you, Pete, over the last 18 months have been probably the most challenging time of your career. You've had a lot of experience, a lot of airlines, but what have you learned, personally, over these last 18 months about running an airline?

Peter Foster:

Well, you're right, of course. It's been the biggest single crisis in the airline industry. I have to say, it hasn't been the only crisis that I've faced in what now, or very nearly, is a 40-year career. These things come and go from time to time. This one, certainly globally, of course, is the worst of the lot. Again, I think, as I said before, the way that you... Crisis management is a slightly overused, and I think a slightly misunderstood, term. It implies that when a crisis comes along that there are a set of actions and a set of behaviours that will either prove successful or not in managing the crisis. Actually, I don't believe that to be the case. I think crisis management is all about having the right framework of management and staff and attitudes and behaviours before the crisis hits.

So in our case, as I say, we were lucky to have a very long-established management team that really knew each other very well. Therefore, we had the internal systems completely set up and the people to be able to manage a crisis of that nature. And so I think, really, crisis management is almost predetermined by the state that one goes into that crisis. I think, really, the lesson for all of us is to make sure that we remain prepared in that way, because this may be the worst crisis that any of us will face in our careers but certainly won't be the last one.

Richard Maslen:

Well, Peter, great way to finish there. Thank you very much for your time. I really appreciate it. And, hopefully, next time we can finally meet up face-to-face again.

Peter Foster:

Thanks, Richard. Thanks so much. It's been good to talk to you.

Richard Maslen:

Brilliant. Thanks a lot. Bye.

Peter Foster:

Bye-bye.

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