Market overview

Global air transportation market

According to the International Air Transport Association (IATA), global passenger traffic grew by 7.6% in 2017, well above the 10-year compound annual growth rate (CAGR) of 5.5%. Full-year 2017 capacity rose 6.3%, and load factor increased 0.9 percentage points to a record high of 81.4%.

Global international passenger markets

In 2017, global international passenger traffic increased by 7.9% compared to the previous year. Capacity rose 6.4%, and load factor grew to 80.6%.

All regions recorded year-on-year increases in demand, led by the Asia-Pacific and other regions.

Asia-Pacific carriers posted annual demand growth of 9.4% compared to 2016, driven by robust regional economic expansion and an increase in route options for travelers. Capacity rose 7.9%, and load factor climbed 1.1 percentage points to 79.6%.

European carriers’ international traffic climbed 8.2% in 2017 compared to the previous year, underpinned by buoyant economic conditions in the region. Capacity rose 6.1% and load factor surged 1.6 percentage points to 84.4%, which was the highest for any region.

The Middle East was the only region to see a slowdown in its full-year international RPK growth rate in 2017 (to 6.6%, down from 11.5% in 2016). Airlines based in the region faced a challenging first half of the year, although it is worth noting that the Saudi Arabia trend in international RPKs recovered somewhat during the second half.

Kazakhstan’s economy

According to Kazakhstan’s Ministry of National Economy, the country’s GDP grew by 4% in 2017. Kazakhstan’s growing investment appeal is a major driver of sustainable economic growth: in 2017, growth in capital investment increased nearly threefold, funded primarily by companies’ own cash flows, which increased by 20.5%. Investment activity was also boosted by the implementation of innovation-driven industrial projects and infrastructure initiatives under government-sponsored programmes, such as Nyrly Zhol (The Bright Road), Nyrly Zher (housing construction) and Industrialisation, as well as the national Agribusiness–2020 Programme.

The annualised inflation rate decreased to 7.3% from 8.5% in 2016, staying within the 6%–8% range targeted by the National Bank. Kazakhstan’s foreign trade volume increased by 25.1%, with exports increasing by 31.6% and imports by 15.8%.

EXPO 2017, which was hosted in Astana, gave a strong boost to export-oriented industries, which expanded their supply.

Kazakhstan’s air transportation market

The transport sector accounts for more than 8% of the country’s GDP. Kazakhstan’s economy grew by 4% in 2017, with the transport industry driving much of this growth by posting a 4.8% annual growth rate.

Kazakhstan’s aviation market grew rapidly for several years until 2014, when challenging economic conditions stunted growth. Historically, the aviation market has consisted predominantly of local passengers – both domestic and outbound international. Kazakhstan’s market would have contracted in 2016 if it had not been for rapid growth in transit traffic mostly contributed by our Company. The inbound market has grown in recent years – from a very low base – as Kazakhstan has started to emerge as a tourist destination.

Kazakhstan’s total traffic increased by 23% in 2017, the highest growth rate over the past 25 years. The inbound segment grew again in 2017, boosted during the summer by the EXPO, which Astana hosted from June to September.

Passenger traffic at Astana Airport increased by more than 20% in 2017 to over 4 million passengers. While the EXPO impacted traffic through Astana during the summer months, more of the airport’s growth in 2017 was the result of transit traffic because of our Company, which grew by 30%, with freight traffic up 24%. Passenger traffic is expected to grow by 35% by 2020, with transit traffic increasing 2.5-fold and freight traffic doubling.

Evolution of the competitive environment

We are by far the largest carrier in Kazakhstan, having served 4.2 million passengers in 2017.

SCAT reportedly carried 1.7 million passengers in 2017 compared to 1.3 million in 2016. According to IATA, privately owned Bek Air is the third-largest airline in Kazakhstan, having carried slightly fewer than 1 million passengers in 2017, and Qazaq Air is the fourth-largest, with slightly more than 250,000 passengers.

Kazakhstan is pursuing a liberal policy in the aviation market, which has enabled foreign airlines to expand. This policy also poses no barriers to new entrants to Kazakhstan’s aviation market.

In 2017, Kazakhstan’s market was served by 27 foreign airlines, including Aeroflot, Fly Dubai, Turkish Airlines and others. New entrants to the market in 2017 included Air China, Finnair, LOT, and Wizz Air (OAG).

Our strong growth

We have posted double-digit annual growth in passenger transit traffic since 2014.Transit traffic grew by over 50% year-on-year in 2017, contributing to our overall passenger traffic growth of 12% and now accounting for 24% of our international traffic.

Our revenues were up 24% in 2017 to USD 767.5 million. Transit passengers accounted for a majority of this growth, with an increase in inbound international traffic accounting for the remainder.

Connecting services are the fastest-growing segment, given Kazakhstan’s beneficial geography as a hub attracting traffic between China and Europe, including Russia and reflecting our efforts to build a global network.

Focus on Kazakhstan as a transit corridor

In 2017, the Kazakhstan-China market potential grew to a record high, with Air China opening new routes and our Company launching additional flights. We plan to increase capacity in Hong Kong and add new destinations to China in the near future. Regional traffic between Kazakhstan and China is growing due to a low base in tourism and stronger business ties. According to CAPA (Centre for Aviation), there were 40 weekly one-way frequencies in October 2017 and more than 6,000 weekly one-way seats from Kazakhstan to mainland China. We are the market leader, operating 24 of the frequencies across five routes and accounting for more than a 60% share of total seat capacity.

Urumqi, in China’s far west, less than 500 km from the Kazakhstan border, has particularly strong ethnic traffic, as it has a large Central Asian community. Urumqi is less than 1,000 km from Almaty, but the journey by bus or train takes approximately 24 hours.

We also carry significant sixth freedom traffic to and from Urumqi. Connections to other Central Asian countries are popular, given ethnic ties, although there is intense competition with China Southern, which uses Urumqi as it is hub.

In Beijing, we also rely on sixth freedom traffic, but the focus is more on connections to Europe and Russia. China and Kazakhstan have committed to increasing economic ties, which should boost local business traffic, and an increased focus on tourism should lead to an increase in visitor numbers in both directions.

The biggest opportunity for further growth will be in sixth freedom traffic: we offer a much faster connection from China to Europe than Gulf airlines, and we have a very low cost base, enabling us to price competitively and attract one-stop traffic.

Over the past four years, we have developed Astana Airport into a transit hub. In recent years, we have focused almost all of our expansion in the capital city.

Infrastructure constraints have impeded growth on the part of our Company and other airlines in Almaty. Almaty Airport is still larger, handling over 5 million passengers in 2017, but traffic growth has been modest the past few years. Almaty Airport is privately owned, whereas Astana Airport is government-owned and has benefited from significant government investment, including the building of a new terminal that opened just prior to EXPO 2017.

Georgia, Russia and Ukraine were our main growth markets in 2017, contributing sixth freedom traffic on our routes to India, China, Hong Kong and South-east Asia. We expect Georgia, Russia and Ukraine to again be growth markets in 2018, along with Uzbekistan.

We plan to focus mainly on increasing capacity to existing destinations in 2018 and accelerating network expansion in 2019.

Russia is our largest foreign market, accounting for 26% of our total international seat capacity. Russia is also by far the largest international market from Kazakhstan, accounting for nearly 30% of total international seat capacity. Our capacity in the Kazakhstan-Russia market is up nearly 50% over the past year, according to CAPA and OAG data. Aeroflot, S7 and SCAT are the only other airlines operating year-round services in the Kazakhstan-Russia market.

Industry outlook

In 2017, Kazakhstan successfully passed an aviation Security audit by the International Civil Aviation Organisation (ICAO) and confirmed its high degree of compliance with international airport security standards.

As instructed by the President of Kazakhstan, transition to the UK model of government regulation of the industry is planned under the 100 Concrete Steps National Plan.

For 2018, Kazakhstan’s airlines plan to launch flights from Astana to such new destinations as Tyumen, Krasnodar, Vilnius, Tomsk, Chelyabinsk, Sochi, Batumi and Dushanbe. Foreign airlines (AirBaltic, Emirates, FlyDubai and Aeroflot) have plans to launch new routes, including between Riga and Almaty, Dubai and Almaty, Dubai and Aktau, Krasnoyarsk and Almaty and Moscow and Kyzylorda.