Qazaq Air: The State Needs It Like a Goat Needs an Accordion

Not long ago, I met with a vice president of Air Astana at the company's initiative, after several of my posts about expensive airline tickets.

We talked about a lot of things, and I casually asked for his opinion on Qazaq Air. Naturally, he sidestepped the question, but said he did not entirely think it was right to compete on the same routes.

I am certainly not an expert in the aviation business, but I am not at all sure that developing such an alternative company under the Samruk-Kazyna umbrella is the right course.

To begin with, I went to the DFO (Depository of Financial Statements) and looked at the company's 2015 financial statements. The numbers astonished me.

The company operates 3 aircraft, with total lease payments of KZT 3.4 billion for one year. That amount will most likely grow, since the aircraft leases are denominated in US dollars.

In its first five months of operation, the company's revenue was KZT 386 million, while operating expenses were KZT 3.5 billion.

The operating loss came to KZT 3.115 billion. Revenue does not even cover the costs of fuel, personnel and airport fees.

In 2016, lease costs will rise significantly because of the exchange rate, as will aircraft maintenance costs and so on.

Even if revenue grows tenfold next year, which I strongly doubt, the company will not even be able to reach positive EBITDA, let alone make a profit.

Most of the money will leave the country in the form of lease payments, and from a macroeconomic standpoint this will have a negative effect on Kazakhstan. In effect, state money will have been used to support the Brazilian economy.

But the most interesting question remains this: since Samruk-Kazyna already has Air Astana in its portfolio, why create another company that, first, competes on the same routes and, second, uses different aircraft from Air Astana's, which significantly increases maintenance, repair and training costs when viewed from the parent company's perspective?

Samruk-Kazyna is a commercial organization, and its primary task is to maximize the value of the fund. Decisions like this one can in effect be described as value minimization and direct harm to Samruk-Kazyna's shareholder.

If this is a social project, then it could at least have been set up under the auspices of Air Astana, in order to cut costs and use the reputation of an existing brand. Simply compensating for losses on unprofitable routes would have cost far less.

Moreover, low-cost airlines are also a competitor for Kazakhstan Temir Zholy (KTZ), which is already experiencing enormous problems.

Creating low-cost carriers in Kazakhstan is a good thing, but Bek Air, SCAT and Air Astana already exist, and setting up a state-owned company to increase competition cannot be considered an efficient business decision at a time of tenge depreciation and falling real incomes.

If the aim was to develop regional air travel, the answer is not to build state-owned companies but to:

1. Subsidize unprofitable flights

2. Reduce the cost of aviation kerosene

3. Cut airport fees

4. Make regional airports more attractive to foreign carriers.

But there is another question: what will be done when it becomes clear that this was, to put it mildly, not the most profitable decision, and the question of closing the company arises?

It is unlikely that Air Astana will take on all of this legacy (unless it is forced to), and from the standpoint of the aviation business I see no logic in it whatsoever.

Of course, I would like to see Qazaq Air's brilliant development plan and understand how it intends to increase its revenue by at least 10–15 times in order to break even on costs.