INTERNATIONAL AIR TRAVEL TO KAZAKHSTAN: A CHOICE

UNCLAS ALMATY 004196

SIPDIS


SENSITIVE

DEPT FOR EUR/CACEN, EB

E.O. 12958: N/A
TAGS: EAIR ECON KZ ECONOMIC
SUBJECT: INTERNATIONAL AIR TRAVEL TO KAZAKHSTAN: A CHOICE
BETWEEN ALMATY AND ASTANA

REFTEL: A) `04 ALMATY 5035; B) ALMATY 3902


1. (SBU) Summary: There may be some clear skies ahead
following the recent turbulent environment facing
international carriers serving Kazakhstan. For all intents
and purposes, the GOK has abandoned its previous demand
that all international air flights that now land in Almaty,
instead, arrive in the new capital of Astana. This would
have resulted in all passengers to Almaty being forced to
take connecting flights from Astana on the national carrier,
Air Astana, which holds a virtual monopoly on domestic air
service. Rising opposition, not only from the diplomatic
and international business communities, but also from local
business and political leaders played an important role in
weakening the GOK's resolve to carry through on this plan
(Ref A.) End Summary.

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GOK Backs Off From its "All Flights to Astana" Demand
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2. (SBU) Kazakhstan's Ministry of Transportation remains at
the center of the highly charged negotiations over the
transfer of international flights to Astana. However, the
GOK has backtracked from its demand to shift all flights to
Astana by the end of September 2005, although it has
succeeded in convincing Turkish Airways, while retaining
most of its Almaty flights, to open twice-weekly routes to
Astana. Such Astana flights began in October. Following
the unveiling of its proposal to force all international
carriers to serve only Astana, the GOK faced unprecedented
criticism from both the international and domestic business
communities.


3. (SBU) Moreover, unusual, public dissent from a number of
political leaders, including criticism by well-connected
Almaty Mayor Imangali Tasmagambetov, seems to have prompted
the GOK to shelve this plan, at least for now. Nonetheless,
tense negotiations between various European and Kazakhstani
delegations continue, as European carriers attempt to iron-
out long term marketing plans for the region. As the GOK
looks toward the near term future it has apparently decided
that a pull back from its tough "Astana landing-take it or
leave" position was in its best interest. For the time
being at least, international service into Kazakhstan will
remain centered in Almaty.

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We Will Build a New Airport and They Will Come
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4. (SBU) Dramatic efforts have gone into Astana's airport,
as part of the GOK's plan for its new national capital. A
$300 million upgrade, financed by the Japanese Bank for
International Cooperation, was used by the GOK to open a new
international terminal in Astana in December 2004. Other
improvements to the airport complex include runway surface
and lighting to conform to ICAO standards for all-weather
operation. The new, 22,000 square-meter, terminal is
designed to handle a flow of 750-800 passengers per hour
during peak periods and a total of 3 million passengers per
year.


5. (SBU) These extensive improvements were intended to
prepare Astana airport to be the single port of entry for
international flights to and from Kazakhstan. Yet almost
from its grand opening, Astana's airport has been plagued
with continuing problems, and these long-touted projects
soon fell behind schedule. This and the inability of
national carrier Air Astana to finance the acquisition of
additional planes have helped put this plan on hold. On
November 17, ComOff met with Robert Young, the new manager
of Astana's airport, to receive his views on issues facing
this facility and to learn of upcoming developments. As
Young reported, his mandate is to turn a profit on this
airport, which had just received hundreds of millions of
dollars in upgrades. Young underscored that his mission was
predicated on the forcing of international flights into
Astana, the expected increase in Air Astana connecting
flights serving these captive passengers, and the hoped for
growth in spending by these passengers transiting this
airport. However, as Young emphasized, the likelihood of


this scenario being played out anytime soon appears to be
dim.

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Air Astana's Expansion Plans Meet with Strong "Headwinds"
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6. (U) Many doubted that Air Astana would have been able to
serve the captive market that would have been created had
all international flights been transferred to Astana. Last
October, then Air Astana President, Lloyd Paxton, announced,
at a meeting chaired by Kazakhstani Prime Minister Danial
Akhmetov, the airline's plans to obtain seven additional
Boeing 757s, virtually doubling the size of his airline
overnight. Paxton also promised that Air Astana would
increase the number of flights between Astana and Almaty to
up to eight per day. However, due a shortage of available
planes for leasing, Air Astana has had problems acquiring
additional aircraft, and these ambitious expansion plans
have been put on hold.


7. (SBU) Lloyd Paxton also had a vision of turning Astana
into a global air and financial hub, a Dubai on the steppes
of Central Asia, and obtaining Boeing's new, long range 787s
was to be the cornerstone of this dream. Paxton's plan was
for Astana to become a central air hub, served by B787s
flying in from around the world. While in Astana, these
visitors would spend time shopping, and partaking of
Astana's attractions. It appears that BAE management
apparently has a different vision, and Paxton has recently
departed from his position with Air Astana in Kazakhstan.


8. (SBU) During a September 29th meeting between the ComOff
and Air Astana's VP for Commercial, Ibrahim Canliel, Air
Astana described its long term expansion plans, which are
predicated on leasing additional Boeing 757s and 737s to
augment its existing fleet. Canliel outlined less ambitious
plans to increase air service between the oilfield cities of
Western Kazakhstan and Europe as well as adding an
additional flight to Turkey. These proposals make economic
sense and would most likely be profitable routes for the
company. When specifically asked by the ComOff whether his
company was considering leasing Airbuses, Canliel didn't
categorically rule that out, although he insisted his
preference was to continue with Boeings, which constitute
the bulk of Air Astana's fleet. A final decision on the
number and type of aircraft to be added is expected by the
end of the year.

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Turbulent Air Talks Continue
--------------


9. (SBU) Important Star Alliance partner, Lufthansa, remains
frustrated by the tough operating environment it faces in
Kazakhstan. In late July, the GOK met with a German
delegation, but reached no agreement that would lead to
additional Lufthansa flights in Astana. In an early October
meeting with ComOff, Lufthansa Kazakhstan Country Manager
Dirk Grossman reported on contentious negotiations between
Germany and Kazakhstan. Grossman added that Lufthansa
offered two weekly flights to Astana beginning in the autumn
of 2005. But, it also has requested a return to daily
(i.e., seven weekly) flights that Lufthansa once had between
Frankfurt and Kazakhstan. On this request, the GOK has
refused to budge, instead demanding an Air-Astana-Lufthansa
code-sharing arrangement, and starting in the summer of
2006, a 50-50 formula calling for every flight to Almaty to
be matched by an Astana flight.


10. (SBU) The Germans have categorically rejected these
demands, believing the last condition (the 50-50 rule) would
call into question the continued economic viability of air
service to Kazakhstan. More is at issue in Germany's case,
as Air Astana competes with Lufthansa on routes to Germany;
and some small charter companies from both countries operate
flights to and from Germany in the summer months.


11. (SBU) Tense negotiations between various European and
Kazakhstani delegations continue, as European carriers
attempt to iron-out long term marketing plans for the
region, and the final act in this drama has most likely yet


to be played out. The British have interests on both sides
of the issue, since British Aerospace Engineering (BAE) is
the 49% owner of Air Astana and manages both the airline and
the Astana airport. Nonetheless, the British have out in
front often leading the European Commission approach to
negotiations, which proved particularly challenging for the
Kazakhstanis. At the same the possibility of the Dutch
cutting a separate deal with the GOK (the Dutch airline,
KLM, has maintenance and flight arrangements with Air
Astana) was forestalled since they preserved their cover by
acceding to an EC-wide agreement on negotiating stance vis--
vis Kazakhstan.

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Yet, Other Airlines May Soon be Adding Flights
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12. (SBU) During the Ambassador's meetings with the
Minister of Transport, Askar Mamin (Ref B),the Minister
also said that Air France and KLM had expressed interest in
providing service to and from Atyrau. In reply the
Ambassador underscored the importance of letting market
forces play themselves out in determining which flights
would best work. At the same time, Air Austria is exploring
the possibility of reentering the Kazakhstani market (it
pulled out of Kazakhstan in 2000, citing a weak market as
the reason). Austria's Vienna-based ambassador to
Kazakhstan and the GOK recently announced that Air Austria
will offer service to Kazakhstan starting next year.
Reportedly Arabian Airlines may also soon be offering
service between Astana and the UAE.



13. (SBU) Comment. Unexpectedly fierce Kazakhstani public
and private sector criticism, buttressed by sustained
pressure from the foreign community, seem to have convinced
the GOK to step back from the brink of trying to force all
international flights to land in Astana. The inability of
Air Astana to obtain additional planes to implement this
ambitious plan may have sealed the fate of what was an anti-
market forces proposal. For all of these reasons, the GOK
now seems to have adopted a far more flexible position on
this issue. End Comment.


14. (U) Minimize for Dushanbe considered.


ORDWAY


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