Steps Kazakhstan should take to develop its aviation
This January, President Kassym-Jomart Tokayev instructed the cabinet to establish an international airline hub in Kazakhstan. Following a months-long pause, the expert community started discussions on how to implement this directive.
It is worth noting that after the president talked about the development of airline hubs, almost everyone thought he was talking about airports. However, an airline hub is something bigger than just an airport.
An airline hub is also more than just a partnership — it is a close symbiosis between an airline and an airport because an airport without aircraft doesn’t make any sense. Aircraft, in turn, require specialized infrastructure to take off, land, refuel, disembark and board passengers, and transport cargo. Affordable fuel is required for all these activities as the key resource.
Only through this combination can an airline hub be established. Consider the cases of Emirates and Dubai International Airport, Turkish Airlines and Istanbul Airport, and Lufthansa and Frankfurt Airport.
An airline hub is focused on transit flights. The main flow of passengers and cargo arrives and then departs to their final destinations. Why? Because it’s impossible to connect every town in the world with direct flights. I doubt there would be a significant number of passengers flying daily from Karaganda to Minneapolis. This is why everyone is gathered in one convenient place before flying to their desired destinations.
Let me be clear, neither the Astana nor Almaty airports can be considered international-level hubs. This is quite obvious based on their passenger flow and flight geography.
Why does Kazakhstan need a hub?
The main reason comes from geography. Unlike cars, aircraft fly in a straight path and do not depend on the terrain.
Kazakhstan lies in the exact center of Eurasia, at a similar distance from all the most important regions of our continent. The main route here is the route between Europe and Southeast Asia, and Astana, for instance, sits right in the middle of this route.
You might say, “There are direct flights.”
Yes, there are. And there are large hubs in both the East and the West that serve as transit points.
But let’s take a look at Panama and its Tocumen International Airport. There are many big airports in the U.S. and South America; however, Panama alone serves 16 million passengers annually, maintaining tight cooperation between the airport and Copa Airlines. What lies behind this success?
Panama is located right in the center of the route connecting the Americas. The airport features a new, convenient terminal designed for transit flights. Copa Airlines operates a single aircraft type (Boeing 737), which allows for cost optimization.
Back to Kazakhstan.
Airports require massive infrastructure investments, which, in turn, won’t happen without a prospect of return. However, the problem is that airport tariffs are regulated by the government. Over the past 20 years, such regulation has led to aviation services becoming unprofitable. How, then, could transit terminals emerge in this environment?
Flight ticket prices float freely, meaning that current prices are fair as they correspond to supply. When supply is low, the prices are high.
Why is that so? Because there are not enough aircraft. This also causes insufficient flight frequency.
More planes are needed, and the flight network should be expanded. As a result, passenger load and profit margins would decrease, along with ticket prices, due to the increase in supply. But how can revenue be sustained? A differentiated value-added tax (VAT) rate for domestic flights should be introduced — not 16%, but 6%.
We already know that VAT is paid by the customer, so these 6% are needed more for passengers rather than for airlines.
Aviation fuel is not expensive in Kazakhstan — local fuel is cheap and its share ranges from 60% to 70% of total consumption. Local airlines buy it directly from oil refineries. This argument disproves the claim that “flight tickets are expensive due to high fuel prices.”
What is actually expensive is imported fuel. Russia is the sole supplier of this product to our market. Why is it the only foreign supplier? Because imports from countries outside the Commonwealth of Independent States (CIS) are subject to a 5% duty.
Fuel from Russia is sold in Kazakhstan at its Russia-market price without deducting the 20% VAT, unlike exports. When imported, a 12% VAT is applied. Since all imported fuel is used for foreign aircraft, it is sold VAT-free. This means the imported VAT is subject to reimbursement, which can take up to two years. As a result, traders factor VAT into costs along with their premium — no one is going to work for free.
As a result, the price of imported fuel rises by 40% to 50%, just like that.
What should we do in this situation? Only to saturate the market with fuel through the introduction of zero VAT on imports and the abolition of duties.
To stimulate market transparency, VAT should be 0% on the stock market. This economic measure would facilitate the trade.
Kazakhstan has already been implementing the Open Skies policy, according to our officials. However, in fact, these issues are regulated by international agreements, specifying what airlines can fly where and how often.
If a new airline wants to fly to Kazakhstan, it still has to apply to Kazakhstan’s Civil Aviation Committee.
I am happy with the success achieved by domestic airlines. Air Astana, in all fairness, has emerged as a source of national pride. Scat is showing impressive results without any government aid.
Unfortunately, at some point, someone decided that aviation is strictly about aircraft and hubs are strictly about airports. This philosophy of dividing the indivisible led to Kazakhstani airports ending up in a sad condition and creating a challenging situation in the aviation fuel market.
It is high time to comprehensively reform aviation.
