When we decided to supplement a stay this summer in Kyiv with a trip to Prague, I booked our Kyiv-Prague-Kyiv flight two months in advance; I did a rather extensive search, and the best deal I found was $340 roundtrip per person.
Incidentally, this was the same price I paid last year – also about two months in advance – booking a trip from Southern California to Boston, just going to the website of the airline flying there non-stop from the airport nearest to my house. Both trips involved non-stop flights, and in both cases tickets carried substantial cancellation penalties.
In both cases, flights were more or less on time, and the meals served on the Kyiv-Prague and Prague-Kyiv flights were so… well, sub-standard, that they were no different from small snacks provided by the US airline. The only real differences between the two trips were in how far I traveled and how much competition there is on the respective markets. The distance between Los Angeles and Boston is about 3.7 times that between Kyiv and Prague. This means (roughly, of course) that a coast-to-coast trip I took in the US was 3.7 times less expensive than my Kyiv-Prague-Kyiv trip.
Next year will mark the 30th anniversary of the first major liberalization of an airline market. In 1978, then US President Jimmy Carter signed the Airline Deregulation Act. Over the years that passed, air travel within the US turned from an expensive and luxurious way to get from point A to point B into a form of mass transport.
Last year, US airlines operated over 10 million flights. Per mile flown, Americans now pay (in inflation-adjusted prices) about half of what they did 30 years ago. It is also true that planes became more crowded (this is where part of cost-savings comes from), and in-flight meals (even on five-hour coast-to-coast flights) are a thing of the past; but then, you will never convince me that the food I got on my Kyiv-Prague-Kyiv flights is worth the $170 I could have saved were there any real competition on this market. After all, $170 is more than we spent on food (and beer) in Prague over three days.
In contrast to domestic markets, governments are very protective of their carriers when international routes are concerned. International air travel has long been governed by a complex web of restrictive bilateral agreements, limiting competition and keeping prices high.
The first changes on this front came about in the early 1990s, with deregulation of the European Union’s market and the first liberal bilateral agreement between the US and the Netherlands.
This year, the EU and the US signed an open aviation area agreement (to come into force in May of next year), which will remove more of the few restrictions remaining on this huge transatlantic market, and is projected to bring in even more flights and even lower fares.
Where is Ukraine in all this? And, what does all this movement toward further liberalization imply for our country?
I guess the first two paragraphs answer the first question. International airfares from Ukraine are high, and lack of competition is to blame. The history of regulation in the airline industry suggests that pressure for liberalization will mount as more people travel (while the number of people traveling by air to/from/within Ukraine quadrupled from 2000 to 2006, the total volume is still about equal to that of Orange County airport – barely sufficient for getting into the list of the top 50 US airports by number of passengers), and it will be up to the Ukrainian government to decide whether to expose Ukraine’s carriers to full-scale competition with foreign airlines.
Of course, my advice (after all, you cannot expect anything different from someone with an advanced degree in economics) is to liberalize the market and go for more competition, keeping safety, as is done throughout the world, tightly regulated. Yet, I give this advice not only as a passenger who thinks that $340 for a roundtrip to Prague is too steep. I also believe liberalization will be good for Ukraine’s airlines in the long term.
The funny thing about competition is that the only way you can learn playing this game is by playing it. You will have few incentives to try finding out how you can run your airline more efficiently if there is no direct competitor operating more efficiently, offering fares that allow it to make money, while you realize that, given your current way of doing your business, you will be seriously in the red if you choose to match your competitor’s prices.
In the longer run, you either go out of business or find ways to cut costs (and fares) and still keep your service attractive to passengers. Open and fair competition is the only and ultimate test for whether a firm is fit to be in the business. The longer Ukraine waits to open up to international competition, and the more experienced EU airlines become in competing with each other, the harder it will be for Ukrainian carriers to compete with them in the future.
Another important implication of competition is that competitive markets tend to increase the attractiveness of a country’s airports to transfer passengers, while putting neighboring countries into a less advantageous position.
For example, when the US and the Netherlands signed a liberal bilateral agreement in 1993, non-stop passenger traffic between the two countries increased by 13 percent over the next year. At the same time, US-Germany traffic went up by only 2 percent, while US-Belgium non-stop traffic fell by over 7 percent.
This basically means that some of the passengers who used to travel to Brussels non-stop now chose to fly to Amsterdam and then take a train to Brussels from there – all because competition brought down airfares to Amsterdam, while fares to Brussels remained high under a restrictive air services agreement.
All this means that tight restrictions on competition on international markets from Ukraine will in the long term hurt Ukrainian carriers’ chances of obtaining their share of the Europe-Asia market. Should that market open up for competition with Ukraine-Europe routes still subject to strict regulation, Kyiv’s Boryspil International Airport will lose the transit passengers it recently started gaining: Ukrainian carriers’ hands will be tied, while their competitors will be free to do whatever they please.
It is true that, shielded from any serious competition, Ukraine’s airlines are profitable, and increasing demand for air travel ensures they can both remain profitable and grow their fleet and networks. Yet, the longer the Ukrainian government waits before exposing the country’s carriers to competition on international markets, the less prepared the airlines become to meet this challenge when (or if) it comes. Not to mention that airfares will remain way higher than they should be.
Volodymyr Bilotkach is a research fellow, Kyiv School of Economics, and an assistant professor at the University of California, Irvine.
