Ukraine’s accession to the European Open Skies agreement, officially signed on Oct. 12, is likely to radically alter the Ukrainian aviation market.
Under the new agreement, foreign airlines can fly between Ukrainian cities and schedule as many flights as they like. Ukrainian airlines, in turn, could fly between European airports but have to start and finish their flights in Ukraine.
Previously, foreign airlines needed the approval of the government to start flights to Ukraine. This process was time-consuming and bureaucratic, experts said. The agreement is good news for customers because it reduces ticket prices, but is bad news for Ukrainian carriers.
Yevhenii Dykhne, CEO of the country’s flagship carrier Ukraine International Airlines (UIA), told the Kyiv Post that the program would throw his company against unfair competition from around the world.
“Ukrainian carriers are disqualified on many issues in (this) competition,” Dykhne said on the sidelines of the Kyiv International Economic Forum held on Oct. 7.
Open market
The liberalization of the Ukrainian aviation market brings unwanted competition to UIA, the country’s floundering flagship carrier.
The agreement is meant to foster competition which would bring down ticket prices, but Dykhne worries that UIA can now be easily overwhelmed by foreign competitors.
“We don’t have access to cheap investment like our competitors,” he said.
On Oct. 21, low-cost Spanish carrier Vueling launched routes from Kyiv to Paris for as little as 30 euros per ticket. Hungary-based Wizzair has also announced that it would be increasing the frequency of flights on over 25 routes from Ukraine in 2022 by 120%.
The Irish Ryanair and other European low-cost airlines already undercut UIA in ticket prices. A midweek ticket to London from Kyiv in November is four times less expensive than a UIA ticket.
According to Dykhne, foreign airlines receive state financial support from their country’s government and dodge excise taxes on fuel, which gives them an unfair advantage.
For him, private airlines in Ukraine, like in other countries, are part of state infrastructure and should be supported by the government.
“We did not receive any help from the Ukrainian government, unlike many of our European competitors,” Dykhne said.
“We also pay aviation fuel excise taxes that our competitors do not pay.”
Massive debts
The Open Skies treaty threatens the company, which is already hurt by the COVID-19 travel restrictions.
In 2020, UIA recorded a net loss of nearly Hr 4.5 billion ($170 million) after the suspension of international aviation. The company could face closure over its debts, Radio Free Europe/ Radio Liberty reported in September.
UIA’s current “operating debt” is a staggering Hr 20.6 billion ($780 million). The company also saw a huge number of ticket cancellations due to COVID-19, which forced UIA to refund over $52 million.
The company owes Hr 1.5 billion ($57 million) to the Ukrainian State Air Traffic Services Enterprise and Kyiv Boryspil Airport.
The layoffs that followed were severe. UIA fired almost a third of its total staff, more than 1,000 people. The airline also halted many of its international routes and significantly downsized its operations.
Dykhne did not comment on this debt, however, he stated that the company was prepared to expand or reduce its activities to survive.
“Unfortunately, this restructuring affected both staff cuts and fleet cuts,” he said.
UIA requested a loan from the Ukrainian government to stabilize its financial situation and prevent layoffs, but this request fell on deaf ears.
If the airline does not settle its debts, it will not be able to receive safety accreditation and could be subject to “sudden termination,” according to Oleksiy Danilov, the secretary of the National Security and Defense Council.
The Ukrainian government, which refused to aid UIA in stabilizing its financial situation, has now suggested that it may further diversify the Ukrainian aviation industry with the creation of a new state-owned airline.
In a market in which UIA must compete with other international airlines and low-cost competitors, this may spell disaster, but Dykhne said it was none of his concern.
“If the state, within the framework of its transport development strategy, sees the need for the creation of a national company, then this is not our business,” Dykhne said.
According to the CEO, the airline’s post-pandemic strategy was to continue to grow by launching new transatlantic charter routes, rebuilding its international transit model, and refining its market offer.
Business model
The airline intends to stick with its current operating model, even if it differs from low-cost airlines. UIA primarily provides transit connections through Ukraine to international destinations.
“We have business passengers and transit passengers. We don’t need to categorically reduce our prices to fill a plane,” he said.
According to Dykhne, currently around 82% of passengers on UIA go through Ukraine to reach their final destination.
This year, business has picked up for the airline. It became profitable again in the first half of 2021, recording a net profit of $795,000 (Hr 21 million), but this profit is still low and the airline is looking for new ways to increase its profits and work towards paying off its debts.
On the back of a surge in international travel, which has now recovered to around 70% of pre-pandemic levels in Europe, Dykhne said that the company intends to regain lost profits through investment and new charter routes.
Charter routes offer a reasonably low-risk alternative for the airline compared to the establishment of regular air routes. With charter arrangements, the airline works with tourism agencies to ticket for the flights and organize the logistics.
“We believe that long-haul charter flights are a new opportunity. There are no restrictions on the Mexican market now. This is a completely new tourist market for Ukrainians,” he said.
Dykhne believes in the company’s business model to go back to pre-pandemic levels of profit, he said.
“Thanks to this model we fly to all the capital of Europe and to many cities,” Dykhne said.
“We carry the flag of Ukraine to other airports.”
