Sky competition: when will the aviation market in Ukraine "take off"

Photo: facebook.com/flyuia.ua

Photo: facebook.com/flyuia.ua

Due to the coronavirus crisis, 2020 has become the worst in the history of aviation: airlines around the world have suffered significant losses, and some even found themselves on the verge of bankruptcy.

In particular, the revenues of world passenger carriers decreased by more than half—by $314 billion. And if evaluating the losses of all Ukrainian enterprises of the aviation industry as a whole, then, according to the calculations of the Aviation Committee of the Chamber of Commerce and Industry of Ukraine, they amounted to 15 billion UAH. Analysts assert that the Ukrainian aviation market will be able to return to the pre-quarantine level in two or three years. Who will stay "in the sky", and can Ukraine become an international hub?


Ukrainian aviation market will recover in 2024

Experts predict that in 2021 the Ukrainian aviation market will grow by about 8%, and by 2023—by another 15-20%. A complete recovery of the market to the level of 2019 in terms of passenger traffic, sales volumes, revenues of airlines and air transportation airports is expected no earlier than 2024.

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It is worth noting that today Ukrainian carriers incur a number of additional costs compared to foreign competitors—this is an excise tax on fuel, duties on the import of aviation equipment and spare parts, the need to pass in flying the airspace of Eastern Ukraine.

The coronavirus also added problems: the airlines had to significantly revise their staff, optimize the route network and schedule, and also focus on profitable destinations in order to change the financial model. For example, the website of Ukraine International Airlines indicates that due to the coronavirus crisis it lost about $60 million last year and was forced to lay off about 1,000 employees.

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For its part, the largest airport in Ukraine, Boryspil, during the ban on flights in Ukraine, estimated its losses at hundreds of million UAH, and more than 4,000 employees received only two-thirds of their salaries. Instead, the cargo terminal was operating at 50% capacity.

Semen Kravtsov
Semen Kravtsov
Ph.D. in Law, Attorney-at-Law, Associate Partner at INPRAXI LAW

The recovery from the crisis will begin with an increase in demand, but there is a high probability that the aviation boom will not happen when the "green light" is given to air transportation.

The main reason is a change in the behavioral model of air passengers.

In addition to the fear of flying due to possible infection with coronavirus, there are concerns about booking tickets because of the risk to lose funds due to illness on the eve of travel or canceling a flight due to the unpredictable introduction of quarantine restrictive measures.

Consequently, Ukrainians prefer alternative modes of transport within the country. Moreover, the development of online technologies provides various budget options for conducting business meetings, so the question of the advisability of long-haul high-value flights, for example, to Singapore or Sydney, increasingly sounds rhetorical.

There is also a possibility that at the beginning of post-quarantine flights will be a kind of privilege: now some airlines are considering the possibility of providing for admission to flights only if they have information about vaccinations against COVID-19.

Another reason for the slowdown in the aviation market is that many Ukrainian airlines, instead of flights canceled in 2020, allowed passengers to book future flights for free. That is, the passengers actually credited the airlines. However, when the mass free bookings begin, some airlines will not be able to pay the air transportation costs.

Oleksandr Khmelevsky

Oleksandr Khmelevsky

Ph.D. in Economics, independent expert


Can Ukraine become an international air hub?

Can Ukraine be a successful international air hub, at least a cargo one, since we are located in the center of Europe?

There was no significant crisis in the air cargo market in 2020. The decline was recorded, but it was insignificant—within 8%. The crisis was avoided due to the transportation of large volumes of medical goods—masks, protective suits, etc., Andrey Krivorotov, Director of the Sea and Air Freight Department at ZAMMLER, told The Page.

If we compare the cargo turnover in Ukraine in 2020 with that one in 2019, then, oddly enough, it has remained at about the same level.

In 2021, the transportation of medical goods on such a scale is not expected. Therefore, even with an increase in the number of other traffic in 2021, cargo turnover will remain at the level of 2020.

Maksym Gardus
Maksym Gardus
Expert of the Reforms Delivery Office of the Cabinet of Ministers of Ukraine

In principle, Boryspil Airport is already confidently moving towards a hub model. Indeed, in the pre-crisis times, the share of transfer passengers reached 30%. And this is a consequence of the implementation of the Boryspil Strategic Development Plan for 2015-2019 that approved the transit concept.

Now Boryspil is in the same niche of medium-haul flights with Minsk, Warsaw, Moscow, and Istanbul. To develop in such a tough competitive environment, an airport must attract customers not only by quality, but also by price. At the same time, the base company has a huge drawback compared to its competitors—the impossibility of an eastern direction. And this is a matter, in fact, not only of the war with the Russian Federation, but also of the rise in price of the Central Asian and Far Eastern directions (due to the bypass) to a level that casts doubt on their profitability.

In addition, today the hub requires competitive rates for boarding/service, overnight parking, low cost of aviation fuel, competitive prices for handling, and hangars for maintenance and repair.

As well as related services (washing, painting the aircraft). A modern automated cargo terminal is also needed for handling cargo. Reasonable prices for air navigation services are also important—terminal fee for ANS. For example, in Warsaw it is now 3-4 times lower than in Boryspil.

Today, the hubs are the large airports of Amsterdam, Doha, UAE, Paris, and Frankfurt. And in Ukraine, for the hub's policy to justify itself, rapid economic growth is necessary, for example, as in Turkey. And a nationwide strategy, as in Latvia over the past 15 years.

Andrey Krivorotov
Andrey Krivorotov
Director of the Sea and Air Freight Department at ZAMMLER

Taking into account the current state of infrastructure and the absence of all the necessary base, Ukraine, unfortunately, cannot yet be an international air hub and cargo hub in particular. Firstly, the Boryspil cargo terminal that is now the country's main airport (accepts up to 85% of cargo arriving in Ukraine) was built in the 60s of the XX century. Therefore, its bandwidth is very low.

Secondly, in order for Ukraine to be a hub, at least several large international cargo airlines like Cargolux Airlines International should operate flights to us.

Third, a base company is needed to connect two regions of the world—Europe and Asia, or Europe and America. Earlier in Ukraine, this could be considered UIA, but with the onset of the coronavirus crisis, it canceled dozens of foreign flights, including from China.

Fourth, pricing is important. Customers are often looking for the best deals.

For example, a few years ago I was calculating the direct air delivery of goods China-Ukraine (from Hong Kong to Kyiv). It came out 30-35% more expensive than air delivery from China to one of the European airports—Frankfurt or Vienna, and further delivery by trucks in Ukraine.

What changes are needed in the aviation market

Ukrainian airlines are now in dire need of funds to overcome the crisis. Government investments in the industry, credit and tax holidays would help companies get through difficult times. This is done abroad. For example, the Italian authorities are going to nationalize their main carrier Alitalia to keep it "afloat".

France's largest carrier Air France will also receive large financial assistance from the state. And the United States allocated $25 billion to support the aviation industry. But the Ukrainian aviation did not receive any assistance from the state.

At the same time, the state has a certain interest in air transportation. After all, the construction of airports in Odesa and Dnipro is underway, and it is planned to create two more in Transcarpathia (Zakarpattia in Ukrainian). Also, the government approved the Concept of the State Target Scientific and Technical Program for the Development of the Aviation Industry of Ukraine for the period 2021-2030.

However, these efforts are aimed at passenger transportation, while cargo transportation remains unaddressed, although it also has great potential and needs investment. Two years ago there was information about the preparation of a project to build an additional new cargo terminal in Ukraine with an area of 10,000 square meters.

At that time the total amount of necessary investments was about $25 million. Unfortunately, with the beginning of the pandemic, this project was frozen.

To become a cargo leader means to have modern equipment and appropriate capacities that distinguish you from your competitors. The best example is the storage conditions of the corona vaccine—Pfizer (-70 C). Not all airports in the world can provide its proper logistics today. Therefore, a business that operates with high-tech equipment, a priori, cannot do without significant financial investments.

Semen Kravtsov

Semen Kravtsov

Ph.D. in Law, Attorney-at-Law, Associate Partner at INPRAXI LAW

For his part, Andrey Krivorotov believes that the main problem of the Ukrainian aviation market is the inadequate state of the infrastructure. After all, there are no cargo terminals at airports at all, the airports themselves, access roads to them and warehouses were built in the 60s and 70s. That is, they are outdated, and there are still not enough warehouses.

The second problem is excessive bureaucracy. The aviation community is already in dire need of digitizatioт—translation of document flow into electronic format and integration into a common system. Now, each service operates in a separate program—the customs office has its own system, the carrier has a different one, and the air service also has its own. And this complicates cargo tracking, customs clearance and delivery.

For comparison: in Europe, the cargo can be cleared through customs even when it flies in the air, everything is simplified as much as possible and works in one system.

Conclusions

In 2021, it will certainly be more difficult for Ukrainian airlines and airports to make money on passengers due to changes in operational efficiency, revision of business models and their adaptation to realities. This, in fact, is a challenge that can significantly redistribute the aviation services market.

In general, the situation will be affected by the fact that airlines will begin to compete not only with each other, but also in domestic transportation with land transport.

For its part, the war in eastern Ukraine will hinder the implementation of the hub model in our country. Since it affects traffic, forcing foreign airlines to avoid part of our airspace, and domestic ones—to pass in flying the territory of a neighboring state in the eastern directions.

Oleksandr Laneckij
Oleksandr Laneckij
CEO at UAB Friendly Avia Support

Passenger air transportation in Ukraine so far depends on three factors:

1. The prohibitions on movement—ranging from the prohibition of foreigners to enter the EU as a whole without special visas (workers or family members visas) and ending with the restrictions of specific countries. For example, Denmark, Belarus, and Germany do not allow foreigners to enter, regardless of their citizenship.

2. The fear of catching coronavirus—the pandemic has become global and uncontrollable. And I'm not sure that the corona vaccine will change anything, especially given the pace at which it is imported into Ukraine.

3. The decline in income. After all, the pandemic, and especially the quarantine measures, hit small and medium-sized businesses. Accordingly, no income—no flights.

In general, IATA (International Air Transport Association) predicts that an improvement in the domestic aviation market should be expected closer to the Q4 of 2021. Although high hopes are pinned on summer navigation and the pandemic slowdown during the holiday season.

In general, IATA (International Air Transport Association) predicts that an improvement in the domestic aviation market should be expected closer to the Q4 of 2021. Although high hopes are pinned on summer navigation and the pandemic slowdown during the holiday season.



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