international centre for policy studies Problems and Prospects for Developing the Air Passenger Carrier Market in Ukraine kyiv 2005 This paper was prepared by specialists from the International Centre for Policy Studies (ICPS) based on the results of discussions with various stakeholders during a roundtable entitled “Which strategy should Ukraine follow for air transport in the ‘open skies’ context?” The authors of this paper were a group of specialists from ICPS: Oleksiy Blinov, Ildar Gazizullin and Ihor Shevliakov. The ICPS would like to thank all organizations and experts who provided support during the organization of these roundtables and the preparation of this policy paper. Translation and English editing: L.A. Wolanskyj Design and layout: Ostap Stasiuk Printed in Ukraine, by ЕКМО Publishing House. vul. Zhmerynska 10, Kyiv. Теl: (380@44) 241@9827 Print run: 700. Order № ЭК@0О219 © 2005 International Centre for Policy Studies Contents Overview . Threats and their implications . Weaknesses . What should be done . Exploiting Ukraine’s transit potential . Key external factors . Appendix . Air transport in numbers . Appendix . Roundtable agenda . Appendix . List of roundtable participants . Overview The purpose of this report is to identify state policy issues regarding the air pas senger carrier market in Ukraine that need to be resolved on a priority basis. This analysis was prepared after a discussion with stakeholders during a round table entitled “Which strategy should Ukraine follow for air transport in the ‘open skies’ context?” The air passenger market is one of the Airport into a modern hub for Central fastestgrowing in Ukraine today. The devel and Eastern Europe; opment of both regional and international transport has been strongly influenced by • Lobbying the interests of domestic air the growth of the country’s economy and lines and companies on this market in the expansion of transit traffic during the international negotiations. last five years (see APPENDIX ). The govern ment’s main policy approach for expanding Ukraine can continue to significantly air passenger traffic has been to introduce increase its volumes of both passenger and crosssubsidies for regional transport in cargo air traffic. Firstly, the country is conve – and to cancel visa requirements niently located and has several international for citizens of the EU, the US and a number airports, particularly Boryspil International of other countries in . Airport, which would allow Ukraine to attract serious transit traffic. Even if air Ukraine’s national interests in this sphere transport has only a small share of the coun lie in: try’s overall transport sector today, the potential for air transit is comparable to the • Increasing the revenues of domestic potential of its transit pipeline networks. enterprises and the tax revenues of the Secondly, the long tradition of a developed State Budget; aviation industry and air transport ensures the presence of qualified professional work • Ensuring that the country’s population force and the necessary technical and pro gets the best service for the best price; fessional educational facilities. • Ensuring national security in air passen The policy approach chosen by Ukraine’s ger transport. government will determine the further development of this market. Of all the trans Two strategic state policy objectives can port sectors, air transport has the biggest ensure the national interest: share of international traffic and therefore operates according to interstate agree • Taking advantage of Ukraine’s potential ments. The effectiveness of Ukraine’s for as a transit country more efficiently by eign policy will determine how successful transforming Boryspil International private market players will be in fulfilling The Chicago Convention is the basic document of international law that regulates air carriage. Other international agreements are gradually becoming more important, including those within the frame work of: ) regional unions: for instance, the requirements of institutions of the EU, such as the European Aviation Safety Agency (EASA) and the Joint Aviation Authorities (JAA), and ) internation al commercial unions: for instance, the World Trade Organization regulates international cargo trans port via air carriers. problems and prospects for developing the air passenger carrier market their business plans because the Ukrainian As of June , Ukraine and the EU market remains heavily regulated: the devel approved a “horizontal” agreement opment of international routes between regarding certain aspects of air links Ukraine and the rest of the world continues that, when ratified, will allow European to be determined at the intergovernmental airlines to have access to the Ukrainian level. market from any EU country. This step is a shift from parity interstate agreements This is why a series of contradictory public between Ukraine and EU countries statements by different government officials towards an open skies policy. This will about future state policy regarding air trans increase competitive pressure on domes port in Ukraine—and, what is more, the way tic carriers. in which these announcements were made— has led to a situation where the future devel • A slowdown in developing the transfer opment of the market is very unclear both capacities of Boryspil International for existing participants and for potential Airport. Delays in carrying out the poli investors: cy of developing an international hub will lead to a loss of passenger traffic as • Unilateral, opaque and inexplicable the development of alternative hubs to changes to the rules of play on part of Kyiv in Istanbul, Moscow, Munich and the Government. Prior to announcing Vienna goes into high gear. its initiative for a Concept to develop the air passenger transport market, the Today, not a single Ukrainian airline is capa Government failed to: ) analyze the ble of competing on a level field with the top effectiveness of previous policy in the international airlines if the market is liberal sector and the appropriateness of exist ized. The experience of Central European ing legislation or else to make any such countries, who liberalized their domestic air analysis public; ) identify the reasons transport markets upon entering the EU, and directions for changes that the new showed that midsized domestic carriers Administration believes necessary to cannot hold their own in competing with make in this market. The draft Concept the European majors and, as a rule: ) go was not presented to market partici bankrupt, ) drop their international desti pants. Business reacted negatively to the nations, especially longhaul ones, or ) give lack of consultations regarding the shift up and merge with their competitors. in state policy because of growing inter national competition and the need for The state must initiate and carry out the longterm planning and investment in restructuring of both this branch and its this sector. companies in order for the market to devel op any further, since the presence of major • A rapid move to liberalizing the air international airlines, such as Austrian passengercarrier market in Ukraine. Airlines, in Ukraine International Airlines The roadmap for the development of the market is the year Comprehensive State Program for the Development of Air Transport in Ukraine approved by Cabinet Resolution № dated July . According to interviews and statements from top officials at DerzhAviaSluzhba, the state aviation safe ty service, and the Ministry of Transportation and Communication, the new Concept anticipates, among others, establishing a flagship carrier in Ukraine. However, this duplicates measures already written into the existing Program. On average, the timeframe for a typical business development plan among air carriers is – years, for airports it is – years, while for the aviation industry it is – years. problems and prospects for developing the air passenger carrier market or portfolio investors could conflict or be incompatible with the interests of Ukrainian society. If the current situation, with its lack of clari ty as to further state policy in this branch, continues, it will have negative longterm consequences for Ukraine. The opacity of state policy will get in the way of the strategic plans of market participants, while the inability of domestic carriers to defend their interests during international negotiations will cut into their revenues, and therefore into Budget tax revenues. Ukraine could lose its advantages as an air transit country, while the domination of international carri ers will complicate national security in civil aviation. problems and prospects for developing the air passenger carrier market Threats and their implications Restricted transfer capacities will cut revenues in the sector and in the State Budget. Today, Austrian Airlines, one at Boryspil International Airport of the main competitors to domestic airlines Boryspil International Airport, which is on international routes out of Ukraine, flies state owned, has already reached its limits in to Dnipropetrovsk, Kharkiv and Odesa in terms of transfer capacities, which has lead addition to Kyiv. As of , one of the most to enormous queues during peak hours powerful European airlines, Lufthansa, has and a level of terminal services that does not also begun to fly to Dnipropetrovsk and meet contemporary standards. The develop Donetsk airports. ment of the airport, in particular its transit capacities, has been hampered in the last –