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
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© 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 – years—ever since the new runway was Restricted access to North built in —by the lack of necessary state American markets among and private investment that might make it national carriers possible to handle current passenger levels. Because the state air traffic control system in Ukraine does not meet US standards, Growing competition on regional AeroSvit, a top national carrier, lost a and international routes chance to expand its transatlantic flights to other routes. The open skies approach will lead to more routes between Ukraine and the EU and will reduce the barriers to entry into the The high cost of leasing and Ukrainian market for international carriers. purchasing modern airplanes The likelihood that domestic carriers will lose their international connections and Ukrainian airlines are having a hard time even some domestic ones as the market is expanding their fleets because of the VAT liberalized means that the transit capacities that they have to pay for importing air of Ukraine will stop developing as transit planes into Ukraine, high import duty passengers are gradually redirected through rates, and problems with arranging for pur the hubs of foreign airlines. This, in turn, chased equipment to be certified in
The passport control process has not been simplified at domestic airports, even though the presi dent eased the incoming passenger visa regime by dropping visa requirements for citizens of Canada, the EU, Japan, Switzerland, and the US. This is slowing down the processing of international passen gers and is leading to growing lines at peak times. Estimates are that the transfer capacities in the air port's terminals at these hours are about .– times less than demand.
The Federal Aviation Administration of the US announced in that the safety ratings for flights in Ukraine were being downgraded from Category to Category . This means that Ukraine is now considered a country that does not fully meet the safety requirements set by the International Civil Aviation Organization (ICAO).
Prior to , this problem was handled on a temporary basis by a Cabinet resolution that exempted companies that imported airplanes on the basis of an operating lease from the VAT. In February , because of a new policy of reducing tax breaks, this became impossible. On July , the Verkhovna Rada passed a bill that exempts companies from paying the VAT on airplanes that are leased for no more than months or until the end of the current calendar year. It is awaiting the president's signature.
problems and prospects for developing the air passenger carrier market Ukraine. Meanwhile, the state, through UkrTransLeasing, and Ukrainian manufac turers have been unable to set up a long term, effective mechanism to get Ukrainian or foreign airlines to buy Ukrainianmade planes.
Lack of a qualified workforce in the sector
Representatives of ground services and air lines alike admit that the lack of properly qualified professionals means that they have to spend more to train their workers and to hire foreign specialists, usually flight per sonnel. This is also putting a damper on the development of businesses in this sector, since about – years are needed to train qualified aviation professionals.
problems and prospects for developing the air passenger carrier market Weaknesses
Uncoordinated government policy Dilatory restructuring in the branch of the branch and its Over the last years, the status of enterprises DerzhAviaSluzhba, the state aviation safety service, changed several times: the agency The government strategy of establishing a operated both as a separate organ and as a competitive national carrier and interna department of the Transport Ministry. tional transit hub at Boryspil International These kinds of changes had a negative Airport has been under discussion since impact on the development of policy in this and has been continually put off. To sector because: ) staff turnover at Derzh this day, no Government has determined AviaSluzhba grew and ) responsibilities how exactly it would merge domestic air and instructions from the Cabinet of Minis lines in order to set up this national carrier. ters were not clearly divided between DAS The state is unable to establish effective, and the Ministry. To this day, the Ministry is holistic corporate management over the authorized to coordinate transport policies companies in the aviation sector that it con in air transport. trols—the state airports and the largest air lines in which the state has a stake (see Contrary to EU countries, where programs FIGURE ). Among other problems, this has for the development of the civil aviation led to conflicts over how best to develop industry are developed by a related institu Boryspil Airport. tion, in Ukraine this task is assigned to the Industrial Policy Ministry, which lacks both Combining the functions of economic reg the experience and professional staff need ulator and corporate governor of state ed for longterm planning and for adapting enterprises in civil aviation is resulting in a the domestic aviation industry to market conflict of interests when either managing operating conditions and the needs of or regulating. Dividing up these functions today’s airlines. This has also led to dis means handing over the running of com agreements between the Ministry and DAS— panies to professional managers, while go which is responsible for certifying the man vernment agencies and regulatory bodies ufacture of aviation equipment in Ukraine— carry out only the necessary technical and in terms of developing policy regarding the economic regulation and ensure the condi harmonization of domestic standards of tions necessary for the companies to con manufacturing with EU standards—such as tinue to develop and grow—without the JAR/Part EASA—and regarding Ukra right to interfere in their commercial ope ine’s fullfledged membership in the Joint rations. Aviation Authorities.
In recent years, mergers have become quite common in Europe, such as the merger of Austrian Airlines with three smaller Austrian carriers, and the merger of Air France and KLM.
Separating these functions was specifically written into the April Law “On natural monopo lies.” In international airline practice, this kind of separation is resolved through privatization, while with airports it is resolved by setting up a public corporation, a concession, or holding companies to manage airports: examples include the British Airports Authority, Aeroports de Paris, the Czech Airports Authority and so on.
problems and prospects for developing the air passenger carrier market An underdeveloped network and regarding deregulating their markets, these countries discovered that older members of small fleet among domestic the EU themselves do not meet these airlines requirements, as they provide state subsi dies or restricting the access of other coun The network of routes of domestic airlines tries’ airlines to their markets. and their fleet, most of which is leased, are relatively small compared to their main None of Ukraine’s top four airlines is capa competitors. None of the leading Ukrainian ble of competing at the same level as inter airlines has more than planes in its fleet national carriers under an open skies policy. that meet international standards. Nor is Their small fleets, limited network of any Ukrainian airline a member of one of routes, far smaller revenues, and the lack of the three global alliances, which means an established transit hub in Ukraine make they cannot take advantage of a wider inter it difficult for domestic airlines to take national network. Nor is it likely that any of advantage of the economies of scope or them will join an alliance, as the main economies of density compared to the pas alliances have already formed and are show senger transfer traffic that their internation ing little interest in Ukraine’s relatively al rivals have. smallsized carriers. Ineffective protectionism No concrete plan for liberalizing of domestic manufacturers the passenger carrier market of aviation technology The Ukrainian Government has no specific The Ministry of Industrial Policy is propos plan to prepare to integrate its aviation mar ing setting up barriers to the import of avia ket with the EU, which could reduce the tion equipment into Ukraine as one of its benefits of an open skies policy and a liber main means of protecting domestic manu alized air transport market, both for the sec facturers. The ineffectiveness of this kind of tor and for passengers. By not formulating a policy, it is argued, lies in the fact these bar liberalization strategy, Ukraine could repeat riers do not differentiate between different the mistakes of the countries that joined the types of planes—regional (short haul), medi EU in or those who will soon join— um haul and long haul. Obviously, Bulgaria and Romania. The Governments Ukrainian manufacturers cannot possibly of these countries were unable to protect compete in some of these categories, espe their domestic airlines from the conse cially models for passengers or more, quences of expansion because of the overly with international market leaders Airbus short transition period. Moreover, after and Boeing simply because they do not complying with the requirements of the EU make models of that size. Similarly,
The main international alliances are Sky Team, Star Alliance and OneWorld. These strategic alliances were struck at the end of the s for the purpose of sharing destination networks and tick etselling systems among the top global players on various continents. These alliances are based on codesharing agreements and preferential terms for partners, which has made it possible to expand their routes and sales volumes virtually without increasing actual flights. It also made it possible to reduce flying times by arranging more convenient connections through the flights of alliance partners.
Among all Ukrainian airlines, four domestic companies—AeroSvit, UIA, Ukrainian Mediterranean Airlines and Donbassaero—handled % of passenger traffic in . In , the top airlines con trolled only % of the market. This increased concentration is happening mostly as a result of the grow ing pace of international transport and partly as the result of minor regional players being squeezed out.
problems and prospects for developing the air passenger carrier market Ukraine’s domestic airlines can only com a single system. A good example is service pete effectively on most international mar between Boryspil and Zhuliany Airports. kets by using equipment that is foreign made. Regional airports. In contrast to interna tional ones, the main problem for regional airports is their low payload levels. This is Lack of a clear strategy to develop due to the low volumes of domestic traffic, the country’s airports meager financial and technical capacities of most regional carriers, and the relative over An unfavorable tax regime is hampering the saturation of airports in the regions. In all, development of domestic airports. It Ukraine has around airports, of them requires stateowned domestic airports to international. The almost total lack of state transfer a significant part of their revenues financing not only prevents regional airport to the State Budget, despite the fact that the infrastructure from being upgraded to mod cost of their services is quite high and that ern standards: often they cannot even main they need to be reinvesting their capital tain basic certification requirements. Ano into maintaining their certification and in ther factor that had a negative impact on developing themselves. some regional airports was being transferred out of state hands into community owner The country’s top airports are natural ship, because local governments have nei monopolies, which means it is important to ther the necessary levels of budget financing regulate the commercial operation of air to be able to subsidize them nor any clear port services and to set rates in order to pro strategies for developing these airports. tect the balance of interests between cus tomers (passengers, airlines and so on) and the airports themselves. The current system Slow work in harmonizing of changing airport fees at the request of the Ukrainian technical standards airports is overly bureaucratized and too to EU standards draggedout, taking – months. This reduces the likelihood that airports will be Because of all the problems with inadequate managed efficiently because it does not gen financing, technical provision and profes erally permit timely reaction to changes in sional staffing, state agencies in this sector the cost of providing airport services or in are not able to keep up with adapting domes the overall market situation. tic norms and standards to EU legislation. These include requirements for technical International airports. The development regulation, access to ground services markets of these airports is being hindered by the in domestic airports and specific technical lack of a coordinated strategy for expanding systems, including terminal services, amend the flight schedules of those airlines that use ments to the Aviation Code, and regulation the airports’ services and the airport itself. of all aspects of electronic ticket sales by both There is also poor coordination among air domestic and foreign airlines in Ukraine, ports in terms of serving passenger traffic as including consumer rights protection.
Moreover, foreign passengers and most domestic ones prefer airplanes that are made by foreign manufacturers.
The International Air Transport Association (IATA) is requiring all its airline members to switch over entirely to electronic tickets by the end of .
problems and prospects for developing the air passenger carrier market Ineffective domestic system for training aviation professionals The lack of qualified aviation personnel is the result of: ) the retirement of senior spe cialists because of improved pensions for flight teams; ) a disconnect between exist ing aviation training programs and contem porary requirements of professionals in this field; ) a growing lag in the moderniza tion of the system of state regulation and educational programs for aviation profes sions, including outdated equipment, inad equate state financing of educational facili ties that train aviation specialists. One par ticularly negative factor was the transfer of some aviation institutions to the Ministry of Education and Science, which does not have qualified specialists to prepare require ments and approve curricula for aviation programs.
One effort to improve the situation has been certification and regular reviews of the appropriateness of certification requirements at educational institutions. Today, Ukraine has educational centers and institutions that are certified to teach aviation professionals.
problems and prospects for developing the air passenger carrier market What should be done
State influence over the market International Airport into a modern hub for Central and Eastern Europe. Development policy. This means identify ing a development strategy for air transport • Make technical and economic regula and agreeing the functions and develop tion more effective. ment of aviation and other forms of trans portation. • Reduce legislative and other barriers to renewing domestic air fleets, especially Corporate governance. This requires estab by creating easy conditions for leasing lishing effective instruments for managing and buying modern air equipment. stateowned stakes in civil aviation enterpris es, including the incorporation of state • Arrange sufficient financing and regula enterprises, in order to protect national tory control over the system of profes interests. These include expanding air trans sional training in the sector, especially port services markets, ensuring a good posi through certified specialized education tion for Ukrainian companies on interna al institutions. tional markets, increasing the commercial efficiency of aviation businesses, increasing • Institute EU legislative norms regarding the number of jobs for highlyqualified per the demonopolization of certain airport sonnel, and increasing tax receipts. services, especially runway and terminal services. Technical and economic regulation. This means establishing sectorwide standards, • Introduce the international practice of harmonizing them with international stan public debate and hearings with interest dards, and ensuring effective safety oversight groups in the process of developing poli in the aviation industry: air traffic control, cy around changes to the regulatory sys aviation safety and environmental safety. It tem or to the direction of development also requires regulating the aviation services in civil aviation. In particular, this means market in order to establish a level playing establishing a strong feedback system field for all participants, to protect the between the government and aviation national interests of Ukraine, and to estab market participants. lish a reliable consumer protection system.
Priority actions • Taking advantage of Ukraine’s potential for transit traffic by transforming Boryspil
problems and prospects for developing the air passenger carrier market Exploiting Ukraine’s transit potential
Option : Option : Maintaining status quo Establishing an international • The state does not directly intervene in network carrier based on one the structure of the market, allowing par ticipants to find the best solution on of the market leaders their own. • Establishing a single air carrier on the basis of AeroSvit or Ukraine Internatio • The problem with this is that national nal Airlines. objectives will be reached only very slow ly and without any guarantee, given the • This option could lead to unfair compe fundamental differences in positions tition with the other company on inter among different interest groups, which national and domestic routes alike. cannot be reconciled without the involvement of the state. • Given that these two companies current ly cover complementary routes, strength Option : ening only one carrier could lead to Ukraine’s losing access to the combined Establishing a state carrier network of international routes.
• The state sets up a new state airline or an Option : airline based on either VAT Air Ukraine or SAE Ukraina. Merging the two market leaders, AeroSvit and UIA • This option will be difficult to carry out. The lack of a suitable fleet, a good net • Establishing single carrier or commer work of destinations, and an estab cial alliance based on these two compa lished sales system for air transport serv nies. ices will require huge state investments. • This will make it possible to combine the • Setting up yet another airline will lead to network of international routes. additional, commercially irrational com petition among Ukrainian airlines. • It may be difficult to get approval for This can only strengthen the position of consolidation from the shareholders of foreign competitors. both companies.
Today, existing Ukrainian airlines already have access to most international destinations. DerzhAviaSluzhba is looking into the option of redistributing routes that are either not being used or whose exploitation is not in accordance with the terms of licensing agreements.
Ukraine already has more than commercial airlines, at least three of which are partly stateowned. All these airlines are competing on international markets with a slew of powerful international carriers.
problems and prospects for developing the air passenger carrier market This alternative is in accordance with inter cedure of gaining permission for “com national practice and with a policy of pro mercial concentration.” Theoretically, moting national interests on international the newlyestablished company would markets for air transport services. The have a dominant position on specific option of consolidating the two top airlines international routes. could be the best one, given that it will allow the popular flying destinations of the two • Antimonopoly legislation might look on companies to be combined into a single the second alternative, setting up an wellbalanced network: alliance, as “collusion,” but it has a sim pler procedure for getting the necessary • AeroSvit: Central, Southern and permission. Moreover, establishing an Northern Europe, North America, the alliance specifically on international Middle East, Southeast Asia, and the Far routes makes it possible to avoid dimin East. ishing competition on the domestic mar ket as a result of a merger. • Ukraine International Airlines: Wes tern Europe and North Africa. The choice and implementation of any given option for consolidation should be Consolidation could take place in two ways: determined by: ) prior agreement of the ) an outright merger of the two companies positions of airline shareholders regarding or ) the institution of joint commercial development strategy, the principle for com activity (an alliance) on the market of inter bining schedules, and the role of the base national connections: airport in the case of a merger or alliance between airlines; ) coming to agreements • The first alternative presents more prob regarding the best flight schedule for both lems because, in addition to requiring companies in terms of good connections at the approval of both groups of share Boryspil Airport, codesharing for ticket holders, the merger of the two compa sales, sharing the air fleet, and joint use of nies will also require, based on Ukraine’s ground service infrastructure and service antimonopoly legislation, a lengthy pro personnel—and sticking to them.
See the analysis of the different options for consolidating Ukraine’s airlines by Volodymyr Bilotkach in “Issues in Network Development by National Airlines: Case of Ukraine,” a manuscript from .
Research into the US aviation market (Borenstein in , Evans and Kessides in , Berry et al., in ) showed that when a company controls a hub airport, competition on the domestic market tends to be restricted.
problems and prospects for developing the air passenger carrier market Key external factors
The EU’s official policy towards Ukraine as is towards lower prices for air transport an “EU neighbor” will be implemented in means that the profitability of the entire sec the sphere of air transportation on the tor is shrinking. basis of cooperation in integrating Ukraine and the EU through the work of joint spe The process of consolidation and concen cialized committees. The actual timeframes tration on the world aviation market is grow for instituting an open skies regime will ing more active and the influence and com depend on further negotiations between the petitiveness of top European airlines who two Governments. are leaders in the three world alliances (Lufthansa in the Star Alliance, British As world prices for airplane fuel rise and, Airways in OneWorld and Air France/KLM along with them, the cost of air services at in SkyTeam) is also growing stronger on the the same time as the overall trend in Europe routes that Ukrainian airlines fly.
World trends in the airline business
Over the next few years, the process of agglomeration of companies and the consolidation of the world market will continue to pick up speed. According to IATA, the sudden increase in the cost of jet fuel will likely result in overall losses of over US $bn in the glob al aviation industry for . This will lead to growth in market share among lowcost air lines on direct mediumhaul routes. It will also lead to even greater consolidation and more mergers of airlines, as well as to growing state subsidies of airlines.
The EU is actively following a policy of integrating both domestic and international air transportation markets. In April , four groups of regulations in the Single European Sky policy were approved. Their aim is to unify flight safety standards and to increase the efficiency of European air transport. The EU’s external policy in aviation is aimed at achieving its “neighborhood” policy objectives, including the signing of open skies agree ments, as well as expanding the access of European airlines to the Chinese, Russian and Japanese markets.
See the February Communique of the European Commission on aviation policy in EU neigh bor countries at http://europa.eu.int/comm/transport/air/international/doc/com___en.pdf.
The profit margins of major world airlines are around %, while those of international airports are %.
problems and prospects for developing the air passenger carrier market Appendix
Air transport in numbers
Figure . Growth of passenger traffic Figure . Growth of investment vs GDP in Ukraine in fixed assets % % 60 120 Passenger numbers Transportation and 50 GDP 100 communication 40 Air transportation 80 30
20 60
10 40 0 20 10
20 0
30 20
1999 2000 2001 2002 2003 2004 2002 2003 2004 H1’05
Source: Derzhkomstat Source: Derzhkomstat; calculations by ICPS
Figure . Average distance per Figure . Passenger volumes passenger ’000 km ’000 passengers
2,000 1,900 All air transportation Domestic flights 1,700 1,900 International connections International flights 1,500 1,800 1,300
1,700 1,100
1,600 900
700 1,500 500 1,400 300
1,300 100 1999 2000 2001 2002 2003 2000 2001 2002 2003
Source: Derzhkomstat Source: Derzhkomstat
problems and prospects for developing the air passenger carrier market Figure . Passenger traffic by region million passenger km 2002 2003 Other oblasts Other oblasts 8% 8% Kyiv Dnipropetrovsk Dnipropetrovsk 33% 3% 3% Kyiv Odesa Odesa 41% 3% 4% Donetsk Donetsk 7% 8%
Kyiv oblast Kyiv oblast 46% 36%
Source: Derzhkomstat Source: Derzhkomstat
Figure . Completed flights, ’
Total flights Total flights
150 180 Connecting/Transit 140 160 Domestic airplanes Origin/destination in Foreign airplanes 130 Ukraine 140
120 120
110 100
100 80
90 60
80 40
70 20 0 60 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Source: Derzhkomstat Source: Derzhkomstat
Total connecting flights Total flights within Ukraine
160 0.7 80
Foreign airplanes (left axis) Domestic airplanes 140 0.6 70 Domestic airplanes (right axis) Foreign airplanes 120 0.5 60 100 0.4 50 80 0.3 40 60 0.2 30 40
20 20 0.1
0 0 10 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Source: Derzhkomstat Source: Derzhkomstat
problems and prospects for developing the air passenger carrier market Figure . Air transport crossing the border of Ukraine, planes
Total Total
40,000 60,000
Ukrainian Foreign Passenger Cargo 35,000 50,000 30,000 40,000 25,000
20,000 30,000
15,000 20,000 10,000 10,000 5,000
0 0 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Source: Derzhkomstat Source: Derzhkomstat
Passenger carriers Cargo carriers
35,000 3,500
Ukrainian Foreign 30,000 3,000 Ukrainian Foreign
25,000 2,500
20,000 2,000
15,000 1,500
10,000 1,000
5,000 500
0 0 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Source: Derzhkomstat Source: Derzhkomstat
Figure . Ownership of leading passenger carriers (as of July )
ZAT AeroSvit – Ukrainian Airlines ZAT Ukraine International Airlines
VAT Buro EBRD 5% 10% VAT UkrInformConsult 10% debis AirFinance 6%
VAT Genavia Invest 25%
Austrian Airlines 23%
Gilward Investments B.V. State Property Fund of Ukraine State Property Fund of Ukraine 38% 23% 62%
Source: Company data Source: Company data
problems and prospects for developing the air passenger carrier market Appendix Roundtable agenda On July , the International Centre opment strategy for the sector and how to for Policy Studies held a roundtable on the tackle existing problems. The purpose was topic, “What strategy should Ukraine follow to identify the positions of different stake for air transport in the ‘open skies’ context?” holders, exchange ideas among them as to the main problems in the sector and their Its goal was to organize a meaningful public roots, and to prepare a series of proposals dialog between the government and air for resolving those problems and formulat lines, aviation infrastructure enterprises ing concrete recommendations as to state and specialists as to the options for a devel policy.
:–: Registration :–: Opening Introductory speech: Vira Nanivska, Director, International Centre for Policy Studies :–: Presentation: “Analysis of the problems and prospects for developing the air transportation sector in Ukraine” Presenter: Ildar Gazizullin, Economist, International Centre for Policy Studies :–: Presentation: “Current issues in developing the air transportation sector in Ukraine: Coming up with a concept for rebuilding air transportation.” Presenter: Viktor Zelenkov, Department Manager, DerzhAviaSluzhba, the state aviation safety service. :–: Presentation: “As Ukrainian carriers see it: A strategy for developing air transportation.” Presenter: Hryhoriy Hurtoviy, CoChair of the Supervisory Board of AeroSvit, an airline. :–: Q&A session :–: Open discussion of these five questions: . What should government policy goals be in developing air transport? . What was the impact of previous efforts to implement longterm air transport development policies? . What should be the priority strategic direction for the sector’s development? . What issues need to be tackled for domestic air passenger transport to develop successfully? . What should the priority steps be for the air transport sector to develop successfully? :–: Roundtable wrapup : Closing
problems and prospects for developing the air passenger carrier market Appendix List of roundtable participants
№ Full name Organization . Volodymyr Anufriyev General Director, Simferopol International Airport (state) . Pawel Dobkowski Representative, Octagon Ltd, a consultancy, Poland . Ildar Gazizullin Economist, International Centre for Policy Studies . Hryhoriy Hurtoviy CoChair, Supervisory Board, ZAT AeroSvit – Ukrainian Airlines . Serhiy Korshchuk Manager, Air Transport and Licensing Department, DerzhAviaSluzhba . Volodymyr Kryzhevskiy Economist, Ministry of Finance . Serhiy Kutsiy Press Secretary, ZAT AeroSvit – Ukrainian Airlines . Hryhoriy Lipovskiy General Director, UkrainianMediterranean Airlines . Serhiy Lukin Dean, Faculty of Management and Logistics, National Aviation University . Serhiy Maliutin General Representative in Ukraine, TransAero, a Russian airline . Oleh Molchanov Marketing Manager, Simferopol International Airport (state) . Yuriy Molod General Director, Southern Airlines . Vasyl Momot General Director, CP Kyiv International Airport (Zhuliany) . Serhiy Murashkin Deputy Director, Boryspil International Airport (state) . Vira Nanivska Director, International Centre for Policy Studies . Larysa Nepochatova President, AST Busin, an insurance company . Volodymyr Poliakovskiy Director, ARP , an airline . Vitaliy Potyomskiy President, ZAT AeroSvit – Ukrainian Airlines . Oleksandr Rudoy Project Manager, FIM Consulting . Yulia Shevchuk Legal Advisor, “Developing Leasing in Ukraine” project, IFC . Andriy Shkatiuk Executive Director, ZAT AeroSvit – Ukrainian Airlines . Andriy Sobol Commercial Director, ARP , an airline . Yevhen Treskunov Director for Strategic Development, ZAT AeroSvit – Ukrainian Airlines . Olha Volodchenko Assistant Press Secretary, ZAT AeroSvit – Ukrainian Airlines . Oleksiy Yakovets First Deputy Director, CP Kyiv International Airport (Zhuliany) . Viktor Zelenkov Manager, Commercial Regulation Department, DerzhAviaSluzhba
problems and prospects for developing the air passenger carrier market