Government's action may not be enough to secure sector's future (1,100 words)

Published: 9/11/2001

In an effort to restore the flagging fortunes of the Ukrainian airline sector, Valery Pustovoitenko, Minister of Transport announced a plan earlier last month to merge the three state owned airlines: Airlines of Ukraine (Air Ukraine), Aerosvit, and International Airlines of Ukraine (MAU) into what has been described to date as the National Airline (NA). The minister has commented publicly that the merger is the solution to the problems of the sector and would strengthen the position of the Ukrainian airlines in both the domestic and international markets. At present, 35 airlines operate in Ukraine, the largest being the three in question, namely: state entity, Air Ukraine, Aerosvit (22% state-owned), and MAU (61% state-owned). Currently, MAU has a 19.4% share of the domestic air transportation market, Aerosvit 19.5% and Airlines of Ukraine, 10.1%. However, in the last couple of years, those carriers with state participation have been steadily losing share, with a fall of 8.7% in the first half of 2001 following similar falls in 2000. The declining performance of the airlines is attributed to their severe financial condition, with debts to Eurocontrol and Rosaeronavigatsiya for ATC services that have resulted in aircraft being seized for non-payment, including the one belonging to Air Ukraine that was arrested in London after carrying the Ukrainian national football team back in August 2000. The impact of the tight financial situation has led to a steady deterioration in Air Ukraine's operational fleet, which has fallen from a reported 10 aircraft in August 2000, to a current five out of the 30 aircraft that it owns. Overall, since 1994, the total number of aircraft registered in Ukraine has shrunk from 1,228 to 380, with only 150-200 aircraft reported to be in a flyable condition. Supporters of the merger point out that, if this trend continues, international routes provided by Ukrainian airlines will shrink by 50% by the end of the year and potentially decline further in 2002, to leave only 25-30% provided by Ukrainian carriers in 2003. According to the Ministry of Transport, the overhaul of the fleet belonging to Air Ukraine is possible only with the proposed merger of airlines in which the state has interests. Some critics consider that the merger is also likely to give Air Ukraine a new lease of life at the expense of the other, largely better operated, partners in the new venture, particularly Aerosvit. Reports suggest that, if the merger does occur, the Ministry of Transport will place an order for ten An-140s with Kharkov Aircraft Plant for probable leasing to the new structure through the state leasing company, Ukraeroleasing, so substantially increasing the aircraft available from the 13 aircraft currently operated by the constituent elements. However, it is not clear how this would, in itself, provide the capability to recover international traffic. Despite claims by Pustovoitenko that “preliminary agreements have been achieved with all the airlines”, the industry largely expects that Aerosvit will try to preserve some level of independence within NA, given that the state owns only 22% of the company and, therefore, in principle requires the approval of the company's shareholders for any merger. This is particularly the case if, as reported, the state wishes to control 51% of the new airline: a move that, for some observers, implies an offsetting deal whereby, while establishing a national airline, the company will effectively be a rescue of Air Ukraine by Aerosvit. In fact, Aerosvit's involvement could turn out to be akin to the proposal it made earlier this year to the government, suggesting that it would take control of the management of Air Ukraine, in return for the overhaul and renovation of the airline's fleet. This proposal was rejected by the Ministry of Transport, but the deteriorating condition of the state entity may make it more amenable to such a solution, given that the government's most recent rescue package - the tender organised in May 2001 by the Ukrainian Fund of State Property - failed to attract any bids for 49% of Air Ukraine. In this kind of scenario, Aerosvit could gain with Air Ukraine at least a 30% share within a “soft” holding structure. The plan to merge the country's leading airlines comes as part of an effort on the part of the Ukrainian authorities to consolidate all its air transport interests, again contributing to the view that this is an attempt by the government to secure better prospects for the proposed national airline. In July 2001, the government merged seven airports, servicing 84% of the country's air passengers: Borispol, Zhulyany (Kiev), Donetsk, Lvov, Odessa, and Simferopol in the state-owned joint stock company, “Airports of Ukraine”. In August 2001, the Ministry of Transport also announced its plans to reorganize the state enterprise, Ukraerorukh (providing ATC services in Ukraine), into a closed joint stock company. Local suspicions are that government's moves are a thinly disguised plan to monopolize the industry. While this view may be justified, given the past record of the Ukrainian authorities, it overlooks the fact that the government has increasingly few options, given the critical state of the carriers and infrastructure providers. All of the entities require investment, the JSC status allows external participation and, in the case of the airlines, sufficient critical mass to be viable competitors. There is still a danger, however, that NA might emerge from the process revitalized with new and renovated aircraft and start to retake share from its less well-supported competitors as well as use its gathering power to leverage prices up again. While accepting the risks of government using its position in an anti-competitive manner, it is premature to judge the results of the state's move. A new airline would still have to cope with chronic problems of personnel and aircraft and requires investment in order to achieve meaningful change. There is no indication as yet as to what would catalyse that kind of turnaround. The purchase of the ten An-140s is an action aimed primarily at keeping the struggling Ukrainian programme running, rather than the provision of feasible fleet. It is also something that requires the Ukrainian government to commit substantial funding and, to date, despite much discussion, little has been seen in the way of actual money. A substantial overhaul of the airline at present seems some way off and any potential growth in share would have to come from the state, giving the new airline's favoured status. Even so, it still requires the airline itself to have the resources in order to exploit it. For some local carriers, even the label of "national carrier" might not be enough to save NA from the further encroachment of foreign operators on to the market.

Article ID: 2747