Yuri Miroshnikov, one of the most experienced top managers of Ukrainian aviation, the third president of Ukraine International Airlines in 2004-2019, told LDaily about the genesis and development of UIA, surviving the unprecedented global quarantine, and prospects for Ukrainian aviation.
LDaily: Please tell us about the history of UIA. What helped UIA become so successful in the Ukrainian market?
Y. Miroshnikov: One of the most significant achievements of the company is that after experiencing many crises, difficulties, recessions, and problems, it still exists and functions normally (until the lockdown of the airline industry due to a pandemic). There is practically no airline in Ukrainian aviation that has been on the market for so many years.
The secret of success is that the company was designed quite correctly from the beginning. UIA is almost of the same age as Ukraine’s independence. At that enthusiastic time, new ideas were born in the minds of the leaders of the aviation industry of Ukraine and foreign investors willingly offered their proposals. In aviation, UIA became the first joint venture between the state and a foreign investor. The investor was the world’s largest Irish leasing company at that time – GPA Plc. Group. There was a good alignment between the government of Ukraine and the Irish shareholders, towards the goals set for the airline.
It was based on the understanding that obsolete Soviet equipment was becoming less and less competitive both in terms of fuel efficiency and passengers’ expectations for comfort and service. Therefore, the main emphasis was placed on modern aircraft — either Boeing or Airbus. The choice fell on Boeing, and since then, UIA has been operating mainly Boeing aircraft for 28 years.
The network of priority routes was concentrated in Western Europe. These routes were the most competitive. When Ukraine opened, European companies began to fly here with their modern equipment. The task was to create a competitive Ukrainian company. It would seem easy to do, you just need to buy modern planes for Air Ukraine — Soviet Aeroflot’s direct successor in Ukraine. However, foreigners had the wisdom and perseverance to argue that only a new type of aircraft would not help. We needed new standards, approaches to doing business, aviation commerce, and the economy in general, and as a result, it was decided to create an independent airline as a joint venture.
Among the prioritized goals and tasks, there was also the integration of the airline and its route network with the European air transport structure. For its part, the state has taken the right step allocating routes mainly to Western European destinations, in particular, to all capitals. This also has been a component of success.
November 25 marks the 28th anniversary of UIA’s first flight. The company started working in winter, which was a wrong move, as it caused excessive losses. In addition, it was wrong to start practically without working capital. Ukraine made only a small financial investment, and the main contribution of the state was in the form of exclusive rights for the routes for 15 years. The Irish shareholders also contributed very little money, and their main contribution was an aircraft lease paid for a few months, and training of pilots, flight attendants, and engineers for Boeing 737. This may have prevented from achieving greater success quickly. If we waited for spring, we would have more time to think about where to find another financial partner who would provide working capital…
Later, UIA attracted investors such as Austrian Airlines and Swissair. The EBRD also became one of UIA’s shareholders. By the end of 90th, the company overcame many obstacles, difficulties, problems and began to work steadily in the Western European market. It succeeded in harmonizing standards and service levels with those in force in European aviation. And it was definitely a success for Ukrainian aviation. I talked to many representatives of the shareholders of that time, and everyone agreed that the goals, intentions and objectives of investing in such an enterprise as Ukraine International Airlines were achieved. And in general, if you look at the first Charter UIA has truly achieved its stated goals as an airline. This is definitely a success.
After the privatization, for the last 10 years, UIA has also become very successful in realizing the country’s transit potential in air services. That is one of the significant geopolitical advantages of our country. Transit reached 50% of passenger traffic on UIA flights, generating a number of positive effects, as these are the passengers whose destination is not Ukraine at all. They could fly to their destinations via Istanbul, Moscow, Vienna, and other alternative hubs, but went via Kyiv — by the Ukrainian airline, via the Ukrainian airport. Accordingly, we created jobs, paid taxes, and brought export earnings in Ukraine. These are undeniable advantages for Ukrainian aviation and the country’s economy.
Unfortunately, geopolitical circumstances have been very unfavorable for transit through Ukraine since 2014. The major transit flow was in the East-West direction. However, transit activities were significantly complicated when the huge Russian market was closed to our aviation, and Ukraine lost control over two powerful and attractive (one economically — Donbas, the other touristic — Crimea) regions, and these were the largest domestic markets after Kyiv, as well as when Ukrainian airlines were banned from using the airspace of Russia. These factors has turned generation of transit passenger flows through Boryspil Airport into the generation of losses for UIA.
Aviation is a cyclical business even without geopolitics. All the world’s aviation, the market and major players periodically go through ups and downs. For obvious reasons, aviation is now in a very deep dive throughout its history. Restrictions on the movement of people are seen by governments in most countries as almost the only way to protect against the spread of virus. That’s why the losses of the travel industry are much more significant than in any other industry.
LDaily: How has the release of more international airlines, such as Ryanair, affected UIA? How has the flight program changed, and did the demand for UIA services change?
Y. Miroshnikov: It did not have a significant impact if we do not take into account the global impact of liberalization and low-cost model on air transport. In order to attract low cost in Ukraine, rates and fees in some airports were reduced — the government agreed to reduce fees for them. However, it would be too cynical and unfair to reduce it only for low-cost, and not for other airlines. Boryspil Airport offered an open scheme to stimulate the development of routes and increase air traffic so that Ryanair would receive the rates and costs per passenger that were a condition for its entry into the Ukrainian market. However, other airlines also received them, it mainly depended on the scale and volumes. At UIA, passenger volume and scale of operation was quite high, and the company was also eligible to these rates. In terms of the cost component, it even led to a small positive effect. UIA tried to explain to the government that the task of reducing the cost of air transportation for the population should be solved also by reducing the costs for airlines. Namely, back in 2015, UIA proposed to the government a “10 steps” program, the steps which the authorities needed to take in addition to the airline’s actions. Unfortunately, almost nothing has been done since then, except for the reduction of airport fees in Boryspil to attract low-cost carriers.
There are, however, examples, when Ryanair has cannibalized routes by simply intercepting part of the existing traffic of other companies. As a result, the economy for some foreign airlines has changed so much that they have given up flights to Kyiv. Of course, this is unprofitable for the airport. However, under fair market conditions, competition is possible. In response to customers’ expectations of lower ticket prices, UIA has done a great deal of work in recent years. And on some routes, head-to-head with Ryanair, it has achieved good loads and positive margins.
LDaily: How can you describe the aviation market of Ukraine? What are its advantages and disadvantages?
Y. Miroshnikov: Aviation market of Ukraine is still very weak (and the pandemic did not make it stronger). This is primarily due to low income per capita. People have a desire to fly, but they don’t have enough money for that. If somebody’s goal to fly is work, study or visiting friends and relatives, then the cheaper the ticket is the better. And this is exactly what low-cost carriers exploit. But when a person flies for a vacation or on business, exhibitions, conferences, etc., the price of the ticket is not the only cost component: there is still accommodation, insurance, food, transport … All this is quite a significant package, which could be complicated and increased by the visa requirements and costs (so it is good when the visa-free zone expands). The most popular destinations for Ukrainians are now inexpensive touristic Turkey and Egypt, and they are traditionally visa-free. But when Spain and Italy became visa-free, there was no such tourist boom as in Egypt or Turkey because they still had a much higher cost of a stay, and people made choices according to their financial capabilities. Therefore, the lack of funds is a weakness of the Ukrainian market. However, at the same time, the potential is being formed — subject to economic development and increasing incomes. The potential is huge because the population and territory of the country are quite large on a European scale.
Another negative factor for domestic aviation is the relative cheapness of the railway. In practice, aviation cannot win this competition in the Ukrainian market. We often hear from the low-cost believers about tickets for only €20. Yes, that is how things are in Europe, meanwhile, railway prices there reach €130-150! Therefore, local airlines have a good chance to compete with trains.
In addition, one of the peculiarities of the low-cost model is that tickets are sold cheaply only long before your flight, and right before departure they are very expensive. Passengers who buy tickets at the last minute because they have to go to Paris “urgently on business” and are willing to pay a lot of money for their ticket — they compensate for the low fares paid by the passengers who bought tickets six months before. From my own experience, the difference in price can be ten times and more, so on average, the amount of income from the flight turns to be more or less appropriate for the economics of the airline. In Ukraine people are happy to buy cheap tickets, but they stop buying as soon as cheap seats run out and, according to the airline’s calculations, it’s time to sell at a higher price. And people have other means to travel domestically — by train or bus, and on dozens of competing airlines internationally — they have many route options, and Internet search engines help quickly find the best option.
However, one of the untested effects of the low-cost operations is that two competing operators came to Ukraine and took away labor migrant passengers from bus carriers. This is also a kind of intermodal cannibalization of passenger traffic, but it is historically known. The whole phenomenon of low-cost was born in the United States, the first routes opened exactly where there was good bus traffic, and they offered the same price as a bus ticket or even slightly lower. And customers chose the plane for 1.5-2 hours instead of traveling 10-15 hours by bus. That is, low-cost carriers initially “stole” passengers not from classic airlines, but from ground transportation.
LDaily: You also had a low-cost program at UIA, when a passenger could buy tickets for UAH 500-700 to various destinations. You eventually gave it up. What was the reason?
Y. Miroshnikov: In fact, they were even cheaper, but people bought a ticket for UAH500 and would not buy it for UAH1,000. And to build an economically feasible flight, you need not only someone to buy a ticket for UAH500, but also those who will buy it for UAH1000 and UAH2000.
Another effect of the low-cost model expansion (spread not only in Ukraine but everywhere, especially in Europe) is the general reduction of average ticket prices. In the late 1990s and early 2000s, the normal round-trip price of a three-hour route was $/€400-500, and $/€350 was very low. 20 years have passed, and now the price of $200 seems incredibly high. In Europe, this effect actually occurred somewhere in 2004-2006, and in our country it happened a little later. This is a psychological commercial and market effect brought by low-cost carriers. On the other hand, cheaper tickets means tighter seating and simplified or non-existing package of free services — like paid meals, luggage, and even a choice of seat.
In the late 1990s and early 2000s, UIA sold $400, $500, and $600 round-trip tickets in economy class, but there was a choice of two hot meals and free bar. Subsequently, as a result of the reduction in prices, we canceled free meals, later reduced the free baggage allowance, and then took new and new steps towards reducing the cost of the service package by shrinking free options for economy cabin. The price of $400 or $500 included 20 kg of luggage and free food, and after becoming $150-200 (and sometimes $20), it didn’t include any of those. And then every wish of the passenger must be paid: if you want to sit by the window, pay $5, or $10 to eat, $20 for something else… But the total amount paid is still less than before, and there is an opportunity to save by paying in advance only for what you really need on a certain trip. So, abandoning the “low-cost” program, which was a kind of experiment, UIA switched to a model of low-price transportation, remaining a network airline.
LDaily: In your opinion, what needs to be improved at the legislative level so that the aviation market develops faster than now?
Y. Miroshnikov: There are a number of points from the already mentioned “10 steps”, which the state has not done yet. Some of them are still relevant, and some may have lost their relevance. For instance, VAT on domestic flights is one of the current issues. This is the money that is earned by the state, but not the airline. About $10 million a year given the scope and prices of the domestic market (before the pandemic, of course). By the way, on international flights, we have a zero VAT rate — as the rest of the world. That is, if the state applies a zero tax rate to domestic flights, the passenger will immediately pay 20% less. And 20% reduction in the cost of domestic transportation will stimulate the market, which will lead to more passengers, flights, therefore, there will be more takeoffs and landings at airports, so eventually, they will receive more revenue. Due to the growth of revenues, airlines will be able to open more flights and create new jobs. It is difficult to calculate the exact economic effect, but at least there will be a zero option — that is, the state will get from other taxes and economic benefits that $10 million missed from VAT. But they still hesitate to do that!
The second point is important for international transportations. For all its striving for European standards, Ukraine will not dare to apply a zero rate of excise duty on aviation fuel for commercial aviation as the EU did a long time ago. And what happened then? Ryanair, British Airways, Lufthansa, and any other European carrier pays a zero rate of excise duty on aviation kerosene both at its base airports (whether London, Frankfurt, or Paris), and in Kyiv as a non-resident. Ukrainian carriers are exempted of this tax abroad, but they must pay it at home. This is discrimination of Ukrainian airlines compared to their European competitors. The situation is not balanced.
The third point was very important before the beginning of a pandemic. These are the clearly inflated rates and fees for navigation of our state-owned air traffic control company UkSATSE. These fees are much higher than European ones, especially for navigation in the area of aerodromes. The fair rate is based on the number of aircraft in the sky and the costs of this enterprise, which must be optimized. For many years, rates did not reduce, despite a steady increase in the number of flights, and a confusing knot of problems and mutual claims was formed. As a result, many airlines, especially Ukrainian ones, incurred excessive costs. However, today the pandemic has caused an economic blow: Ukraine’s skies are almost empty, and UkSATSE is suffering huge losses virtually losing revenue due to a critical decline in the number of flights as it must ensure safe navigation and maintain air traffic and engineering infrastructure.
There is a number of other measures that the state could implement. For example, a well-thought-out strategy for the development of air transport, not confusing it with the strategy of aircraft production. Yes, aircraft industry should be engaged and developed, but there is also air transport, and they do not depend on each other. Airlines should be free to choose the types of aircraft they need — competitive, reliable, economical, etc. The aircraft industry must be able to design and produce aircraft in series, rather than a single-piece artefact, ensure certification, maintenance support and spares supply.
We need a system of legislative measures that would consciously support healthy protectionism and ensure the development of the industry as a whole. This is because the Ukrainian aviation industry competes with the European, American, Asian, and even Belarusian ones. This happens on specific routes and with specific players, and not only between the airlines, but between the airports as well. In most countries, sometimes in open, sometimes in a hidden form, but protectionism exists. Just think about the multibillion-dollar aid provided by governments around the world to their airlines. All over the world, but not in Ukraine!
LDaily: How do you communicate with the authorities about the legislative measures for the development of civil aviation in Ukraine? Is there any dialogue at all?
Y. Miroshnikov: When business at different levels tries to inform the state, all standard methods of normal civil society are used. Usually, the dialogue is conducted through correspondence — letters to the Ministry of Infrastructure, the Government, the President. The program “10 steps” to reduce the cost of transportation was presented at press conferences. As I am an advisor to the Committee on Transport and Infrastructure of the Verkhovna Rada, I have proposed to consider options for bills on both the zero VAT rate and the protection of the competitiveness of the Ukrainian aviation industry. However, even the simplest draft law on VAT although not quite complete in version of the Ministry of Infrastructure, waits to be considered for many months. They completely rejected the draft on support and protection of competitiveness.
LDaily: What needs to be improved at the legislative level so that more low-cost carriers are attracted to the Ukrainian market?
Y. Miroshnikov: I think that Ukrainian legislation is quite open. This is proved by the fact of the unlimited arrival of low-cost carriers on the Ukrainian market. I would rather advise the government to try to capitalize on the interest of low-cost carriers in our country. We should make something useful for the country instead of flirting with the electorate. So far, the low-cost carriers that came to Ukraine have not invested anything at all, they just started flying like any other company. The history of this business model is the operation of low-cost carriers in abandoned airports. It happened in the USA and later in Europe. This is their investment in infrastructure, the development of tourism, attracting tourist flows to the country, not from it. None of this yet happened in Ukraine. Meanwhile, the classics of low-cost model are flights not to the main airports, but to the secondary ones, which our state so much wish to reopen and develop.
LDaily: What impact does the coronavirus have on aviation today? What are the losses?
Y. Miroshnikov: Aviation is one of the most significant and biggest victims of the pandemic. If you use the emotional figure of speech, it is a deadly effect. Nobody remembers such depth and duration of crisis and recession. During the Second World War, when civil aviation as an industry was in its infancy, there may have been a larger decline in percentage terms, but no one noticed it. There were very few flights then, it was still an exotic transport.
The crisis of September 11, 2001, various epidemics, SARS, Ebola, volcanic eruptions — all this was local and sometimes led to restrictions and suspension of flights in a certain geographical area for only 3-4 days. Ukraine was also affected by the Icelandic volcano: there were many people who got stuck in airports and had to travel by bus. But 3-4 days passed, and everything recovered, everything was back to normal. This has not been the case so far: the emergency situation lasts already more than six months and leads to a 50-60% (sometimes more) reduction in traffic. Flights that are left are half-loaded simply because there is no demand. People now have so many spontaneous barriers to travel that they are simply afraid of falling into a trap. And in such circumstances, if we are talking about a vacation it is better to go somewhere near your permanent place of residence by your own car. If we talk about business, then in this environment, meetings are preferred to be replaced by video conferencing — Zoom, Skype, or something else. This has never happened before, and we will be trying to get out of this crisis for a long time, and, of course, we need global approaches.
There are proposals, but no solutions yet. In particular, the International Air Transport Association (IATA) has proposed to end the practice of bans: citizens of one country can arrive, and citizens of others cannot; this country is in one zone and this one is in another. It should be more like this: if you want to fly somewhere, you have to go through a certain procedure and get tested. And if your test is negative, you do not have to go through self-isolation or bans on visiting a country in the red, yellow, or green zone. This is one of the unified approaches to which people will get used to in a while and will start traveling again.
Currently, scattered decisions of different governments are destroying aviation. To ban the citizens of one country, but allow of another; here you need a test, there the self-isolation is required… All this changes often and unpredictably, but nobody plans a trip two hours before departure! Planning starts in at least a week, or ten days. During this time, everything can change, and you get to cancel a hotel reservation, air ticket, ruining all the plans because the government at your destination or departure country has introduced new rules. Although if, God forbid, you get sick, you would not fly anywhere yourself… We need standardized global measures on hygiene, protection, conditions for service, work of airports, and infrastructure. If such measures are introduced, the resumption of air traffic can begin. It is said that by 2023-2024, aviation will generally reach the level of 2019. These predictions, unfortunately, are getting worse constantly. Again, when we say “aviation”, we mean the travel industry: tourism, hotels, restaurants, and other related elements, everything works in a complex.
LDaily: How many people have already lost their jobs due to the crisis, and will there be a new wave of layoffs?
Y. Miroshnikov: In general, the losses of the Ukrainian aviation industry will amount to at least 30-40% of jobs. The policy of many countries is aimed at preserving employment. For example, in the United States, financial assistance is provided to airlines under condition that they will not resort to mass redundancies. In the European Union, people are paid 80% of their salaries from state funds, and this allows not only workers to live normally but also employers not to cut staff. Ukraine has done absolutely nothing in this direction, it probably can’t.
LDaily: How companies can compensate for the losses?
Y. Miroshnikov: I do not know what other methods can be used except for cost reduction, including staff and fleet. There are negative trends here because the airlines which got help from their states, are able to work, although it is extremely difficult for them. A number of European carriers are still flying to Kyiv because they are receiving assistance from their government, which makes it possible to cover the losses from the fact that they are flying half empty. Ukrainian companies cannot afford it because no one helps them. And they either choose cautious tactics of operation at the level of 10-15% of last year’s volumes or admit that it’s only a little more to bankruptcy.
LDaily: Do I understand correctly that in the six months of the pandemic, the state has not helped aviation in any way? As a result, airlines may go bankrupt, people will lose their jobs, and the market will be left without a local carriers.
Y. Miroshnikov: Aviation did not receive a single penny. In fact, I do not know whether Ukraine as a state has helped anyone: I have not heard of such precedents. It definitely did not help the aviation and the travel industry.
I have heard such phrases many times: “Why do we need airlines? The main thing for us is to have airports. And foreign carriers will also fly there, and everything will be fine.” But a foreign airline is an importer, it creates jobs in its own country, and it pays taxes there, including money paid by Ukrainian citizens.
Ukrainian airline has workplaces and pays taxes here, bringing a foreigner to Ukraine, receives money from an Englishman, Georgian or American and invests it in the national economy. If employing transit model, airline receives money not only from a foreigner who needs to go to Ukraine but also from someone who does not care where this Ukraine is: they buy a ticket from Almaty to London via Boryspil paying money to a Ukrainian carrier, instead of giving it to Air Astana or British Airways. Transit model makes it possible to attract this money, but it can only be handled by a national airline because no foreign one can build a network centered in Ukraine. Civil aviation uses the system of traffic rights arranged in such a way that each state gives the rights to the airline of the country from which the flight is performed. Ukraine gives to Spain, Spain to Ukraine, Ukraine to Kazakhstan, Kazakhstan to Ukraine… However, Kazakhstan will not directly give Spanish airline the right to fly from Kyiv, and Spain will not give it to Kazakh airline. Therefore, the main principle of transit is only the national company and the basic hub airport. And this is good for the economy because of the huge number of additional jobs. For example, there are very few people in Ukraine who want to visit Reykjavik. But if in Boryspil you embark not only kyivites on a flight to Reykjavik, but also transit passengers from 20-30 connecting (most logically – Eastern) flights, this route will be loaded and it will have the right to exist. That is, without transit the route Kyiv — Reykjavik will be unprofitable, but with transit, it can exist.
Transit on the domestic network was up to 65-70%. This means that when there is no such transit, only a third of capacity is needed. Or if you continue to operate all these flights without transit passengers, they will be loaded by a third and will be unprofitable. Transit through the base airport “Boryspil” in this case allows you to make much more domestic flights. Accordingly, if the passenger flies only between the domestic destinations, thanks due to the transit model, they will have more opportunities — like three flights a day instead of three flights a week. This is the benefit that country receives if its national airline operates the transit model. So, eventually, the winner is Ukraine, its citizens, its aviation.
Please read: What tool will help turn the despair and fear caused by COVID-19 into the energy of the company’s profit growth?
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