Last week, two European carriers took the controversial decision to effectively severe their ties with Ukraine, Brussels Airlines and British Airways stating that the Ukrainian air travel market is no longer profitable for them.
This is despite air communication with Ukraine being of strategic importance, both for cooperation between Ukraine and the EU and for Ukraine itself.
Ukrainian International Airlines also recently closed air communication with Astana and Colombo.
This series of events have set the alarming bells ringing for the Ukraine airline industry.
Ukrainian carriers, it has to be said, are in more oppressed conditions than their competitors. European companies are leaving the Ukrainian market because of low profitability and low demand for flights. Under current conditions, Ukrainian airlines have no choice but to reduce their network of flights. In any country, a logical solution would be to use state mechanisms in the form of incentives for national companies to revive the industry and promote economic growth. Unfortunately, for now, Ukraine has a different view on this.
There are 50 permanent airports in Ukraine but only about 10 actually operate, most of which need major repairs and costly reconstruction of airfields. But this is not the main fault of the Ukrainian aviation industry. Ukrainian air carriers have become hostages of politics. They are losing out to foreign counterparts. This is not down to market mechanisms but is political.
There are several reasons:
- Navigation. First of all, the state for a long time has supported the expensive cost of air navigation services compared to the European one. As a result, Ukrainian carriers are forced to overpay about $350 for a medium-haul flight and about $1,000 for a long-haul flight.
- Taxes. In Ukraine, there is value added tax, which is 20% of the amount of any goods or service related to domestic flights, which makes the flight extremely unprofitable.
- Excise taxes. In Ukraine, there is an excise duty on aviation and is $32 per ton. European practice prohibits the use of excise duties on fuel for passenger flights, and therefore Ukrainian airlines are losing out.
- Military conflict. Part of the territory of Ukraine is under occupation, where military operations are constantly ongoing, including the use of short and medium-range missiles. The example of Boeing MH17, which was shot down over the territory of Donbas, confirms the seriousness of the situation. In this regard, in Ukraine there is a ban on air travel over the eastern territories where hostilities are taking place and over the Crimea peninsula. In addition, there is a ban on direct flights to the Russian Federation, as well as transit over its territory.
The first two restrictions apply to all airlines, since they are focused on safety. At the same time, the ban on flying to the Russian Federation and transit movements in the sky over the territory of Russia is caused by political factors and damage Ukrainian air carriers. To fly east, they have to spend much more kerosene and accordingly increase flight time.
Passengers still fly from Ukraine to Russia and vice versa, however they must do a transfer. Passenger traffic goes to the Baltic countries, Belarus, as well as Turkey to get to Russia. At the same time, rail and ground communications with Ukraine and Russia remain. As such unfair competition is created between different types of communication and rail and ground transport attract passengers which discriminates against air.
Ukraine has created additional problems for itself with border controls. Of course, every passenger is looking for the most profitable ways to get to their destination but Ukraine is forcing passengers to seek alternative opportunities for border crossing without controls.
Aviation is the safest mode of transportation for tracking passenger movements as it includes security, passport data verification, customs and border controls both before departure and after landing. This cannot be said of other modes of transport.
Due to the conflict with Russia, some of the border is uncontrolled which generates illegal crossings and criminalization. Those parts that are under control are not able to fully track the entire perimeter of the border.
Belarus gains economically because most of those who want to fly to Russia fly through its capital, Minsk. Minsk has become the most convenient interchange hub and has tripled air travel and even built an additional terminal. Ukraine is losing not only direct passengers flying to the Russian Federation, but also transit passengers from foreign markets who choose an alternative hub airport, such as Istanbul.
“The efficient functioning of the economy requires the rapid movement of goods, money and people,” wrote the famous economist Friedrich von Hayek.
While developed countries invest heavily in infrastructure, transit is self-supporting in Ukraine.The biggest chance for Ukraine to be connected to Europe is through air travel so the state should create all conditions to support the industry. However, in Ukraine, current experience shows that air carriers face harsh, unfavorable conditions caused, to a large extent, by the state itself. As a result, Ukraine’s largest airline, “Ukraine International Airlines”, has been forced to severe its links.
Such trends have real consequences in the long term and the state should be obliged to do everything to promote air carriers. Ukraine should perhaps draw on the experience of other countries.
Ukraine is not the only country that has a military conflict or foreign sanctions, but it is almost the only one that turns its back on domestic investors without giving support.
Georgia, after facing Russian sanctions, provided state subsidies to airlines to remain on the market and retain a competitive advantage.
Qatar, under pressure from neighbouring countries, reacted logically: a visa-free regime was introduced with several other countries, which allowed the national air carrier to boost demand in other markets and increase the profitability of companies.
Even Russia is more pragmatic and business-oriented toward resolving such issues. Its government compensates national airlines for losses due to traffic losses resulting from economic sanctions.
However, in Ukraine a similar approach has not yet been seen.
Moreover, the state increases the tax burden and pressure on the largest market players. In order to be in a “club of European countries” it is worth learning from Europe.
The state in other countries is obliged to intervene and change the priority from politics to the economy.
Otherwise, the consequences can be disastrous.
(c) EU Reporter