Without Wizz Air: What Forced the Only Low-Cost Airline in Ukraine to Withdraw from the Market

The Ukrainian subsidiary of the Wizz Air Hungary budget airline is ending operations on the eve of the tourist season. Apparently, investors fear for their investments because they see no improvement in Ukraine, and they are hastily evacuating their assets from the country.
Maxim Arslanov 23 April 2015 17:39

The story of the first budget airline in Ukraine was too short. Not very long ago – in 2008 – the carrier ceremonially appeared on the domestic market, offering tickets at UAH 9. The subsidiary of the Wizz Air Hungary airline company performed its first flights within Ukraine from Kiev to Odessa, Simferopol, and Lviv. After that, the low-cost carrier gradually began operating on international routes, adding flights to Dortmund, Cologne, Katowice, and Oslo.

Passengers liked the idea, especially considering the fact that its advertising campaign was carried out with the support of Minister of Transport and Communications Josyp Vinskyi, who lobbied for the reconstruction of the runway at the Zhulyany airport in Kyiv, where an Airbus 320 belonging to Wizz Air Ukraine landed demonstratively. Subsequently, this airport became the first Ukrainian base of the low-cost carrier.

However, changes soon occurred in the operations of the carrier. After a successful promotional campaign, Wizz Air Ukraine gradually began closing unprofitable domestic flights and concentrating on international routes, which are more profitable.

"At the moment of arrival of Wizz Air Ukraine, the market was more than 80% not ready for full operation of the low-cost model. In particular, their Ukrainian subsidiary encountered the unpredictability of the national tax legislation, the high cost of fuel, monopolization of services at airports, inadequate levels of services, passengers’ habit of buying tickets through travel agencies, and so on. If you take a list of the 10 basic external conditions requirements that determine a low-cost carrier’s chances of success, no more than two of them were met in 2008," Yevhen Treskunov, a partner at the Aviaplan consulting company, told the Center for Transport Strategies.

According to him, in the seven years in which Wizz Air was based in Ukraine and other foreign low-cost airlines operated flights, the list of the requirements that were met managed to increase to four, and the entire market benefited from this. They taught Ukrainian passengers to buy tickets en masse through the Internet. Wizz Air Ukraine also managed to get local airports to reduce the turnaround time of aircraft at the airport - one of the most critical requirements for efficient operations of low-cost carriers. For example, in Europe the period between a landing of a flight and the next flight of a low-cost carrier is 20-25 minutes, which allows them to perform more flights and consequently increase their revenue from each aircraft. In Ukraine, nobody could initially ensure flight turnaround time of less than 50-60 minutes.

"The same Wizz Air showed the Boryspil airport that if the embarkation and disembarkation of passengers is performed not through one door, as usual, but through two doors at once, then this will reduce the downtime of an aircraft on the ground. At the same time, luggage can be loaded and unloaded faster if this is an airline requirement that is strictly regulated by a ground handling agreement," said Treskunov

The airline’s ambitious plans were adjusted somewhat by Ukrainian realities and the economic crisis that the country faced in the period of 2008-2009. That notwithstanding, the low-cost carrier’s fleet eventually increased to five aircraft and it made plans to open new bases in Lvov and Donetsk.

External factors The events of 2014 radically changed the situation in the country and resulted in deeper economic crisis. The loss of two commercially attractive airports in Simferopol and Donetsk, the rapid devaluation of the hryvnia national currency, and the freezing of the population’s incomes amid fighting in eastern Ukraine dealt a blow to passenger traffic. The transport volumes of domestic airlines fell by 20.2%, according to the State Aviation Service. Airports in continental Ukraine lost 22.5% of their clients.

The decision to terminate operations in the spring after increasing its losses in the winter looks strange

The situation in the airline industry was complicated further by currency regulation, which obliged carriers to sell the lion's share of their revenues and then buy dollars after a while, leaving them unable to make the necessary payments promptly and resulting in losses on exchange-rate differences when buying foreign currency.

Against the background of all these events, the only low-cost carrier in Ukraine announced the termination of its operations. To be more precise, Wizz Air Ukraine stopped operations on 20 April. Part of its network of routes - eight destinations - will be served by its parent company, Wizz Air Hungary. One of its aircraft will be re-based Kosice, and it will perform flights to Milan and Sheffield from the beginning of June 2015.

Flights will continue to be performed from Kiev to Budapest, London, Dortmund, Hamburg, Cologne, Munich, Katowice, and Larnaca. Flights to Moscow, Kutaisi, Barcelona, ​​Valencia, Milan, Naples, and Venice will be discontinued.

Internal factors What explains the departure of Wizz Air Ukraine? "[This is] due to the ongoing instability in eastern Ukraine, the devaluation and volatility of the local currency, and the impact of foreign-exchange controls. Wizz Air Hungary’s operation will significantly mitigate these impacts and enable Wizz Air to remain one of the major airlines in the Ukrainian market and stand ready for expansion once market circumstances improve," states the a press release containing the carrier's official explanation for this decision.

However, experts believe that these are not the only reasons. According to them, it would be more logical to close the business at the end of the lucrative summer season. "This step looks a bit strange. Why close the company on the eve of the highly profitable summer season? The decision to shut down operations in the spring after its losses increased in the winter looks strange. In my opinion, there are two possible reasons for this decision. First, the founders do not see opportunities to make money on in Ukraine in the future because of the projected fall in demand for transportation. However, in view of the foregoing, the second possible reason is obvious: such radical changes, which are contrary to economic logic, could have hidden political motives," the Styl Avia company’s Director Yevhen Khainatskyi told the Center for Transport Strategies.

"In fact, the true reasons for the decision may be different from what was said in the official statement. Judge for yourself: why discontinue flights close to the airline industry’s profitable month of aviation, when demand for tickets from tourists increases? Moreover, the legislation requires the company to provide advance warning of such a decision to the aviation authorities and passengers. It is most likely that investors feared for their investments because they did not see improvements in Ukraine and hurriedly ‘evacuated’ their assets from the country," said former commercial director of Wizz Air Ukraine Vadym Tretiak.

The company’s IPO may also have played a role. Experienced securities traders are accustomed to using any information for speculation. Therefore, the existence of "an asset with a high degree of risk" in Ukraine may adversely affect the parent company’s share value.

The company’s IPO may have played a role

"For global aviation investors, existence of a subsidiary in Ukraine today poses a certain degree of risk to their overall business. One may think, ‘How can two Wizz Air aircraft registered in our country affect its share quotation when the Wizz Air group has a fleet of more than 50?’ I will answer by citing a recent, very sad experience as an example. After the crash of an Airbus 320 aircraft belonging to Germanwings, which is a subsidiary of the Lufthansa airline, the stock price of the latter fell by 4% in single day. Financial markets react instantly to any risks involving an airline business. Therefore, with the unfavorable development of the military-political events in Ukraine and the simultaneous IPO by the entire Wizz Air group, there is a significant risk of undervaluation. Therefore, this this factor is also very logical and it could definitely have influenced the decision to leave," said Treskunov

Otherwise, why violate the law and depart on the eve of a profitable season, selling tickets for the month of May at a discount? "According to Article 94 of the Air Code, an air carrier is obliged to notify the civil aviation authority about termination of regular transport services 30 days before the scheduled date of termination and state the reasons for the termination," lawyer Andrii Huk told the Center for Transport Strategies. According to unofficial information, the decision was made during an extended meeting of the supervisory board of Wizz Air Ukraine in mid-February. However, they somehow forgot to announce the decision. Possibly, the Ukrainian management of the airline and its Hungarian shareholders were holding discussions until the last moment on continuation of operations...

The State Aviation Service says that it did not receive notification from Wizz Air Ukraine. "This news is certainly bad for the market because it reduces the choice for passengers. However, with a 30-percent shrinking of the market and the triple devaluation of the national currency, it is very difficult to maintain capacity. We are well aware that this was an optimization decision taken by the parent company. I would like to note that Wizz Air Hungary remains an operating carrier on eight routes, for which we will provide maximum support on our part," the State Aviation Service’s head Denys Antoniuk told the Center for Transport Strategies.

This situation is most likely positive for travel agents: it is difficult to make money with Wizz Air and the airline influenced the market by setting low prices for several destinations, which reduced the profit margins of travel agents

What is next? However, it is still an open question whether Wizz Air Hungary will remain an operating company. Despite the promise in the press release to operate flights with the parent company’s aircraft, the carrier has not yet received permission to operate on these routes. To do this, it will have to complete the formalities with its own authorities very urgently and then apply to the Ukrainian authorities for permission. So far, according to Antoniuk, nobody has submitted applications to him for these destinations.

What are the consequences of Wizz Air Ukraine’s departure from the market? "It will be worse for passengers, as with any reduction in supply. It will be worse for Wizz Air’s partners in Ukraine – the Zhulyany airport, ground handlers, and tankers – because their volume of work, which is already small, will reduce even further. Employees of Wizz Air Ukraine have to look for work and most likely relocate. Employment opportunities for pilots in Ukraine are reducing and the labor market is shrinking. This situation is most likely positive for travel agents: it is difficult to make money with Wizz Air and the airline influenced the market by setting low prices for several destinations, which reduced the profit margins of travel agents even when they were selling tickets for competing airlines," said Serhii Kaduchenko, the owner of the Treveldesk company.

Wizz Air can be expected to return after cessation of fighting and gradual recovery of the economy, as well as after the signing and implementation of the Common Aviation Area agreement, when the Hungarian carrier will be able to increase supply on European routes without obstacles.