Yurii Miroshnikov: How the Political Crisis is Affecting the Airline Industry

Yurii Miroshnikov President of Ukraine International Airlines 10 February 2014 19:33

The president of Ukraine International Airlines, the largest airline company in Ukraine, discusses the difficulties associated with protests, the Common Aviation Area, and cooperation with the Boryspil airport

What were company’s results for 2013?

Last year was good for us because we increased passenger traffic by 64% and transported about 4.6 million people. We also doubled our fleet and, according to preliminary data, reached an annual turnover of about USD 742 million. We ended the year with a small profit, although things could have been be much worse given the events taking place in the country. It should be noted that the results of our operations and our forecasts were more optimistic before October. As of October, we were expecting a net profit of USD 20 million, but the political events in Ukraine and the economic situation in the industry then played their roles. In particular, the cost of fuel increased and problems arose on the charter market, for example, in Egypt, to which charter flights were poorly booked. In addition, the liberalization of the Kiev-Moscow route led to a price collapse and dispersal of the existing passenger traffic among a larger number of players. We had a revenue shortfall of USD 10 million in December.

How did the political events affect the operations of the airline company?

We currently have serious problems caused by political events. We are seeing a drop in demand for transportation and cancellations by groups of passengers that previously planned to fly either to Ukraine or on transit through our airports. Leasing companies are not agreeing to lease airplanes to us. Although they have no alternative clients and they are putting the airplanes back on the market, they are afraid of leasing them to Ukrainian carriers. In addition, some shippers are looking for alternative routes for delivery of their products, bypassing our country. Therefore, the negative impact of the political crisis is very high, but we continue to hope for pent-up demand in case of quick and peaceful resolution of the situation.

But the State Aviation Service is arguing the opposite: that the increase of passenger traffic through airports in January exceeded 20% and the political situation has had no impact on the industry

Let me remind what happened in January 2013. The AeroSvit airline company stopped operations during this period, and there was a sharp drop in passenger traffic. Therefore, the basis for comparison in this case is wrong. For objectivity, the figures for 2012 should probably be provided. We understand what will happen in February and March because we are also seeing the results of preliminary bookings. In addition, the people that plan their trips six to eight months ahead are already making decisions not in favor of Ukraine.

What will 2014 be like, according to your forecast?

It will definitely be very difficult. What is happening in Ukraine belongs to the category of things that we, as a business, cannot influence, but we are suffering from it. Since we cannot change it, it is difficult for us to predict what will happen tomorrow. If everything is resolved quickly and peacefully, then we will restore many parameters and finish 2014 approximately the same way as we finished 2013. We have incurred losses in the first 1.5 months of the year, but we have the opportunity to catch up in case of an optimistic scenario. The year will be disastrous if the crisis drags on, and we will be forced to take unpopular measures: reduce the number of flights, our fleet, and our personnel. We will do everything to ensure that the airline company survives, but a high price will have to be paid for this and it will be very painful.

What could be the size of your losses in 2014?

We currently have a revenue shortfall of about USD 40 million. This is insignificant against the backdrop of the planned turnover of USD 1 billion, but it is a lot considering the average industry profitability of 3% and the loss of 4% of revenue.

Will the company explore new destinations in the difficult 2014?

It is difficult to answer this question today. A little earlier, I could talk about specific plans. However, the current political events are forcing us to seriously and deeply reconsider everything that we intended to do in 2014. Therefore, I can only say now that the UIA plans to develop based on a network model and increase the transit flows from which we have already learned to benefit. It is specifically thanks to transit traffic, which accounts for about 40% of our passengers, that we are able to reduce our losses. Kiev-New York flights will be launched within the scope of our model. We are also moving in the direction of Beijing with great difficulty because we have been unable to obtain permission from the Chinese authorities for the past six months. Therefore, we have postponed the launch from April 12 to the end of June, and we are not ruling out further postponements in the future.

In addition, we intend to launch several medium-haul flights to destinations in the west and north-west: Stockholm, Dusseldorf, Minsk, and Chisinau. Several destinations are also planned in the east: Dushanbe, Ashgabat, and Tashkent. Our plans also provide for a number of destinations in the Persian Gulf.

How do you assess the initialing of the agreement on Common Aviation Area with the EU by Ukraine?

All our activities in recent years have been focused on preparations for the signing of this agreement. One of the key issues in the agreement is parity. Formally, it gives the two parties the same rights, but the opportunity to take advantage of these rights do not always exist in practice: it is much easier for a foreign carrier to receive convenient slots at Ukrainian airports than it is for us to receive them at foreign airports. Indeed, it is quite problematic to carve out a comfortable time in the timetable because of the intense workload, and the balance is disrupted.

On the other hand, in our opinion, liberalization should not be rushed because numerous untapped opportunities already exist. For example, European carriers can perform 56 flights per week from Italy to Ukraine but, for some reason, nobody is in a hurry to enter this route. The situation will most likely remain unchanged after the signing of the agreement until the market regulates everything, especially considering the fact that increase of passenger traffic is constrained by the visa regime, although there are numerous examples in which the removal of these barriers have generated demand: Israel, Egypt, and Turkey.

Let us also consider the pessimistic scenario. European network carriers, which are beginning to take transit passengers away from us to their hubs, will come to Ukraine after the liberalization. As a result, not only UIA will lose, but also domestic airports, where the number of takeoffs and landings is reducing and revenues from fees are falling. In addition, low-cost airline companies are appearing here to take over direct traffic. As a result, we are left with nothing. To avoid this, we are operating in the easterly direction to use this to compensate for the losses from the western side. However, we are encountering certain difficulties here. If the West is too liberalized, then the East is over-regulated. During negotiations with countries such as Uzbekistan, we recognize ourselves from 20 years ago when we signed with Europe intergovernmental agreements of the old format, which allowed carriers to perform no more than two flights per week. These documents did not include any clauses on transit and dealt exclusively with passenger traffic between the two countries.

By the way, how was the dispute with the Uzbek aviation authorities and Uzbekistan Airways resolved?

Under various pretexts, we are still not given the opportunity to fly in such a way as to transport on transit through Kiev.

How successful was UIA’s debut in the long-haul sector? How has competition on the Kiev-Bangkok route affected the occupancy rate?

Its debut on this route was successful. We offered an acceptable combination of price and quality on this route. The average occupancy rate was 83-84%. In addition, the bet on transit also yielded benefits because about 30% of the passengers on this flight make transfers. We are pleased that many of them are travelers from Western Europe, from countries such as Belgium, Switzerland, and the Netherlands. Many passengers were from Poland.

On the other hand, it should be remembered that we began to fly during the peak season, which was followed by a fall, which will be replaced by a rise closer to the May holidays. However, we are hoping that the flight will be in demand not only during the tourist season. We have worked with local carriers, and we can now offer customers the opportunity to complete their flights to countries such as Vietnam and Cambodia.

How comfortable is it for you to operate in Terminal D? Have you been able to solve some of the technological problems under the new leadership of the Boryspil airport?

Yes, there are definite improvements now. The main improvement that we are waiting for is transfer of the zone for domestic flights to Terminal D. The other innovations have their downsides. For example, public eateries have appeared in the gallery, but the area for recreation and the number of seats in the waiting halls have reduced simultaneously. Drive past the terminal D has become more convenient because barriers that separate it from streams of automobiles have appeared. However, this is uncomfortable for people meeting arriving passengers because they cannot stop near the terminal and the people they are waiting for are forced to walk with their luggage to the parking area, which is slightly remote.

In general, looking to the future, we can say that the terminal project does not correspond to the transport model that UIA is implementing and the one that would have been logical for the Boryspil airport as a hub. The terminal was designed as a non-transit terminal, and this is the main problem. They are attempting to adapt it for transit, but this is quite problematic. We are already analyzing the difficulties that we will encounter two years from now, when our fleet will expand to 50-60 airplanes. In international practice, terminals are constructed in a way that allows their subsequently expansion. That does not exist here. There is not enough space in the airport apron. It is constricted by the boundaries of the airport on the one hand and by the runway on the other. There is a small space that the airport plans to use to expand the apron. However, what will be the benefit of this expansion? The apron can accommodate 50% of UIA’s fleet today and it will be able to accommodate 50% of UIA’s fleet two years from now. This means that the fleet will be scattered throughout the territory, as a result of which minimizing the period of connecting flights during transit waves will be impossible. This also means that it will be difficult for the airport to compete with other hubs.

How has the dispute between the airport and AIRO Catering affected the supply and quality of in-flight meals at the airport?

We are cooperating with both companies. About 60% of the service is provided by the AIRO Catering company and about 40% by Do & Co. We, of course, favor competition because airline companies are squeezed between two millstones - supply monopolies on which expenditures are constantly rising and the intense competition for passengers that forces us to lower prices and resort to tricks. Therefore, we were happy to see a little competition between the two companies: at least, it would have slightly weakened the pressure from one of the presses. However, if a supplier occupies a monopoly position, it adversely affects our expenditures. Following its ban from accessing airport infrastructure, AIRO Catering’s competitor currently drives its meals to aircraft in vehicles.

Tags: FlyUIA, avia