Saving the UIA: Anti-Crisis Solutions For Country's Largest Airline

The largest airline in Ukraine finds itself on the brink of bankruptcy, and it is asking the government for USD 100 million in financial support. However, is this really the only way out? We consider how to save the company at a time of crisis.
Maxim Arslanov 03 October 2014 14:30

The request of Ukraine International Airlines (UIA) to the government for a stabilization loan of USD 100 million again confirmed the plight of the domestic airline industry’s flagship. The fall of the market by 30%, the closing of the airports in Donetsk and Lugansk, the loss of Simferopol, the depreciation of the national currency by 60%, and the increased costs resulting from the need to bypass Russian airspace have dealt severe blows to the company, and recovery from this will be very, very difficult. However, was the carrier right to turn to the authorities for help?

The management of the company claims that it will be very difficult to survive without government support. The fact is that the UIA is not just any commercial entity but the market leader, which employs more than 2,000 people and provides employment to people in adjacent industries, such as airports, oil companies, and onboard catering firms.

"Therefore, it would be absolutely irresponsible not to make the government aware of this. If we are the backbone of this system, then we should interact very closely with the authorities at this difficult time," the UIA’s President Yurii Miroshnikov said in response to a question from the CFTS portal. "External factors, their scope and strength are such that the inner strengths of the company and its shareholders are not sufficient to counteract them," he added.

The head of the flagship airline also cited the example of Russian carriers, which appealed to their government for assistance because of the losses that they have had to incur as a result of having to bypass Ukrainian territory and stressed that there was absolutely nothing to be ashamed of in UIA’s letter to the government.

Where is UIA’s anti-crisis program? However, has the company done everything within its control? Was an appeal to the authorities the only way out of this situation? What is the likelihood that the government will respond to this appeal and provide the carrier with a stabilization loan? There should be no illusions here. The government currently needs to address many problems, including the war in the east of the country, the economic crisis, and preparation for the most difficult winter heating season since independence, during which Ukrainians risk finding themselves in cold homes with no light during severely freezing weather. Financial resources for these are sorely lacking. Therefore, finding an extra USD 100 million for rescuing one airline will not be easy, to put it mildly.

However, a legitimate question arises even if the money is found: on what will it be spent? The management of the UIA has not revealed to anyone an anti-crisis program that clearly outlines its next steps and the expected results. It is probably not worth counting on funding in the absence of such a plan. However, according to experts, the government could still support the company by returning what belongs to it by right.

"It is hard to say something about a government loan without seeing an anti-crisis program outlining how the loan will be used. Possibly, it is appropriate in this case to return to the issue of reimbursement of value-added tax, which will help airlines to review their revenues and survive the winter. Reimbursement of value-added tax is a very pressing issue because airlines are unable to spend their own money on investment projects and - in the current situation - on preservation of the company in the form in which it exists," the Stil Avia company’s Director Yevhen Khainatskyi told the Center for Transport Strategies.

However, as the CFTS found out, a problem that was recently on the agenda is no longer relevant. "Today, we have no problems involving VAT refunds because everything is being paid. So far, we have yet to receive about UAH 8 million for July and August this year, but this is not an overdue debt," the UIA’s spokesperson Yevhenia Satska told the Center for Transport Strategies.

Need for drastic measures The carrier will receive any support that will help it to stay afloat only if it takes serious anti-crisis measures. According to experts, the reduction of the airline’s fleet by 10% and retrenchment of 100 of its more than 2,000 employees will not be enough for the airline to survive in the current adverse conditions. "I have said before that a difficult autumn and winter await us. During this period, it is necessary to implement anti-crisis measures that are much more stringent than usual. By this, I mean reduction of its fleet, the geography of its flights, and consequently its administrative costs. It is necessary to leave clearly unprofitable routes, on which the proportion of transit passengers exceeds 40-50%. Such routes are not profitable but merely feed other routes," said Khainatskyi.

The UIA is in no hurry to optimize its costs but hoping for support from the government. It is possible that the company is thus seeking to secure certain preferences

"It is necessary to reduce its administrative costs, reduce its aircraft fleet, and review the work schedules and remuneration of the personnel that facilitate its operation. After all, the most valuable assets of any carrier are the people that work for it. Unfortunately, it cannot do without staff cuts. To what extent? We can see that the market has already declined by 30%. My prediction is that the decline will reach 40-50% in autumn-winter, compared with last year's indicators. Therefore, optimization should be commensurate to the realities of the market. It is impossible to cut costs by 10% and be successful when the market has collapsed and the purchasing power of the population has fallen by 40-50%," he added.

As an example, the expert cited the experience of Japan Airlines, which in 2009 incurred serious financial losses that forced it to file for protection from creditors under the provisions of the bankruptcy law in 2010. It is worth noting that Japan Airlines received a stabilization loan of USD 2 billion from the government, but this loan did not help it to maintain its previous volumes but merely delayed the time of implementation of unpopular measures, which included optimization of its route network and fleet and retrenchment of approximately 15,700 workers or one-third of its staff.

"The company reduced its costs by about 70%, leaving only those routes where flying was feasible and beneficial. It came out of bankruptcy 18 months later and regained its pre-crisis market shares on practically all routes over the next 2-3 years. The airline survived, recalled the employees it retrenched, regained its transport volumes, and regained the trust passengers. It was necessary to undergo a ‘reset’ and it did so successfully. That is the approach I would recommend taking in the difficult Ukrainian realities," Khainatskyi said.

Meanwhile, the UIA is in no hurry to optimize its costs but hoping for support from the government. It is possible that the company is thus seeking to secure certain preferences that will allow it to operate comfortably on the market. However, its future prospects are unlikely to be rosy if the authorities refuse and it fails to implement anti-crisis measures.

According to a poll on the web portal of the Center for Transport Strategies, the UIA’s efforts in search of financial assistance from the government are not popular. Only 19 percent of the participants in the poll support provision of a loan to the carrier under the existing conditions, 40 percent oppose, and 38 percent believe that help should be provided only in exchange for shares in the carrier.

Tags: FlyUIA, avia, finance