Fingers point to monopolist Ukraine International Airlines as new low-coster SkyUp hit by court attack

Photo: emerging-europe.com 

Ukraine

Article by: Olena Makarenko

SkyUp is a small private Ukrainian low-cost airline. Its first flights took off in 2018, the year after the EU visa-free regime with Ukraine was introduced. While it seemed that conditions were favorable for low-cost airlines, their route into the Ukrainian market has turned out to be stonier than expected.

The reason for this revolves around the de-facto monopoly on air travel held by Ukrainian International Airlines (UIA) whose co-owner is oligarch Ihor Kolomoyskyi. Recently, a court scandalously deprived SkyUp of its license. State officials spoke out in support of the low coster. A number of experts saw Kolomoyskyi’s trace in the scandal. So far there is no evidence of the UIA being involved. However, the incident once again revealed the problem of monopoly in the Ukrainian market.

During its year of operation, SkyUp has had its ups and downs. 14 June of this year was definitely the latter. On that day, the Baryshivka district court of the Kyiv Oblast suspended SkyUp’s license for passenger transportation. A plaintiff complained of flights being delayed and the company not honoring its commitments towards its clients. Later, the journalists revealed that the plaintiff was not real: the women who allegedly appealed to the court said she had never been SkyUp’s client and did not appeal to the court.

The company filed an appeal against the court’s decision. However, the absurd events did not stop there. Oleksandr Alba, co-owner of SkyUp, described that the lawyer of the fake plaintiff attended the Kyiv Court of Appeal hearing.

“About the plaintiff who did not file a lawsuit and did not fly. This lawyer asked to disqualify the judge, in order to play for time. Why? This is an interesting question. Whose interests does this lawyer actually protect and where did he receive the plaintiff’s signature? These questions are no less interesting. However, you do not need to be a lawyer to understand: it’s a fake.”

So far, the company operates as usual.

The government’s position

State officials have been supportive of the new airline since its launch. On this occasion they have supported it too, sharing society’s sense of outrage.

The Prime Minister Volodymyr Groysman called on the Minister of Infrastructure Volodymyr Omelian to deal with the situation in terms of the law and make everything possible for the company to be able to function according to the law. He also applied to the Ministry of Justice to prepare corresponding letters regarding similar incidents to all the bodies of the judiciary which are responsible for it and also to President Volodymyr Zelenskyy.

Omelian, in his turn, called the decision of the Baryshivka district court “more than strange” which was “outside its jurisdiction.” The Minister also mentioned that his employees developed a mechanism which would allow airlines to operate without stress for the passengers and the airlines itself.

“What is going on is a clear attempt to intervene against mechanisms of free competition created by us. This is for sure not a competitive method of competition. It will again lead to an aviation monopoly in the sky,” said Omelian.

On the question of the 5 Kanal journalist on whether the UIA and Kolomoyskyi were involved, the Minister answered indirectly.

“At this stage, I do not have any particular evidence. However, I think that such evidence should appear in law enforcement agencies because even the mini-investigation we conducted by ourselves shows that it was for sure a plot by particular people.”

Why is everyone blaming the UIA?

Two months before the incident. SkyUp started selling tickets from Kyiv and Kharkiv to Paris and Nice. Before, it was only the UIA that flew from Ukraine to Paris. In March, Ukraine and France liberalized the airline route between the two capitals and increased the number of flights. This resulted in SkyUp becoming a competitor to UIA on the route.

Other developments on the Ukrainian market created other problems and competitors for the UIA, in particular, all the low-cost carriers.

For example, in 2017 the UIA contributed to the difficulty of Ryanair entering the Ukrainian market. In the spring of 2017, Ryanair announced it was coming to Ukraine, only to declare in July of the same year that it was leaving it before even starting to operate.

Among the reasons were disagreements on the conditions with Ukraine’s main airport Boryspil, Ryanair’s reputation of being a tough negotiator, and the UIA which was believed to be a third party in the situation. Boryspil and the UIA were suspected of collusion.

“We discovered that the state-owned Boryspil Airport gave an 80% discount to the UIA. This amount raises a logical question: what should the profitability of the airport be for it to be able to offer such a discount?” MP Yuriy Derevianko asked at the time.

Also, Serhiy Hyzhnyak, an expert in the aviation industry did not predict a bright future for UIA.

“The main opponent to Ryanair, which is now entering the Ukrainian market, is the UIA. They realize that if the low-cost airlines come to Kyiv under current conditions, probably in 3 years the [UIA] airline will go bankrupt,” said the expert in 2017.

Ultimately, Ryanair did enter the market, and not alone.

“According to analysts’ prognosis, 2018 had to become a year of low-costers for Ukraine. As we saw, it did happen,” says the report Characteristics and Analysis of Development of Low-Cost Airlines in Ukraine.

Also according to the survey, during 2018 a total of 21 Ukrainian companies transported passengers. Of these, five are leaders, including the UIA of course. Regular international flights were operated by 10 local airlines to 46 countries of the world. During the year Ukrainian airlines opened 17 new routes. Also, five international companies started to operate regularly in Ukraine. Totally, in 2018, 38 international airlines were flying to Ukraine from 37 countries of the world.

According to liga.net, in 2018 the UIA transported 8 million people – twice as many as in 2014. Two-thirds of all passengers using Boryspil Airport arrived via UIA flights. At the same time, the losses of the airlines amounted to more than $100mn.

At least this is what the company declared. But actually, stating losses might be a strategy to avoid paying taxes.

Previously, Euromaidan Press wrote that demonstrating that it has no money, the company ceased paying the state-owned Ukraerorukh that provides navigation service and is responsible for the work of dispatchers.

“In court, UIA claimed that the tariffs requested by the state were too high and unfair, although all other companies pay the same amount. What is more, UIA requested compensation from the state for the previous years (2016-2017) when it paid “inflated” tariffs. UIA already owes the state 500 million UAH, but the first court decisions lean towards the company’s interest and oblige the state to provide navigation service further. Also, UIA does not pay the aviation fee that amounts to $2 per passenger.

The elephant in the room

It seems that whether the government likes it or not, it will have to deal with the UIA troubles sooner or later. Yuriy Myroshnykov, the UIA president in the interview to liga.net already spoke about possible government support.

Covering the issue, the media was expecting that to a large extent the case would depend on who became president. Its interlocutors pointed at the main instruments of how the government can influence the activities of an airline:

  • Through the State Aviation Service which decides the questions on the access to lines, the rights of international companies for the night parking, licenses etc;
  • Through taxes (for example, for fuel);
  • Through Ukraerorukh, the agency responsible for navigation;
  • Through the Antimonopoly Committee.

Also, the control over state airports allows unequal conditions to be created for different players and important legislative decisions are lobbied in the Parliament and the Ministry of Infrastructure.

“We say the UIA, but think Kolomoyskyi. We can suggest that a new president loyal to the business of the oligarch a priori will allow the airlines to have additional preferences in may UIA’s problems related to the high cost of the fuel and high stakes on air navigation,” the media quoted Viktor Logvinenko, the ex-head of the Aerosvit and the UIA. However, in this case, the other players might demand the same conditions.

The media names two possible scenarios for the government regarding the UIA:

  • to leave it as it is which can lead the company towards bankruptcy and potential grounding;
  • to bail it out, which might cost billions.

Liga.net’s interlocutors agree that no one is interested in a UIA bankruptcy. According to Logvinenko, no less than $150-$175 million are needed to replace at least a part of the UIA’s volumes in this case.

The company’s management in its turn can follow one of two possible ways – keep competing in the market which is becoming more and more competitive or to leave it. The second story already happened in Ukraine in 2013, that time the company Aerosvit went bankrupt and left the market. Of note is the identity of one of its shareholders – Kolomoyskyi.

Edited by: Michael Garrood

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