Ukrainian largest air carrier and one of the assets of oligarch Ihor Kolomoysky, UIA, is in a steep peak. We wrote about UIA's record losses, the company faced some problems with paying salaries, and the employees began to quit. The number of complaints about the service of passengers has also increased.
This year the situation has worsened. Recently, the company announced a sharp reduction in flights. And in a recent interview, Minister of Infrastructure Vladyslav Krykliy stated that UIA has debts to the state. And if the issue is not resolved, the company will go bankrupt.
Zelensky's team’s rhetoric regarding UIA has noticeably changed. More recently, Krykliy spoke about the losses suffered by Ukrainian airline companies due to the closure of the Russian sky and even promised them compensation from the budget. UIA then estimated its damage at 203 million USD. But, apparently, they are not going to pay them yet.
Minister Krykliy, who only a month ago promised UIA and other airlines compensation for flying around Russia, radically changed his mind. In an interview with RBC-Ukraine, he said that UIA is indebted, and if the issue is not resolved, "the company is bankrupt. And this is not very good," he said.
Speaking of doggies to the state, Krykliy has in mind UIA's debt to UkSATSE, which is about half 20 million USD. The company owes this money for the already provided air navigation services. But it is in no hurry to pay, challenging the debt in the courts. The key argument is allegedly inflated prices of UkSATSE.
Kolomoysky said: “I do not manage UIA. If there are debts, then it acts in accordance with its contracts and agreements, which means there is no money.”
Aron Mayberg, co-owner, and head of the UIA Supervisory Board, notes that the cost of air navigation services in Ukraine is 350 USD per one medium-haul aircraft and 990 USD more per long-haul flight than in Europe. And this, according to him, has become one of the causes of UIA losses.
According to Mayberg, this year, the company will most likely also be unprofitable. As of September, debt to Boryspil airport reached about 12 million USD.
Some sources of Strana assure UIA has salary delays, which makes the employees fired. An unspoken order was also given not to recruit new people for vacancies. "There are no reductions yet, but the staff is still decreasing," he said.
Apparently, UIA hoped to solve its financial problems at the expense of the budget. In particular, they lobbied for state compensation to air carriers for flying around Russia. UIA then estimated its damage at 203 million USD.
But now, apparently, the issue of compensation has been frozen. Minister Krykliy said that "such things can only be decided at the political level. Secondly, we need to find budget funds for it. Thinking about it is one thing, but finding the money for it, big money is something different."
That is, apparently, there will be no payments, at least now.
Meanwhile, UIA recently announced an “optimization” of its flight schedule as early as November 16. In particular, flights to Riga, Minsk, Amman, and Beijing will be canceled. The frequency of flights in many directions from Kyiv to Europe and Asia will be reduced to once a day. The exception will be destinations to London and Vilnius (there will be two flights a day), as well as to Istanbul, Tel Aviv and Tbilisi (several times a day).
Domestic flights will reduce the frequency of flights to once a day in Kherson, Zaporizhia, and Ivano-Frankivsk (now - twice a day).
All these innovations at UIA are explained by the unprofitableness of flights. Passengers are in a panic. As of October 29, that is, a few days after the announcement of the reduction of the flight network, the company’s contact center received 67,000 calls, which is three times more than usual. People are interested in what will happen to the purchased tickets. UIA promises to compensate for the money.
Real losses or accounting creativity?
"The company has been working in red for a year and a half. The revenue is not enough even for salaries and jet fuel, there are problems with payments to contractors," a source familiar with the situation at UIA told Strana.
Aron Mayberg names several causes of losses, including UkSATSE’s too high rates, a ban on flights to Russia, and an excise tax on jet fuel.
But, according to the director of Friendly Avia Support, Oleksandr Lanetsky, the main reason is cheap tickets.
“There is no solvent demand in Ukraine. That is, people are ready to fly, but only cheaply. Ticket prices have fallen fourfold since 2012. Not only UIA, but other carriers are suffering from this. Most flights of Ryan Air are to Poland, Germany, the Baltic States, that is, they are oriented towards people who used to travel by bus, but now fly by plane. Ticket prices in Ukraine are lower than the cost. To bring carriers revenue, they must be at least twice as high," he says. An exception is made by several routes (to Amsterdam, Paris, Vienna, etc.), but they do not save the situation.
The situation, allegedly, was aggravated with toughening competition when the Ryan Air low-cost airline entered Ukraine and domestic carriers, in particular, Yan Air and Sky App, became active (which, according to rumors, Kolomoysky had recently tried to neutralize by suspending the license through the Baryshivsky court).
In addition, UIA is trying to maintain a transit direction by selling affordable connection tickets in Kyiv.
However, there is another explanation for the huge losses of UIA. “The company regularly gives financial statements, but only according to Ukrainian standards. I have never seen international reporting. And, as practice shows, domestic accounting can be handled quite creatively. For example, some of the planes in UIA’s fleet belong to Kolomoysky’s structures,” ex-deputy minister of infrastructure Oleksandr Kava explained to Strana.
Some experts also say that UIA specifically drove at a loss by withdrawing funds from the company. That is, the same scheme has been worked out as with Privatbank.
“Everything resembles blackmail, following the example of Privatbank. Give me money, otherwise, I will do something bad. Like, if you don’t give compensation, we’ll collapse the air transportation market, and we have about 70% of the market and it will be bad for everyone,” Vyacheslav Konovalov, an analyst with Europatrul, admits.
Schemes for UIA
The main question is what will happen to UIA and whether the company will become bankrupt in one day, as it once happened with Aerosvit.
The head of the company, Yevgeniy Dykhne told Strana: “We are not talking about any bankruptcy. We are discussing the debt repayment schedule with UkSATSE. He also noted that the goal is to bring the company to profit.
“We took a forced step - reducing frequencies and canceling some flights eastbound. Yes, we had to act within our capabilities: shrink, review financial policies, and optimize the network taking into account the size of the fleet and the cost of servicing flights. With current realities, optimization turned out to be a real measure that can bring the company to breakeven," Dykhne added.
However, experts with are not so optimistic. They predict several schemes for UIA.
The first is real bankruptcy. "Believe me, they are still working, because they are still counting on compensation from the state. As soon as it becomes clear that they will not be there, they will decide the issue radically," the source of the country said.
But there are options. Experts do not exclude that the owners may not close the company, but transfer UIA’s assets to another carrier, for example, Windrose, which also enters Kolomoysky’s orbit of influence.
“This is, in general, a standard business strategy: to collect debts and transfer assets to another company, and to “kill” the debtor company. It is ten times cheaper than solving financial problems within one enterprise,” says economist Oleksiy Kushch.
But he himself calls such an option unlikely. UIA does not own airplanes; its main assets are a brand, software and people. It can also be considered a bonus destination on routes. At one time, under such a scheme, UIA obtained the routes of the bankrupt Aerosvit.
The second option is the nationalization of UIA. Since the company is a large carrier, as in due time with Privatbank, it can be taken from the owners for a nominal fee. “There have been precedents for the nationalization of airlines in many countries, and this is not the worst option. At the very least, it will be possible to avoid a collapse in the market associated with a sharp reduction in flights,” Lanetsky says.
According to experts, the owners are interested in such a scheme, which "will simply be able to lease planes twice as expensive on the international market, instead of pulling a company entangled in debt."
But the state in this case will have to pour a lot of money into the airline sphere, which may not appeal to external lenders who are already unsuccessfully trying to recover from the previous owners of Privatbank.
Will Zelensky save UIA?
The main intrigue is whether Zelensky will save UIA. As you can see, recently the official rhetoric regarding this airline has changed markedly.
And, according to experts, this is no coincidence. The main reason is the general negative in relation to Kolomoysky’s influence on the Ukrainian authorities. Lenders have long been dissatisfied with the too slow progress of the Privatbank case in the courts and the lack of guarantees that they will not be returned to their former owners. In this case, the nationalization of yet another Kolomoysky’s company might cause a big scandal.
But Kushch does not exclude that UIA might still receive some money from the state. “First, they started the news about compensations for flying around Russia, but they got an extremely negative reaction. But everything can change if the question arises of the bankruptcy of the national carrier,” he admits.
How will we fly then?
In any case, UIA’s problems threaten to hit the whole market, as this carrier controls up to 60% of passenger traffic. Lanetsky says the main risk is a sharp reduction in routes and flight net.
However, according to Oleksandr Kava, there will be no collapse. “Other carriers, including international ones, are actively developing. Plus, our market is open to low-cost airlines. Therefore, an attempt to return the monopoly and expensive tickets will fail,” he said.