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Would Ukraine launch its own state airline company?

Author : Anna Peshkova

Source : 112 Ukraine

President Zelensky voiced his desire to create a state-owned airline company, which would be no worse than Turkish or Singapore Airlines
17:54, 4 May 2020

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Recently, President Zelensky voiced his desire to create a state-owned airline company, which would be no worse than Turkish or Singapore Airlines. Moreover, according to the president’s plan, it would use domestic aircraft.

Some would say this is just a guarantor’s dream, but it turned out that the plan is quite precise. Infrastructure Minister Vladyslav Krykliy said that the purchase of aircraft has already been agreed with Antonov state enterprise.

Will the state be able to make money on the president’s dream, or are we dealing with a new version of the long-suffering hyperloop?

Related: Embezzlement at Antonov Enterprise: Suspect dismissed from Defense Ministry year ago

Why Ukraine needs a national carrier

The idea of ​​having a high-quality state-owned airline, which would promote the image of Ukraine abroad, is extremely attractive.

In the context of the global pandemic, it became clear: if one of the Ukrainian companies did not evacuate our citizens, the state would be completely isolated and our people would remain in China,” Serhiy Kyrylenko, an expert in the infrastructural issues, said.

In addition, Ukraine definitely has to save its aircraft industry. Our country is one of the ten countries in the world that own the full cycle of creating aviation equipment. Nevertheless, for a long time, the state-owned enterprise Antonov has not been engaged in serial production. The last An-158 aircraft was released five years ago. Only the small aircraft industry is flourishing due to the ultra-light aircraft of domestic private designers.

But it is strange enough that a new state company is created during total privatization under the slogan of the inefficiency of the state as an owner. Ex-First Deputy Minister of Infrastructure of Ukraine Volodymyr Shulmeister believes that Zelensky’s new dream also has political implications.

UIA really suffered greatly from quarantine restrictions and the closure of flights. Its leadership has already requested a stabilization loan from the government in the amount of $ 50 million at 5-6%. However, experts doubt that financial assistance will save it from further bankruptcy. For example, Virgin Airlines and South African Airways, which did not receive government support, have already filed for bankruptcy.

Theoretically, one could not create a new airline, but nationalize one of the existing ones. But Infrastructure Minister Krykliy emphasized that this is not the case. And Zelensky, hinting at UIA, said: "they will not get this benefit." However, Oleksiy Kushch, financial analyst and expert at the Growford Institute, believes that UIA management can still benefit from the creation of a new low-cost airline.

Airplanes first

There might be some problems with the resumption of the production of Antonov State Enterprise. In 2017, it was estimated that $ 770 million was needed for this purpose. Such money was never found. In addition, the company lacks human resources. Most of the production facilities were closed or mothballed, and employees left the country and work in Russia, the USA, and Europe.

Even if we assume that the country has found money to modernize production, and also returned professional staff, it needs to prepare decent money for the aircraft itself.

Related: Defence Ministry official organizes embezzlement scheme at Antonov state enterprise

The cost of building one AN-148 and AN-158 aircraft at the Antonov price list is $ 30 million. The company might sell the aircraft to the state for approximately $ 25 million. Thus, the country will need hundreds of millions. It is not surprising that in 2006-2009 the government did not find money in the state budget to buy even two An-148s for transporting the first persons of the state. Interestingly, UIA claimed that the cost of the aircraft was overestimated.

Of course, there is an option not to purchase vehicles, but lease them, as most airlines do. Which is also not too cheap (about 4,000 USD per hour). But in this case, it will be necessary to amend the legislation and create a leasing company.

The leasing company would credit the purchase of aircraft with a national low-cost airline, which would give an impetus to Antonov to produce ten aircraft per year, Oleksiy Kushch assures. Such a number of aircraft, according to the expert, would be enough to gradually fill in domestic airlines, and in the future, regional medium-range ones. When the aircraft show efficiency, it will be possible to connect state-owned banks to lend to buyers of aircraft.

But the question of creating a leasing company is not easy. During Viktor Yushchenko’s presidency, several An-140s were already leased to Aeromost-Kharkiv and Odesa Airlines, and without state support, this was more expensive than buying on credit. A leasing company such as Antonov-Finance, created under Yanukovych, needs at least 150 million USD per year.

Antonov’s planes can take off from unprepared soil, but with long-term operation we would not get far. Ukraine needs airports, not all regions have them.

For example, in Kryvyi Rih, the native city of president Zelensky, about 19 million USD is needed for the reconstruction of the airport. Zelensky knows this because he himself asked the business to invest this money in modernization without reinforcing such a request, however, with no counter promises.

Zhytomyr airport is not working. And minister Krykliy received open letters asking him to allocate almost 15 million USD for repairs. Money for this is not pledged. And financing for the reconstruction of the airport in Izmail (Odesa region) was removed from plans for 2020 after the coronavirus outbreak.

Related: “Antonov” state enterprise to renew production of “Ruslan” aircraft in 2019

Everything new is long forgotten old. In 2016, the idea had already been voiced to create a national airline on the basis of An aircraft, only for domestic flights though. It turned out that modernization would cost 38 million USD, and the idea was postponed. So the implementation of Zelensky’s dream in life depends on large-scale financing.

Boing instead of An

You can’t earn much on domestic transportation. The share of domestic traffic for Ukrainian airlines is only about 10%. The capacity of the local market is not enough to recoup the costs of the development and production of the aircraft.

For example, Turkish Airlines is primarily a holding company, created with the aim of capturing foreign markets. But would we be able to establish international transport? Economist Mykhailo Kukhar assures that we can get flights to other countries, following the open-gate "gate to gate" rule. The national operator automatically receives the same number of "flights" to world airports, as we give to Boryspil. However, not a single American or Asian company flies to us, and British Airways, Finnair, AirFrance, Alitalia close flights.

Ukrainian Minister of Infrastructure is sure that international flights aircraft should belong to the foreign companies. Perhaps the reason is that Antonov’s products are highly likely to be suitable only for domestic transportation.

If we talk about the procurement of foreign vehicles, we could buy Boing-767, but it would be many times more expensive than domestic aircraft. The average amount is 120-220 million USD. However, because of the crisis, many companies are abandoning aircraft, which will make it possible to get them from lessors at a discount.

Cost of the president’s dream

Establishing production and buying an airplane is only the half of the problem. We should not forget about the repair of the vehicles. Pilots and stewards, who must undergo mandatory certification, should receive about $ 15 million a year. Air navigation costs more than $ 1,000 per hour. There are also airport charges - from 6,000 to 25,000 USD per flight. Banks and agencies need to pay a commission for selling tickets. Fuel is another 11,000 USD per hour. It is not necessary to hope for a repetition of the situation with the negative cost of oil.

Related: Canada may use Ukraine's middle-class Antonov aircraft, - official

The company will also have to receive state preferences, which will artificially limit competition in the market. However, fully state-owned airlines do not bring money to their owners but exist through subsidies. 51% of Turkish Airlines company, recalled by president Zelensky, is owned by private owners (after a series of reorganizations).

It’s very difficult to even calculate how much a new state airline might cost. According to experts, the idea of Zelensky might cost hundreds of millions of dollars. And the ex-Minister of Infrastructure Volodymyr Omelyan mentions the sum of 10 billion USD. This figure is commensurate with the 2020 budget deficit planned after its sequestration.

Zelensky’s team understands this, so it talks about a mythical investor who to sponsor the idea of ​​the Ukrainian president. The Minister of Infrastructure speaks of a partnership "with other large industrial companies that would like to focus on the Eastern European market."

Due to the ban on import of parts from the Russian Federation, Ukraine cannot fulfill its old obligations to Kazakhstan for the supply of An-74, despite an advance of $ 15 million. We do not refund the advance; we do not want to purchase components. If we use import substitution, on paper it will be a completely new plane, and then we will have to carry out expensive certification. This issue seems to be unresolvable.

Related: Azerbaijan interested in buying ten Antonov An-178 from Ukraine

Even if we manage to find an investor, the costs will be gigantic. Moreover, even now the project of cooperation between Ukrainian Railways and Deutsche Bahn has been paused since there is no 3 million USD in the budget for this.

Would new An-aircraft fly?

A few years ago, economist Oleksiy Kushch described the idea of ​​resuscitation of the aviation industry by creating domestic low-cost carriers. He suggested: if production grows, it will be possible to saturate the market in five years. Even if we are working on launching the company now, it is unlikely that Zelensky will launch it until the end of his cadence.

Kusch does not believe in the implementation of the idea under the rule of the Ze-team.

Ukraine has already had its own airline company. "Ukraine Airlines" existed from 1992 to 2002. The state constantly allocated the most profitable types of its activities to individual enterprises, privatizing Airlines using schemes. Profitable directions were transferred to the UIA subsidiary in the countries of Western Europe, "Aerosvit" - all the most profitable destinations in the countries of the Mediterranean, Eastern Europe, and the CIS, the "Ukraine" company took the best technology. Every year, Ukraine Airlines used fewer and fewer aircraft, and before the bankruptcy, it had only three Tu-134 planes and one Tu-154.

Related: Boeing decided to save Ukraine's Antonov from the collapse

Dniproavia company also belonged to the state, most of its shares in 2009 were transferred to the private company Galtera, which is associated with oligarch Ihor Kolomoisky.

A number of experts suggest that the president switch his attention from passenger to cargo transportation, and establish production of the An-70. If you look at how Antonov’s planes are actively used today, then quarantine really is the delivery of humanitarian supplies. Five An-124 Ruslan and An-225 Mriya aircraft are chartered for a month by EU countries.

Transport and regional aviation have always been the hallmark of Ukraine, and one of the leaders of the American military-industrial corporation Lockheed Martin said that in the world only two companies can produce transporters. Resumption of production - a chance to return to its former glory. At least transport aircraft are needed by the country itself since all of our 55 copies are still Soviet-made.

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