Does oligarch Ihor Kolomoisky exert an undue influence on presidential frontrunner Volodymyr Zelenskiy? It’s a question that has dogged the comedian-turned-politician since he won the first round of Ukraine’s presidential election on March 31.
Zelenskiy’s connection to the powerful oligarch — whose 1+1 television channel broadcasts his shows — is a real concern to many Ukrainians, and particularly to the business community. They wonder what will happen to markets where the oligarch plays a significant role should Zelenskiy become president.
One such market is commercial aviation.
Kolomoisky is known to have a significant stake in Ukraine International Airlines, or UIA, the country’s flagship network carrier. UIA has not been having a good two years. In 2018, the company posted a $100 million loss, a nine-fold increase from the loss in 2017.
Experts worry that, should the company’s problems continue, the government could intervene to protect it — a move that would be bad for competition. And government action could be worse if the president is influenced by Kolomoisky.
The Kyiv Post reached out to aviation experts to determine the worst-case scenario if Zelenskiy wins the election and proves loyal to Kolomoisky.
Turbulence ahead?
Although UIA’s passenger count has grown in recent years, the carrier has been hit hard by the high cost of flying around Russia and Ukraine’s occupied territories to reach Asia, soaring fuel prices, currency risks, fleet renovation delay costs, and growing competition from low-cost carriers.
These troubles come amid broad difficult conditions: 2018 has, overall, been a tough year for European airlines, with five medium-sized companies declaring bankruptcy.
In the past, UIA has engaged in anticompetitive behavior to protect its market share.
Experts say anticompetitive support from the government is possible, if not very likely, as it would hurt both the market and Ukraine’s reputation.
On the other hand, if UIA fails to pull out of its dive, Ukraine could lose its only major network carrier. There is also no other airline waiting in the wings to take over the company’s routes. This makes it likely that, if need be, the government would come to the company’s rescue.
“The question is: ‘Will (UIA) use its resources to knock out competitors?’” said Andriy Guck, a partner and aviation expert with Ante law firm.
Guck says that, while UIA initially resisted new low-cost arrivals, it has adapted to the competition since then. Still, he added, trying to knock out competitors is “in its DNA.”
Yevhen Mahda, director of the Institute of World Policy, told the Kyiv Post that it’s possible low-cost airlines could be pushed out of the country. Guck says that the worst would be if UIA took over some of its rivals more profitable routes.
But Serhiy Vovk, director of the Centre for Transport Strategies, told Kyiv Post that, while this risk exists, it is unlikely: too many large players in the market can apply counter pressure.
Yevgen Treskunov, co-founder of independent aviation consulting firm Aviaplan and former executive vice president on strategy and development at UIA, agrees. He says that Ukraine is committed to market agreements and “unilateral actions would lead to political and economic tensions.”
If the government were to go down the anticompetitive route, one worst-case scenario could be a “freeze” in the progress toward airway liberalization with other countries, Treskunov said.
But Guck believes that, while some countries would respond with tit-for-tat sanctions on UIA, others would take a more measured response and applying diplomatic pressure. But if the government really wanted to prop up UIA at other airlines’ expense, it could “brazenly” weather this pressure, he said.
Reactions by foreign airlines would vary. According to Guck, the flexible low-costers would be quick to pack up and leave if the business climate got too difficult. But larger, network-type carriers are here for the long haul and would adapt to the new conditions or fight against them, he said.
Such a move would be an about-face for Ukraine. The government arranged a major discount for RyanAir’s service fees to lure the low-cost airline to the country.
However, UIA enjoyed discounts from Boryspil International Airport as well, which the Antimonopoly Committee of Ukraine called “non-transparent.”
Viktor Logvynenko, a former regional manager of AeroSvit and UIA, told Ukrainian media that a president loyal to Kolomoisky’s interests could possibly offer the company preferential treatment concerning two of its main problems: the cost of fuel and navigation fees.
However, other carriers would demand these discounts too, Guck said.
Too big to fail?
UIA currently owes the aviation authorities hundreds of millions of hryvnia because it resisted paying government fees. It is fighting an ongoing court battle, while other airlines are paying the fees.
A situation where UIA does not have to pay the fees because it is considered too big to fail would be very bad, according to Vovk.
The experts agree that, should UIA’s finances or business model continue to deteriorate, the government must ensure that any move to support the company is carefully thought through and transparent.
Treskunov said that, in Ukraine, it is more difficult for a company to have an orderly bankruptcy and survive than in the West because creditors can run on the company, hoping to get their money back before the others do.
UIA responds
The airline told the Kyiv Post in an email that it is taking steps to improve operations and reduce costs, which already led to “rather good results” in the first quarter of 2019.
However, the airline does need support from the government. Company spokesman Maksym Arslanov said that anticompetitive conditions are actually working against UIA because “air navigation rates… provide unequal conditions for Ukrainian carriers compared to their foreign competitors.”
Arslanov added that fuel prices are substantially higher in Ukraine than in European countries, making it harder to compete against foreign carriers – an analysis echoed by aviation expert Treskunov. Taxes on fuel contribute to its high cost, according to Arslanov. The tax rate is set by parliament.
When asked about the possibility of anticompetitive conditions under pressure from Kolomoisky, Arslanov dismissed the notion outright.
“Politicians use various, even the most absurd methods in their struggle for voters during the election campaign,” he wrote. “So these hysterical utterances are nothing but propaganda.”
