Does Ukraine close its sky?

By Natalia Sysenko, Expert of the Institute for Economic Research and Policy Consulting[i]

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The EU is seeking a close partnership with Ukraine in aviation field. And one of the priorities of its transport policies is achievement of the accord on Common Aviation Area (CAA)[ii]. The CAA is the single air transport market, allowing flights without any limitations in route, frequency and number of carriers. In addition, it means the unified safety and security rules, modernized air traffic management, and tackling the climate change.

By recently, Ukraine has demonstrated its strong will to establish the CAA with the EU and indeed has made significant moves forward. For Ukraine “to open-up its sky” means to intensify the process of airports infrastructure development, to establish high standards for aircraft and air services, to increase safety, to modernize air traffic management procedures and aeronautical systems, to update its sector legislation. However, apart from all this, the essential issue of the CAA is full liberalization of air transport market of Ukraine.

And here we come to the point where major objection from Ukrainian side has recently arisen. Obviously, air transport market as such is not a classic example of competitive market. Natural monopolies related to limited physical land infrastructure are extremely strong. And airports bottlenecks will not allow all market participants (namely airline companies) to enjoy all possible benefits of open sky.

On the side of the EU, the most wanted airports and routes are overcrowded and, therefore, they are almost unavailable for newcomers, i.e. Ukrainian companies. On the side of Ukraine, there are abundant, but outmoded, airport capacities, which in their majority are poorly managed and inadequately regulated by the state. As a result, monopolistic abuses and behaviour are not rare on the domestic market. Open sky would rather stimulate competition and, consequently, increase of operators (namely European ones), lower prices and higher quality.

However, Ukrainian carriers could lose their current positions. Generally, in response to increase in competition, companies usually try to build up their capacities, increase the efficiency; and it is possible to achieve this goal by different ways, in particular by consolidations with the other market operators. E.g., KLM and Air France, Lufthansa and Swiss International Air Lines once had chosen such way. The consolidation can occur in different ways: formation of the national flag carrier, merger with foreign companies, and consolidation between national players. The latter actually took place in Ukraine, when alliance between Aerosvit, Donbasaero and Dniproavia was created. Naturally, Ukrainian companies lobby for protectionist actions of the government.

At the same time, the negotiations between the EU and Ukraine on the CAA have slowed down since the end of 2010 due to a range of reasons^[iii]. Indeed, first, in October 2010, Ukraine increased unit rates of charge for route services and for approach and aerodrome control^[iv]. International air organizations such as IATA, EUROCONTROL, and AEA actively protested against these changes as allegedly unjustified. It was stated that new rates take into account high profit margin, when such practice is absent in the EU at all. Although rates charged by Ukraine are not the highest in Europe, this decision became an issue in the EU-Ukraine negotiations on Common Aviation Area. Second, in March 2011, the Vice-Prime-Minister and Minister of Infrastructure claimed Ukraine would not join the CAA in the close future until visa barriers were eliminated^[v]. Though, it looks like protection of Ukrainian interests, it is not so. Ukrainian passengers and airports would benefit given any scenario of the “opening-up of the sky”. Thus, the aviation authorities revealed their position not to create level playing field, not to implement needed reforms, but to conserve status quo on the market, which is characterized by monopolistic abuses and inadequate regulation.

Thus, finalization of the negotiations on the CAA between Ukraine and the EU as well as start of substantial reforms in Ukrainian aviation sector are postponed.

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[i] The article is prepared within the framework of the project "Implementation of EU-Ukraine Association Agenda: the Expert View", which is implemented by the Consortium of think tanks, including Ukrainian Center for Independent Political Research (UCIPR), Institute for Economic Research and Policy Consulting (IER)and Center for Political and Legal Reform (CPLR), and funded by the European Program of International Renaissance Foundation. The media support is provided by Іnternews Ukraine. The Project is implemented in cooperation with Public Expert Council under the Ukrainian part of the Ukraine-EU Cooperation Committee.

[ii] See Open Sky: Flights without Limitations

[iii] See Open Sky: Flights without Limitations 

[iv] Resolution of the MTCU, No. 669, September 15, 2010

[v] In June 2010 he claimed Ukraine would finalize negotiations on the CAA with the EU in 2011.