We Need to Come Down to Earth: a Rational Point on the Common Aviation Area Agreement · p. 392 - SkyUp Airlines

We Need to Come Down to Earth: a Rational Point on the Common Aviation Area Agreement

04 Nov 2021

Agreement on Common Aviation Area between Ukraine and the European Union has almost disappeared from the media field. However for the industry the work is just beginning. SkyUp Airlines Commercial Director Lyudmila Slobodyanyuk has written an article on this issue for nv.ua, which with the permission of the editorial board we publish in full on our website.

Lyudmila Slobodyanyuk, Commercial Director at SkyUp Airlines

The signing of the Agreement on a Common Aviation Area (CAA) between Ukraine and the EU has become almost a national holiday. However, like any international treaty, the document contains opportunities and risks for both parties. If the goal was to turn the country into a potential customer base for foreign airlines, then this mission has been accomplished. If the idea was to get real benefits for the economy, then this was only the first step. Now we have to overcome admiration and look at the event realistically.

From showiness to efficiency

After the celebration ends, the discussion on the Agreement should finally be shifted from the political to the practical area. The first question: is it really starting to act now? If not, when and how? So far, the new procedures for applying for routes remain unclear. As an example, now there is highly regulated air traffic between Kyiv and Amsterdam, where only two airlines operate the minimum number of flights. And it is completely unclear whether the Agreement allows other players to enter the destination before ratification by the Netherlands. The same goes for many other routes.

One of the positive aspects of the Agreement is the unification of aviation industry standards with the European Union. However, this block has been postponed. Updating the legislation risks to last for years, and as of today, not even a roadmap for these changes has been made public. The same applies to the development of mechanisms of state assistance to enterprises in the sector: aviation and handling companies, airports. There is no understanding whether the state and European partners are ready to commit themselves to the development of institutions or programs that would transparently provide support in order to equalize domestic business in rights with European business (which receives such assistance in large volumes).

Among the important controversial aspects of the Agreement, which have already been discussed in the media, is inequality in access to domestic markets. Ukraine allows commercial flights within the country to European carriers, while our airlines do not receive similar rights in the EU. It is expected that this will stimulate the rapid growth of passenger traffic from the regions, and this, in turn, will allow the renewal of regional airports. However, in the EU itself, the situation is not so positive.

More than half of the regional airports in Germany, for example, have never been profitable since 2005. If airlines paid a fair price, there would be no such difficulties, but the state considers growth through low-cost airlines as a tool to stimulate the economy, while subsidizing airports and airlines (Resolution Guidelines on State aid to airports and airlines 2014, Resolution 2018 / C 456/06). This mechanism has been debugged and launched throughout the EU at least until 2024. Thus, an airport with a passenger traffic of up to 700,000 passengers per year receives about 8 million euros over 10 years. In total, since 2005, the aviation industry in the EU has received $3 billion annually. Ukraine does not have the resources and mechanisms to act similarly. Moreover, there is no understanding of the need to integrate the country and its aviation enterprises, primarily airports, into the EU industry in full. At the same time, the operation of the airport is a rather expensive story, where the share of fixed costs is large, therefore, the existence of medium and small regional airports is impossible due to the lack or sufficient volumes of load at a fair price or other sources of funding.

In addition to the negative financial result, regional airports increase the burden on the environment in terms of noise and emissions. Therefore, in France, since 2021, a number of regional flights have been closed if the distance between cities could be covered by train in less than 4 hours. Within such context talking about the development of regional airports in Ukraine on the part of the EU is not entirely correct, because now our country has no prospect of receiving financial support to minimize the consequences of negative impact on the environment, but at the same time there is a great risk of being faced with the requirement to reduce emissions. The latter will force Ukraine to conserve even large regional airports.

In addition, there is an excise tax on fuel in Ukraine, which significantly increases ticket prices, but European airlines will pay it only if they refuel their planes here. However, for many flights, this is not necessary: it is enough to fill the tanks in the EU and not overpay in Ukraine. Thus, this excise tax will not become a source of filling the budget, but it can continue to restrain the development of national players.

How to make the Agreement really profitable

The development of any industry requires a strategic approach from the state. And such a strategy should be based on the interests of domestic enterprises that pay taxes, create jobs and invest in infrastructure development. Since the first years of the country's independence, Ukrainian aviation has relied too much on the capabilities of foreign partners.

An important example is the almost extinct aircraft industry, which now requires huge investments to become economically viable again. The state is supposedly ready for such expenses, but at the same time, for some reason, it endangers independent domestic airlines, which are developing and creating a popular product. This is a rather risky step when a fundamentally new period begins for our market.

In order for domestic players to have the opportunity to further contribute to the development of the country, new procedures are needed for interaction between the state and business. In Europe, as we know from the events of last year, aviation support amounts to billions of euros in direct grants, as well as tax breaks and profitable lending. To support equal competition, similar processes should be launched in Ukraine. Today the aviation industry expects:

  • Transparent and clear industry development strategy for understanding government priorities.
  • Creation of a roadmap on the timing of standards unification in accordance with the requirements of the CAA Agreement.
  • Development of effective support mechanisms for all enterprises in the sector: airports, handling companies, air carriers.
  • Solutions to urgent issues in the sector: abolition of excise taxes on fuel and VAT on domestic flights, which will significantly increase the volume of passenger traffic.

Without this, the CAA Agreement seems to be more profitable for European partners, who have unlimited access to a market with more than 44 million inhabitants. And this despite the fact that the European air transportation market itself is overloaded. It has more companies than needed, which became clearly evident during the pandemic. An indicative symptom is a decrease in ticket prices, which is observed despite the rise in the cost of aviation fuel. Why is this so? The answer is simple: the number of planes in the skies over Europe significantly exceeds the rate of recovery of passenger traffic.

Common aviation area leads to market stimulation only in case of existing restrictions in terms of carrying capacity or high tariffs on routes. In Ukraine, the situation looks more than balanced. We do not have an overload, while all types of airlines are present: classic, hybrid, low-cost, charter. In addition, the average price for 90% of the routes is marketable. Thus, we already have all the advantages, so we should not expect miracles here, and for the first time we will fully feel the consequences of Ukraine's lack of full integration into the EU aviation industry. Could the Agreement lead to the fact that some of the players will be forced to leave the market? Yes, this is quite possible. If we leave everything as it is and just keep celebrating,  then the common aviation area will turn into a closed door for the country's enterprises. However, if we start to act now, then the open markets will become truly new opportunities, making everyone benefit: the state, business and passengers.