All against all. How is the Ukrainian sky shared?

03-06-2016

The history of crisis in the Ukrainian aviation market, or why do we have expensive airline tickets  cfvjktn

Sergey Khizhnyak’s column for liga.net

Ukrainian air passengers found themselves trapped by time-consuming judicial proceedings of airline companies and the imperfect regulatory policy regarding the airline market. The situation is so bad that only an immediate political solution can save it.

Case history

The crisis in the aviation industry began two years ago – in summer of 2014. This was not caused by the decline in market volumes, problems in the east of the country, the triple hryvna devaluation or the political instability. The reason was the actions of a main regulator of the airline market. It was then that the State Aviation Administration completely blocked the market by refusing to carry out the commission’s decision and provide airline companies with new permits for air routes. Moreover, prior to that, it announced that current rules on access to the air transportation market were illegal.

As a result of this artificially created situation, existing airline carriers could use only those permits for routes they have already had, but new airline companies couldn’t enter the market. All this happened amid the market decline. As a result of 2014, the market lost about 30% of passenger traffic.

A new Ukrainian airline company ‘Atlasjet Ukraine’, which has just planned to enter the market and had ambitious plans to develop its networks of flights, suffered from this regulator’s decision the most. In June-July of 2014, the commission decided to allow airline companies to operate 16 domestic and 14 international air routes. However, it wasn’t able to exercise its right because of the position of the State Aviation Administration. The situation was also aggravated by the commission’s denial to increase the number of frequencies for the Ukraine International Airlines (UIA) airline company on the Kyiv-Teheran (Iran) route as the company had debts before the Boryspil airport. It competes with the Ukrainian-Mediterranean Airlines (UM Air) company on this route. So, it was the beginning of the crisis that has been paralyzing this industry for two years.

War of all against all       

While being dissatisfied with the decision of the ministerial commission, the UIA airline company addressed a complaint to the State Service of Ukraine for Regulatory Policy and Entrepreneurship Development concerning the abolition of market access rules approved by the Order of the Ministry of Infrastructure #245. However, the relevant ministry appealed the decision of the State Service of Ukraine for Regulatory Policy and Entrepreneurship Development. Then there were a dozen of lawsuits. All against all. The UIA is against the Ministry of Infrastructure and the State Aviation Administration, the UIA is against the Atlasjet, the Atlasjet is against the UIA and the Ministry of Infrastructure.

As a result, on March 3, 2015, the Kyiv’s District Administrative Court held the rules permitting the air transportation approved by the Resolution of the Ministry of Infrastructure #245 invalid. The regulatory vacuum reigned in the market.

Crisis No.1. Regulatory vacuum. 

To replace the ministerial order, the State Aviation Administration quickly developed, adopted (the decision #686) and even registered in the Ministry of Justice its own rules on November 13, 2014. However, this decision didn’t enter into force – the market set itself against. The State Aviation Administration was accused of lobbying the interests of a certain air carrier and the artificial restriction of competition. The order’s provisions were unrealistic for most Ukrainian airline companies to meet. They just had to close and stop their operation.

After lengthy negotiations, the intermediacy of the then Minister of Infrastructure, engagement of an external law firm and the abolition of the most acute demands came into effect on June 5, 2015, but the effective date for some of provisions was postponed to the next year, i.e. to June 5, 2016. The adopted version was a difficult compromise agreed by the parties to unlock the market somehow. The Atlasjet obtained a package of permits and opened several flights. Other Ukrainian airline companies received new routes as well.

However, the need to revise the rules is obvious for everyone. In such a version, they negatively affect both air carriers, airports and passengers.

Crisis No.2. Fees in special fund

Another crisis was arising simultaneously. On August 3, 2014, the UIA airline company stopped paying state fees in a special fund of aviation, arguing that this fee didn’t comply with the Ukrainian legislation. Legal proceedings are still ongoing and the UIA debt to the State Aviation Administration is more than 147 million hryvnas.

The Air Code and the Government’s Resolution of 1993 regulate the special fund activity. The current Resolution is outdated and requires to be revised. However, other air carriers on the market – both the Ukrainian and international ones – follow this rule.

Crisis No.3. Parallel lines met  

This spring, the new leadership of the State Aviation Administration decided to bring the rules on granting assignments for air routes in line with the needs of market players and stimulating the development of air services. Proposed amendments were related to the two most critical restrictions: additional requirements to the airline companies’ ownership structure and the mandatory work exclusively on domestic routes for a year before getting the access to international routes.

However, an additional requirement was included to the rules – now new permits are granted only to air carriers that don’t have any debts to the special fund. In other words, they made a “good job” for everyone except the UIA. The debt of this airline company to the special fund, which is currently being challenged in the courts, actually blocks the development of new routes for the air carrier. This is the provision that was a formal cause of the UIA to appeal to court to challenge the legality of amendments to the rules (Order #222).

The court decided to suspend this provision as a security for a claim that will be considered on June 6.

This provision is really ambiguous. On the one hand, the airline company has debts and the regulator wishes to have the levers of influence to recover the debt. On the other hand – the special fund’s mechanism is not related to the assignment for routes and should be defined in laws or government’s regulations.

The bottom line

The situation came to a deadlock. If amendments continue to be valid, the UIA will lose, but another airline companies will be fine. If the court cancels the amendments – the UIA will be fine, but other Ukrainian air carriers will have to stop their flights, because the postponed order’s provisions that don’t allow them to operate come into effect on June 5. In other words, only those companies that carried out the flights on domestic routes within the previous 12 months will be allowed to operate on international airlines – but it is only three domestic airline companies: the UIA, Dniproavia and Motor Sich. In addition, all permits of air carriers, which didn’t prove that they are owned by Ukrainian citizens, are canceled automatically.

The main reason for this situation is a lack of a clear state’s regulatory policy. It is unacceptable that the relevant ministry can’t shape the policy in the industry and rules are approved under the influence of certain players behind the scenes.

Effective regulation should contribute to the market development. A great skill is to find the right balance between regulator’s requirements, public needs and real possibilities of business.

What is to be done?  

To rewrite the rules from scratch. With the participation of the Ministry of Infrastructure, the State Aviation Administration and independent experts. Unfortunately, the version of rules of 2014 was a great setback for this industry.

By the way, dozens of other rules in the aviation area need to be revised as well. Our state has a great tool for this – the initiated Agreement with the EU on Common Aviation Area (“Open Skies”). This document contains Ukraine’s commitments on implementing about 100 regulations that control the industry in the EU countries in its legislation.

There is no need to reinvent the wheel. The roadmap to create an effective regulatory system is already in our hands.

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