Selling Seats in the Sky

Ukraine’s airlines are determined to survive despite low-cost competition

By Yulia Pushko
Government Relations Director, Willard

Despite the threats posed by bird and swine flu, terrorism and the chaos in fuel prices, Ukraine’s airline industry has grown steadily over the past decade, with demand considerably outstripping the supply of seats. 

Then the economic crisis landed.  Cash-strapped corporations slashed business travel budgets and banished top management from their business class seats.  Vacationers opted to holiday close to home – if they took a holiday at all.

Almost overnight, passenger traffic volumes that had been rising by 18 percent to 20 percent annually fell so promptly that Ukrainian airlines were compelled to band together to survive. Routes and services were cut or coordinated with competitors to fill planes, and codeshare agreements permitted the companies to sell tickets on each other’s flights.

This year, the industry says that the volume of passenger traffic on scheduled flights is down 25 percent, overall, and load volumes on long-haul flights to Asia have been halved.  The recession has touched even popular seasonal charter flights, says Vladimir Gaydash, PR director for Aerosvit Airlines, the country’s largest carrier.
In the romantic air transportation business, there are three accepted ways to keep passengers on board: offer deep discounts, sell or park unused aircraft, or reduce expenses by cutting routes and slashing service.

Offering deeply discounted tickets can be the most costly alternative.  This tactic is used if the airline is required to support current demand and needs to fill planes by any possible means. The downside is that the airline needs to be prepared to fly at a financial loss.  In Ukraine, Aerosvit has introduced the strategy on a limited basis through its Crazy Friday discount program, where selected roundtrip flights to international destinations can be had for under $100. This does create an apparently nonsensical imbalance in prices – not an unknown phenomenon in the airline industry - with flights from Kyiv to Lviv or Moscow fetching double-digit prices while one-way trips to Donetsk demand $250 or more. 

Low-demand routes go on sale, while high-demand routes generate what profits there are to be had.   So goes the struggle for new passengers at this point in the recession.  But does it work?  

“We have reduced our prices, but have discovered that reducing prices doesn’t necessarily bring an increase in the quantity of passengers,” says Vladimir Kamenchuk, head of Wind Rose Aviation, which offers scheduled and charter flights. 

A spokesman for Wizz Air, a low-cost carrier that entered the Ukrainian market in June, 2008, said that airline had even increased ticket prices on domestic routes due to currency fluctuations.

Parking, selling or returning leased aircraft is no bargain for airlines either.  Most planes are leased for from five to ten years; in Ukraine it is unprofitable to buy an aircraft unless there is access to inexpensive financing.  Returning leased planes involves breaking those contracts, and returning a plane to service after it’s been mothballed requires thorough and costly inspection and repair before it will be considered airworthy once again, airline industry sources say. 

Adapting the airline to better meet market can mean many things. 

For Russia’s Aeroflot, it meant rebranding its flight attendants, emphasizing the model look and putting only sleek, beautiful young women on its flights while grounding those who failed to meet the new image. At the other end of the scale, it can mean going the no-frills route, eliminating in-flight meals and charging for checked luggage in an effort to minimize costs and maximize revenue.  It can also mean dropping all but the most profitable routes, and coordinating service on routes where there was head-to-head competition. 

Eliminating unprofitable routes frees up the equipment that scheduled airlines use to dip into the profitable charter segment with less risk, and the dependable cash flow can be used to pay operating costs. 

In Ukraine, scheduled carriers have been doing just that – creating codeshare agreements with competitors on routes that both carriers once served.  Today, there may be fewer, but fuller, flights on certain routes, and both airlines are able to sell tickets on the flights.  Codeshare agreements permit an airline to fly only two or three routes while using codeshare pacts to create ‘virtual flights’ and sell tickets for 12-15 routes (Codeshare agreements permit a flight operated by Airline A to also operate with an Airline B flight number as well, allowing both to sell seats for the trip).

Consumer groups have argued, albeit largely unsuccessfully, that the  agreements create a deceptive situation because travelers buying tickets on Airline A’s flight 2975 from Kyiv to Uzhgorod aren’t aware they’ll actually be aboard Airline B’s flight 650 aircraft.

The codeshare is a product of tough times – if there were enough travelers on a route to fill two competing aircraft, each airline would operate its own flight. 

"This year, airlines entered into over 30 codeshare agreements with local and international partners.  In Ukraine there is basically no competition between local airlines as everybody, except for Wizz Air and Khors, have concluded similar codeshare agreements,” said Oleksandr Kava, head of the Center for Political and Economic Analysis.

For the entrepreneurial kamikaze, it’s always possible to build your own airline from scratch.  There are advantages: aircraft can be leased cheaply, labor is cheap as well; and good initial promotion will stimulate sales while interest in your new carrier is high. 

Experts say that a start-up airline can make do with as few as two aircraft.  They also recommend procuring the planes locally – like the new An-140 aircraft built at Antonov’s Kharkiv aircraft plant. 

Some wags have observed that as the An-140 has been dubbed the “Yulia” in honor of Prime Minister Yulia Tymoshenko, leasing these models could eliminate political risks with the government – at least until the January elections.

Entering the market during the low season – between late October and early March - would provide ample time to develop and promote routes, prove market viability, and position the new carrier to enter the high (March – October) season and skim the cream of flights. It takes about $50 million to get a seat in the high-stakes poker game that is the airline business.  Under the European Union’s Open Skies Agreement, which Ukraine signed this year, new players need to prove that they can operate for three months without profit. 

The only question is when the recession will end.

"Demand may look better, but the bottom line has not improved," International Air Trade Association Chief Executive Giovanni Bisignani said recently in a statement.  "We have seen little change to the unprecedented fall in yields and revenue. The months ahead are marked by many uncertainties, including the price of oil. The road to recovery will be both slow and volatile. In the meantime, the industry remains in intensive care."