UIA is requesting US $100 mn and privileges from the government

UIA wants to evoke pity in the hope of getting privileges from the government

Photo: Konstantin Melnitskiy

Ukraine’s largest air company Ukraine International Airlines (UIA) appealed to Premier Arseniy Yatsenyuk with a request for a stabilization loan in the amount of US $100 mn for 10 years. The company also wants to receive VAT refund on time and not to sell hard currency proceeds that are used to cover operating costs abroad (the companies are obligated to sell 75% of their hard currency earnings). The company is also requesting the Ministry of Infrastructure to develop a program aimed at the support of the air transport industry. All these proposals are outlined in the letter submitted by UIA to the head of government (Capital has a copy of this letter).

The domestic airline indeed sent a letter to the premier to attract attention to the situation that has developed in the airline industry, corporate press secretary of UIA Yevheniya Satska informed Capital. “The letter tells how the crisis in Ukraine impacted the domestic air transport industry and contains our proposals of several urgent anti-crisis measures,” she explained. Further, Satska says that nothing is said in the letter about the exemption from the sale of hard currency proceeds. “This is absurdity”, she said and added that IUA has not yet received a response from the Cabinet of Ministers. The press service of the Ministry of Infrastructure confirmed that it received a copy of the letter from UIA of September 12, 2014.

Huge losses

Deteriorating financial situation forced the airline to appeal to the government. Despite the company’s stable development over the past several years, UIA today is on the verge of survival and the accumulated reserve of stability has been practically exhausted, reads the letter from the airline.

This is due to a number of factors: recommendation of the governments of many foreign countries to not travel to Ukraine, the annexation of Crimea and the military actions in the east of the country, sharp devaluation of the hryvnia, etc. “The disaster of Malaysia Airlines sparked a panicky drop in demand, though the situation began to stabilize only in July. As a result, in August UIA sustained significant losses instead of the traditional earnings during this season. In connection with the emergency events in 2014 the company lost more than US $90 mn or 12% compared to the record high annual turnover of 2013, according to the letter submitted by UIA.

UIA lost around US $20 mn due to the absence of transfer passengers from Simferopol, Donetsk and certain regions of Russia, which “fed” other routes of the airline. The company lost more than US $7.5 mn due to the restriction of flights over the ATO zone and the territory of Russia. As written in the letter, the airline became uncompetitive compared to Russian and Turkish airlines flying on transit routes between the east and west.

The situation will not change much by the end of the year, as even if the situation stabilizes the flow of passengers will not be revived all that quickly. In 2014 the airline will lose around US $60 mn due to the lowering of tariffs and the flow of passengers. Over the first four months of 2015 losses could be as high as US $40 mn. The VAT refund debts of the airline at the end of this year could reach UAH 20 mn. “The aforementioned extenuating circumstances have caused an extremely difficult financial situation, which makes the risk of losing Ukraine’s leadership in transportations by the end of the year quite realistic,” it is written in the letter from UIA.

In favor and against

The predictions of experts in the airline industry regarding whether or not UIA will be granted a loan vary. General Director of the Windrose company Volodymyr Kamenchuk believes that the government will issue a loan to UIA. He says this is due to the upcoming elections, fear of tarnishing the country’s image, etc. Expert in the airline industry Serhiy Khyzhnyak believes the chances of UIA receiving a loan of US $100 mn are slim to none as today there are no mechanisms for the government to grant loans to private companies. “There were never such precedents in the airline industry,” he added.

Khyzhnyak says that the government does not possess full information about the financial status of the company compiled according to international standards. “UIA should present its strategy of development, an optimization plan and guarantees of repayment of the loan,” he noted. Under the WTO rules, the allocation of stabilization loans to a certain airline or exemption from payment of VAT could be construed as a subsidy that will have a negative impact on competition, says lawyer of the law firm Marchenko Danevych Andriy Huk.

Accordingly, countries whose airlines invested in Ukrainian air transporters (Hungary, Turkey) may accuse Ukraine of unfair support of certain players on the market, he explained. “Typically, such situations are resolved within the limits of procedures of the WTO and Ukraine will be forced to cancel such decisions. Otherwise, the EU will gain the right to subsidize its airlines to the detriment of Ukraine,” says Huk.

The steps in support of UIA will have shades of anti-competition and may be the subject of appeal by other market players to the Antimonopoly Committee, Huk believes. In order to avoid such accusations, the government should offer the chance of receiving a loan and exempt all airlines operating on the Ukrainian market from the sale of hard currency, the expert concluded.