Air travel is one of Ukraine's fastest-growing markets. The development of both regional and international transport links have been strongly influenced by strong economic growth and a steady increase in transit traffic in recent years. After years of political tug-of-war and intrigue over the strategic development of Ukraine as a transit country the government recently announced aims to transform Kyiv's Boryspil International Airport, the country's largest, into a modern transport hub by 2020.
Boryspil, located 29 kilometres from the centre of the capital, has all the makings of an international transit airport. In 2006, it served nearly 5 million passengers - an 18% increase on 2005. Income in 2006 was UAH 445.8 million (USD 88 million), UAH 44 million (USD 8.7 million) more than the year before.
However, says the Kyiv-based International Centre for Policy Studies (ICPS) in a recent report, Boryspil in its current form has already reached its limits in terms of transfer capacity, which has led to long queues during peak hours and levels of terminal services that don't always meet international standards. Since a new international-grade runway was completed in 2001, development of the airport, in particular its transit capacity, has been hampered by the lack of state and private investment. "Ukraine's geographical location is pretty fortunate and Boryspil, under favorable circumstances, could take up some of the Asian transit flows which are currently overloading the hubs in Frankfurt and Paris," says Ildar Gazizullin, an ICPS analyst.
Boryspil as a transit hub
Recognising this potential, the government says it expects to attract some USD 2.27 billion in investments to turn Boryspil into a true international hub. The long-awaited plan foresees the construction of a new Terminal D with capacity for 1,500 passengers per hour, subject to further expansion to up to 2,000 passengers per hour by 2010. Next, a Terminal E with a 2,000 passengers per hour capacity will be completed by 2015. A further terminal of unspecified capacity is also penciled in for development by 2020.
In addition to new terminals, the concept also envisages the reconstruction during 2007 and 2008 of the domestic-only Terminal A and the rebuilding of Terminal C. The central building housing Terminal B is to be totally reconstructed by 2010 and new hotels, parking areas and office space are planned for completion in 2011. A high-speed rail link between the airport and Kyiv is due to open in 2012.
If the plan goes ahead as stated, Boryspil's total capacity should increase fivefold to more than 20 million passengers a year - a more respectable comparison to London's Heathrow at 68 million per year or Paris’ Charles de Gaulle at 52 million.
Boryspil officials have greeted the government move with enthusiasm and a sense of relief. "This is a very important step that everyone has been waiting for," says Boryspil's finance director Natalia Gombalevska. "The direction and investment required are now becoming clear," she adds. An international tender for investment will be the next milestone, Gombalevska says.
The Ministry of Transport is expected to announce the tender for Terminal D later this month.
Stiff competition looms
Developing Boryspil will not however mean simply an increase in capacity. An open skies approach, as has been demonstrated in countries such as Poland, Hungary and the Czech Republic, would open more routes between Ukraine and the EU and reduce entry barriers into the Ukrainian market for international carriers. However, a liberalised market would undoubtedly mean that domestic carriers would face stiff competition on their existing international routes and even some domestic flights, the ICPS report points out. It remains to be seen whether the local Ukrainian operators, used to many years of largely competition-free operation, will actively resist deregulation.
"Before liberalisation, the government should create the same conditions for national airlines that our competitors are operating under now," said Aron Mayberg, General Director of Aerosvit, leading national carrier. "Airlines need a competitive environment to work in. For that purpose, it would be quite enough to fully introduce European aviation rules in Ukraine and give national airlines at least four or five years to adapt themselves to those conditions before airspace is liberalised."
High cost base for local airlines
Ukraine's airlines are having a hard time expanding their fleets due to the VAT and import duties they currently have to pay on new aircraft purchased abroad. Arranging for the flight certification of foreign equipment in Ukraine can also be a lengthy and bureaucratic process and both ground services companies and airlines acknowledge the lack of properly qualified personnel, who can require years of training and professional development to meet international skill and experience levels.
Meeting international standards
Inadequate financing, insufficient technical depth and the aforementioned staffing issues have made it hard for Boryspil to streamline local standards with European legislation. In order to make progress, the airport has to manage a whole shopping list of targets, including meeting technical regulations, altering rules for access to ground services markets, upgrading terminal services and meeting international norms on all aspects of electronic ticket sales.
External factors
As world prices for aviation fuel rise, the resultant rise in the costs to airlines has meant that the overall trend in Europe is for profitability to diminish as the pressure to reduce ticket prices remains strong, the ICPS report says. Consolidation in the world aviation market is growing and the top European airlines (Lufthansa, British Airways and Air France) are also growing stronger on the routes that Ukrainian airlines fly.
Funding from Japan
In 2005, the Japan Bank for International Cooperation provided a USD 172 million loan for the construction of Terminal D, with a 1.5% annual interest rate over 30 years with a ten-year grace period. The Japanese saw the airport as a fast-developing business with good prospects for increased traffic (Boryspil handled 1.5 million passengers in 2001 and 2.3 million in 2003).
Land battle with Aerosvit
The Japanese funding has yet to be used due to a conflict between Boryspil officials and Aerosvit, the large Ukrainian carrier had plans to build a terminal of its own at the airport.
A few years ago, Aerosvit rented and then bought a 32-hectare plot of land near Boryspil's central terminal for USD 600,000. In 2005, the company began the USD 120 million construction phase, but Boryspil's management immediately brought a suit against Aerosvit alleging the land had been purchased illegally. The airport then announced a decision to build a new terminal using the Japanese loan. A Kyiv court ruled in favour of Boryspil and Aerosvit were ordered to hand back the land. The airline appealed against the case and still maintains the purchase was legal.
Earlier this year, Transport Minister, Mykola Rudkovskiy, assured that the conflict is over. "We settled the conflict over construction of the terminal in Boryspil airport, which has been going on for the last year and a half," Rudkovsky told Japanese bank officials.
Alongside all that, Boryspil’s top officials, allegedly involved in a number of non-transparent commercial deals, were reshuffled and prosecutors launched six criminal cases against them.
Meanwhile, still pursuing the plan for its own terminal, Aerosvit announced what it called a "strategic alliance" with the Donetsk-based regional airline Donbass Aero. Ukraine's third largest airline, Donbass Aero had been planning its own terminal at Donetsk International Airport and therefore welcomed the prospect of a large partner in a non-merger deal.
