Airline companies vs. aircraft builders

Since the beginning of their existence, Ukrainian airline carriers were forced to use outdated airplanes. The main reason for that was their lack of money for new planes. After all, this led to a situation in which the air fleet of one of the biggest Ukrainian airline companies consists of planes that are more than 15 years old on average.

The necessity to upgrade the fleet was evident for both airline companies and the Ukrainian government. For example, in 2010 Kostiantyn Yefymenko, the then minister of transport and communications of Ukraine, promised to support them. In particular, he talked about promoting the ratification of the Cape Town Convention on protection of aircraft owners’ rights by the Verkhovna Rada and possible implementation of zero tax rate on import of new aircraft and spare parts. “The safety of flights is a top priority matter. The fleet, which the companies are using right now, is outdated,” the official stressed.

Recently, Ukraine ratified the Cape Town Convention. It protects the interests of aircraft owners in cases when users have problems. For example, the owner will be able to take the airplane out of the country without having to worry that it will be arrested to ensure creditors’ claims. The Center for Transport Strategy notifies that a country that did not ratify the convention may not count on benefits and discounts from manufacturers and leasers. And it was much simpler and cheaper for Ukrainian airline companies to supplement their fleets with used aircraft.

Earlier this year, the Ministry of Infrastructure proposed a draft law on the implementation of zero tax rates on imported new aircraft. It also offers to establish a zero tax rate for the first registration of airplanes and helicopters that are imported to Ukraine.

However, Ukrainian airline companies’ lobbyists had to face the lobbyists of Ukraine’s aircraft constructors. And the latter are interested in supplementing the fleet with their planes. Meanwhile, at the moment the fleet mainly consists of imported aircraft. For example, the Ukraine International Airlines (UIA) has 20 Boeing 737 planes of various modifications and only 3 An-148 planes. And AeroSvit has 8 far-range Boeings 767, 21 medium-range Boeings 737, and the company also uses planes owned by its partners (AeroSvit, Dniproavia, Windrose, and Donbasaero are members of the Ukrainian Aviation Group alliance): Airbus 320/321, Embraer 145, ATR-72, and Embraer 190.

But the companies want to pool the fleet. UIA states that using planes of one type reduces maintenance and crew training costs. The company has its own technical and engineer support base for Boeing aircraft. Meanwhile, An-148 planes are flown by Antonov Airlines pilots and maintained by Antonov State Enterprise. The Ukrainian Aviation Group decided to use certain types of aircraft for specific tasks (Embraer 145 and Embraer 195 owned by Dniproavia for regional routes, new Boeing 737 Next Generation and Boeing 767 owned by AeroSvit for far-range flights).

Thus, while modernizing the fleet, airline companies prefer the types of planes they already have. In 2009 and 2010, UIA purchased four new Boeing 737-800 aircraft from the manufacturer. In the near future, the company plans to replenish its fleet with Boeing 737 New Generation planes (perhaps, it will be purchasing two aircrafts per year). In spring 2012, AeroSvit received four Boeings 737-800 as well, and their contract provides for the delivery of a total of 11 Boeing aircraft of various modifications. Dniproavia have purchased two new Embraer 190 planes.

Moreover, leasing is the major tool for Ukrainian air carrier companies. And this is where they can suffer a painful blow. Last February, MP for the Party of RegionsViacheslav Bohuslav, president of board at Motor Sich, an aircraft engine manufacturer, and MP Yaroslav Sukhy offered a draft bill which provides for cancelation of preferential import conditions for foreign-made aircraft under operative leasing agreements. The conditions are applicable to aircraft with a mass between 10 and 30 tons, carrying 50 to 100 passengers. The parameters apply to domestic medium-range An-140, An-148, and An-158 carriers, thus the draft is supposed to equalize the terms for Ukrainian and foreign aircraft manufacturers.

So far, if air carrier companies import aircraft for operative leasing and use them for one year, they need not pay the value added tax, and only pay the first registration fee. According to Bohuslav, before the year is out they move the aircraft abroad, only to import it again without paying VAT.

This September the Verkhovna Rada already passed the first reading of Draft Law No.10134 “On Amending the Tax Code of Ukraine with a View to Raising the Competitiveness of Domestically Manufactured Aircraft.” Aircraft manufacturers argue that it is absolutely justified. Dmytro Kiva, president and constructor general at Antonov State Enterprise, has repeatedly wondered why it is only international manufacturers that enjoy preferences from Ukraine’s government. Meanwhile, while building an aircraft, a Ukrainian manufacturer pays 20 percent VAT on parts purchased in Ukraine. Customs tax on imported parts, which comprise nearly half of an aircraft, make another 20 percent. “Given the price of an aircraft around 25 million dollars, ‘negative preferences’ virtually account for 2.5 million,” said Kiva in an interview.

Actually, one of the chief hindrances stopping Ukrainian air carrier companies from using domestically manufactured aircraft is the lack of flexible leasing programs in Ukraine. Borys Kolesnikov, vice-prime minister and infrastructure minister of Ukraine, promised that companies would lease them provided they get 2 percent, which is a norm in international practice, instead of 10 percent, customary for Ukraine. Kolesnikov also promised a relevant program. The ministry decided to finance aircraft manufacturing via Antonov Finance, a company which is a part of its own structure, and the government is supposed to compensate the credit interest.

However, even now UIA and the Ukrainian Aviation Group alliance have an arrangement with Antonov State Enterprise to lease 15 An-148 and 15 An-158 aircraft. Ukrainian air carrier companies are currently testing these planes. However, UIA president Yurii Miroshnykov stated that further plans would also depend on the forms and methods of government’s promotion of the An-148/158 family on the market, and also on selection and opening of sufficient routes, where the efficient exploitation of this particular aircraft would ensure optimum air mileage. Meanwhile, AeroSvit stopped using An-148 a year ago (the company did use this model of aircraft in 2009-11). They say that the aircraft was not prepared for regular exploitation, and the carrier company thus suffered a loss. In reality, any air carrier company willing to take on a new model should realize that it is impossible to avoid the “childhood diseases” in the early stages. For example, air carrier “Russia,” which has been using a fleet of six An-148 aircraft since 2009, patiently suggests new proposals on perfecting the aircraft as soon as they encounter another problem.

Despite all the difficulties, An-148 and An-158 have a fairly good chance to win a place in the sun in Ukraine’s air carrier fleet. Ari companies have always been suspicious towards new models, but there will always be someone who will be the first to test a new aircraft. With time, all “childhood diseases” are overcome, and other companies follow suit. An-148/158 have competition advantages compared to imported aircraft. First and foremost, it is a rather low price (for example, Embraer 190 costs almost 43 million dollars). The developers also emphasize its economical fuel consumption, the possibility to fly it under poor visibility conditions and land at all types of airfields. These aircraft combine sufficient passenger capacity and flying range for less popular routes.

Apparently, it is these advantages, rather than the 20-percent rise on prices for competitors, that will enable the An family to win. Moreover, last year the government charged its departments to draft a decision on Ukraine’s joining the international Agreement on Trade in Civil Aircraft. The Agreement curbs governments’ ability to employ compensation tools and subsidize the domestic aircraft industries. Member states must zeroize all import and export tariffs for other states which are members of the Agreement. This includes both ready civil aircraft and parts for aircraft engineering industry.