There is expected to be major shifts in the Ukrainian aviation industry this year as Ukraine International Airlines takes the dominant position in the market as alleged ongoing financial issues continue to cripple the activities of Aerosvit Airlines. There have been talks over a potential merger of the two carriers for many years but they have remained rivals competing for rights to serve many of the key international markets from Ukraine’s capital city, Kiev. Over the past year the two carriers have become much closer and now, due to global economic issues and Aerosvit’s own financial burdens, a long expected consolidation is set to take place.

Ukraine International Airlines was one of the pioneering airlines of the post Soviet era in Ukraine and was the main rival to incumbent national carrier Air Ukraine. The carrier was established in October 1992 as one of the first joint ventures with foreign capital in the country and started operations on November 25, 1992 as the first airline in the Commonwealth of Independent States (CIS) to fly new Boeing 737 equipment. The founding shareholders were the Ukrainian Association of Civil Aviation and Guinness Peat Aviation (GPA), an Irish aircraft leasing company, while latterly both Austrian Airlines and the now defunct Swissair became shareholders.

It first started competing with Aerosvit Airlines from the mid-1990s with its rival introducing flights in April 1994 but it was not until the mid-2000s that the rivalry really intensified as Aerosvit developed its Ukraine Aviation Group alliance with Dnipropetrovsk-based Dniproavia and Dontesk-based Donbassaero. In the table below we highlight the largest international operators from Ukraine by available scheduled seat capacity since Ukraine International’s formation in 1992.

The above analysis highlights that since the break-up of the Soviet Union it took the independent Ukraine a number of years to reestablish its aviation sector. Overall capacity from the country declines between 1992 and 1995 but it began its recovery, although it was not until 2006 that it exceeded its early 1990s figure. Although Ukraine International has been a prominent player in the development of Ukraine’s international network over the past couple of decades, up until now it has never been the country’s largest operator, a position held by State carrier from 1995 to 1999 and then by AeroSvit since.

There has been strong growth in the Ukraine international market during the current decade with annual seat capacity rises of 11.0 per cent in 2010, 22.2 per cent in 2011 and 12.1 per cent last year. Interestingly, 2011 was the first time since Ukraine’s Independence that one carrier has held more than a 30 per cent share of capacity from the country as AeroSvit boosted its market share to 32.2 per cent following the introduction of greater synergies with its Ukraine Aviation group partners.

What is certain is the marketplace has certainly changed over recent years and the arrival of Wizz Air Ukraine and the expected growth of foreign low-cost operations into the country has meant greater pressure on the likes of Ukraine International. Although they have maintained their independence there has been a thawing of relationships between the two carriers and greater cooperation. Ahead of the current northern winter season the airlines announced a deepening of their codeshare arrangement to expand transit options in Kiev. Ukraine International was originally a partially state-support enterprise but the government shareholding was sold to private investors in February 2011 leading to suggestions that it could ultimately lead to a merger with AeroSvit.

Media reports that there were behind-the-scenes moves to bring the two carriers under common ownership emanated again late last year but were dismissed by the management of the two carriers. “Broadening of cooperation between Ukraine International and AeroSvit is the result of the awareness of irrationality and futility to continue with the opposition of both airlines having led to our market position weakening and direct threat of further operations,” said noted Yuri Miroshnikov, President, Ukraine International.

There was added speculation when Ukraine International uploaded its summer 2013 flight inventory to the GDS in late November and a subsequent amendment in December 2012 as it included a number of new routes to destinations currently served by AeroSvit.

The speculation over the reason for this network switch intensified during the first week of this year when it emerged that AeroSvit was struggling to maintain its flight schedule as airports, air service providers and lessors started to feel uneasy after a Kiev commercial court highlighted on December 29, 2012 the extent of AeroSvit's debts and agreed to commence administration proceedings. According to reports a number of airports impounded the airline’s jets while others refused the arrival of aircraft.

AeroSvit confirmed on January 4, 2013 that it had filed a petition with the Kyiv Regional Commercial Court to “initiate bankruptcy proceedings” for the purpose of “commencing reorganisation procedure, restoring solvency and ensuring fulfillment of commitments to its creditors in full”. The airline said it was “continuing operations” during this period, suggesting this is more of an administration or an equivalent to US Chapter 11 than a full bankruptcy and closure. The process was launched, according to the airline, to restore its operating efficiency and increase revenue flows.

“As of today the airline is not bankrupt as AeroSvit does not stop its operations and will continue to fulfill its current commitments to its contractors,” the airline said in a statement. “The airline's management remains unchanged and keeps functioning, with all procedures assuring normal operational activities, including flight safety assurance, being carried out in full extent.”

The motives for the network changes are unclear but what is sure is that from March 31, 2013 Ukraine International will take over the operation of 24 existing AeroSvit routes, with the latter codesharing on a number of these flights. This list comprises links from Dnipropetrovsk, Dontesk and Odessa to Tel Aviv and from Kiev to Adler/Sochi, Athens, Batumi, Bishkek, Copenhagen, Ekaterinburg, Kaliningrad, Karaganda, Krasnodar, Kustanay, Larnaca, Munich, Nizhnevartovsk, Novosibirsk, Prague Rostov, Stockholm, Thessaloniki, Vilnius, Warsaw and Yerevan.

Unless any further changes occur this would suggest AeroSvit still plans to operate its long-haul routes to Bangkok, Beijing, Goa, Ho Chi Minh City and New York as well as serving select destinations across the CIS, Middle East and Europe, including Istanbul, Moscow, St Petersburg and Tashkent. However, with the airline’s long-term future uncertain, there could be further changes to the aviation industry in Ukraine this year.