Summary:
- The largest airport in Ukraine, Kiev Boryspil, could be operated under concession from 2020;
- The Ukrainian economy, visitor numbers and airport traffic are all positive despite continuing conflict in the country;
- Passenger numbers at UKiev Boryspil is projected to increase to 54 million per annum by 2045;
- The country's meagre budget airline segment presence will be swelled by the planned arrival of Ryanair from 4Q2018.
Investors can hardly be blamed for shying away from the Ukraine where Crimea was invaded and annexed and where there has been war in the Donbas region in the east of the country involving anti-government pro-Russian factions since Mar-2014. While it is no longer considered newsworthy in the west the violence continues despite 10 ceasefires, the most recent of which began, and collapsed, on the same day at the end of last month.
So what attractions does Boryspil hold for potential investors? Looking firstly at the country's economy, while Ukraine has an oligarch-dominated economy as in Russia, it managed to grow slowly from 2010 to 2013, but remained behind peers in the region and among Europe's poorest.
The economy subsequently fell into crisis because of Russia's annexation of Crimea, military conflict in the east of the country, and a trade war with Russia, resulting in a 17% decline in GDP, inflation at nearly 60%, and dwindling foreign currency reserves.
The international community has tried to stabilise the Ukrainian economy with total disbursements of approximately USD8.4 billion to date. With the loss of a major portion of Ukraine's heavy industry in Donbas and ongoing violence, Ukraine's economy contracted by -6.6% in 2014 and by -9.8% in 2015, but returned to low growth in 2016 and 2017, reaching +2.3% and +2.0%, respectively, as key reforms took hold.
It also redirected trade activity towards the EU following the implementation of a bilateral Deep and Comprehensive Free Trade Agreement, displacing Russia as Ukraine's largest trading partner. Amid positive economic developments, Ukraine returned to international debt markets in Sep-2017, issuing a USD3 billion sovereign bond.
CHART - Foreign tourism arrivals (mainly business rather than leisure) has returned to growth after recovering from a disastrous 2014, with growth of +7.3% and +6.7% respectively in 2016 and 2017
Source: CAPA - Centre for Aviation and Ukraine reports
Boryspil International Airport is the largest airport in Ukraine and the main airport serving the capital city. The airport is located 29km southeast of central Kiev near the city from which it takes its name and accessibility in and out of the capital will soon improve with the construction of a rail line due to commence in Jun-2018.
Passenger traffic growth at the airport itself has been solid and increasing quickly since 2014 when it sank below seven million for the first time since 2010, climbing to 10.5 million in 2017 (+22.1%). The airport's management expects passenger numbers to increase to 54 million per annum by 2045, from the anticipated 12.6 million in 2018.
CHART - Kiev Boryspil International Airport had seen traffic levels return back to pre-crisis levels in 2016. This was further boosted beyond ten million passengers last year when an additional two million people used the airport
Source: CAPA - Centre for Aviation and Kiev Boryspil International Airport reports
In the interim the most pressing target is to increase transit passengers by 16.7% to 3.5 million in 2018. The airport's main competitors are Istanbul Atatürk and Moscow Sheremetyevo, with Frankfurt, Munich, Prague, Vienna and Warsaw airports classed as "potential competitors".
The largest airline at Kiev Boryspil is flag carrier Ukraine International Airlines, which will shortly undergo a fleet modernisation exercise, with new Boeing 737 models and Embraer 195s to replace its 737 Classics. Ukraine International currently has 70% of seat capacity, with the second largest carrier Lufthansa on 4.2%, followed by the local charter Windrose Airlines on 4%.
CHART - The country's flag carrier Ukraine International Airlines has a dominant position at Kiev Boryspil Airport with a 70% share of departure seats
Source: CAPA - Centre for Aviation and OAG (data: w/c 23-Apr-2018)
Moreover, there is very little presence from the low cost airlines, with only 1.8% of capacity currently being flown on that business model, though that will change when, again belatedly, Ryanair begins to operate at Boryspil. The Irish carrier put in its first slot request early in Apr-2018 and plans to commence its first schedules in Oct-2018 or possibly even earlier.
There has been international interest in the airport for some time, despite the country's problems. During 2017 the airport discussed development plans with the Japan International Cooperation Agency (JICA), particularly its second runway project, which could be initiated and completed by 2023. In Jul-2017 the country's Cabinet of Ministers approved a proposal on future concession agreements for both Boryspil and Lviv Danylo Halytskyi International airports.
In the first instance the National Securities and Stock Market Commission (NSSMC) approved the draft order issued by the Cabinet of Ministers on the transformation of Kiev Boryspil International Airport into a public joint stock company. Corporatisation is one of the priorities for Boryspil and is expected to allow the airport to effectively manage property, create joint ventures, develop non-aeronautical revenue and avoid restrictions applicable to state enterprises.
The Prime Minister has stressed that the strategy of attracting airlines to Kiev Boryspil is understandable. But there are two more airports in close proximity to the capital - Zhulyany and Gostomel - and they too need to be developed and could be seen as targets for investors.