Ukraine Regional Airports Readied for Potential Market Sounding

Frode Skulbru


November 17, 2019

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During the summer of 2019, the International Finance Corporation (IFC) launched a selection process for a technical advisory role for four regional airports in the Ukraine:

  • Lviv Danylo Halytskyi International Airport (LWO) (1.6 million passengers)
  • Zaporizhia International Airport (OZH) (400,000 passengers)
  • Kherson International Airport (KHE) (150,000 passengers)
  • Chernivtsi Leonid Kadenuik International Airport (CWC) (146,000 passengers)

The purpose of the study was the execution and completion of a pre-feasibility study for the airports to assess if the same are candidates for a change of ownership through a PPP structure. The pre-feasibility study was to be conducted through technical, economic and financial assessments of the airports and the generation of potential transaction structures. The expected high-level outcome of the assessment is to identify a bankable transaction structure for the airports that could attract private sector participation through a competitive bidding process.

Ten advisory companies were shortlisted after a request for qualification (RFQ) process, and after the following competitive process, a European firm was selected to perform the study alongside local consultants directly selected by the IFC. The final report is expected no later than six months from commencement of the study, which should be around March 2020. The Ukraine has made attempts to attract private, foreign investors to its airports previously. Prior to the UEFA 2012 European Championship in soccer in the Ukraine and Poland there were attempts and negotiations about a possible transaction for Kiev and Lviv airports.

At that time, a transaction was driven by the need to upgrade the airports prior to the international soccer scene entering the country. This attempt did not materialize as the lead time to EURO 2012 was too short. Instead, various upgrades of the airports were completed by the management and Government at the time. In 2015, the privately developed and owned city airport, Kyiv International Airport (Zhuliany) (IEV) was offered for sale on the international market. IEV is the Ukraine’s second busiest airport with a good growth rate and a healthy balance sheet, but since the offer came at the time of high political tension in the region, no takers were found. Finally, there has been talks about privatizing the country’s main airport, Boryspil International but no specific plans have been communicated.

The Four Regional Airports

Ukraine (excluding Crimea) has an estimated population of 42.5 million inhabitants and collectively the cities where the four airports are located have a combined population of nearly 2.1 million.  Lviv is the largest city in the Western portion of Ukraine (and situated only 70 kilometers from the Polish border); the smaller city of Chernivisti is also in the West while Kherson is in the South and Zaporizhia, the largest city of these four, is in the South-East. Over the last decades Ukraine’s economy has grown annually by 2.2% per annum. Moving forward Ukraine’s economic growth, according to the EIU, is expected to slow down (1.6% per annum over the next 20 years) which is a figure comparable to Europe (which is projected to grow annually by 1.5% during the same period). Future air development in the country (and in particular in the four cities/ airports) will be highly dependent on economic growth and for some, the tourism industry (e.g. Lviv, a Unesco-listed city). In 2018, it is estimated that this sector supported (directly or indirectly) over 900,000 jobs representing nearly 6.5% of total economy.  According to the WTTC tourism related jobs are expected to surpass one million by 2028.  During this same period tourist arrivals to Ukraine are expected to increase from 15 million to about 22 million.  Typically, if the economy and tourism expand so does airport traffic (and vice versa). The two less busy airports of Chernivisti and Kerson have limited scheduled air service.  Naturally both have service to the capital, Kyiv, while Chernivisti also has service to Milan (Bergamo) and Kerson to Istanbul (IST).  All routes are operated by Ukraine International Airline except Istanbul which is operated by Turkish Airlines. Zaporizhia has a network of nine medium-haul routes including domestic destinations (e.g. Kyiv), European routes (e.g. Warsaw) and several Turkish routes (e.g. IST).  These routes are operated by seven carriers where the three largest are respectively Turkish Airlines, Ukraine International Airlines and Motor Sich (for which Zaporizhia is its operating base). Lviv, by far the largest of the four airports by traffic volumes has the largest network (39 routes in 2018).  Again, these routes are typically medium-haul and aside from Kyiv, which is the busiest route, most other routes are European (e.g. Warsaw, Minsk, Munich, Berlin, Vienna) and Turkish (e.g. IST, SAW).  The airport has a mix of full-service carriers and low-cost carriers.  On that front Wizz started operation in Lviv in 2017 and by 2018 had become the second largest operator at the Airport (16% of seats). Only Ukraine Airlines is larger with 21% of the seats supplied. According to figures published by ENAC, since 2012 passengers at the four airports have more than tripled and in 2018 collectively the Airports handled 2.2 million passengers (an average increase of 21.0% per annum).  At a country-level, Lviv ranks 3rd (7% of the nation’s traffic), Zaporizhia ranks 6th (about 2% of the nation’s traffic) while the last two, collectively, account for 1% of the nation’s traffic. Source: ENAC Amid this traffic boom these airports face, like all airports in the world, there are challenges in reaching their full long-term potential.  Given the diversity of the nation’s economy and the unique characteristics of its various regional economies, income and traffic growth will not be uniform across the nation. It will be important for any potential investor to understand the region-specific drivers of economic development and traffic growth for each of the airports to be covered. It will therefore be interesting to learn what approach the IFC and ultimately the Ukrainian Government would take if the on-going study reaches a conclusion that the airports have sufficient traffic volumes and financial stability to make them attractive for international investors. EIU: Economist Intelligence Unit. WTTC: World Travel and Tourism Council This figure excludes KHE.