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In the Last 2 Months Alone, Ilyashev & Partners Provided Legal Counseling and Support on the Purchase of Two Aircraft for Its Clients

Date of publication: 9 June 2021

Source: Yurydychna Gazeta

Historically, Ilyashev & Partners Law Firm has been always closely working with the aviation industry. With Attorney at Law, Senior Partner Roman Marchenko, we discussed the changes taking place in the Ukrainian air transportation and aircraft construction markets, the transition to private aviation, the potential of SE Antonov, the innovative vectors of development and interest in the market of investors. We have also touched upon the forced landing of Ryanair plane in Minsk.

  Roman, you are one of the leading Ukrainian lawyers having expertise in the aviation industry. What sparks the professional interest in this practice?

— Historically, Ilyashev & Partners Law Firm has been always closely working with the aviation industry and this is a field where we are the undisputed leaders of the legal market. Our firm has been involved in almost all important projects, including those that are significant for Ukraine. The cases of the downed MH17, bird strikes by Ukrainian aircraft in Genoa and Ankara, bankruptcy of Donbassaero, assembly of Ukrainian aircraft in Iran, investment arbitration against Ukraine as regards Aerosvit and dozens of others: we participated in all these projects. For instance, the leader of the Ukrainian aircraft industry, SE Antonov, is one of our clients. Our firm signed the very first contract with it back in 1998, and it has already been 23 years that we have been successfully advising them. Yet, the topic should be divided into two large subjects: air transportation and aircraft construction. It just so happened since the times of the Soviet Union that Ukraine is a country with a full cycle of aircraft construction: we have a strong aircraft design bureau, aircraft building and aircraft repairing plants, which, unfortunately, are now falling on hard times. Nevertheless, both during the years of the USSR and during the years of independence, Ukraine built its own aircraft. As for air transportation, we have a fairly large country in terms of territory, Ukraine is a part of Europe, and, thus, we cannot do without air transportation, both domestic and foreign.

— How does the current global economic trends influence the aviation industry?

— Talking about air transportation, the problem of the last 2 years is quite obvious: the coronavirus. There are industries drastically affected by the pandemic, and air transportation is one of them. For example, statistics have been published that Ryanair, one of the largest low-cost airlines in the world, in May this year made only 9% of flights as compared to those made on the same day two years ago. This is an unheard-of drop in performance. Our Ukrainian leader, UIA, has completely decommissioned large aircraft and reduced its fleet. Some airlines have not survived the pandemic, and this is not the end, since another bankruptcy round is definitely ahead. By this I mean that the major changes are associated with the pandemic in first place, and with the fact that countries closed their borders to the citizens of other states. What we are currently experiencing is a total restriction of our right to freedom of movement. You cannot simply buy a ticket — as you did before — and fly to almost anywhere in the world. These restrictions have had a significant impact on air transportation: it is now in a terrible condition.

And this is directly related to the aircraft construction industry: the demand for aviation equipment has significantly decreased. However, the additional opportunities for light aviation are in evidence. In the last 2 months alone, Ilyashev & Partners provided legal counseling and support on the purchase of two aircraft for its clients, which will be operated in Ukraine. In addition, we are constantly involved in transactions for the purchase of helicopters. The transition to private aviation is an attempt to confront global challenges, and in this regard, there is more work for the lawyers now.

— What changes are taking place at the national level in the air transportation and aircraft construction markets? What is the Government doing to protect and develop these markets?

— As for the aircraft construction, unfortunately, Ukraine has not yet found its place in the world. Previously, we participated in the large Soviet’s aircraft construction chain. Today, the Russian market is closed to us because of the geopolitical situation. In general, only rich states can afford to have a full cycle of aircraft construction, the European Union, for instance, has no such country, even Airbus is supported by a number of countries. For example, Brazil has Embraer, Canada — Bombardier, which, by the way, is now forced to work closely with the forementioned Airbus, the USA has Boeing.

In turn, we are far from reaching even the Soviet scale, not to say that we are quite fortunate to retain at least part of our production potential. Yet, however, Ukraine is actively engaged in the repair of old aircraft. Our client, Kyiv Plant 410 CA, successfully works with clients from India and Sri Lanka. The engine building and repair sectors are also alive: Motor Sich, Ivchenko-Progress, Lutsk Motor. There is also Aviakon in Konotop, which is actively involved in the overhaul, maintenance and repair of helicopters, — this is another successful enterprise of Ukroboronprom. But there is no mass production of new aircraft. The USSR collapsed, and a new market for this equipment was not found.

Thanks to the President, for the first time in the last years, three new An-178 aircraft were ordered from SE Antonov through the state budget. This is a successful, promising machine of Ukrainian design, and if the State orders them, there is a hope that other customers will also be interested, so the President is doing a good job.

— And what about the air transportation market?

— Air transportation is a private business, and it adapts quickly enough. If there is much to gain from it, the airline starts flying, purchases equipment and develops charter and regular flights. There are successful Ukrainian freight companies that operate all over the world. Another our client, Cavok Air, has built a successful operating model for Antonov aircraft. But there is also a problem. Air transportation is a low-margin business, and any major change in the market significantly spoils the picture. The profitability of passenger transportation is usually at the level of 3-5%, which is very low: if there is some kind of failure, the country is closed and the aircraft is not flying — the company is suffering huge losses. Returning to the aircraft construction, often it is public-private. The state support can be different, in particular, in the form of orders, equity participation or direct subsidies. We are witnessing the endless wars between the EU and the USA, when they investigate and punish one day Boeing, another day Airbus with gigantic fines just for the fact that they are subsidized by the State, and this violates the anti-competitive rules. But, despite this, the State must support the aircraft construction industry.

Our problem is that Ukraine is a poor country not able to maintain the aircraft construction industry at the proper level. In order to reach the break-even point, SE Antonov, for instance, must produce at least 15 aircraft of the same series per year, since the ‘single-piece’ production is a planned loss-making. Ukraine, if it wants to be an aircraft construction state, must order the aircraft itself and actively promote its production in the world.

— SE Antonov should be transformed into an aircraft building corporation, introduce international management standards, etc. Is it objectively possible to carry out these changes in the near future? What other reforms are planned? What is their potential? What will we get in the future?

— SE Antonov is a key aviation enterprise in the military and industrial complex. Both its management body and the relevant special committee of the Verkhovna Rada are composed of professionals that determine the path of further industry development. They see it in the creation of a holding on the basis of Antonov and the adjacent enterprises and, of course, this can only be welcomed. But we must understand that changing signs is not enough: the fundamental problems must be efficiently solved. And the main problem is the insufficiency of circulating assets that can be used for the aircraft construction. What is an aircraft? It is a project running for years and decades, from the idea to mass production. However, manufacturing one aircraft a year is a bad idea – one must immediately count on 20 pieces and produce en masse. To do this, huge investments are required. This is the first problem: one needs to find money for these processes. These are either government or foreign investments. Ukraine has no such funds in the budget, and our Government should help to find the investors. Such investments, probably, would be of interest to Saudi Arabia, China, Turkey. The aforementioned large-scale projects cannot be implemented at the level of the plant director, since these are interstate projects which should be negotiated, for instance, by the President personally. In general, we have certain potential, but due to the lack of money and the sales market, Ukraine cannot do it on its own, we should handle it at the international level and look for partners.

As for air transportation and the Ukrainian state airline: the idea is quite interesting and promising, since our own factories will be loaded with work, employees will get their salaries, taxes will be paid, and our own — not foreign — aircraft will be bought. The main thing is to find the funds required for the large-scale construction. And we are talking about a very serious investment, at least hundreds of millions of dollars.

— What is going on with air transportation? How has the market changed over the past year? What will happen next? Will the regional airports be modernized?

— Remember what Karl Marx said? There is a base and there is a superstructure. In this case, the base is the financial condition of the consumer. For instance, in the USSR there was a flight Kerch-Kryvyi Rih, and from Kyiv to Pirnovo (Kyiv Region) AN-2 flew 3 times a day, like a shuttle bus. But back then the USSR artificially made these flights cheap, they were subsidized. Ukraine, of course, put this idea aside, and now the private airline should receive the real cost of the ticket. Is our citizen able to pay its market value? It’s difficult because people just don’t have that much money. That is why when the welfare improves, even slightly, during the stable periods, the market starts offering such flights. If there is a demand for flights to Kharkiv and Lviv, the number of flights increases. And if there is no passenger traffic between Kyiv and Chernivtsi, we see endless openings and closings of flights, since there is no required plane load.

After Bukovel has been opened, in winter, even 5 flights a day are made to Ivano-Frankivsk, because people go skiing. I.e., if there is demand, the market immediately adjusts. And the airports are forced to adjust. Recently I had an urgent business trip, and I took six-seater Piper from our client to Lutsk. I saw a complete devastation, there are no regular flights at all. Luckily, there is still a Soviet runway; however, refueling is out of the question. There is no demand, no required number of people willing to fly somewhere from Lutsk. People go to Kyiv, Lviv and fly from there. Therefore, everything depends on the well-being of citizens. If Ukraine becomes richer, citizens have more money, they aspire to comfort and want to move faster, these airports will automatically develop.

I do not believe in the artificial increase in the number of airports, which was promoted by the previous government. If the existing airports are in low demand in regional centers, who needs the new ones? Approximately 40 flights a day are made from Boryspil to Turkey and Egypt, and should more people want to fly there, private business will quickly support this, and there will be even 100 flights a day. But if only 5 people a day want to fly to Uzhgorod, then there will be no flight, since it is unprofitable to transport 5 people, or the ticket will be too expensive. By the way, the development of private aviation is attributed to the same. When a businessman needs to get to Uzhgorod, he is forced to rent a private jet or fly his own plane. Clearly, it is unprofitable to fly a plane of 50-70 seats if only 5 people fly there, but if there are 5 people ready to pay, perhaps a private business will someday launch a 5-seater plane. But there must be a regular number of people who need this transport. I do not exclude that light aviation in Ukraine will transform into more accessible forms of charter flights — kind of UberShuttle — already operated in certain countries. Any form of development has the right to exist.

— An important sector of the aircraft construction industry is drone manufacturing. The manufacturers do have some experience and ideas, but there is no interest from the State. Will this sector develop in the nearest future? Investors are really interested. Will there be money in this field?

— Speaking about military drones, Azerbaijan’s tremendous success in its conflict with Nagorno-Karabakh is due not only to drones — it is about the absence of an air defense system (ADS) in Karabakh. For the states having ADS (and all of Ukraine’s neighbors and Ukraine itself do have such system), this efficiency will be much lower. For the effective war with drones in the presence of ADS, there must be gigantic investments, since these must be the swarming drones of a new generation. And, secondly, there should be a lot of such drones, since amid the war hostilities, ADSs constantly shoot them down. This is a very expensive military equipment. At the same time, we know that the officials and the President personally have held high-level negotiations on the purchase of Turkish drones. The President absolutely statesmanlikely raises the question that if we buy drones, we want to cooperate and participate in their manufacturing chain. Certain part of their manufacturing process — to begin with, at least the assembly — should take place in Ukraine. These things can only be welcomed, from both sides: Ukraine needs drones and Ukrainian workers will participate in their manufacturing. Simultaneously, there are several drone designing and developing projects in Ukraine. Ukrainians are smart enough to do this, and hopefully these programs will progress. This is our future, the unmanned flights will only develop, the volume of cargo carried by drones will grow, the scope of tasks for drones will increase. Of course, these are very useful innovations, and Ukraine should not lose its chance to join the ranks of developers of this type of technology. The same Sikorsky Challenge Platform created and based at KPI (by the way, by another our client) offers interesting projects in this field.

— In your opinion, how will the events in Belarus — the forced landing of Ryanair plane in Minsk and the international sanctions that followed — affect the industry?

— Firstly, nothing unpredictable happened. Let me explain. Ilyashev & Partners Law Firm has been advising large Kazakh business for 12 years already. I constantly fly to Kazakhstan, sometimes 2-3 times a month. At the same time, due to my active civic engagement, I have been forbidden from entering the Russian Federation. And I perfectly understand that if my plane flying over the territory of the Russian Federation is landed for some reason at the airport without an international transit zone, I will become an unwitting violator of Russian law. Therefore, I do not fly over the territory of the Russian Federation, despite the fact that this significantly adds to my travel time. Such situation is well-known, and the Belarusian oppositionist has consciously run the risk. If he has not understood this, this is exactly the reason why we need lawyers: to assess the risks. We must understand one general principle: the air space over the territory of the state is the sovereign zone of that state. A person flies into the sovereign zone of a state, and if the plane lands for some reason, he/she will be under the full jurisdiction of that state. If the person has problems with this country, one should be careful and refrain from flying over this country. Of course, it looks like Belarus used the forced landing with no grounds. But another issue is that now the whole world is again being drawn into another conflict. We are already evidencing a new war of sanctions. We refuse permission to their planes to enter our territory and we will not receive money to the budget from such flights, they refuse to supply us the fuel and will also incur losses, it will result in the growing prices for fuel here, etc.

— Is the liberalization of the air transportation market at danger or it will receive a new impetus? Where are we now?

— For sure, there should be no overregulation, everything should definitely be liberalized as much as possible, while keeping with all requirements for aviation security. For example, why the Parkovyi helipad is not being used? It was built long ago, there were pilot projects, helicopters landed there. But there is an old provision that only a twin-engine helicopter can land on such sites, and the lion’s share of the Ukrainian fleet is single-engine. According to the ICAO standards, local aviation authorities have the right to liberalize this issue. This should be done by the State Aviation Administration, and due to the fact that a really professional team is working there, there is a chance for such changes. This is precisely the function of an effective State: to help so that the helicopters can legally fly, the aviation business can really develop, and people have jobs. These are all completely practical things. Ilyashev & Partners held negotiations on behalf of our clients being the owners of helicopters with the owners of this site, who told us about their problems, and we are now jointly trying to change this. By the way, this is how the real European integration looks like: finding the best world practices and introducing them in Ukraine.

— To summarize, what are the major factors (international and national) that have affected the industry and the business environment?

— The major factors negatively affecting the air transportation are the coronavirus disease and border closures. Ukrainians refuse entertainment trips, simply because it is not clear whether you will be able to get to the country of your destination. And what is a suspended trip? The unsold seat on the plane and money not received by the airline. In turn, this means that the company will not pay the lessor, and the lessor will not order a new aircraft from the aircraft manufacturer… This is a long chain. As for the Ukrainian aircraft construction industry, the major negative factor is the lack of money and sales markets. This is a huge problem, and if we – and, first of all, the officials – fail to expend some efforts, the aircraft construction industry in Ukraine will not revive.