BUYING BOEING
Ukrainian carrier AeroSvit invests in U.S. plane fleet but faces U.S.
government regulatory restrictions on expansion and Ukraine
government's endless political battles and incompetency.

By Jim Davis, Business Ukraine magazine
Kyiv, Ukraine, Monday, July 28, 2008

Ukraine-based airline AeroSvit, has in 14 years gone from a bare bones
start-up to a dynamically growing international carrier with a large number
of international destinations as far east as Beijing and Shanghai, China and
as far west as Toronto, Canada and New York City.

However, as with most 14 year olds, the airline is anxious to keep growing,
but finds that it is blocked from expansion in the markets it wants most to
add service by regulations that penalise the airline because of failures of
the Ukrainian government and what airline officials claims is the abysmal
lack of operational safety among its competitors.

THE COUNTRY'S LARGEST CARRIER

AeroSvit Airlines is owned by State Property Fund of Ukraine (22%),
Genaviainvest (25%), Ukrinfoconsult (10%), Bureu (5%) and Gilward
Investments (Netherlands) (38%). The airline now has over 2,400 employees in Ukraine and around the world.

Operating mainly from Kyiv's Boryspil International Airport, AeroSvit has
grown to become Ukraine's largest carrier, with scheduled domestic services
to 11 cities and international services directly or by codeshare to over 33
destinations worldwide.

AeroSvit was established March 25, 1994 and started operations in April that
same year with flights from Kyiv to Tel Aviv, Odesa, Thessaloniki, Athens
and Larnaca in co-operation with Air Ukraine.

AeroSvit first operated Boeing 737-200 aircraft and later added Boeing 767s
which allowed the commencement of its longest hauls to China, India, and
Thailand in the east and the United States and Canada in the West.

Last year was a landmark year for the airline, in which it carried over two
million passengers for the first time, an increase of 31.5% over 2006. The
total number of flights the airline performed increased by 17.2% compared to 2006, reaching 24,800. After first breaking into the list of the world's top
200 airlines more than three years ago, AeroSvit has continued to move
upward on the list.

BUILDING UP A FLEET OF US-MADE BOEING AIRCRAFT

Since its founding, AeroSvit has been an almost totally Boeing-equipped
carrier and expects to it stay that way for the near-term future. In August
2007 Boeing announced that AeroSvit was ordering up to 14 Boeing 737-800
airplanes. The carrier signed an order for seven 737s valued at USD 523
million according to list prices, and secured purchase rights for another
seven.

This order marks AeroSvit's first direct purchase from Boeing since its 1994
founding. AeroSvit will gradually replace its fleet of 14 737 Classic
airplanes with the Next-Generation 737s which Boeing claims is today's most
technologically advanced single-aisle commercial jetliner. In addition to
other innovations, AeroSvit will equip the airplanes with fuel-saving
Blended Winglets.

"This order is significant for Ukrainian aviation. It demonstrates dedicated
execution of our replacement strategy and is an indicator of Ukraine's
current economic development and progress as an important player in
international business and tourism," says Aron Mayberg, director-general of
AeroSvit.

"Boeing demonstrated in-depth knowledge of our business and, with the
Next-Generation 737, presented a compelling solution to our future needs.
We look forward to continuing our excellent cooperation."

The order for Boeing 737s places AeroSvit in the long queue for delivery of
what has been the most successful commercial aircraft in history, with more
than 7,000 orders. Boeing has 1,500 unfilled orders for the Next Generation
737 worth more than USD 100 billion.

OUTSTANDING SAFETY RECORD, DISAPPOINTINGLY
LOW RATING FROM U.S. GOVERNMENT

By any measure, AeroSvit has enjoyed great success in the last 14 years,
becoming an internationally known airline with great growth potential and
the largest air carrier in one of the region's economic hotspots. However,
AeroSvit Deputy General Director Yevhen Treskunov argues that operating
from Ukraine also carries with it immense frustrations.

"Since the very beginning we have made immense contributions to the United
States' economy, with large monthly payments in the past for the lease of
Boeing aircraft and large payments ahead as we expand our fleet of Boeing
737s and 767s.

"We also pay something in excess of USD 3 million per year in commissions
to travel agents in the United States. Of course, let me make it clear that we
are not complaining about these payments since they represent value for
money in our business.

"However, the rules of the US Federal Aviation Administration (FAA), place
Ukraine in Category 2, the same category to which it assigns countries in
Africa where there are armed conflicts and real dangers.

"In practical terms, this designation means that no matter how good our
safety record is at AeroSvit, Ukraine's overall low rating for air safety
means that we are totally blocked from expanding our services into the
United States," he explains.

"AeroSvit's overall record for air safety is outstanding and the FAA admits
that we are not the problem. However, because some other Ukrainian airlines do not have good safety records, we are suffering for the misdeeds of others.

"We must add to that this is also a result of the weakness of Ukraine's
Civil Aviation Agency (CAA) which has a lack of professionals and is not
sufficiently independent to do its job properly," Mr. Treskunov says.

THE SORRY STATE OF UKRAINE'S AIR SAFETY
REGULATIONS

Mr. Treskunov is in a good position to assess the state of Ukraine's
aviation agency as he was previously a leading light at the CAA. He
personally led a team in 2000 that put together a ten-year programme that,
if adopted, would have solved many of the problems that beset the CAA and
Ukrainian aviation as a whole.

However, Mr. Treskunov says that as so often happens, changes of governments and changes of air safety personnel have crippled the agency's effectiveness. The FAA reclassified Ukraine into Category 2 in 2005 and there now appears no possibility that this classification could be changed
any time soon.

A number of local industry insiders point to incidents with some Ukrainian
carriers over the last year that seemed to have sealed Ukraine's aviation
fate for the near future and perhaps for many years to come.

During 2007, the CAA tried without success to close down one Ukrainian
airline that had what is generally regarded as a terrible air safety record.
After the CAA issued the order that would have closed it down, the order
was overturned by Kyiv's Higher Economic Court.

Since then the CAA's hands have been tied. Only firm action by the current
government to appeal the court's order to a higher court and get a
favourable ruling would allow the CAA to carry out its mandate for air
safety regulation.

AIR TRAFFIC AGENCY: VICTIM OF UKRAINE'S
ENDLESS POLITICAL BATTLES

Every airline and air safety official contacted was unanimous in their
condemnation of the CAA and cast doubt on the agency's ability to carry
out its functions in a satisfactory manner.

One source, speaking on condition of anonymity, told Business Ukraine:
"There is a complete lack of regulatory professionals in Ukraine's CAA.
Virtually every really competent staff person eventually gets frustrated
with the endless changes in leadership and the ability of some of the
Ukraine's oligarchs to bend air safety rules to their liking," the source
claimed.

Mr. Treskunov admitted that he was one of those who came to the CAA,
worked very hard with the intention of making real progress in Ukrainian
aviation, but finally got fed up and left for the airline industry. As one source
pointed out, each new government appoints their own people with their own
political agenda, far-removed from the interests of the agency.

Professor Galyna Suslova of the National Aviation University (NAU), one of
the world's most respected air safety professionals, confirms  the situation
with Ukraine's CAA. In addition to teaching duties, Ms. Suslova is acting
director of the International Civil Aviation Organisation (ICAO) programme
in Ukraine. The professor points out that in Soviet times Ukraine was the
centre of aviation education, a fact reflected in the current student
population at the university of over 50,000.

Ukraine still has a good reputation as an aviation education centre and
draws students from all over the world. However, Prof. Suslova agrees that
very few of the top NAU graduates seek employment at Ukraine's CAA because
they recognise it is a dead end. Those who do go into the CAA soon tire of
their inability to do their job and leave for commercial airlines.

She stresses that the weakness of the CAA is not the fault of its personnel
themselves. "The CAA is now undergoing its 17th reorganisation since
Ukrainian independence. There is no air safety organisation in the world
that could do its job adequately under such circumstances," Prof. Suslova
says.

"Not only are there management problems, but Ukraine's main air code has not
really been updated since 1992. A revised air code that would comply with
ICAO standards has been presented to the parliament. It is not perfect, but
it would greatly improve the situation, if we could ever get it passed," she
opines.

OVERCOMING OBSTACLES & EXPANDING SCHEDULE
IN THE UNITED STATES

"We would like to expand our schedule in the United States," confirms Mr.
Treskunov at AeroSvit. "We want to provide an upgraded service to New York
and to begin a five times per week service to Chicago. We are convinced that
this would allow us to increase our purchases of US-built aircraft, and
would make it easier for business travelers to Ukraine to pursue their
interest in investing here. It is very much a win-win situation for both
countries.

"However, until such time as Ukraine improves its air safety regulation, we
are blocked from any further expansion in the US. We hope for a change as
soon as possible, but in reality we fear the changes may be years away.
Incidentally, it is not only AeroSvit but also other carriers who bear the
burden of this situation. Changes would be good for us all," Mr. Treskunov
concludes.

Dan Fenech, General Representative in Ukraine of Delta Air Lines, the only
United States carrier serving Ukraine directly, comments on the current
situation: "Delta Air Lines' operations into Ukraine at present are governed
by the US-Ukraine bilateral treaty and are not impacted by Ukraine's
Category 2 status.

"However, like all major carriers in the market we strongly prefer that the
Ukrainian government achieve all the necessary legislative and procedural
changes required to bring Ukraine back to ICAO compliance and Category 1
status. We believe this would be the best outcome for the people of Ukraine
and the airline industry as a whole."
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LINK: http://www.businessukraine.com.ua/buying-boeing
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NOTE: Boeing and AeroSvit Ukrainian Airlines are both members of
the U.S.-Ukraine Business Council (USUBC), http://www.usubc.com.