Low-costs flights in Belarus: wishful thinking?
Last month, in a speech to the Belarusian parliament, Alexander Lukashenka expressed dissatisfaction with Belarusian airlines. The president questioned the absence of low-cost flights in Belarus and Belarusians’ extensive use of Vilnius, Warsaw and Kiev airports. This issue – discussed by Belarusians for several years – has been problematised by Lukashenka for the first time.
Companies such as Ryanair and Wizzair find it unprofitable to fly to Minsk airport, and so Belarusians choose to travel to airports in neighbouring countries. According to the administration of Belavia, the Belarusian national carrier, it would be detrimental for their business to welcome cheap flights to the country. As a result, Belarusians choose between Lithuanian, Ukrainian or Polish airports – or seek out rare Belavia online sales.
Why don’t Belarusian airports adapt for low-costs?
Belarusians tend to fly from Vilnius, Kaunas, Kiev or Warsaw to EU destinations or for summer holidays. Over recent years, Belarusians constituted over 10% of visitors to Vilnius airport. Since 2008, when the low-cost Wizzair commenced operations in Ukraine, Belarusians often opt to travel from Kiev. Warsaw and Vilnius airports cooperate with several low-cost companies such as Ryanair or Wizzair in selling cheap tickets all over Europe.
The Belarusian authorities noted that Belarusians often fly from other countries, decreasing the profits of Minsk airport. On 24 April, Lukashenka publicly problematised the low-costs issue in Belarus and the consequent extensive use of the foreign airports. The tendency of Belarusians to travel from foreign airports partly relates to the price policy of the main Belarusian airline, Belavia. For instance, in 2015 alone Belarusian airports lost $15m from Belarusians who instead travelled from the “air hubs” of neighbouring countries, writes BelaPAN. Before that, in 2012, former Belarusian prime minister Mikhail Miasnikovich stated in a meeting of the Council of Ministers that the failing tariff policy of Belarusian airlines pushes Belarusians to travel to neighbouring countries airports.
The management of Minsk National Airport says that low-cost airlines barely correspond to Belarusian standards. For example, the Minsk airport opposes additional charges for luggage. Some experts, however, agree that the leadership of Belavia national airlines tries to avoid increased competition from other airlines that can undercut its prices. In addition, so far Minsk finds itself in a more or less steady position since it has a relatively large flow of transit passengers.
Belavia collects dividends on conflicts in neighbouring countries?
The conflict between Ukraine and Russia, which has caused the cancellation of air connections between the two countries, transformed Minsk airport into a major transit point for travellers between Kiev and Moscow. The management of Minsk airport recognises that about half of the total amount of transit passengers travel from/to Ukraine and Russia. Therefore, Belavia has introduced more flights to Ukrainian airports in Odessa, Kharkiv and Lviv.
A little earlier a similar situation emerged with transit between Russia and Georgia. Belavia fully made use of the conflict between those countries that started in 2008, increasing the number of its flights to Georgia. Given the increased flow of Belarusian tourists to Georgia, this step taken by Belavia has proved very promising.
On the eve of the 2018 summer season, Belavia expected Tbilisi and Batumi to remain popular destinations and raised ticket prices to €400 for a return flight. However, instead of buying expensive tickets from Belavia, Belarusians started to look for flights to Georgia from neighbouring countries or to buy bus tours from Minsk according to reports by the online travel site vandrouki.by.
Visa-free tourism and local airports: an underutilised potential
After the introduction of a visa-free regime, Belarusian airports seems to appear even less interested in low-cost flights. As one of the conditions for visa-free travelling across the whole of Belarus is to arrive through Minsk airport, Belarusian airlines benefit from the visa-free policy. Belavia, the fully state-owned company, becomes more optimistic because of a constant increase in the number of tourists who come to the country on a visa-free regime. More than 80,000 foreigners visited Belarus in 2017 under the visa regime which allows visitors to spend five days in Belarus without a visa provided they enter via Minsk airport.
However, the number of tourists would increase if travel costs fell and if the scheme were applied to all Belarusian regional airports. Airports in Hrodna, Brest, Homiel, Vitebsk and Mahiliou together serve only 100,000 people annually. Currently, Hrodna and Brest airports offer only a few flights to Russia, Montenegro, Bulgaria and Turkey. At the same time, only Hrodna airport has been included as part of the visa-free regime (from January 2018).
Investing in the development of other regional airports and widening the visa-free zone might not only attract more tourists but also give a profit from short-destination flights. Cheap routes to Poland or Lithuania from the local airports might become the main source of income considering the popularity of these destinations.
Developing local airports in line with a low-cost strategy would increase competition between the airlines and might result in better services for passengers. At the sane time, by losing its monopoly on short-haul destinations, Belavia could focus on the long-haul flights and transit passengers, while local airports will increase their profits by managing multiple short-haul flights. Alternatively, the management of Belarusian airlines may further restrict competition and access for cheap airlines but most of the benefits from such a strategy would accrue to neighbouring countries.
Skyrocketing economic growth and weak regional development – digest of the Belarusian economy
On 16 March 2018, the official statistical body of Belarus Belstat has announced that GDP growth in the first two month of the year has accelerated.
Meantime, the weak regional development cast doubt on the sustainability of Belarusian economic growth in the future. Decreasing population number, lack of investment, and depressed business climate accompanied by low average wages play here a crucial role.
Finally, on 20 March 2018, the President of Belarus Alexander Lukashenka has announced plans for the establishment of a new ministry – The Ministry of Digital Economy. The digital transformation of the economy needs authorized governance.
Economic growth: Shifting to the fifth gear
According to Belstat, in January-February 2018 the GDP growth reached 5.6 per cent year-on-year. The industrial production has increased by 10.3 per cent and exports of goods by huge 36.5 per cent (in January). Finally, during the first two months of 2018 investment in fixed capital has increased by 24.8 per cent year-on-year.
The current positive economic figures ground on several factors. First, the world oil prices increased during the previous year. Second, because of administrative stimulus real wage growth accelerated, which led to the expansion of consumer demand.
Third, because of first two factors, the economic mood of economic agents significantly improved. Firms expect more orders, hire more workers, and actively lend and invest. Households, hoping for more income in the future, actively take loans, increasing current consumption. Banks began to lend more actively while continuing to reduce credit rates.
These positive shocks warmed up domestic demand. In addition to domestic demand, new shocks spurred external demand (for example, Russian demand for Belarusian exports began to grow due to increased growth in Russia amid more expensive oil).
Meanwhile, because of active administrative policy, the real wage growth since the 4th quarter of the last year was about 30 per cent. This giant increase gave rise to a wave of consumer optimism and demand but also produced a negative impact on price stability, the dynamics of the exchange rate, the fiscal balance, competitiveness, and profitability of Belarusian firms.
In the case that the authorities in the future will not abandon the artificial stimulus of wages, these negative effects will continue to grow, turning into a full-blown threat to price and external stability of the Belarusian economy.
Regional development: Weak performance
Meanwhile, the steady decline of the district Belarusian population in general and its working-age part, in particular, reveals crisis tendencies in the regional development. According to Belstat, the district’s population of Belarus constantly decreases and in comparison with the beginning of the century its number shrank by almost a quarter (see Figure 1), contrary to the urban population of large cities that increased by approximately 9 per cent.
Moreover, the official statistics reveal even more negative trend for the district’s working-age population. During last two decades, its number steadily declined by 1.4 per cent each year and in the last few years its reduction even amplified. All these mean that rural life loses its attractiveness to both adult and young Belarusians.
One of the key reasons stays the significant difference in wages between districts and large cities. The average salary in districts constitutes approximately 78 per cent of the average salary in major cities of Belarus.
The dynamics of entrepreneurial activity in the districts adds additional pain. In particular, over the past three years, the number of micro and small organizations has decreased by 5 per cent (Figure 2). At the same time, the additional development of small business in rural areas possesses potential sources for regional economic growth and, first of all, in agribusiness.
Additionally, Belarusian districts significantly lag behind in attracting foreign direct investment (FDI) that represent a major source of new technologies and create a potential for export diversification of regional goods. For example, during 2005-2015, districts on average attracted 4.6 times less FDI per capita than the major cities of Belarus.
IT sector: Building a new regulator
On 20 March 2018, Alexander Lukashenka has announced plans for the establishment of the Ministry of Digital Economy that will bring the entire domestic economy on the digital platform.
According to Alyaksandr Kurbatski, a member of the Council established for the development of the digital economy in Belarus, IT would penetrate into all sectors of the economy. Now virtually any sphere of human activity affects digitalization and this process really needs to be managed and coordinated somehow.
The creation of a new Ministry fully fits into the ambitious task of the authorities to turn Belarus into an IT-country, reorienting the Belarusian IT-sector to a product model. The government expects that this will significantly increase the value added and increase the level of technological equipment.
However, the long-run consequences of this project still stay unclear. The expectations of long-term positive effect ground on the fact that any progress in improving the level of technical equipment and the integration of Belarusian firms into the global chains will add additional benefits to the country.
On the other hand, additional benefits and preferences for the IT-companies may exceed effects obtained. Moreover, the focus on sectoral preferences may adversely affect the transparency and competitiveness of the business environment.
In the short term, the decree may have a beneficial effect, but only in the form of capital inflows to the country’s IT sector.
Taking all together, the skyrocketing economic growth of the first two months of the year added optimism to the whole economy, however slow progress in the regional development cast doubt on its long-run sustainability.
Aleh Mazol, Belarusian Economic Research and Outreach Center (BEROC)
This article is a part of a joint project between Belarus Digest and Belarusian Economic Research and Outreach Center (BEROC)