Last year and the first half of the year 2010 have been the period of general frustration for airline business on nearly all fronts. The globalized economy, promoted by bankers and stock brokers as a new era for business, has so far failed to deliver on its promises. The deep recession that followed has resulted in unprecedented losses for the airline business all over the world. The natural disaster in Iceland, aggravated by the narrow minded actions of officials, has completed the picture of a depressed industry. Airlines have been and still are struggling to survive in both the EU and Russia. Not all of them were lucky enough to survive. Some are asking, “who will be next to fail under such conditions?”
Contact between Russian aviation authorities and the European Commission on aviation issues have stopped completely – marking almost three years of deadlock. Russian authorities have initiated a number of investigations pertaining to airline ownership and beneficiaries of several European nations, indirectly threatening them with potential problems in obtaining permission to fly to and over Russia within the framework of existing bi-lateral Air Service Agreements (ASA). The mostly useless bi-lateral talks held in 2009 and early 2010 between the Russian Ministry of Transport and respective authorities of many EU nations did not add anything positive to this gloomy picture.
However, in May long awaited but nevertheless unexpected changes in Russian policy towards the West and the EU in particular, began to take shape. Successful and very productive summits between the Russian President and leaders of Northern Europe have taken place in rapid succession. New prospects for Russia joining the World Trade Organization in the near future have started to fuel almost forgotten expectations. And finally rumors regarding the possibility of a “New Basic Agreement” between Russia and the European Union to be signed in the near future have made these expectations even more realistic. This principal turn in relations between Russia and the European Union give us an excellent opportunity to re-visit all major issues of Russia-EU civil aviation relations and try to forecast future developments.
Russia-EU air transport dialogue at a glance
Contact between Russian transport authorities and European Commission DG TREN were resumed rather unexpectedly in May 2010, providing a glimpse of hope for those positively minded and new sources of frustration for pessimists. Little is publicly known as both sides have not released any information. It is known, however, that both sides have agreed to continue a dialogue and have planned another meeting for this autumn.
While re-establishing official contacts is, by all means, a good thing, there are some fundamental deficiencies in the relations between the Russian and European air transport communities. A lot has been said about different positions on different issues. It is not a problem to have different views. Today misunderstanding is a major problem between Russia and European Union, covering virtually all aspects of the airline industry.
What did the Russians actually mean by making an enquiry into the Austrian and Swiss ownership of these airlines? What was the actual purpose of attempts to direct Lufthansa Cargo to Krasnoyarsk airport, a base mostly unsuitable for modern cargo operations? Why are Russian officials not answering letters, e-mails and phone calls when asked for more explanations?
What was the real purpose of the extensive SAFA activities regarding Russian airlines in EU airports between 2006 and 2008? Why are European authorities so reluctant to allow Russian capital or other forms of participation in European airlines? Why does the Association of European Airlines never talk to the Russians? In Russia, we do not hear the voice of European airlines. What are their strategies and goals in this market? What are their financial and operational results in Russia? Answers for these and many other questions have never materialized.
To start improving understanding and mutual trust we need to widen the dialogue beyond the box restricted by political and governmental circles. In these times when policy is being formed from scratch, contributions from a broader spectrum of interest groups, like Parliament members, economists, financiers, and participants across the industry as a whole would be invaluable. We cannot afford to let outsiders – political dealmakers in Europe and Russia who know little or nothing of the airline industry to forge game rules for our industry for decades ahead.
Trans-Siberian route payments
This issue has become a stumbling block that has frozen Russia-EU civil aviation relations for three years. There is a common understanding in Russia that European airlines have asked the Commission to remove Trans-Siberian Route (TSR) overflight royalties. But why the Commission has made this issue not only a number one priority, but de facto a mandatory precondition for all future contacts and negotiations remains a mystery. In this regard, the Commission has made itself a sort of hostage of a single issue.
Historically it was European and Japanese airlines that asked the then Soviet government to provide them Siberian overflight permission for cash. Nobody is forcing European airlines today to make code-sharing agreements or to purchase additional frequencies from Aeroflot. There are a number of other trunk routes from the EU to Asia and the Pacific Rim outside of Russia airspace. What’s all the fuss about? Some say this system is against EU and international aviation laws, yet Russia has never signed any relevant treaties. Some say that that it is unfair to give money to Aeroflot, that it is a breach of the rules of competition. It is highly doubtful that Aeroflot represents any serious competition to European airlines and I do not think that anybody in Europe will ever experience any competitive advantage if Aeroflot stops receiving overfly money at some point. Given that the Russian government wants to help this state-owned company, it could subsidize Aeroflot at any time it chooses – WTO membership or not.
It would be very naive to think that a political, as opposed to an industry solution for the elimination of TSR payments will make any difference from a pure monetary standpoint for European airlines. Today it is absolutely clear that there will be no cost savings for those flying TSR. The TSR fee most probably will be replaced with either new environmental charges of some kind (thank you, European Union, for the hint) or a navaid fee increase or both. A political solution could have possibly been achieved in the late Soviet Union, but these times are long time gone. It is strange that policy makers in Europe can not see that simple fact.
One possible “airline industry” solution would be in the sphere of making Russian air transport more and more de-regulated and more in line with contemporary international standards, allowing for integration into the global airline business. Giving this as a starting point, the issue of TSR overflight payments would dissolve quickly by itself. The Commission should not insist on unilateral cancellation of what some view as unfair costs, but help Russia to modernize its air transport infrastructure and integrate it into the Common Aviation Area, bringing maximum pragmatic advantage for all parties. An approach like this would most certainly be appreciated by the Russian government.
In my own opinion, a practical solution to the TSR payments issue does not rest in political trade-offs; it must be a result of modernization and deregulation of Russian air transport.
New realities of airline consolidation and cooperation
Large-scale changes are taking place in Russian and European civil aviation – consolidation among EU and Russian carriers has caused fundamentally new legal and regulatory problems as well as changes in civil aviation regulations in Russia. I have already mentioned inquiries made by Russian authorities regarding airline ownership and national beneficiaries for several European airlines. The question is: who cares? Very soon there will be no “national”, “flag-carrying” airlines in many EU member states, e.g. in capital of Europe Belgium, and center of Central Europe, Austria, where two major airlines are foreign-owned. Not to mention a dozen of smaller countries.
What will the Russians do if they cannot think beyond the narrow logic? Will they demand the termination of air service to these countries as they are no longer subject to bi-lateral Air Service Agreements? How will Europeans react to such pointless rhetoric?
The expansion of Russian airlines’ includes cooperation with global alliances and the conclusion of previously unthinkable code-sharing agreements. Bi-lateral Air Service Agreements will obtain new meaning in this context. New forms of airline business cooperation are on the horizon both within the framework of global alliances as well as outside of these boundaries. Pursuing its own course, the Russian air transport industry is moving towards de-regulation and liberalization regarding international air service, despite the often harsh framework of bi-lateral agreements.
A truly ground breaking code-sharing agreement was signed between Aeroflot and Air France-KLM in Paris this April in the presence of the Russian and French Ministers of Transport. New SU/AF code-sharing agreements now include intra-European sectors for the Russian carrier and Russian domestic sectors for its European partner.
One might think that this is an exemption to the rule, representing a deeper commercial and marketing integration of Sky Team members favored by their respective governments. This is not, however, a unique case. Just a month later a new set of similar code-sharing agreements followed, this time with CSA, providing Aeroflot with more commercial rights within Europe.
In fact this means that Russia’s largest airline has not only been accepted into the EU Common Aviation Area, but is already taking serious advantage of the fact. Other Russian and European airlines, for example BMI and Transaero, Air Berlin and S7, are also making intensively use of opportunities offered by code-sharing with their partners.
Even more impressive examples of new types of Russian-forged bi-lateral ASAs can be found in another part of the world. The recent agreement between Russia and Hong Kong (which is not an independent state by the way, but still subject to bi-lateral agreement) provides Russian airlines with possibility to have fifth freedom flights via Hong Kong to other Asian destinations. Singapore Airlines is already enjoying fifth freedom privileges for its Singapore-Moscow-Houston service.
Given this context, it is not quite clear why Russian aviation authorities are not supporting the idea of Community Designation and / or a horizontal Open Sky agreement with the European Union. All of these remarkable events are a very tangible indication that mutually beneficial dialogue is both feasible and practical provided both sides want it.
Tourist and Leisure Travel
Tourism between Russia and European countries has been a major driving force behind the constant growth of Russia-EU air traffic over the last twenty years. Air traffic between Russia and EU member states tripled in the 90’s and had been growing at average rate of 15-17% annually thereafter until 2008.
Two out of the four largest Russian international airlines are dedicated leisure travel charter operators – Orenair and VIM Avia. The two largest Russian international airlines, Aeroflot and Transaero, have a significant part of their European business from the tourist industry.
The most liberalized (from regulatory point of view) travel market for air transport, the Russia-Germany market, has clearly demonstrated all the advantages of easy access to the market. For many years Germany has been the No.1 international market for Russian airlines. Other EU countries are far behind, including major tourist destinations like France, UK, Italy and Spain.
In 2008 Lufthansa has carried 430,000 passengers between St Petersburg and Germany. For comparison: France has 75 million visitors per year and only half a million of those tourists are carried by Russian airlines, which means that Air France has another half million passengers. We can see a very similar artificially depressed situation with traffic to Spain and Italy with 50+ million and 40 million international visitors per year. It is hardly surprising that SkyTeam members and their Russian partner, Aeroflot, dominate all these markets.
It is quite obvious that easier access for other Russian carriers to these markets will result in a significant growth of tourist traffic to these countries and to Russia.
Russia’s Tourist Industry Union is currently leading a lobbying campaign targeted at relaxing the visa regime for travelers from developed countries, first and foremost for residents of the European Union. The simplification procedures for obtaining short term visas for those traveling to Saint Petersburg implemented during a trial last year immediately resulted in a boom in the number of travelers to this major Russian tourist attraction. Potentially cardinal changes in the tourist market loom as a consequence of moving forward with negotiations on relaxing visa procedures.
What to do?
Fundamental changes in relations between Europe and Russia demand an immediate response from market participants. There are two basic scenarios. The first is to simply do nothing. “Let politicians do their job. We will wait and jump on this bandwagon when all the ground work is done.” How often we hear this, or if not actually hear, meet this very common, hassle-free, “energy saving” approach.
Another possibility is to provide solid, valuable industry input in this conversation before the political process becomes hardened and poorly informed laws and agreements cripple the progress that has been made so far. The bottom line is that today politicians and governmental officials from both sides do not have any clear strategy for the future development of air transport. European policy on the Russian air transport market looks very sketchy and, from Russian standpoint, one sided. Russian policy for the European air transport market is so vaguely formulated that its provisions are considered by many to be completely unacceptable from the perspective of EU legislation.
In these circumstances, given the airline industry intends to take a pro-active approach and contributes to the political and legislative conversations at the initial stages of what is essentially a new era of relations between Russia and EU, many very useful and positive things could be done.
Here is just one example. In the political arena, Russia and the EU are moving forward to developing the Partnership for Modernization Program, originally proposed by the European Commission earlier this year and well received by the Russian government. The airline industry can and should include itself in this potentially important program with feasible, understandable and pragmatic programs with clear goals and results. The success of industry inspired programs within this framework will build-up mutual credibility and trust for further cooperation in the political and commercial spheres.
Other similar opportunities should be researched and explored to the full advantage of our industry. Endless talk about crazy Russians who are always against all nice EU initiatives (simply because of their bad temper and the twisted workings of their mysterious souls) and the constant Russian accusations about European with their hidden intentions to squeeze unilateral benefits our of Russia and discriminate against friendly Russian businesses will lead to nowhere. It’s for the industry to begin to have a more significant voice in the conversation about the state of affairs in the international airline industry and dispel the myth of gloom with a clear thinking and straight talk about the potential for growth and cooperation in this new era for the benefit of the airline business and better relations between neighbor nations.