«Russia and the World Community’s Respond to a Challenge of Instability of Economic and Legal Systems Materials of the International Scientific-practical Conference ...»
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Introduction International civil aviation has recently faced an interesting combination of liberalization and regulation. While important intercontinental routes, such as EU-USA, EU-Canada or EU-Brazil have been liberalized, regulation of other fields of air transport business has increased. Airport access, air passenger rights, environmental footprint and tarmac delay rules are just a few examples of areas where regulation has tightened over the last couple of years. The dynamics of international air transportation markets is high as never before.
The EU-Russia aviation market is an exception from this general trend. The rules governing civil aviation between Russian and EU airports have remained virtually unchanged for the last decade. They are stuck at a highly protectionist level with little hope for change. While some issues have admittedly been solved (e. g. the dispute about Siberian overflights, as we demonstrate in the third section of the paper), still other problems remain. For example, British Airways has recently applied for a permission to use its largest aircraft Boeing 747 on Moscow-London route. However, Russian civil aviation authorities did not approve the aircraft. A few months earlier, Russian carrier Transaero had unsuccessfully applied for the same right. 18 Such fights between Russian and European civil aviation authorities are common and hinder full development of the market.
The main goal of this paper is to offer a brief overview of the current state of EU-Russia civil aviation relations. We focus on identifying main trends in the relations and forecasting their development in short and medium-term future.
The paper is structured into five main sections. After a brief introduction we proceed with the analysis of air traffic patterns between Russia and the EU.
Later we focus on current intergovernmental regulatory framework and major issues in EU-Russia civil aviation relations, such as Siberian overflights and the inclusion of aviation in the EU ETS. Finally, we study aircraft sales, cooperation in aircraft manufacturing and we offer conclusions.
The European Union is the most important market for Russian airlines. Although the years when more than 50 per cent of all Russian passenger traffic The 747 issue was solved on March 26th 2012 when Russian authorities finally approved the use of the aircraft.
was directed toward EU destinations are gone, it still maintains a 40-per-cent share. In a three-year period 2007 – 2010 the number of passengers increased by 24 per cent (table 1). Approximately a fourth of the traffic flows to Germany, an important business center and a home of a significant Russian minority. Other important destinations are Italy, Spain (vacation favorites) and France. The most important city pair is Paris (Charles de Gaulle) – Moscow (Sheremetyevo), currently served by 10 flights daily.
Table 1: EU-Russia annual number of passengers transported by air 1993in thousands) European Union European European Czech Republic Source: Eurostat, 2012.
Since 2004 the number of daily flights between EU airports and Russia has nearly doubled (table 2). Although the growth was negatively hit in 2009 – by global economic crisis, in 2011 it strongly rebounded, achieving a remarkable 22 per-cent year-on-year increase. The most dynamic market is Spain where the number of daily flights has increased almost five times since 2004.
Another better-than-average performers are Cyprus, Czech Republic and Latvia.
Table 2: EU-Russia average number of daily flights 2004-
TOTAL EU* Traditional scheduled and low-cost flights, per direction. Charter flights are not included in the data – in 2011 they averaged 9 flights a day, majority of them to Italy. Data for Portugal, Ireland, Romania and Malta are not available.
Source: Eurocontrol: STATFOR Interactive Database, 2012.
While more than 75 per cent of EU-bound flights land at airports in old member states, the role of 12 newcomers (countries that joined the EU in and 2007) has been increasing steadily (figure 1). On a flight-to-population basis, new member states have already surpassed the importance of old members:
in 2011 the share of EU population in new member states reached almost 21 per cent; however their share on flights to Russia exceeded 24 per cent. This is a very interesting, perhaps unexpected result. Compared to old members, new member states have worse aviation infrastructure, older aircraft, fewer airlines and lower income to spend on travel. Geographic location of some of them allows for efficient ground transportation to Russia, as for example bus connections between Tallinn and Sankt Petersburg, directly competing with air transportation. Moreover, ten of the countries used to be under a strong influence of the Soviet Union and after the events of 1989 their perception of Russia turned negative. In many cases, it still is negative today. Considering all the factors mentioned it would be easy to come to a wrong conclusion that the demand for flights between Russia and new EU members is low. Conversely, it is relatively high due to other important factors that fuel air traffic growth:
• Latvia and Estonia are a home to significant Russian minorities, reaching more than 25 per cent of population.
• Czech Republic and Cyprus have become popular destinations with Russian tourists, particularly the Czech capital Prague.
• Air Baltic, an airline based in Riga, Latvia, has successfully launched a new business model in 2004 and is today a major provider of connecting flights between Russia and the EU.
Figure 1: EU-Russia average number of daily flights 2004-2011 – new vs. old member states 100,00% 95,00% 90,00% 85,00% 80,00% 75,00% 70,00% 65,00% 60,00%
OLD NEWSource: Eurocontrol: STATFOR Interactive Database, 2012.
In line with general trend in global aviation, low-cost airlines’ share of the EU-Russia market has been increasing steadily. However, due to complicated regulatory environment and nationality restrictions (see part 3 of the paper) it still lags behind expectations and currently holds only 8 per cent of the market.
Main low-cost carriers offering service to Russia are Germanwings (Germany), Windjet, Air One (Italy) and Vueling (Spain). As soon as the EU-Russia civil aviation market is liberalized, we expect a rapid take-off of in the number of destinations offered by low-cost carriers. Nevertheless, as we will argue later in the paper, liberalization is not to be expected anytime soon.
Figure 2: EU-Russia average number of daily flights 2004-2011 – low cost vs.
traditional airlines 100%
TRADITIONAL LOW COSTSource: Eurocontrol: STATFOR Interactive Database, 2012.
2. Regulatory framework In 1944, United States of America organized an inter-governmental conference in Chicago. The aim of the US government was to create a liberal international aviation regime, where all the airlines from all the countries of the world would have the same rights and would be able to operate scheduled flights between any major airports in the world without restrictions. However, US opinion was not shared by the majority of participants. European countries were afraid that liberal rules of international civil aviation would give a huge competitive advantage to US airlines. Therefore, they supported a protectionist structure based on bilateral air service agreements (ASAs). These have governed international civil aviation ever since.
The principle is simple. If an airline from country A wants to operate regular scheduled flights between its home country and country B, a bilateral agreement between governments of the two countries has to be signed. This agreement sets specific rules for operating flights between the countries: names of airlines that gain access to the market, types of aircraft allowed, airports to be served, weekly frequencies, pricing etc. If an airline wants to operate flights from its home country to 100 other countries, 100 bilateral agreements are needed. To complicate things even further, each of these agreements would probably be unique and will contain a different set of rules.
Understanding the problems connected with such a complex structure of thousands of different ASAs, in 1978, USA started signing more liberal and simple “open market” agreements [Doganis, 2007]. In 1992 the process evolved into even more simple “open skies” agreements. The European Union, originally lagging behind, launched a liberalization campaign in the beginning of the 21st century. It started signing so-called horizontal agreements with major partners.
These mean that instead of 27 separate agreements (one for each member state) only one bilateral agreement is needed to govern aviation relations with foreign partners. Today, there are no separate USA-Germany, USA-Italy or USA-France bilateral ASAs any more; instead, only one common USA-EU agreement exists.
However, the status of EU-Russia civil aviation relations is different.
Air transport between the EU and Russia remains highly fragmented, governed by separate bilateral ASAs. These are of a highly protectionist nature. We already mentioned the example of British Airways and Transaero not being able to use Boeing 747s on Moscow-London route because civil aviation authorities failed to give approval. Currently, authorities have a right to ban almost any change in air services, be it entry of a new airline, addition of a new route or increase in flight frequency. This is clearly an advantageous situation for Russian airlines and it is therefore not surprising that Russian authorities are not willing to accept a change. Their stance is in many ways similar to that of US authorities before 2007. Main factors of Russian aversion against change include:
• While robust evidence exists that liberalization leads to increased consumer surplus [see for example Alford and Champley, 2007 or ATAG, 2008], it would most likely negatively impact Russian airlines, which are as of yet not ready for fully competitive marketplace.