Murky times call for a "reset"?

Relations between the European Union and Russia have hardly ever been worse since the end of the Cold War, as was clearly demonstrated at the recent Russia-EU summit in Khabarovsk. Nevertheless, a new partnership agreement will be developed and singed in the foreseeable future. It is obvious that both in Russia and in Europe there are interested groups with entirely opposite views of the future of Russia-EU relations, ranging from a return to head-on confrontation to overwhelming liberalization and the removal of all barriers. One of the biggest advantages of air transport is that it’s equally needed by both sides.
As a result, cooperation in this complicated and still highly regulated area is virtually inevitable and potentially capable of filling the difficult political process with some positive pragmatic content.
"Official" dialogue between Russia and the EU has been virtually suspended since the spring of 2007. Last year did not bring any positive dynamics in that respect. Even more, the highest priority placed by the European Commission on resolving the trans-Siberian overflight payments dispute, and the intention of the Russian government to revisit this issue after Russia’s accession of the WTO, have blocked cooperation between the authorities – including on perhaps more important issues.
Difficulties in the official, "ministerial" dialogue also tend to spoil the business environment. In everyday life and actions of civil aviation authorities new, negative moods are evident. Even reasonable actions of CAAs, airlines and airports are viewed through the confrontation prism. Further development of the market, which contributes to more than 70% of international traffic to and from Russia and is one of the fastest growing and profitable continental markets for European airlines, is grinding to a halt.
The air transport crisis has resulted in dramatic financial losses for most airlines both in Europe and Russia, jeopardizing their very existence as independent entities. The influence of governmental institutions on businesses is rapidly growing. Ideas of protectionism are taking over the minds of politicians and different authorities across the globe. At the same time some new, truly golden opportunities have emerged – for those able to grab them. Among these are bigger market shares, access to the acquisition of new promising assets and, at the end of the day, the possibility to gain completely new positions on the market.
Consolidation of European airlines is fully under way with Germany’s Lufthansa leading the "2008-2009 European season". This year this most successful European airline (and probably one of the world’s most efficient airlines) will add to its assets a number of large European carriers. The question is whether the Lufthansa management will be able to cope with the challenging task of integrating five different airlines into an efficient holding structure. Provided this does happen, how will the European air transport scene change? What will be its influence on EU-Russia relations in the air transport area? It is worth mentioning that the air service agreement (ASA) between Russia and Germany is the broadest and the most liberal among all bilateral ASAs signed by Russia.
The second biggest merger deal, that of British Airways and Iberia, has encountered difficulties. There is an impression that the European Commission has not yet adopted an approach and position with regard to such international mergers. From the EU-Russia standpoint, the only thing is clear: the existing bilateral ASAs are drifting further and further away from the Russian and European realities of today. In the context of bilateral ASAs, whose airline is Lufthansa Italia anyway – Germany’s or Italy’s?
Quite logically, new European mega-carriers will look for Russian partners to cover the blank space on their network maps called Russia. So far only Air France – KLM has successfully solved this task. It is absolutely clear that participation of other major Russian airlines in other global alliances will re-configure the Russian market dramatically. This already started to happen with the announcement that Russia’s second biggest airline, S7 Airlines, was being invited to enter the Oneworld alliance.
Not only are the global alliances looking to add Russian partners. A code-sharing agreement between Russia’s largest network carrier S7 and the European airline Air Berlin/FlyNiki is being perceived as a benchmark and has reverberated both in Russia and Europe.
The unfortunate demise of the much publicized first Russian airline alliance AiRUnion has left Star Alliance, the world’s largest global association of air carriers, without a Russian partner. Star Alliance members, who were busy for the past several years building a hub at Moscow Domodedovo airport, have suddenly found themselves without local feeders after the remains of AiRUnion were urgently transferred to another Moscow airport, Vnukovo.
The management of Star Alliance and its most active members in Russia, Lufthansa and Austrian Airlines, face quite a complex and important task of enrolling a new Russian partner that would be capable of accomplishing the alliance’s goals in the current difficult market environment.
An even more ambitious project has emerged on the ruins of AiRUnion. This start-up, called Rosavia, is potentially capable of drastically changing the whole configuration of the domestic and international segments of Russian air transport. Consolidation of state-owned assets, including large airlines like GTK Rossiya, combined with political influence of the start-up shareholders, could allow this new player to attain the required "critical mass" quickly.
Rosavia’s plans with regard to the international market may seriously influence international traffic to and from Russia and "aviation" relations between the EU and Russia in general. The intention of the new start-up to become a major competitor to Aeroflot on the international market would apparently require a radical change to most of the bi-lateral ASA agreements for the purpose of naming Rosavia the designated carrier. The desire to guarantee fair competition to their airline has made the Rosavia shareholders address Russia’s Federal Antimonopoly Service with an enquiry regarding the legal competence of Aeroflot’s receivership of the Siberian overflight payments.
2008 and beginning of 2009 featured new attempts by Russian airlines to acquire European air transport assets (Aeroflot/Alitalia, Aeroflot/JAT, S7/ Austrian). Accompanied by broad coverage in the Russian and European press, all of them have failed. Potential participation of Russian capital in European air transport meets with very little understanding in Russia and a very cautious, often nervous or even hostile reaction in the EU.
European airlines which do have Russian capital, e.g. Hungarian Malev or German Blue Wings, have been viewed ambiguously and, according to the European press, their legal status could be subject to an investigation by European structures.
While consolidation of European carriers was rapidly growing in 2008-2009, the interest of EU trade investors in Russian airlines was extremely low, if any. Yet some Russian airlines have appeared to be potentially interesting and large stocks could be bought for very attractive prices. The only reasonable explanation is that the Europeans considered Russia’s related risks in air transport as being too high for investment.
The current hot discussions in Europe on the new environmental requirements gathered under the ETS umbrella are not well known in Russia. Russian airlines today are not concerned with this issue, believing that this will not happen any time soon. Quite unusually, Russia could team up with some other influential non-EU countries like the USA, Canada, China and India, to deal with the ETS problem.
The EU leaves non-EU airlines no choice and imposes new, additional financial burdens on operations to and from Europe. It is impossible to say today what kind of reaction would come from the Russian authorities, but if the current moods persist, this reaction could be extremely negative.
No matter how difficult the current situation appears to be, airline business does not stop even when official relations stagnate. Therefore, many in Russia and Europe hope that a direct dialogue among airlines and other air transport entities could fill the political process with positive economic content, thus contributing an additional momentum to the official dialogue. Many also believe that there is an important role in broadening and intensifying the EU-Russia air transport dialogue to be played by institutions which have not been extensively involved in that process until now: the parliaments of Russia and EU member nations, the European Parliament, and trade associations, to name but a few.