=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2002/07/01/f= inancial0845EDT0018.DTL ---------------------------------------------------------------------- Monday, July 1, 2002 (AP) Airlines protests Moscow's fees to fly over Siberia DAVID MICHAELS, and (07-01) 05:45 PDT (AP) -- GUY CHAZAN ZACH COLEMAN The Wall Street Journal Each time a Lufthansa jet flies east from Frankfurt to Tokyo, Aeroflot, Russia's national airline, pockets about $10,000. Unbeknownst to passengers, a portion of their ticket price goes to pay Aeroflot for permission to fly over Siberia -- without stopping in Moscow -- on trips between Europe and East Asia. The arrangement, a holdover from Russia's communist past, goes back some 30 years. During that time, European and Asian airlines have poured about $5 billion into Russian coffers, according to European airline officials. Last year Aeroflot posted a $42 million net profit. But had it not been for roughly $250 million in so-called overflight fees, the airline would have reported huge losses -- just like many of the carriers lining its pockets. In other words, its competitors are helping keep Aeroflot afloat. Russia's airline squeeze shows that for all President Vladimir Putin's talk of westernizing Russia and integrating it into the global economy, old Soviet habits die hard. But after decades of enjoying the benefits of what amounts to an aviation protection racket, the future of Aeroflot's stream of easy money is no longer a sure bet. Europe is trying to use Russia's bid to join the World Trade Organization to put a stop to the payments. Until now, Aeroflot has been able to play divide and conquer with foreign carriers. That's because when it comes to aviation, each of their governments deals separately with Moscow. But in WTO talks, all 15 European Union countries speak with one voice. Their negotiators see the overflight charges as far more than just an aviation issue. For them it violates basic free-trade principles, and they say the practice has no place in the world trade club. European airline officials are expected to meet with EU negotiators next week to hammer out a proposal to end the payments. The negotiators are expected to confront their Russian counterparts later this month. For years the full scope of the overflight system remained obscure. Aeroflot, which is 51 percent state owned, makes only oblique references to the payments in its annual financial disclosures, referring to them as "commercial agreements." Officials at European carriers do a lot of grumbling. The Russians are like "medieval feudal landlords" arbitrarily levying tolls on travelers, says Karl-Heinz Neumeister, Secretary General of the Association of European Airlines, a trade group. As Leo van Wijk, chief executive of KLM Royal Dutch Airlines, puts it, "We're paying for something we shouldn't be paying for." U.S. carriers, which don't fly those routes, have balked at making simil= ar payments to Aeroflot, although Russia has tried to levy them. With the debut of new global airline alliances, such as Star and SkyTeam, Russia has pressed U.S. airlines to pay overflight charges for seats they book on European or Asian partner airlines' flights crossing Siberia -- even if those airlines are already paying Aeroflot. As a result, U.S. carriers dropped the idea of cooperating on those flights, which would have only slightly expanded their global networks. Legal experts say the fees are in violation of the 1944 International Air Services Transit Agreement, which forbids charging for overflights. Moscow never signed that treaty. But in 1970, around the time Russia began imposing the surcharges, it signed the 1944 Chicago Convention on International Civil Aviation, which forbids charging for "the right of transit" over national territory. Anatoly Brylov, deputy director-general of Aeroflot, insists Russia isn't breaching the treaty. European and Asian airlines have been forking over fees to Aeroflot "on their own initiative," he says, so that they can fly nonstop to Asia. He says the foreign airlines told Aeroflot, "We'll compensate you, if you'll only let us." Behind the tortured history of the payments is a simple matter of geography -- and the more-complex matter of politics. The quickest route between Europe and the Pacific Rim is a straight shot across Siberia. But in the 1950s and 1960s, the Soviets kept much of their airspace closed. Jetliners of that era weren't capable of flying that kind of distance anyway. Aeroflot had an advantage over its competition because its planes could refuel in Moscow, and then continue on. Airlines including British Airways, Lufthansa, KLM, Air France and Japan Airlines were forced to fly to the Pacific Rim via Anchorage, Alaska, or the "Silk Route" through the Middle East or India. In 1970, as relations between the USSR and the West thawed, Moscow start= ed allowing European and Asian carriers to fly across Siberia, with a fuel stop in Moscow. Aeroflot extracted a variety of payments for this. One fee was for simply crossing Siberia. Other surcharges were based on what Mr. Brylov calls "the sacred principle of equality." His argument is that if a foreign airline offered more flights or flew larger planes than Aeroflot, it paid the Soviet carrier a cut of the difference to even things out. European and Asian airlines agreed to pay. After all, flying via Moscow instead of Anchorage -- a flight that required a detour around the North Pole -- lopped at least eight hours off the trip between Europe and Asia. That produced huge savings for airlines and their passengers. The Soviets calculated how much Aeroflot's rivals would save and priced their fees low enough to make the deals hard to refuse. Aeroflot was making money and its competitors were saving money on the deals, so everybody was reasonably happy. Then, in the early 1980s, the introduction of new ultra-long-range aircraft, such as the Boeing 747-400, meant that airlines could fly across the USSR without stopping in Moscow to tank up. Suddenly Aeroflot faced some serious new dilemmas. The carrier stood to lose passengers and fee revenue if its rivals flew nonstop to Asia. Meanwhile the Russian airline couldn't skip Moscow: Under global aviation law, most international flights must start or end in the airline's home country. To comply with the rules, Aeroflot planes making the jaunt between Europe and Asia had to touch down on home soil. As passengers clearly preferred the nonstop options on the arduous trip, Aeroflot was likely to lose business to Lufthansa, Japan Airlines or other competitors. For several years, Soviet officials insisted that Moscow be included on every airline's itinerary, necessary or not. Foreign carriers reluctantly agreed because they still saved money by flying across Siberia. But they kept pressing for nonstop flights. Then, around 1985, Aeroflot hit on a new solution. It would charge a so-called compensation fee for the right to avoid the unnecessary Moscow pit stop. Jean Claude Baumgarten, a senior Air France executive in Tokyo in the 1980s, was one of the first airline officials to sign on. "I was a hero" at Air France, he recalls. The fees ate up some of the savings that came from bypassing Moscow, he says, but the net gains "were tremendous." Over time, Russia's fees have gone up, as have the costs of running a jumbo jet. But the dynamic hasn't changed much. Today, a 747-400 costs as much as $8,000 per hour to operate, according to industry analysts at BACK Aviation Solutions, New Haven, Conn. Eliminating the stops in Anchorage or Moscow saves airlines as much as $80,000 on each round-trip, more than enough to pay Russia a fee that can reach $30,000 per round trip. Despite the savings to European and Asian carriers, the fees, which can vary by route and airline, have added up. The airlines won't disclose how much they pay, but a former senior Russian aviation official provided data for 1995: Lufthansa paid fees totaling $18 million. British Airways paid $14.8 million. KLM paid $11 million. Air France paid $4.85 million. In 1997, the only year the Association of European Airlines calculated what its members paid Aeroflot, the total was $225 million, according to the organizations' annual report. Association officials say the figure was much higher in 2001. Asian airlines haven't totaled their charges, and their payment system varies from the European model. Japan Airlines, for example, has a long-standing swap agreement under which it pays Aeroflot's ground fees in Japan, and Aeroflot pays JAL's ground fees in Russia, according to Masaaki Doi, JAL's regional manager for Russia. That was an even trade when JAL struck its first overflight deal with Aeroflot in the late 1960s. But today Aeroflot has seven weekly flights to Japan, while JAL operates one flight to Moscow. That gives Aeroflot a hefty noncash subsidy. Aeroflot's success at wringing money out of foreign carriers has convinc= ed Transaero, one of Russia's largest private airlines, that it should do likewise. With Moscow's blessing, it struck a deal last year to exact overflight payments from Taiwan's China Airlines and EVA Airways. "It is the right approach," says Olga Pleshakova, general director of Transaero. Officials at the Taiwanese airlines declined to comment. Russian officials bristle at the suggestion that their government or Aeroflot is putting the squeeze on foreign carriers. "These are unfounded accusations," says Russia's deputy transport minister Pavel Rozhkov. "No one's forcing anyone to do anything." The money "is not paid for overflight," he says. "These are commercial agreements between airlines." But aviation treaties between various European nations and Russia show t= he significant role played by Moscow. In theory, the agreements grant free transit, but they also stipulate that foreign airlines must strike a "commercial agreement" with a Russian carrier -- designated by the Russian government -- before the treaty goes into affect. No carrier would agree to Aeroflot's demands if the Kremlin didn't require it, officials at foreign airlines argue. Over the last decade, Aeroflot has gone on a spending spree with the mon= ey it earned from competitors. The airline has leased Airbus and Boeing jetliners. It has reduced ticket prices and installed modern seating and equipment to muffle loud engines. It has even improved the food served on its flights. Aeroflot also contributes some funds to operating Russia's air traffic system. "There's no shortage of things to spend it on," says Mr. Brylov, of Aeroflot. Eliminating foreign support would "crush" Aeroflot and force it to "fly at a loss and half the number of routes it operates," he says. EU officials, who say the fees violate basic principles of the WTO, are willing to compromise. They suggest a continuation of the system for a few more years. But they say the money should go into a fund to modernize Russia's antiquated air traffic control system, rather than continuing to subsidize Aeroflot. Many control centers were built under Stalin, and even relatively modern control centers lack advanced guidance systems or English-speaking controllers. But when the EU officials broached the topic of stopping or modifying the fee system during negotiations in March, the Russians "just said nyet. Closed the door," says Constandinos Vardakis, an EU representative in Moscow. "While you're at it, why don't you take our missile silos," snapped Mr. Brylov in an interview. By playing the World Trade Organization card, the EU is simply "flogging the dead horse," he says, because it hasn't found another way to stop the payments. Still, the pressure on the Russians is mounting and there are early signs of a thaw in the 30-year deadlock. In late May, at an EU-Russian summit in Moscow, trade commissioner Pascal Lamy told his Russian counterparts that the fee issue must be resolved this year. Mr. Rozhkov, of the Russian transport ministry, says there could be "some changes" to the overflight system and that Russian officials haven't told the EU that they're "completely against" the fund to modernize Russia's air traffic control system. Discussions will continue with the Europeans, he says, although "maybe not as intensively as they would like." =20 ---------------------------------------------------------------------- Copyright 2002 AP