Prospects for Development

Prospects for Development of Air Transport Sector Services IN THE REPUBLIC OF MOLDOVA in the Context of Negotiating the Future Free Trade Agreement between Moldova and the EU

RADU BEZNIUC

Chisinau 2010 The views expressed in this study are solely those of the authors and do not necessarily reﬂ ect the opinion of the ﬁ nancing institution.

ABBREVIATIONS...... 4

EXECUTIVE SUMMARY ...... 5

INTRODUCTION ...... 8

PART 1 FEATURES OF AIR TRANSPORT IN MOLDOVA ...... 9 1. Regulations and policies on air transport ...... 9 2. Airport infrastructure ...... 10 3. Airlines ...... 12 4. MOLDATSA: degree of current integration in the SINGLE SKY process via EUROCONTROL ...... 13 5. Fuel supply companies ...... 14

PART 2 LIBERALIZATION PROCESS OF THE EU AIR TRANSPORT MARKET ...... 15

PART 3 ASSESSMENT OF THE MARKET LIBERALIZATION IMPACT ON THE MAIN AC- TORS FROM AIR TRANSPORT MARKET IN MOLDOVA ...... 18 1. International airports ...... 18 2. Airlines ...... 23 3. Navigation and air trafﬁ c service (MOLDATSA) ...... 28 4. Passengers ...... 29 5. State Budget ...... 32 6. Comparative aspects ...... 35

PART 4 AIR TRANSPORT SERVICES SECTOR REFORM UNDER LIBERALIZATION. OP- TIONS FOR STATE ENTERPRISES ...... 38 1. Institutional reform ...... 38 2. Airport reform ...... 39 3. State airline reform ...... 40

CONCLUSIONS AND RECOMMENDATIONS...... 46

BIBLIOGRAPHY ...... 48

METHODOLOGY...... 49

3 Abbreviations

CAA Civil Aviation Authority ACI Airports Council International ACMI Aircraft, Crew, Maintenance & Insurance ASAC/SACA State Administration of Civil Aviation BAO British Airport Operator EIB European Investment Bank EBRD European Bank for Reconstruction and Development EC European Commission ECAA European Common Aviation Area ELFAA The European Low Fares Airline Association ENAC Italian Civil Aviation Authority EUROCONTROL European Organization for the Safety of Air Navigation EUROSTAT Department of European Economic Statistics IATA International Air Transport Association ICAO International Civil Aviation Organization JAA Joint Aviation Authorities JAR Joint Aviation Requirements MFAEI Ministry of Foreign Affairs and European Integration SESAR Single European Sky ATM Research EU European Union WTO World Tourism Organization YM Yield Management

4 Executive summary

The general subject-matter of the study is to evalu- determined by the economic crisis that affected ate the impact of air market liberalization process the EU itself. on the main actors in the fi eld. The main aircraft operators registered in the Re- The study clearly shows that liberalization of air public of Moldova are Air Moldova, Moldavian transport services in the Republic of Moldova will Airlines, Tandem Aero. Each company’s share of lead to greater competition between air companies passenger traffi c for 2009 in Chisinau Airport, ac- and will create additional opportunities for air- cording to information provided by ASAC, is as fol- ports, fi nal consumers – the passengers, and also lows: 49.8% for Air Moldova, 4.4% for Moldavian for other industries of national economy, which Airlines and 2.6% for Tandem Aero. will be indirectly affected by this process. Due to its statute of state-owned airline company, The most diffi cult task falls to the national airlines. Air Moldova was nominated, almost in all bilateral They have to give up the protective umbrella pro- agreements, as the operator on behalf of the Re- vided by bilateral agreements and confront a liber- public of Moldova with commercial rights to perform fl ights. Thus, Air Moldova has always had a alized competitive environment. 50% market share. The institutional reform in the sector, launched in The process of liberalization represents a gradual February 2009, is still incomplete. This leaves its abolition of limits on designation, capacity, fre- mark on the overall industry condition and is also quency and tariff setting in civil aviation. It aims refl ected in the audit reports on compliance with to create an effi cient air transport structure based ICAO standards issued by international special- on free market mechanism where all the decisions ized bodies (ICAO). The suspension of the process are taken as a result of a mutual interaction of sup- of institutional reorganization has created impedi- ply and demand. The role of national governments ments to ASAC activity (Civil Aviation Administra- is limited to safety and security. tion of the Republic of Moldova), which led to ineffective functioning of the oversight system of fl ight Liberalization will help to create the conditions safety and aviation security (according to ICAO for a stepping up of competition between airlines audit in November 2009 and May 2010). on air transport services market in the Republic of Moldova. This will lead to a diminishing of in- In order to ensure a coherent process of air trans- comes per seat obtained by air carriers for fl ights port liberalization in the Republic of Moldova, the to ECAA destinations, but will also lead to an in- institutional reform in the sector needs to be con- crease in sales volume. cluded. The impact of air transport liberalization in the Passenger traffi c is concentrated in the only Republic of Moldova on international airports reg- Moldova’s airport which operates regular fl ights istered in the country will bring along an inten- - Chisinau International Airport. Following a pe- sive growth – leading to an increase in passenger riod of growth for the period 2000 – 2008 (from air traffi c through Chisinau International Airport, 245,000 to 845,000 passengers per year), passen- and an extensive growth – by stimulating the in- ger traffi c through Chisinau airport has recorded terest in at least one regional airport on the part of in 2009 a decrease of 4.7% as compared to 2008, aircraft operators and investors.

5 Radu Bezniuc

In the probability of accelerated passenger traffi c The direct positive effect for government budget is growth, as a consequence of air transport market the reduction of work-related travel expenses in- liberalization, airports in the Republic of Moldo- curred by public sector employees. Work-related va will be main benefi ciaries of liberalization. If travels, specifi c to ministries, hold a big enough liberalization is to be advanced, the passenger share of each institution’s budget, and the aver- fl ow through Chisinau airport can reach up to age tariff reduction on air transport market, in the 1,500,000 people per year in the second year fol- wake of air transport services liberalization and lowing liberalization. competition enhancement, will be refl ected in total transport expenditure of given institutions. The Regional airports will become a focal point for in- representatives of national airlines think that the vestors, and Balti airport can reach a traffi c level of price reduction of fl ight tickets for offi cial travel is over 30,000 passengers a year in its second year feasible at the present time by signing direct con- of operation. tracts with operators designated on specifi c routes, The major impact of air transport liberalization on by removal of intermediaries represented by travel airline companies operating to and from Chisinau agencies that cannot ensure a certain price level. airport will be an increase in the level of compe- The negative impact on government budget might tition. The abolition of restrictions on operators’ be a reduction in social contributions paid by na- designation, frequency and capacity will lead to the tional airlines, in case of cost optimization through emergence of new companies on the market and to implementing employment cuts. an increase in passenger traffi c. Most passengers Inland transport traffi c will be redirected towards travelling to and from the Republic of Moldova are low cost and low-fare airlines. Once air transport sensitive to fare level. Therefore, entry of low cost becomes increasingly accessible, use of inland operators into the market in case of liberalization transport for long-distance travels signifi cantly di- might become imminent. The attractiveness of minishes. Nelu Iordache, the owner of “Blue Air” Moldovan air transport market for low cost opera- Company, thinks that „Air transport market lib- tors is determined by the advantage of exploring a eralization in Romania led to an increase in pas- new market, price-sensitive with respect to airline senger traffi c. A very large number of passengers ticket prices, correlated with their experience and were redirected from coaches/minibuses to low possibilities (fi nancial, technical) concerning such cost fl ights. Public land transport companies were expansions. among the biggest losers in the wake of liberaliza- Simulations of air transport services market evo- tion.” According to representatives of numerous lution in the Republic of Moldova, in the poten- low cost operators, they take over primarily the tial entry of two low cost operators on the market, passenger traffi c from coaches and train. This hap- show a decrease in the market share of national pens because travel costs don’t differ essentially operators Air Moldova (from 50% to 43%), Mol- but travel time is considerably reduced. Accessible davian Airlines (from 4% to 2,7%), Tandem Aero air transport will lead to a decrease in coach/mini- (from 3% to 2%), within the fi rst two years of lib- bus/train passenger traffi c on Bucharest and Kiev eralization. routes (airports were low cost airlines operate).

All interviewees believed that the great winner will Tourism industry is the second sector of economy, be, of course, the consumer, i.e. the passenger. In after air transport, that will be strongly affected by the fi rst two years after air transport market lib- the liberalization process. eralization in the Republic of Moldova, the pas- The process of air transport market liberalization sengers will benefi t from a decrease in fl ight ticket will require the adoption of a coherent reform of prices up to 50% for ECAA destinations, accord- air transport sector, which will promote the free ing to the relevant experience of other states. The movement of transport services, the elimination passenger traffi c increase will be also partly deter- of obstacles to freedom of establishment, and will mined by a rise in degree/frequency of air trans- foster harmonization of national regulations with port use by passengers. common rules set out in the Multilateral Agree-

6 Prospects for Development of Air Transport Sector Services in the Republic of Moldova ment on the Establishment of a European Com- In the process of market liberalization, harsh common Aviation Area (ECAA). petition and the signifi cant reduction in revenues can stimulate mobilization of effi ciency enhance- The institutional reform shall be consistently im- ment and cost optimization efforts at the level of plemented through: the national state-owned company. A process of 1. amendments to the Civil Aviation Law and optimization and an objective cost reduction of Aviation Security Law in compliance with state-owned airlines can become the surviving so- the Airline Codes assigned by ICAO; lution for this type of airline operators. 2. separation in terms of scope of the two sec- The attenuation of the negative impact of liberali- tors of civil aviation: Aviation Safety and Se- zation on national airline operators can be achieved curity (1) and Commercial Policy in the fi eld through increasing airline companies’ fl exibility of Aviation (2). (by reorganization policy of each operator), adopt- The central constituent of „on the ground” reform ing a low-fare operation model, and diversifying will be the modernization of airport infrastructure. revenue sources. Beside the enhancement of capacities of process- With liberalization of access to European Common ing passenger traffi c in Chisinau airport (runways Aviation Area, airline companies from the Repub- renovation and platform renewal), Balti airport lic of Moldova will be provided new development modernization shall be requested, being the most opportunities, gaining the possibility to operate on prepared airport at the moment for operation of new markets. commercial fl ights.

7 Introduction

European integration is the main objective of of experience of States which have gone through Moldova’s foreign policy. This process provides, this process is important. inter alia, integration into the European Common Many citizens of the Republic of Moldova are won- Aviation Area. Joining the European Common dering why there are fl ights from Romania to other Aviation Area will represent, in fact, the liberali- EU countries, and there are none from Moldova. zation of air transport in Moldova. But few people know that this is due to liberaliza- At present, the national aviation policy aims at tion of air transport market in Romania when join- protecting the local airline market. There are many ing the European Common Aviation Area. Market tools used for intervention in the transport sector, liberalization leads to strong competition between including licensing, limiting market access to for- airline operators, and in these circumstances the eign operators in Moldova, coordinating price lev- „fi ght for passengers” begins. The most powerful els, etc. Application of protective measures has led confrontation occurs for the prices of fl ights and to price increase in transport services. Signing of passengers will only choose the best offer. a free trade agreement between Moldova and the European Union will drastically change the situ- Availability of low prices leads to increased acces- ation. This process may have various effects, both sibility to air transport services and to impressive positive and negative, depending on the quality of growth of passenger fl ow. negotiations to be carried out by representatives Airports will be positively affected by the liberali- of the Republic of Moldova. By letter dated April zation process due to increased number of passen- 2010 and addressed to the Commission President, gers, i.e. larger income and opportunity to develop the Government requested to initiate negotiations their infrastructure and facilities. on air transport liberalization in the Republic of The most diffi cult task falls to the national airlines. Moldova. They have to give up the protective umbrella pro- This process will involve removal of restrictions on vided by bilateral agreements and face a liberal- rights to fl y and complete freedom to provide air ized competitive environment. services within the European Common Aviation The process of air transport market liberalization Area, limiting interventions in pricing, common will have an indirect impact on other sectors of rules in the areas of safety, management of air traf- the economy, fi rst among them, tourism industry. fi c security, and environment and strict rules on Lower costs for air transport will encourage tour- competition and state aid. ist traffi c, and the incoming tourism will record a The general subject-matter of the study is to assess positive impact on hotel industry in Moldova as the impact the air transport liberalization process well. will have on the main actors in the fi eld. Analysis

8 1. Features of air transport in Moldova

1. Regulations and policies on air ture, ”de jure”. To successfully pursue the aviation transport safety oversight and security of aviation functions, the Civil Aviation Administration or any other The air transport activity in the territory and air- state authority needs a status and clearly defi ned space of the Republic of Moldova is currently regu- powers. lated by two special laws: the Law on Civil Avia- tion No. 1237-XIII of 9 July 1997 and the Law on The institutional reform in the sector, launched in Aviation Security No. 92-XVI of 5 April 2007, the February 2009, is still incomplete. This leaves its Convention on International Civil Aviation of 7 De- mark on the overall industry condition and is also cember 1944, and by the treaties to which Moldova refl ected in the audit reports on compliance with is party. Upward trend of aviation technology and ICAO standards, issued by international special- air transport regulations imposed harmonization ized bodies (ICAO). The suspension of institution- of national legislation by applying international al reorganization process has created impediments norms and standards (especially those developed to ASAC activity (Civil Aviation Administration of in the EU) in the national legislation: there were the Republic of Moldova), which led to ineffective 27 JARs (Joint Aviation Regulations) implement- functioning of the oversight system of fl ight safety ed on the development of ICAO standards for cer- and aviation security (ICAO audit carried out in tifi cation and technical maintenance of aircraft, November 2009 and May 2010). fl ight operation and staff licensing. According to the Air Moldova representatives: On February 3, 2009 at the initiative of the Gov- „In the absence of suffi cient resources (including ernment, the Law on Civil Aviation was amended trained people), the Ministry of Transport and by Law. 12-XVI on the Structure of the Civil Avia- Road Infrastructure does not take any fi rm ac- tion Public Administration Bodies. Thus, instead of tion to exercise its functions, including regulating the State Administration of Civil Aviation (ASAC) the activity of air transport, these functions being two new authorities were created: the Agency of formal and amorphous”. Transportation and the Civil Aviation Authority. The air transport is performed only by air opera- The Agency of Transportation was supposed to tors holding air operator certifi cates and operat- exercise the functions of a state policy promoter ing licenses or permits to operate fl ights. AOC Air and the Civil Aviation Authority to implement the Operator permit issued by the Civil Aviation Au- policies and conduct oversight of fl ight safety and thority is the proof that the applicant has met and aviation security. To date, the situation remains complies with all requirements and conditions set suspended. ”De jure”, according to Civil Aviation out in aviation regulations in force, issued by the Law (Article. 4, 5 and 6), the civil aviation is regu- Ministry of Transport and Road Infrastructure. lated and supervised by the Agency of Transporta- The conditions for obtaining a license to run fl ights tion and Civil Aviation Authority, i.e. non-existent or fl ight authorizations are determined by aviation structures, ”de facto”. In fact, certain functions are being performed by ASAC, a non-existent struc-

9 Radu Bezniuc regulations, issued by the Ministry of Transport Meridiana from Italy. Under the same agreement, and Road Infrastructure.1 Air Moldova can run scheduled fl ights at any point/ Moldova International Airports to Rome airport, The economic policy in air transport is exerted by and Italian operator can run international fl ights the Government through the Ministry of Trans- from any airport in Italy to a single destination, i.e. port and Road Infrastructure. The Government Chisinau. In this situation, Meridiana has greater maintains tight control over the air traffi c market fl exibility in terms of frequencies and destinations by developing agreements / arrangements that it can offer to its customers, while Air Moldova is are establishing market access carriers (imposing limited, as agreed, to a single destination- Rome; restrictions on frequency, capacity, air routes, air- for Air Moldova, obtaining operating rights from craft types, rates, etc.) and by holding a national Chisinau to other airports in Italy is part of an- air transport company owned by the State. other process of negotiations with the designated Granting of commercial rights and designation Italian operator and ENAC (Italian Civil Aviation of operators for international fl ights to and from Authority), a process that involves an effort with the Republic of Moldova is now being performed several sessions. Another restrictive measure is de- through bilateral intergovernmental agreements. termined by bilateral agreements to designate one Despite its status of state airline, Air Moldova has airline by each party (Air Moldova and Meridiana been designated, in practically most important bi- - in the case of Italy). In this case setting tariffs re- lateral agreements, as the operator of the Republic mains at the discretion of the designated airlines. of Moldova with the commercial rights to perform Usually, this semi-monopoly generates high tariffs fl ights. Thus, Air Moldova has always had the sta- and their decrease cannot be forced by market cir- tus of market leader, with a share of over 50% of cumstances, as long as there are only two players the market. on each side. According to data provided by ASAC, Moldavian airlines operate fl ights to 25 destinations (Mos- 2. Airport infrastructure cow, St. Petersburg, Frankfurt, London, Paris, Riga, Lisbon, Madrid, Rome, Milan, Verona, Vi- a.International Airports in Moldova; enna, Bucharest, Athens, Istanbul, Antalya, Bu- Currently, there are three airports in the country dapest, Timisoara, Larnaca, Kiev, Surgut, Tel with the status of international airport: Chisinau, Aviv, Varna, Sofi a and Surgut). In relation to some Balti and Marculesti Airports. The passenger traf- destinations, the additional protocols concluded fi c is concentrated in the capital of Moldova only. by the aeronautical authorities of the Contract- ing States shall establish limitations on the com- The Chisinau Airport was rebuilt / upgraded be- mercial rights assigned to designated companies. tween 1999-2001 through the use of credit re- These limitations are particularly characteristic to sources from EBRD, under the warranty issued by most popular destinations among passengers and the Government. The mechanism of loan recovery the struggle for the designated airlines is more in- / return was based on the principle of introducing tensive, including from the designating countries a separate passenger tax, i.e. the modernization (Moscow, Istanbul, Rome, Milan, Verona, Vienna, tax, which is embedded in the airport duty. It is Bucharest). a standard practice, by which the sponsor ensures that the loan rate is paid within the deadlines set A classic example to be considered is the fl ight forth in the contract. In case of Chisinau Airport, it from Moldova to Italy. According to the bilateral is the passengers who „reimburse” the loans bor- agreement of September 19, 1997, replaced in April rowed by the airport. 2006 by the „Horizontal Agreement” signed with the EC, two operators were appointed and granted At present, the Balti Airport is not functional in commercial rights to execute regular fl ights: Air terms of commercial fl ights. This is because no na- Moldova from the Republic of Moldova and the tional or foreign air operator was interested in operating from/to this airport. There have been some

1 L A W on Civil Aviation no. 1237-XIII of 09.07.1997. attempts to revive the airport by making persistent

10 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

„recommendations” in the address of Air Moldova 2009 is shown in Diagram 1.Creştrea numărului to run fl ights from this airport as well. The post- de pasageri pe curse regulate în 2008 faţă de 2007 Soviet infrastructure and poor runway, as well as a fost de 29% (Diagrama 1). the exhaustive nature of the market in Moldova The increasing number of passengers on regular still constitute obstacles to relaunch the airport. fl ights in 2008 as compared to 2007 scaled up to The former military Airport Marculesti is, prob- 29% (Figure 1). This growth rate is considered im- ably, the second airport in Moldova recording pressive for traditional European airports. At the mainly occasional cargo fl ights. The track, which same time, this growth rate is typical for Eastern was built to receive heavy aircraft including the European Countries of whose citizens work in AN-124 has good features and the hangar facilities for military aircraft can represent a signifi cant ca- large numbers abroad. pacity for cargo storage. Following a period of growth for the period 2000 Passenger traffi c is concentrated in the only Moldo- – 2008 (from 245,000 to 845,000 passengers per va’s airport which operates regular fl ights. Evolu- year), the passenger traffi c through Chisinau Air- tion of passenger traffi c during the years 2000- port has recorded in 2009 a decrease of 4.7% as

Diagram 1: Passenger trafﬁ c trough Chisinau international airport, 2000-2009, Passengers number

Source: Statistics provided by the ASAC compared to 2008, determined by the economic per year. Congestion is recorded in the morning crisis that affected the EU itself. hours, when the fi rst wave of fl ights originating from Chisinau is caused by the limited number of Cargo traffi c recorded a volume of 2.021 tons of one-stop registration and security check points. mail and cargo transported in 2009. In Estonia, for instance, the CARGO volume transported in 2008 Border Guard and Customs Service are part of the constituted 41.744 tons (according to EUROSTAT: processing passenger traffi c mechanism at air- Statistics in focus - 91/2009), i.e. about 20 times ports. The set up artifi cial barriers (represented more than the volume registered in Moldova. by customs, border guards) create conditions for These fi gures exemplify the untapped potential of redirecting a portion of the passenger traffi c to the air cargo traffi c. other airports. Simplifying the process of passport control and creating an effective green corridor on Modernization of the Chisinau International Air- arrival in the country could represent elements the port was carried out in order to increase the ca- EU would like to amend. pacity in passenger traffi c processing. Thus, it was designed for a capacity of 2. 500. 000 passengers

11 Radu Bezniuc a. Handling services; siderations, in particular, the food offered by the Moldovan catering companies is less demanded. Handling services are those airport support services provided to airlines, which are divided into service ramp and passenger registration service. These 3. Airlines services cannot be removed from preparation / reception of a fl ight. Airlines pay for the services a. Local operators: state and private ones; of a handling operator, depending on the type of The main airline operators registered in Moldova aircraft and number of passengers / fl ights served. are Air Moldova (owner - state), Moldavian Air- Amounts to be paid by the airline operators’ han- lines (owner - group of local and foreign inves- dling services are included in the ticket price paid tors) and Tandem Aero (group of local investors). by fi nal consumers, i.e. the passengers. According to data provided by ASAC, the share of There are two registered handling operators with- each airline passenger traffi c recorded in 2009 in in the Chisinau Airport: Airport Handling and the Chisinau Airport constituted 49.8% for Air Moldo- Handling Service of Moldavian Airlines. These op- va, 4.4% for Moldavian Airlines, and 2.6% for the erators are under real competition between them. Tandem Aero. Practically all airlines operate with Airport Handling provides services especially to aircraft produced in West: A320, SAAB 340, SAAB Air Moldova, Sibiri Airlines, Meridiana, Tarom, 2000, FOKKER 100, EMB 120. Aerosvit, Austrian Airlines, Lufthansa, Tandem Due to its statute of state-owned airline company, Aero and part of irregular/scheduled air servic- Air Moldova was nominated, almost in all bilateral es, while Moldavian Airlines Handling serves the agreements, as the operator on behalf of the Re- fl ights of Moldavian Airlines, Carpat Air, foreign public of Moldova with commercial rights to per- companies like Turkish Airlines, Air Baltic and form fl ights. Thus, Air Moldova has always had a part of the irregular services. Thus, the minimum 50% market share. In 2004 Air Moldova has been comfort of the competitive environment is being certifi ed by IATA, after changing the fl eet operated ensured for this market segment. on commercial fl ights. Moldavian Airlines has developed a successful b. Catering services project on connecting fl ights through the airport The food served on aircraft boards or catering in Budapest. Thus, the number of daily fl ights to service is another element of the ticket cost struc- this destination reaches two frequencies. In part- ture also borne by passengers. The traditional per- nership with the Romanian operator Carpatair, ception of the majority of passengers fl ying from Moldavian Airlines was able to undertake an im- Chisinau is that they are to be necessarily served portant traffi c bound for Italy and Germany via on the aircraft board. The attempt to introduce in Timisoara airport. 2004 reduced rates to the Chisinau-Moscow fl ight Tandem Aero operates fl ights to Tel Aviv. Flights has created controversy among the passengers who to Israel represent a specifi c market niche, which opted for a lower price (without food on board) for was formed over a long period of time. Tandem this destination. For most of them, it was unac- Aero does not have its own aircraft, using the fl eet ceptable not to benefi t from food on board, even of Air Moldova on ACMI base, by means of opera- if they bought a cheaper ticket that did not include tional leasing. this product. There are two registered catering operators at the b. EU Operators; Chisinau Airport, i.e. Airport Catering and the Ca- tering Service of Moldavian Airlines. This is a com- Among EU operators we can mention MERIDI- petitive area, similar to that of handling services. As ANA, CARPATAIR, AUSTRIAN AIRLINES, TAR- mentioned by the representatives of Air Moldova, OM, AIR BALTIC, LUFTHANSA. the great majority of the foreign companies pre- MERIDIANA is an air operator nominated by the fer to offer food on aircraft board, prepared by the Republic of Italy for air transport relations be- local airport catering. Thus, from economic con-

12 Prospects for Development of Air Transport Sector Services in the Republic of Moldova tween Italy and the Republic of Moldova. It is the is one of the operators designated by the aero- largest Italian operator after AlItalia, which applies nautical authorities of both countries (Turkey and a low-fare type trade policy. It operates fl ights, in Moldova) to carry out regular fl ights to Antalya. particular to/from Verona and in Code-Share with S7 Airlines is one of the largest Russian airline Air Moldova operates the Rome-Chisinau and Mi- operators that performs fl ights from Moscow to lan-Chisinau routes. Chisinau. The Western Fleet and the status of a CARPATAIR is the operator who managed to de- nominated operator to perform fl ights from Russia velop the structure of the airport hub in Timisoara, to Moldova had secured to the Russian company Romania. The Chisinau Airport is part of the struc- an increase of up to 8,4% of market share in 2009 ture of the operator’s network. on Moldovan market. The operator has opened its own representation and has introduced two daily TAROM is the fl ag carrier of Romania and it is in frequencies during summer time. code-share with Air Moldova, running daily fl ights to Bucharest. Aerosvit is one of the largest operators in Ukraine. After it merged with Donbass Aero, the Aerosvit Austrian Airlines has daily fl ights from Vienna to fl eet was upgraded by purchase of Embraer 145 Chisinau and in partnership with Air Moldova has aircraft (50 seats), which allowed greater fl ex- two daily frequencies to these destinations. The ibility in addressing new markets, such as Chisi- market share of Austrian Airlines is being repre- nau and Bucharest. The main goal in operating sented, to the largest extent, by the business pas- fl ights to Chisinau is to generate additional traf- senger traffi c, which use the airport in Vienna as a fi c for the hub airport in Kiev for its direct fl ights transit point to other European and transatlantic to New York, Beijing, Mumbai and Bangkok. The destinations. operator was launched with attractive fares for the According to Eugen Dvornic, ASAC Deputy Gen- Moldovan market and lack of visa regime between eral Director, Austrian Airlines is currently one of Moldova and Ukraine. The fact that Ukraine be- the supporters of the idea of liberalization. This is longs to the same former post-Soviet space repre- due to the fact that operation of a 50-seat aircraft sents an advantage in attracting passengers from does not meet the demand for fl ights operated by Moldova as well. the Austrian company anymore. UTair is a Russian air operator that launched in The low-fare Air Baltic operator runs fl ights to the 2010 regular fl ights from Surgut to Chisinau. It op- Baltic countries, and relies to cover the Northern erates, in particular, with Tu154 Soviet aircraft and Europe area too. It is considered to be a successful Airbus A320. company, as part of the big Scandinavian family. According to data provided by ASAC on the fl ow Recently, LUFTHANSA entered the aviation mar- of passengers transported in 2009 by the Chisinau ket of the Republic of Moldova. It operates fl ights Airport, the market share of each airline operating from and to Munich Airport. The German Opera- scheduled and charter fl ights from Chisinau Air- tor is in close partnership with Austrian Airlines port is as follows (Diagram 2) and the targeted market segment is the business and transit passenger as well. 4. MOLDATSA: degree of current integration in the SINGLE SKY process c. Operators from outside the EU. via EUROCONTROL The air operator from outside the EU with the MOLDATSA, which is the body responsible for air longest presence on the market is Turkish Airlines. traffi c management in the airspace of the Republic It operates daily fl ights to Istanbul. The young of Moldova, is probably the company that has al- fl eet, quality service and well-developed network ready been set for integration into the Single Sky of fl ights make this operator extremely attractive project ERUOCONTROL - European Organization to customers, especially for connection fl ights to for the Safety of Air Navigation. Asia. During summer time, the Turkish Airlines

13 Radu Bezniuc

Diagram 2: Market share of air companies operating from Chisinau international airport , 2009

Source: Statistics provided by the ASAC

MOLDATSA is a member of EUROCONTROL indirectly it can feel the presence of fuel suppli- since 2000 and has the necessary equipment and ers from destination airports of the airlines from facilities complying with standards imposed by Moldova. Thus, if the fuel costs at the airport in EUROCONTROL and the EU standards, respec- Istanbul become more attractive, the air operator tively. can supply its aircraft at that airport. But in this case, lending through products offered by LUKOIL 5. Fuel supply companies is a strong argument for the airline to choose the basic fuel provider. There is only one operator/provider of aircraft fuel within the Chisinau Airport, i.e. LUKOIL. LUKOIL has no local competition with other operators, but

14 2. Liberalization process of the EU air transport market

The European air transport market has been very markets has led to a substantial restructuring of highly regulated on a national basis and frag- the industry and increased competition between mented due to excessive protection. There were airlines. The largest airlines have competed with multiple arguments in favor of intervention: lack other similar companies and airline operators, but of transport services storage, consumer protection also new competitors. On those routes where com- (particularly safety of passengers), protection of petition occurred earlier, the prices for tickets de- national companies. As a result of protection and creased by about 15%, leading to lower profi ts for market segmentation within the EU, prices were airlines in real terms by almost 20%. Since then, generally too high and services were not optimal. due to liberalization measures that followed, the pressure over the prices continued; the economic Consequently, the European Commission has and promotional tickets dropped by 50 percent tried on several occasions to liberalize the intra- between 1997 and 2000; the largest price decrease Community air traffi c market. It was assisted by was recorded for the segments in which fi erce com- the European Court of Justice, which decided in petition existed. This change of conditions gener- 1986 that EU competition rules must be also ap- ated signifi cant changes for all players.1 plied to the air transport and ordered the Council of Ministers to develop a common policy on transport, along with the same liberal lines that apply Case study to the rest of the economy. The liberalization proc- Savings resulting from liberalization 2 ess started with the inter-regional air transport, A study by ELFAA (The European Low Fares Airline then tampered with termination of market shar- Association), aiming at winning the political support ing agreements and limitation of intervention to of the Brussels shows that, starting 2004, the low prices. cost sector made savings for passengers of about 12 billion per year for intra-community fl ights. The Third EU legislative package adopted in 1997 The lobby group also confi rmed that association led to complete liberalization of air traffi c. Under members have generated benefi ts for the European the Multilateral Agreement on the Establishment regions of about 3-4 billion through the tourist traffi c of the European Common Aviation Area, the Euro- newly generated. ELFAA sustains that the 12 billion reduction in rates was not due to lower prices of air pean Common Aviation Area (ECAA) was created, tickets offered by low cost operators only. This was based on mutual access of Contracting Parties to also a result of tariff decrease made by incumbents air transport markets and the freedom of settle- in response to low cost tariffs charged by budget ment, equal conditions of competition and com- operators. „If low cost operators would cease to exist, mon rules, including in the areas of safety, secu- the tariffs would undoubtedly register acceleration”. rity, air traffi c management and environment. The study was conducted as an attempt of a young association to make its presence felt in Brussels. The Liberalization of air traffi c in the EU led to un- precedented development of civil aviation. Since 1 Willem Molle, ” The Economy of European Integration: Theo- 1987, air transport has recorded an annual growth ry, Practice, Policy”, p. 253, Epigraf Publishing House average rate of around 6%. The liberalization of 2 Airline Business, October 2004, ”Low-cost lobby targets Brus- sels”

15 Radu Bezniuc

association has also launched a study in cooperation nies and turned towards the regional mar- with BOEING, according to which low cost operators ket (Olympic). tend to have a younger fl eet, use more modern and, respectively, greener aircraft. Another aspect is • The companies changed their merging char- revision by the Council of Europe of the relationship acter. There have been attempts to achieve between public and privately owned airports. It international merging of EU companies. As was the case of Ryanair: following the rules of a result of failed fusion between Swissair the Council of Europe, at least part of the support and Sabena, and the failed trial to merge package granted by the publicly owned airport operator Ryanair to Brussels Charleroi was illegal KLM and Alitalia, Air France and KLM have and had to be returned. achieved a successful fusion. 3 Liberalization of air transport has opened the Eu- All major carriers have had to reduce their costs, ropean market to low cost operators. By offering increase their productivity and improve their serv- cheap fl ights to the most important social and eco- ices. The main way by which this was achieved was nomic centers, this group of airlines has greatly decreasing the number of employers, recruited di- infl uenced the role of the passenger transport in- rectly by the airlines. Some airlines have been able dustry by increasing the accessibility of this type of to restructure at a lower stage, while others fought transport for a much larger part of society. for a period of time with this issue, depending on By using cheaper airports that offer lower costs, support provided by government to recover. these operators changed the hierarchy of airports. Passenger air transportation grew very rapidly, Thus, the regional airports have become major Eu- but the structure of airlines remained until 2004 ropean transport networks. practically unchanged. During the last years, the intra-EU liberalization and global competition Case study have profoundly changed the situation, leading to Berlin Schonefeld Airport4 entry of new competitors, few mergers of companies in the EU and major European companies to In May 2004, the destiny of the Berlin Schonefeld airport was changed forever. This happened because consolidate relationships with other major carriers the low cost company Easyjet selected the Berlin in the world. Schonefeld airport late 2003 as continental operating Industry restructure was managed through entry mainland. Thus, a market of about 5 million people living around the capital of Germany was targeted. of new companies on the market, merger of exist- To “meet” the low cost company, Berlin Schonefeld ing companies and companies leaving the market. reserved the B terminal exclusively for the use of • Indeed, there occurred many new compet- Easyjet company. The terminal has a capacity of about 1 million passengers. Thus, the airport had ing companies, which exerted consider- the highest increase since passenger traffi c doubled able pressure over those who were present from 1.7 million to 3 million passengers, leading to on the market before, in the context of the an increased share of low cost passenger traffi c of links within the EU. Many of them are low the airport at around 30%. cost carriers such as Easyjet and Ryanair. Berlin Schonefeld miracle was due mostly to the However, due to this type of competition revolutionary pricing structure, introduced in 2004: and since the market entry threshold for airport taxes were reduced by 80% for any airline large-scale businesses in the international fl ying to a new destination during the fi rst year of air transport services is quite high, there has operation, 60% in the second year and 40% in the third one. been no change in market position of major carriers; • The exit of companies with a status of national air transport company was produced after 2004 only. Some companies that have 3 Willem Molle, ” The Economy of European Integration: Theo- been defeated in this competition have left ry, Practice, Policy”, p. 253, Epigraf Publishing House the group of international transport compa- 4 Jane’s Airport, December 2004/ January 2005, ”Germany chases low fares”

16 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

The emergence of a new type of air - low cost com- the fi eld, if they were investors, they would defi nitely panies has profoundly changed the structure of air invest in airport’s business. transport. Change of specifi c services demand by these operators has modifi ed the importance of the The obvious results of the liberalization process in regional airports. So, they have suddenly become EU are: attractive to airlines while the dedicated airports 1. Increased competition among airlines; had to adjust their development strategies to new market conditions. Thus, the competition between 2. Emergence of a new type of airlines - low airports has become a reality. cost operators; 3. Signifi cant decrease in charges for airline Case study tickets;

Airports - low cost impact 4. Intensifi cation of regional airports’ role; Some airports in the EU have quickly adjusted their 5. Signifi cant increase in passenger traffi c. costs and tariff structure to low cost requirements of the world. Liverpool Airport is frequently presented as an example. This airport serves the low cost operators at the operational costs level. Another practice to be considered charging extremely attractive fares during off-peak periods. While even the successful low cost operators noticed that their margin of profi tability is subject to increased competition, it is clear that airports are clear winners of the low cost era. In the opinion of many experts in

5 Airline Business, December 2004, ”Airports: Fresh thinking on charges”

17 3. Assessment of the market liberalization impact on the main actors from air transport market in Moldova

The liberalization process is a gradual abolition corded by Eurostat in some countries (Statistics in of restrictions on designation, capacity, frequency focus - 91/2009), after liberalization of passenger and coordination of tariffs. This is aimed at cre- traffi c, the direct impact of liberalization on Chisi- ating effective structure of air transport, based nau Airport will represent a signifi cant increase in on the free market mechanism, where all deci- passenger traffi c. There may be two scenarios of sions are taken as a result of mutual interaction traffi c evolution - pessimistic (traffi c development between demand and supply. The role of national in Romania) and optimistic (traffi c development governments is limited to fl ight safety and secu- in Latvia): rity. Usually, the impacts of air transport liberali- Thus, under optimistic scenario doubling in pas- zation are divided into two groups: the economic senger traffi c during the modeled period 2011- and the environmental impact. In the opinion of 2012 can occur. other professionals in the fi eld, they must be sup- plemented with “other” impacts, including devel- At the same time, there are other assumptions in opment of new technologies and other qualitative this respect. Thus, according to representatives of changes. The direct economic impact is refl ected Air Moldova: ”... any forecast under this section on the air transport; the indirect one - on tourism; should be at least correlated with assessments the induced economic impact -on other sectors of made by Hochtief (Austria) in developing the Mas- the economy and the catalytic economic impact- ter Plan for Chisinau International Airport”. Rep- on structural changes. resentatives of Air Moldova state that, the maximum annual increase in that report is estimated 1. International airports at 14%. Even if infl uenced by liberalization, the increase in passengers will be limited. At present, The impact of air transport liberalization in the the limitations in the freedom of movement within Republic of Moldova on international airports reg- Europe indicate a number of up to 150-200 thou- istered in the country will bring along intensive sand of legalized migrants within EU. growth – leading to increase in passenger It should be mentioned that the low-cost carriers air traffi c through Chisinau International Air- have an aggressive approach to negotiating airport port, and extensive growth – by stimulating charges with airports. According to Eugen Dvor- the interest in at least one regional airport nic, ASAC Deputy Director, Chisinau Airport is not on the part of aircraft operators and investors. prepared to reduce these fees due to the existing The intensive growth, on which all current contract with EBRD. regular fl ights operated by local and foreign companies are concentrated, will positively affect the Chisinau Airport. Based on statistical data re-

18 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

Diagram 3: Forecasted number of passengers trans- Diagram 4: Forecasted number of passengers transported through Chisinau Airport PESSIMISTIC VARIANT ported through Chisinau airport OPTIMISTIC VARIANT

Source: The modeling was done based on passenger trafﬁ c development in Latvia and Romania, according to EUROSTAT (AVIA_PAOC)

The extensive growth will require increased entry of a low cost operator on the market, there number of international airports in the Republic were already two operators who were operating of Moldova that will operate regular fl ights. traditional fl ights from Bacau Airport. The cumu- lative passenger traffi c of these two operators con- In the view of many experts, the low-cost era be- stituted about 40.000 passengers per year. After longs to the airports’ era. In recent years, the air the low cost operator entered the market in 2007, transport development in Europe has been linked, the increase was of 177% (Diagram 5) for the most part, with increased number of low cost operators. The signifi cant development and The active presence of low cost operators in Bucha- growth of regional airports is exclusively due to rest has also changed the structure of market share. market liberalization process. Bucharest, Otopeni and Baneasa Airports had different evolutions in terms of market share that each The evolution of passenger traffi c, both in the airport had in the total volume of passenger traffi c pessimistic and optimistic case may be subject to generated in the two airports in Bucharest. changes in the structure of the market share. In Romania, one of the low cost operators focused its Thus, the market share of Baneasa Airport was efforts on developing traffi c at the Bacau Airport to equivalent to 11% in 2005 and it grew up to 25% in meet the demand of the North-East region. Upon 2008 (Diagram 6).

Diagram 5. The effect of Blue Air entry on the market Diagram 6: Market share evolution on Bucharest air- of Bacau Airport, passengers numbe port.

71396

Source: Statistical data Bacau airport Source: EUROSTAT (AVIA_PAOC)

19 Radu Bezniuc

At present, there is a single operational airport Diagram 7. Passengers trafﬁ c evolution in Cluj air- in Moldova with commercial rights to perform port, period 2006-2008, passengers number ﬂ ights, i.e. the Chisinau International Airport. This situation is due to both lack of necessary operating conditions at airports in Balti and Cahul, and 93% lack of interest of local and foreign operators for these airports. The concentration of population in 60% the region of Chisinau but also relatively small dis- tances to Balti and Cahul regions are factors that determine targeting of passengers to the Chisinau Airport. 2006 2007 2008

Since 1992, there have been attempts to organize Source: Statistical data of Cluj Airport regular fl ights from Balti to Moscow and charter fl ights from Cahul to Istanbul. These fl ights, however, were cancelled either due to economic This was due to increased passenger traffi c on in- reasons in case of Balti Airport or restrictions im- ternational fl ights, where low cost operators have posed by the airport authorities in Turkey, in case launched direct fl ights from Cluj to the most de- of Cahul Airport. manded destinations in Europe - Italy and Spain. Trends observed as a result of liberalization proc- The low cost era stimulated competition between ess produced on various Eastern Europe markets, regional airports, particularly those who are placed such as Baltic countries, Poland, Bulgaria and Ro- at a relatively short distance one from the other. mania, is that the fi rst wave of increased passen- This is very specifi c to the large cities, like London, ger traffi c is recorded at the main airports in each Paris, Milan. Each airport is trying to develop the country. Gradually, the second wave will include low cost segment and to have the necessary tools regional airports. Thus, after identifying the point to persuade its low cost operators to operate from of origin / destination of a passenger, the airline their airport. operators, especially the low cost ones will be able to know with a high degree of precision the traffi c Case study that one or another region would generate. THE TERMINAL1 For instance, after saturating the market with low For the growing groups of airports, the introduction cost products in Bucharest, operators have begun of low cost terminals appears to be the most to explore possible expansion to other regional appropriate strategy to capture the business of low airports, such as Timisoara, Cluj and Bacau. If cost operators. For airports that choose this way, the case of Cluj Airport statistics show a huge in- the motivation is simple. They want to offer products crease in passenger traffi c after entry of low cost with lower cost levels that would attract new operators on this market. Thus, according to sta- customers and this is because the market conditions themselves change. tistics registered with the airport of Cluj Napoca, the airport has recorded within two years a high The airports will provide growth opportunities for consecutive growth in passenger traffi c: the traffi c both types of traffi c: conventional/ traditional and low cost. Services will be divided so, that the clients evolution in 2007 the increase was of 60% com- would have opportunities to choose. At the same pared to 2006 and 93% in 2008 versus 2007!, time, to be compatible with EU regulations, the costs i.e. from 390.500 passengers per year to 752.000 for renovation of old terminals (to become operable passengers (Diagram 7: Passengers traffi c evolu- by low-cost) will be borne by passengers to use those tion in Cluj airport, period 2006-2008, passen- terminals. gers number). A realy impressive growth.

1 Airline Business, December 2004, ”Airports: low cost terminals”

20 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

The tendency of the airports directed towards low single roof. Gatwick Airport is an example, where cost sector is to reduce airport charges per passen- Easyjet and other low cost operators have expanded ger. Thus, the Marseille Airport aims at reducing rapidly without special agreements on decrease of fees for low cost passenger terminal to up to one fees and charges. Regardless of whether the new Euro. For comparison, the passenger charges in terminal models correspond to the low cost airlines 2005 constituted 5.96 Euro for intra-community fl i- of any category or not, they just want to be as cheap ghts operated from conventional terminals. as possible! The impressive offers made by Easyjet and Ryanair based on the estimated traffi c volume created the In a forecast of concentration of a low cost opera- necessary “comfort” for representatives of the tor’s attention on the Balti Airport, this regional airport in their intention to convert an unused cargo airport would be able to record interesting devel- terminal into a low cost one at an expense of $ 14.5 million only. opment, stimulating business development in the Northern part of the Republic. Simulation of such According to Philippe Wilmart, Markenting a situation would generated two scenarios, either Director, Marseille Airport, building of a low cost terminal is probably the only realistic way for low pessimistic or optimistic growth. cost operators to offer adequate fees. The additional The pessimistic scenario (Diagram 8, 9) is that passenger traffi c of 1-2 million per year generates upon termination of the market liberalization enormous and extremely important revenue for the airport and fi gures show that this kind of terminals process, the Balti Airport could generate a traffi c are certainly more profi table than the traditional of around 23. 000 passengers in 2011 (in case of ones. Payback periods are much shorter, and the fl ights with a frequency of three times per week, advantage of working with low cost operators is with an aircraft of 185 seats and load factor of that they are willing to sign long term agreements 80%), and in 2012 there will be an increase of from 10 to 20 years. 29% (resulting from the maintenance of the Balti Currently, there are fi ve low cost companies Airport market share of 2%) will have a traffi c of operating fl ights from Marseille Airport: Ryanair, about 30. 000 passengers. Easyjet, Germanwings, Jet2 and Pegasus. Under optimistic scenario (Diagram 10, 11), the As airports examine the concept of low cost terminals, they tend to respond to local market conditions and market share of the Balti Airport could be of 1% in opportunities. If an airport needs to grow and it can 2011 upon signifi cant increase in total passenger develop cheaper infrastructure, these metamorphoses traffi c in Moldova, as per trends noticed in other have sense. It is not necessarily contradictory to states that have gone through the process of liber- manage all existing models of airlines under one

Diagram 8: Forecast trafﬁ c of passengers, Balţi Airport, Diagram 9: Forecast trafﬁ c of passengers, Balţi Airport, 2011, number of passengers PESSIMISTIC VARIANT 2012, number of passengers PESSIMISTIC VARIANT

21 Radu Bezniuc

Diagram 10: Forecasted passenger trafﬁ c, Bălţi air- Diagram 11: Forecasted passenger trafﬁ c, Bălţi airport, port, 2011, number of passengers OPTIMISTIC VARIANT 2012, number of passengers OPTIMISTIC VARIANT

alization. The estimated increase for Balti Airport Lately, after liberalization of this market, there is in 2012 compared to 2011 can be of up to 94% un- an increased interest for investments in regional der conditions of 2% market share. airports. The procedures through which they get investment are different from taking over the air- However, according to Air Moldova representa- port concession even by some of the low cost op- tives, there are no close prospects to re-open the erators up to selling shares to private investors. airport in Balti upon liberalization of air transport services in the Republic of Moldova. Case study The investment attractiveness of airports will Provincial airports in Italy evolve2 be another impact that will have air transport liberalization in Moldova. Regional/national airports Low cost carriers stimulate the growth of the from the Republic of Moldova will become points European regional network. Italian airports take advantage of the international traffi c growth, of interest for investors. Increased interest of local particularly through expanding regional routes in and foreign investors, in particular of the airlines Europe and increased activity of low cost operators. for other international airports registered in the Due to low cost services and increased number Republic of Moldova but inoperable at the mo- of direct fl ights, regional Italian airports started ment will be in effect for air transport liberaliza- to attract a larger number of passengers a year. tion. This interest will be recorded within the gen- Provincial airports, mostly owned by local councils aim at expanding their facilities in order to support eral trend registered in countries which have gone the new intra-European routes. To avoid competing through this process. with other municipal services in obtaining fi nancing, Evolution of European air transport market has some airports have sold their shares to attract private capital to fi nance expansion projects. A number of shown that airports represent an area of air trans- foreign companies have entered the Italian market port industry with a reduced degree of risk under or pursue to purchase shares of those airports. limited competition and continuous trend of growing in number of people using air transport. Handling and catering operators will be also Investments in airport infrastructure have secure affected by accession to the Multilateral Agree- and transparent sources of recovery in the form of ment since it will entail handling services liberali- dedicated sets of airport charges.

2 Jane’s Airport, June 2005, ”Italy’s provincial airports evolve”

22 Prospects for Development of Air Transport Sector Services in the Republic of Moldova zation as well (No. 96/67, Council Directive 96/67 prices for airline tickets, but also to a decrease in of 15 October 1996 on Access to the Ground Han- airlines’ revenue per chair will also increase. At the dling Market at Community Airports). The prob- same time, it should be noted that the number of ability that other handling operators will enter the passengers carried will increase and so will the to- market is high. In their intention to reduce costs, tal amount of operators’ revenue. In other words, both local and foreign airlines will seek to obtain the airlines will earn less money per passenger best offers on the market. Under these conditions, (due to lower rates) but will register higher total there will occur other handling / catering opera- volume of sales. tors to provide the demanded product on the mar- According to Air Moldova, at present, the restric- ket, even under the pessimistic scenario tions are set in relation with destinations to Italy, Romania, Austria and Germany. 2. Airlines Entry of low cost operators on the mar- The major impact of air transport liberalization ket upon its liberalization is inevitable. The bulk over airlines operating to and from Chisinau Air- of passenger traffi c to and from the Republic of port will be increased competition. According Moldova is sensitive to the price of the ticket. The to Anatolie Bzovii, Executive Vice President of the competitive advantage of the low cost companies Moldavian Airlines:”Not only the state-owned op- compared to traditional airlines in general and to erator will be affected by the liberalization process, Air Moldova, in particular, consists of developed but also all national operators”. networks of fl ights and operational costs with ex- Liberalization of air transport market envisages, tremely high effi ciency. According to the forecast among others, termination of existing bilateral of the likely increase in passenger traffi c, statistical agreements and conclusion of new ones and con- data presented in liberalized markets could result secutively creation of a real competitive environ- into two model impacts: with pessimistic increase ment on this market. in passenger traffi c and optimistic increase in passenger traffi c. Both simulations of the market ev- Bilateral agreements represent an element of olution are likely to involve at least two low cost the protective market. Local air operators nomi- operators on the market, generically indicated as nated by the Republic of Moldova under bilateral LOW COST A and LOW COST B. agreements signed with other countries have the advantage of selective allocation of commercial The pessimistic scenario (Diagram 12, 13) of rights for a certain route or another. This way of increased number in passengers assumed that Air obtaining enforcement of commercial rights for a Moldova will undergo changes in market share es- given fl ight can be regarded as a comfortable one timated at 50% in 2010 (about 448. 000 pax) to for the national airlines. This is due mostly to the 43% in 2011 (538. 000 pax) and 2012 (645.500 fact that there is safety, in most cases, that the pax), Moldavian Airlines will record 2.7% in 2011 degree of competition may not record dramatic and 2012, while Tandem Aero - 2% in 2011 and changes in a short period of time, as it happens on 2012. a liberalized market. The optimistic scenario (Diagram 14, 15) of Removal of restrictions on designated opera- increased number in passengers shows a greater tors, frequencies and capacities will lead to emer- decrease of Air Moldova market share, which will gence of new airlines on the market and to the record a decrease of share up to 33% in 2011 and growth of passenger traffi c. For example, after lib- 30% in 2012, Moldavian Airlines shall record 2,1% eralization of market, any EU-registered aircraft in 2011 and 1,9% in 2012, while Tandem Aero – 2% operator willing to perform fl ights from Italy to in 2011 and 2012. These estimations are based on Moldova will be able to do so, without any restric- a maintenance of 20% increase in the number of tion from the authorities in Italy and Moldova. passengers transported by existing operators. Thus, by increasing the number of airlines that Modeling of scenarios was done taking into will operate regular fl ights from Italy to Moldova, account a growth of 20% in 2011 and 2012 in the the degree of competition which will lead to lower

23 Radu Bezniuc

Diagram 12: Market share 2011, PESSIMISTIC VARIANT

Diagram 13: Market share 2012, PESSIMISTIC VARIANT

number of passengers carried by each airline al- Thus, entry of high growth generators on the mar- ready existing on the market, while the decrease in ket was simulated, i.e. two low cost companies. The market share for each air operator is determined, pace of growth for the pessimistic scenario was the as appropriate, by the pace of market growth con- one characteristic for the Romanian market devel- ditioned by the liberalization factor of this market. opments after deregulation, and the optimistic one

24 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

Diagram 14: Market share 2011, OPTIMISTIC VARIANT

Diagram 15: Market share 2012, OPTIMISTIC VARIANT

was considered the one characteristic for Latvia af- we expect an increase in passenger traffi c mainly ter the same process. due to the direct relation Moldova-Italy”. According to Anatolie Bzovii, Executive Vice-Presi- But not all actors of air transport services market in dent of Moldavian Airlines: ” Given the specifi cs of Moldova share the idea of increasing the passenger passenger traffi c and the potential of our country, number upon launch of low cost companies. Thus,

25 Radu Bezniuc according to Air Moldova representatives: ” Sce- of other sectors of the national economy) but also narios described, under no circumstances may be (ii) negative ones (job cuts, decrease in number of achieved simply by joining the ECAA from the fol- destinations operated by air operators, keeping lowing considerations: ECAA area covers only 36- prices of air transport services or even increased 40% of the total traffi c in the Republic of Moldova; indirect costs for these services to be incurred by only 15-18% of traffi c to the ECAA is more or less citizens, loss of control over civil aviation economy concentrated in one region and allow to initiate and policy, decrease in state budget revenues, de- low cost fl ights”. creased export and increased import of air services, decreased turnover of funds resulted from On the other hand, there should be observed an civil aviation in the domestic economy, etc.). All increase of 88% in passenger traffi c on the route these are dependent on the ability of the Republic Chisinau - Bucharest in the fi rst eight months of of Moldova to: a) negotiate the Agreement and the 2010, after decreasing the rates for these fl ights. steps to join the ECAA, (b) preparation of major This case confi rms, in fact, the potential of growth players to be infl uenced by the implementation in passenger traffi c, provided the price of the air of the ECAA process (Ministry of Transport and tickets will be decreased. Road Infrastructure, the Civil Aviation Authority The impact might be positive in case of na- and air operators). tional airlines. According to Anatolie Bzovii, Vice- Despite the great disadvantage the market liberali- President of Moldavian Airlines: ” Upon liberaliza- zation creates to the domestic companies, i.e. com- tion of access to European Common Aviation Area, petition, there are advantages confi rmed by the airline companies from the Republic of Moldova experience of other national operators who have will be provided new development opportunities, gone through similar processes. It is the case of gaining the possibility to operate on new markets. BULGARIA AIR that managed to develop a profi t- It will depend on each operator’s policy and plan in able niche for itself. The ”wet-lease” is meant, i.e. this regard and their reorganization policy”. rental of aircrafts and crew for EU airlines. Thus, Representatives of the national operator Air during critical winter periods, the operator manag- Moldova consider the possibility of obtaining full es to essentially complete its budget revenues from rights to operate intra-europan /cabotage fl ights, this activity. The Bulgarian operator proceeded to simultaneously with the liberalization of air trans- mix the fl eets by focusing on the Boeing 737-500 port services for foreign companies in Moldova, as and Airbus 319 aircraft. At the same time, the Bul- a benefi t that is of interest to airlines in Moldova. garian crew costs are much lower than those with At the same time, the national operators will have crews from Italy, for instance. A more attractive no restrictions to operate on destinations to which offer that complies with JAA technical standards they currently have no access (Verona, Bologna, has created a market advantage for Bulgaria Air. Bergamo, etc.). Another advantage that may be obtained for national airlines, upon initial negotia- Case study tion of operating rights for irregular fl ights, is leas- Increasing Denim Air profi ts3 ing of aircraft, including under ACMI (wet lease) to airlines of ECAA Member States, with no „right According to the statement by Leen Jansson, to objection” – a condition imposed to airlines be- President of Denim Air Group „...specializing in aircraft leasing, including pilots provided to airlines longing to the European countries and tightly fol- newly created throughout Europe, Denim Air has lowed by the aeronautic authorities of these coun- managed to successfully and profi tably serve a tries in order to protect the interests of the local market niche over seven consecutive years”. companies. By leasing aircraft and crews to other airlines, most In the vision of the national operator Air Moldova, of the operational costs are paid / borne directly by adherence of the Republic of Moldova to ECAA may customers and thus are excluded from our turnover. have both positive impacts (i) (boosting of aviation, passenger traffi c growth, additional revenue for 3 Regional Airline World, volume 21, 2004, ”Denim Air profi ts airports, decrease in air service prices, stimulation increase”

26 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

Pregătirea fi nanciară slabă a operatorilor locali, în competitive advantage of this airline towards Air special compania de stat Air Moldova nu-i va permite Moldova, that are operators dedicated to Italy- să facă faţă concurenţei cu operatorii Europeni Moldova relations. With a parent company as tradiţionali sau low cost. În opinia Vice-directorului CARPATAIR, operating in a liberalized environ- General al ASAC, domnului Eugen Dvornic, ”... acest proces de liberalizare este prematur. Compania ment in Romania, Moldavian Airlines has good aeriana naţională trebuie să fi e pregătită pentru chances to survive, in case of air transport liber- competiţie. Este aşteptată o pierdere a volumului de alization in Moldova. Both - the experience and venituri. Compania aeriana trebuie să aibă resursele fi nancial strength of CARPATAIR, will put their fi nanciare necesare pentru a intra în concurenţă dar stamp on Moldavian Airlines’ shares in a competi- şi o pregătire tehnică pe măsură”. tive market, so that it could take full advantage of the benefi ts that liberalization process will pro- Fare fi nancial training of the local operators, vide. The target markets will be, of course, Italy especially those of Air Moldova state airline will not and Germany, where CARPATAIR operates for a allow the company to compete with the traditional very long time. or low-cost operators from EU countries. Accord- ing to Eugen Dvornic, Deputy Director General of The impact of the Soviet fl eet can be miti- ASAC, „…this process of liberalization is prema- gated. This is a sensitive issue for some airlines ture. The National Airline must be ready for com- registered in Moldova. The Moldovan airlines op- petition, since a decrease in company’s revenue erating regular commercial fl ights lined up their is expected. The airline must have the necessary fl eets to technical standards of the EU since 2002- fi nancial resources to compete and get through a 2004. Thus, Air Modlova operates exclusively corresponding technical training”. aircraft produced in West (Airbus 320, Embraer 190, Embraer 120), while Moldavian Airlines op- The absence of guarantees in getting slots erates aircraft like Foker 100 SAAB 2000 SAAB for access to EU airports upon demand represent 340 and Tandem Aero uses A320 aircraft. Most a major risk for the national operators. This is be- of local airlines that are not operating commercial cause there will be no fair access on the EU market fl ights on regular routes but have a former soviet for all actors on this market. fl eet represent a matter of concern to the ASAC. Lack of transparent interpretation of defi - This is because upon signature of/ accession to nitions in the existing protocols of accession to the the Multilateral Agreement, there will be imposed ECAA creates, according to ASAC representatives, fl ight restrictions for this type of aircraft, while the the risk to “ground stop” for the local aircraft com- majority of operators registered in Moldova oper- panies. This is because there are items in protocols ate Soviet fl eets in the third world countries, where that allow the European Community to request, there are no fl ight restrictions for these types of ”… permission for an air carrier to be subject to aircraft. This issue could be solved by stipulating a specifi c safety assessment, thereby limiting its an extended period of implementing restrictions operation within EC”. Also, these articles contain on this type of aircraft under the Protocol of Ac- only terms like “safety defi ciency” and “security cession. In the view of Veaceslav Pituscan, Head of defi ciency” which, according to ASAC, must be the EU Economic Relations Department, MFAEI, clearly specifi ed to avoid possible ambiguities. In ”... the possibility to access to the Multilateral the opinion of Eugen Dvornic, Deputy Director Agreement, by signing a separate Protocol that General of ASAC, ”... sometimes, the European would establish / clarify some elements with spe- aviation authorities use the so-called ” practice of cifi c character for airlines of RM is the most plau- double standards” and in this sense we agree that sible option. It is the case of air technique, which inclusion of more transparent defi nitions will cre- predominantly consists of Soviet aircraft that are ate more fair and clear conditions for airline op- not accepted by the aeronautical authorities of the erators”. EU. Consequently, their removal from service is imposed. It is obvious that in this case it is cru- The high fl exibility Moldavian Airlines / Car- cial to negotiate deadlines / milestones and condi- patair have will probably represent the major tions under which they will be subject to “off the

27 Radu Bezniuc ground” imposed by the aeronautical authorities According to Jozsef Varadi, CEO WIZZ AIR, a of the Republic of Moldova.” successful YM solution is to cut off costs as much as possible. This is because at the end of the day, The attractiveness of the Moldovan air the airline with the lowest cost structure will transport market for the low cost operators is survive. Both the Yield Management and profi ts dictated by the advantage to explore new markets, are very much driven by the market. Depending sensitive to the price of airline tickets coupled with on the market pressures, we can get a better yield for certain destinations. For other routes, where their experience and opportunities (fi nancial, tech- competition is much closer, the situation might be nical) of such expansion. With an operating struc- different. The philosophy of WIZZ AIR is close to that ture based on low costs, but also very good degree of Easyjet: the sooner you buy, the lower the price is of fl eet use, these operators offer very low tariffs. and the prices have a rising trend only. This system To understand whether a market or another is at- is different from that of Ryanair, where tariffs are tractive to low cost operators, we must know the reduced during different periods of sale and thus, it is not clear when the best time to buy a ticket is. Flybe way these operators think. The rigorous control of has an individual control system for each route, but costs is the golden rule. This means to revise eve- with one common element for all markets, i.e. three rything, to ask oneself whether a particular item of application periods: high, low and medium. the costs is necessary and if it generates income. This rule does not mean to offer NOTHING and The low cost operators interested in the charge for EVERYTHING. It is essential to under- market of Moldova are the Italian operators, Rya- stand very clearly what namely does the airline of- nair, Wizz Air, Easy Jet, Blue Air and classical Aus- fer and to whom? trian Airlines companies (increasing capacity) and Aerosvit. According to discussions held with Nelu Case study Iordache, owner of Blue Air (low cost operator in Methods, myth and money4 Romania) they certainly will be among the fi rst to „The complex level of the yield management model enter this market after liberalization. He also spec- (YM) creates our competitive advantage”. This ifi ed that there are some low cost operators willing comment was made by Toby Nicol, Easyjet Corporate to launch fl ights from Italy, Spain, Germany and Communications Director. Understanding the Great Britain to Chisinau. Statistics on passenger phenomenon how the low cost operators manage to traffi c trends show a potential increase of up to offer low tariffs and make “sound” profi ts is something 90% of traffi c in the fi rst year of operation after that surprises many people. The EasyJet YM model is a series of “cups” of prices. If an aircraft has 150 liberalization. To the largest extent, the increase seats with 10 “cups”of prices, upon “fi ll” of each will be due to redirection of traffi c from buses, “cup” we move forward. The initial sales’ price for minivans or trains. Thus, at an estimated quan- a particular fl ight and the growth rate from a “cup” tity of 904. 000 passengers for 2010 to go through to another are mainly dictated by sales performance the Chisinau Airport, there will be an annual traf- for the same fl ight achieved a year ago. Therefore, fi c growth from 360. 000 (40%) up to 810. 000 we use history (statistics) to determine the current price. Since we have a relatively stable network, we (90%) passengers. These fi gures are also subject of can state that for a certain day of MONDAY in JULY attention for those that examine the attractiveness last year, the demand increased with a certain rate. of the aviation market in Moldova. Consequently, we can start with a certain price to be increased in line with the previously recorded demand. 3. Navigation and air traffi c service (MOLDATSA) Joachim Hunold, Director of Air Berlin has a similar vision for the handling charges to generate the best The major impact of liberalization in case yield. The Yield Manager constantly monitors the of MOLDATSA will be upgrading of specialized market and undertakes corrective actions/measures. equipment, as a result of preferential access to EU He stimulates the demand if needed, and anticipates funding applied. The practice of other states that the demand. have acceded to the Multilateral Agreement demonstrates signifi cant support on behalf of Europe- 4 Regional Airline World, volume 21, 2004, ”Methods, myths an institutions / bodies. Thus, upon accession of and money-making”

28 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

Western Balkan countries to the Agreement, they tive offers for customers. It is also the case for the have received various forms of funding / support: air transport. According to a Study on Regional Air EUROCONTROL, with funding from the Europe- Traffi c conducted for the EU in Ireland, after mar- an Commission helped Albania to draft a master ket liberalization, prices for fl ights between Dub- plan for 2001-2010 Air Traffi c Management. lin and London have dropped by 50%. The same trends were recorded for regional fl ights from Ger- In the case of Bosnia and Herzegovina, in mid many, where tariffs were reduced by 20%. 2006, EBRD approved a 14 million Euro project for the selection of an Air Navigation Service Provid- Despite the affi rmations made by Air Moldova rep- er. Croatia has received joint funding from EBRD resentatives, that “during the past fi ve years” the and EIB (European Investment Bank) amount- amount of average price / tariffs showed a decrease ing 55 million Euros for upgrade the main Center in air services from year to year, ticket prices have for Air Traffi c Control in Zagreb. In the middle of not experienced signifi cant decrease. 2002 EBRD approved funding of a project for FYR Most people in Moldova traveling by plane know Macedonia of 11 million Euros for upgrading Civil the difference between the striking prices to fl ights Aviation. It supported refurbishment of specifi c from Chisinau and fl ights from low cost operators parts of the air transport sector, such as air traf- in Bucharest. We refer here to the most requested fi c control facilities and infrastructure of the Ohrid routes to European countries (Italy, Spain, France, Airport. In November 2004, the EBRD and the Portugal). With about 100 Euro, one can buy round EIB approved a project for Serbia and Montenegro trip tickets from Bucharest to Rome and Bucharest with a total value of EUR 112 million to improve air to Vienna, while these rates in Chisinau are 2.5 to traffi c control of the two countries’ airspace. 3.5 times higher. In our intention to see the effect Modernization of Air Traffi c Management of liberalization on a concrete example, destina- in Moldova, in accordance with SESAR project will tions operated by low cost companies that entered certainly get support from the European and spe- the air transport market in Romania in 2007 were cialized structures. selected. On 15 August 2010 the charges in one di- rection available for 30 October 2010 with depar- 4. Passengers ture from Chisinau and Bucharest were compared. Thus, the price difference between air tickets for All interviewees believed that the great winner of fl ights from Chisinau and from Bucharest (Dia- the air transport liberalization will be, of course, gram 16) with the same destination is headed by the consumer, i.e. the passenger. And the national Larnaca, i.e. 7.2 times higher, followed by Vienna operators are the ones to loose. (7 times) Paris (5.4 times), London (4.7 times), Expected decrease by half of the ticket pric- Rome (4.5 times), Madrid (4.4 times), Milan, Ve- es over the fi rst two years will represent impact rona, Munich (the four times), Lisbon (2.3 times), no. 1 on passengers. The liberalization process will Frankfurt / Main (2.1 times). The Chart below al- lead to lower prices by stimulating competition. A lows to compare the rates. competitive market always generates more attrac- The practice of other countries shows that liberalization of air transport, which allows unrestricted entry of low cost operators on the market leads to decrease in air tickets prices by almost twice. The destinations affected by these cuts are, of course, those operated by low cost airlines. Under these circumstances, it is likely that this effect will be noticed on the market of the Republic of Moldova as well. Liberalization will lead to emergence of new direct fl ights. Nowadays, under the pres-

29 Radu Bezniuc sure of economic effi ciency but also bilateral agree- Increased density of the network of fl ights within ments (in some cases), the classical operators opt Europe is a process boosted by low cost operators. for concentrating traffi c at specifi c connection One of the specifi c elements of low cost operators airports (for ex. Frankfurt, Vienna, Rome, Buda- is to identify cities with a dense fl ow of passen- pest, Timisoara), carrying passengers to the point gers with the possibility to launch direct fl ights. of fi nal destination via partner airlines (Lufthansa, Thus, for instance in Bucharest, several new des- Austrian Airlines, Air France / Air One, Malev, tinations were opened to Italy, Spain and France. Carpatair). After liberalization of markets, switch In addition to the classic fl ights to capitals, there to complete connection system is noticed, which have been developed fl ights to other major cities in will involve direct fl ights from airports of origin to these countries, as follows: for Italy: Turin, Bolo- destination airports, avoiding HUB (intermediate) gna, Naples, Pisa, Catania, Pescara; for Spain: Bar- airports. As a result of these changes new destina- celona, Zaragoza, Valencia, Malaga, for Germany: tions will occur. Thus, we can expect that direct Dortmund, Weeze, Stuttgart, Cologne, Dusseldorf fl ights from Chisinau to Berlin, Barcelona, Valen- and for France: Lyon, Nice. cia, Venice, Turin, Paphos and other destinations Passengers will benefi t from signifi cant that generate enough passenger traffi c will emerge time savings due to emergence of direct fl ights. and where low cost operators do already exist. A classical round trip fl ight from Chisinau to Brus-

Diagram 16: Top differences between tariffs available from Chisinau and Bucharest airports situation on 15.08.2010 For ﬂ ights with departure on 30.10.201

Source: companies’ booking systems of Air Moldova, Blue Air, Wizz Air, Ryanair, EasyJet, German Wings, Air Berlin

30 Prospects for Development of Air Transport Sector Services in the Republic of Moldova sels with a single connection lasts at least 9 hours alization of visa regime between EU and Moldova (via Budapest), while a direct fl ight will last about are consistent and the European institutions are 6 hours. The real time saving constitutes at least obviously open for this subject. 30% per round trip fl ight. The state will be considered the one that Increase in air transport use by consumers is decreased the tariffs by undertaking necessary a derivative of decreased prices for air tickets. The steps to liberalize the market, likewise the con- opportunity to travel more with the same money is sumer believes that Air Moldova (the State airline) a real incentive for those who want to come home does not want to decrease the prices for air tickets. more often (Moldovans in Italy, Spain) or those The consumers are among those seeking market who want to explore new destinations in Europe. liberalization the most in terms of air tickets price Increased passenger traffi c volume will be intensi- decrease. Many passengers do not distinguish very fi ed, to a large extent, by increased degree/frequen- clearly the responsibilities of airports and those of cy of air transport use by passengers. Increased airlines. This might be due to the old unifi ed ad- passenger fl ow is generating, in its turn, increased ministrative system called AEROFLOT and the number of fl ight frequencies for the same desti- absence of other airlines on the market. In case nation. This is extremely attractive especially for of tariff policy, many consumers do not know the business trips. The way a destination or another mechanism on how these prices are fi xed. The only will be required will dictate the intensity of operat- thing they are concerned by is how it is possible ing frequencies. The fl ight Chisinau-Vienna, which to fl y from Bucharest to a certain destination at a has a character specifi c to business trips can serve price 2 to 3 times lower than from Chisinau. Here, as example. There is now strong demand for these most probably, the big charges are associated with destinations, more as connecting airport and Aus- the arbitrary desire of the national operator to ex- trian Airlines, i.e. the designated operator from ploit the situation in its favor and earn as much as Austria is probably seeking to increase its capac- possible. Air Moldova, in its turn, is associated by ity, namely to use a larger aircraft or to increase the consumer with the position of the Moldovan frequencies. At present this is not feasible under state in this area and the tacit approval of these the restrictions imposed by the Bilateral Agree- levels of charges. Perhaps it is the case that along- ment, but the liberalization of air transport market side with the launch of the liberalization proc- would eliminate such restrictions. In these circum- ess, the real role of Government in this area must stances, when there is market demand to increase change by abolishing the protective status the air the number of fl ight frequencies to certain desti- transport has now in Moldova. nations, this is done without any administrative Market liberalization leads to improved tools by means of bilateral Agreements between business environment by increasing the ac- countries. cessibility of air transport. ”Increased level of air Removal of restrictions on visas for Roma- transport accessibility in the Republic of Moldova nia had major effect on the number of passengers. is among advantages of air transport liberalization The same effects are expected for Moldova. At the process” – is the affi rmation made by Eugen Dvor- same time, one has to keep in mind that the fi rst nic, Vice-Director General of ASAC. The business wave of increase in passenger traffi c will come from environment is also sensitive to transport costs Moldovan citizens/ migrant workers in Italy and and reductions in tariffs stimulate several areas of Spain. They are highly motivated to avoid transits economic growth. More affordable air transport through Romania and Ukraine (as it happens at generates, in its turn, increased frequency of its present) when using the services of low cost opera- use by both the population and economic agents. tors. According to Veaceslav Pituscan, Head of the The experience of countries that have promoted EU Economic Relations Department, MFAEI ”... their entry cost operators on their markets shows there is no conditioning imposed by EU on the lib- that many times, this step leads to improved busi- eralization of visa regime and liberalization of air ness environment in the region due to becoming transport market in the Republic of Moldova.” The more accessible in terms of air transport. Lower efforts of the current Government to achieve liber- prices, more destinations and greater frequency

31 Radu Bezniuc are elements that stimulate the intention for busi- 5. State Budget ness or personal trips. Business persons are likely From the perspective of the profi t tax rate to be mobile and this means, fi rstly, their ability to of “0%”, the state currently has no direct benefi t arrive to the destination quickly and at an accept- from the activity of national air carriers. A change able cost. of tax rate level will constitute, in fact, the estimat- The integrationist process generates, un- ed negative impact air transport liberalization will doubtedly, a specifi c fl ow of passengers, i.e. the have on the state budget by reducing revenues of institutional one. This factor is independent of the the national operators upon entry of low cost op- aviation market liberalization, but it is a derivative erators on the market. But this impact is also rela- of intensifi ed relations between the EU and Moldo- tive, since one cannot say with certainty how big va. Being supported by a stable political situation, the profi ts / losses of local airlines will be. the traffi c in passengers traveling on business to The liberalization process leads to in- and from the EU will probably record a signifi cant creased number of jobs. The liberalization increase too. process will have negative impact on the fi rst The regional airports will be demanded more phase, when the national operators will reduce the frequently. The phase of territorial expansion of number of jobs. At the same time, the practice of foreign business persons’ interest will be depend- other countries shows that ” ... the low cost sector ent on the possibility of direct access to regions of during the past years is the generator of increasing interest in Moldova, using the facilities provided air transport industry. Without low cost service by a regional airport. The high density of competi- growth the industry would stagnate. As a group, tion specifi c to the capital area of a state motivates the low cost sector was the only one that has in- entrepreneurs to consider new areas for invest- creased the number of employees.”10. At the same ment. Usually, airports have a catalytic role in this time, a higher volume of passenger traffi c will process. The moment that will cause this “migra- stimulate greater demand for employees in this tion” varies, but the trend is common for all Euro- sector, which will probably redirect a part of the pean countries. personnel laid off from airlines to airport services.

Source: ICAO Survey: The Economic Impact of Air Service Liberalization

According to a study on the impact on air trans- same issues other state airlines in eastern Euro- port liberalization conducted for ICAO, the effect pean countries that joined the EUA did. Accord- of economy liberalization is as follows: ing to a study conducted by the EC, the national operator concept is foreign to a regional market. The liberalization process may generate new and Worldwide, national governments have consid- better (more accessible) services that stimulate the ered the national operator as a symbol of national growth of passenger trafﬁ c, which in its turn leads sovereignty. This is, however, an exhausted con- to economic growth, namely increased number cept. In many regions such as Latin America and of jobs. In conclusion, it is difﬁ cult to exactly es- Europe, many countries have abandoned the “na- timate whether the state budget will have to lose tional” operator. Finally, national operators in the from liberalization of this sector or not. UK, Germany, Spain and the Netherlands have The concept of national operator is not com- been privatized. SABENA from Belgia bankrupted mon to regional markets. The relationship Air back in 2001, while the Swiss operator SWISS was Moldova - state budget represents special interest bought by Lufthansa. for the industry. Since the state is the sole founder of Air Moldova, this airline will probably face the

32 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

The direct positive effect for government management agency, people still go home and surf budget is the reduction of work-related travel the net in the night. In their view, corporations are expenses incurred by public sector employees. looking for partnerships with a balance between classical and Control Agencies. The self-booking Increased competence among air operators will system is clearly an advantage for corporate travel stimulate the general process of tariffs decrease departments. When the employees see the ticket on a liberalized market. Lower prices for air tick- price on the computer screen, they usually direct ets will result in lower travel costs for public in- them to cheaper options this phenomenon being stitutions, i.e. the state budget. Work-related trips called “visual guilt”. This fact suggests the inherent specifi c to ministries constitute a big share of each power of online approach. By their nature, the online agencies seem to be more suitable for the way people institution’s budget, and the average tariff reduc- want to buy their trip, while traditional agencies tion on air transport market, in the wake of air seem to know more about how airlines, hotels and transport service liberalization and competition rent-a-car services are to be managed. enhancement, will be refl ected in total transport expenditure of given institutions. Enhanced rela- The impact of liberalization on the secto- tions with EU will involve an increase in use of air ral infrastructure can only be positive. The services by public servants. The way the process of probable increase in accelerated pace in number acquiring air transport services will be managed of passengers will generate specifi c expansion of may signifi cantly decrease the costs of servants’ air transport infrastructure. The degree of expan- travel or, on the other hand, may remain without sion (intensive or extensive) is also dependent on signifi cant changes. several factors. For example, in case of low cost The national airlines representatives think that operators,the increase of airport taxes set by the the decrease in air tickets price for formal trips is airport operator will become, at a certain point, feasible at present by signing direct contracts with one of the stimulating factors for extensive expan- operators designated on specifi c routes, by remov- sion, i.e. to the regional airports. ing intermediaries represented by travel agencies In a politically stable environment, investors are that cannot ensure certain price level. very attracted by the air transport industry, particularly for specifi c service infrastructure. Airports Case study and airlines related support services (handling, NET PROFITS5 catering, maintenance, cargo centers) are areas for Likewise the online travel agencies are seeking investment with a high degree of interest from in- corporate travelers (transnational companies, vestors. In addition to private investors, the branch public institutions), the operators themselves search infrastructure may receive funds or special funds for strategies to attract customers traveling on from EU institutions. Good examples were pre- business to their own web pages. According to the sented in the “Navigation” chapter, where projects Coalition of Business Travelers, corporate travel funded or co-fi nanced by the EBRD and EIB have managers consider online companies as “serious and growth-oriented players, continuously improving been specifi ed. In case of Moldova, the Chisinau their products”. The airlines managers can not be Airport seems to be the object of increased inter- indifferent to those who distribute their product. est for EBRD. Thus, the Second Loan Agreement Airlines must be concerned that, over a long period between EBRD and Chisinau International Airport of time, with increase of online travel agencies they amounting 40. 000. 000 EUROs and representing have created a monster that will constitute a barrier the second phase of airport modernization, with- between users they seek and their own online sales. According to Steve Tracas, Director General ,”Orbitz out requiring any state guarantee, as it was the for Business”, “...they are just an online agency. They case of the fi rst funding. The safety of repayments were set up for this purpose likewise the opposite and the transparent mechanisms by which they of the classical/traditional agencies that have just are made (upgrade fees) create the necessary in- a booking tool. Even if your company has a travel vestment comfort for fi nancing. Tourism industry is the second sector of econo- 5 Airline Business, October 2004, ”Net profi ts” my, after air transport that will be strongly affected

33 Radu Bezniuc by the liberalization process. The economic impact es. Thus, in 2004 Ryanair has transported 206. 000 on tourism will be an indirect one. Cooperation be- passengers, of which 80% were incoming passen- tween the authorities responsible for tourism and gers. Thus, the market share of low cost operators has exceeded 25%. At the same time, these proces- air transport industry is important. The case study ses have not “cannibalized” other segments, such as below represents an example of increased cooper- charter fl ights or traditional airline traffi c. In fact, ation between the tourism sector and airports. they have also witnessed a continuous growth. It is up to the airports and the tourism industry to work Case study together in order to benefi t from the opportunities AIROPORTS VSV TOURISM6 created, as a result of these developments. Operators review their marketing strategies to capture tourist traffi c. According to Rt The competitiveness of tourism packages Hon Mike Moore, Director General of WTO (World for Moldova will increase upon decrease of Tourism Organization) „The restrictions on traffi c transportation costs. In the opinion of tourism rights, hundreds of bilateral agreements are the agency representatives publicly expressed, the biggest challenges for local tourism prosperity”. high prices for air tickets represent an impediment „Airports are part of the travel chain. They are the fi rst and last places seen by passengers. Therefore, for development of incoming tourism in Moldova. airlines and airports must work constantly to pro- The foreign tourists are willing to make a com- mote their image and to provide enjoyable experien- parative analysis of costs for a trip to Moldova and ces for travelers. „A good touristic product could be the Czech Republic, for instance. When talking „damaged” if the airport is not aligned to the speci- about travel and accommodation costs incurred fi c needs of visitors / tourists” says Don Huse, Chief for a trip to the Czech Republic, they are at least Executive of Auckland Airport. „Most airports work to attract business travelers and passengers who fl y equal or even more attractive. It is diffi cult to make frequently, but statistics show that passenger profi le an estimate of the expected increase in number changes. If, by 2000 more than 65% of passengers in of tourists. At the same time, the transportation Copenhagen Airport were from business category, costs represent a sensitive element for travel agen- these indexes are now below 50%, sharing the tou- cies. Customers have always a choice what country rist traffi c travel segment” says Niels Boserup, CEO they want to travel to, and the price / quality is the of Copenhagen Airport. The low cost airlines are the most powerful catalysts for these changes. By lowe- strongest argument for them. ring tariffs, low cost operators generate demand The change of prices for air transport will not rep- by a new type of passengers. Thus, the traditional resent the basic element that will stimulate the fl ow airlines are forced to follow the same format. The of foreign tourists. High accommodation costs and result is the increased number of „friendly” airports with low costs and it explains why the airport au- imperfect tourism infrastructure can be considered thority seeks to provide low cost terminals and other factors that prevent Moldova to become a more at- facilities to attract low-cost airlines. This also ex- tractive touristic destination. Hospitality industry plains the increased number in airports specialized is also dependent on the number of incoming tour- in low cost traffi c, such as Paris Beauvais, London ists. At a higher occupancy rate of hotel capacity, Stansted, Frankfurt Hahn. Strategies adopted by there is the possibility of applying lower rates for airports to assist the tourism industry are diverse. Some airports have given a “chair” in the Board of accommodation services. The interdependence of Directors to various tourism institutions. Other air- the air transport industry and tourism is evident ports cooperate with tourism authorities to attract and greater accessibility to air transport services more tourists. A even more radical approach was can boost sales and tourism. adopted by the airport authority in conjunction with the tourism authority and Government of Salzburg Diminishing of air travel tariffs will lead province / land in Austria: in 2001 an agreement to cheaper packages to the EU. The most popular was signed by which Ryanair guaranteed to bring means of transport used by tourists from the Re- 150. 000-200. 000 tourists per year to Salzburg, in public of Moldova visiting the EU are their own exchange for marketing support of local authoriti- cars. To the largest extent, this factor is determined by lack of tourism packages available from local 6 Jane’s Airport, February 2006, ”Airports fl y the tourism fl ag” agencies, which would provide both accommoda-

34 Prospects for Development of Air Transport Sector Services in the Republic of Moldova tion, transport and transfer from airport to the Accessible air transport will lead to a decrease hotel. High costs for air tickets and lack of direct in coach/minivan/train passenger traffi c on Bu- fl ights to tourist destinations in Europe determine charest and Kiev routes (airports where low cost the customers to use their own transportation to airlines operate). travel. Sometimes, tourists’ motivation is dictated It is known that some of Moldovan citizens or per- by their wish to visit more countries during one sons with double citizenship use more affordable trip, and the large family is an additional argument services provided by low cost operators from Bu- to travel by their own vehicles. charest or Kiev. The large offer of destinations and The low cost operators will indirectly pro- low cost companies that perform intra-commu- mote the Republic of Moldova as destina- nity fl ights from Romania, stimulate the demand tion. Launch of any new destination represents of passengers arriving from Moldova. To get to an advertising effort for the airline launching these Bucharest or Kiev, Moldovans use, in most cases, fl ights. Promotion of air fl ights will take place both buses or minivans that execute• scheduled routes in Chisinau and in cities that will operate low-cost from Chisinau. Market liberalization and intro- services or other airlines that might be interest- duction of low cost fl ights from Chisinau will cer- ed in the air transport market of the Republic of tainly divert the passengers that opted to fl y from Moldova. The low cost experience shows that, usu- Bucharest or Kiev to use direct fl ights from Chisi- ally, these operators have the opportunity to pro- nau. Another phenomenon that may exist is that of vide packages that include all spectrum of tourism migrating the traffi c from the neighboring country services: transportation by air, airport transfers at (Ukraine) to cheaper fl ights from Chisinau. It is a destination and accommodation. All these services phenomenon similar to the one recorded in rela- can easily be found on any web page of low cost option to passenger traffi cking from Moldova to low erator. In addition, there is a strong informational cost offers in Bucharest. support from airlines promoting a new destinations. In many cases, when the new destination 6. Comparative aspects is also a tourist destination, the operator also fo- The experience of countries that have gone through cuses on promoting the item as tourist attraction. liberalization process of air transport market has Thus, the ability of persons responsible for tour- been described partly in the form of case studies. ism in the Republic of Moldova to fi nd appropriate The results of liberalization represent an impor- item of attraction will determine the number of EU tant milestone for estimating the impact this proc- tourists to visit Moldova. ess will have on air transportation in Moldova. Inland transport traffi c will be redirected The local air operators will be adversely af- towards low cost and low-fare airlines. Once air fected in the fi rst phase of this liberalization proc- transport becomes increasingly accessible, use ess. Romania’s experience shows a signifi cant de- of inland transport for long-distance travels sig- crease in weight TAROM had before liberalization. nifi cantly diminishes. Nelu Iordache, the owner Thus, the market share TAROM currently has con- of “Blue Air” Company, thinks that „Air transport stitutes 19%. market liberalization in Romania led to an increase in passenger traffi c. A very large number of pas- It should be noted that in case of the three na- sengers were redirected from coaches/minibuses tional operators in Romania - Tarom, Blue Air and to low cost fl ights. Public land transport compa- CARPATAIR, their combined market share has re- nies were among the biggest losers in the wake of mained practically unchanged over the past three liberalization.” According to representatives of nu- consecutive years (39% of the market). Instead, the merous low cost operators, they take over prima- share of each operator within this share changed rily the passenger traffi c from coaches and trains. (Diagram 17). Thus, in 2009 as compared to 2006, This happens because travel costs don’t differ es- there has been a decrease from 60% to 50% for sentially but travel time is considerably reduced. TAROM, BLUE AIR has grown from 19% to 37% and CARPATAIR had a decrease from 21% to 13%. Maintaining of constant position of 39% market

35 Radu Bezniuc share by operators in Romania is largely due to the Diagram 17. Market share of each Romanian airline existence of Blue Air, i.e. a low cost operator regis- in the framework of general market share tered in Romania, offering a competitive product, as compared to the offers made by other low cost operators that entered the air transport market in Romania after liberalization. The soviet fl eet is another sensitive issue of liberalization, i.e. the technical equipment of airlines registered in Moldova. This type of aircraft are being kept “off the ground” since they do not comply with EU standards of certifi cation. The experience of countries that have acceded to the Multilateral Agreement is different, starting with immediate interdiction to use this category of aircraft and to negotiate a reasonable period of application of such prohibitions. For Moldova, which has a large Source: Air Transport Intelligence Database fl eet of this type, the option of establishing an extended period for implementation of these restrictions may constitute a compromise. to recover the costs. Consequently, the airport will increase the airport charges, by making pressure on The low cost operators generate major chang- civil aviation authorities. Fair Investment-Effective- es in the strategies airports’. The liberalization ness Reports are important for airlines and essential process contributes to increased passenger traffi c for low cost operators. The discussions about taxes are unavoidable and are part of the IATA and ACI in major airports of the countries that acceded to relationship. the Agreement, as well as expanding the number of airports. The way the airport managers manage to comply with new market conditions is crucial for The highest increase in passenger traffi c is the development of passenger traffi c through that registered with airports specialized in services ren- airport. Statistical data show signifi cant increase dered to low cost operators. Thus, Baneasa Airport in passenger traffi c in all countries that have lib- from Bucharest ranked as second airport within eralized air transport market. According to EURO- EU with an increase of about 78% in passenger STAT, as compared to 2006, Romania registered traffi c in 2008 over 2007, while the Otopeni Air- in 2007 a 40% increase in passenger traffi c, while port in Bucharest grew during the same period by Latvia, Poland and Lithuania had increases of up 3% only (Eurostat Statistics in focus - 91/2009). to 90%. The passenger – the big winner of the air transport market liberalization! This statement Case study is found in almost any study or analysis of mar- AIRPORTS7 ket impact. Increased competition among airlines generates discounts for airline tickets and a wide The relationships between airports and airlines are choice of destinations that can be accessed direct- still diffi cult. Due to the large number of operators who are struggling for survival, profi ts made by the ly. Price reductions have varied in different coun- airport sector continue to generate suspicion and tries where liberalization has occurred, from 20% sometimes turn into open hostility. The exaggerated to 50% of the initial rate. Changing the structure of and unjustifi ed investments made by airports repre- passenger traffi c strategies results in change of air sent a point of rivalry between airlines and airports. operators, when they are in competitive environ- Thus, exaggerated level of investment in projects of ment. As long as the Moldovan market will not be reconstruction or modernization of airports, including runways, will require greater airports’ effort able to offer its consumers attractive products in terms of price, they will fi nd cheaper solutions to get from Chisinau to any required destination. Mi- 7 Airline Business, December 2004, ”A thaw in relations”

36 Prospects for Development of Air Transport Sector Services in the Republic of Moldova gration to low cost operators of a portion of poten- In terms of participation in forming the fi nal price tial customers who fl y from Bucharest is already a of air tickets, the share of this cost center is equiv- fact. Some customers choose coaches to have re- alent to the fee enjoyed by travel agencies from duced transport costs. It is obvious, however, that Moldova, i.e. up to 9% commission. if there is an offer for a direct fl ight from Chisinau The level of commission paid is determined by that is 50-75 Euros more expensive than the same each airline individually, depending on the market fl ights from Bucharest and Kiev, the passengers situation, competitive environment and ways of are already keen to opt for it. sales’ promotion. The low cost consumer is the one familiar with In 2010 there was a signifi cant decrease in yielded the Internet and online booking systems. By con- fee levels by the air operators on the Moldovan centrating the largest volume of sales through their market, in some cases this fee being even elimi- websites, the low cost operators eliminated, in fact, nated. Under these circumstances, customers are travel agents from the chain of intermediaries. encouraged to access the airlines’ reservation sys- The opportunity for direct online reservations, si- tems. For air operators this is the main goal - to multaneous viewing of multiple bids and growing draw the fi nal customer on its online reservation number of credit cards’ users motivate customers system. At present, with the evolution of online to access air companies’ web pages and purchase payment systems but also due to web accessibil- online tickets. The culture of online bookings is ity, there is a strong tendency to divert passengers under formation but the tendency of an increased from traditional agencies to online reservation number of consumers to use this tool is evident. systems (especially in case of direct fl ights / with- The travel agencies are also affected by low out connections). cost era and the changes it generates. Promoting on-line reservation systems and air companies’ desire to capture the fi nal consumer resulted in changing the way many customers prefer to buy airline tickets. At the same time, the fees that agencies provided to operators selling air tickets were eliminated, and therefore income from ticket sales diminished. Thus, many travel agencies in the EU focused on selling tourist packages, while sale of airline tickets is no longer a reliable source of income for them.

37 4. Air transport services sector reform under liberalization. Options for state enterprises

The process of air transport market liberaliza- Currently, these two institutions do not exist. The tion will require adoption of a coherent reform for Transport Agency has worked for a very short pe- the air transport sector, which will promote free riod of time and was later reorganized into another movement of transport services, elimination of ob- state structure (Ministry of Transport and Road stacles to freedom of establishment, and will foster Infrastructure) and the Civil Aviation Authority harmonization of national regulations with com- was never created. “De jure”, the Civil Aviation Ad- mon rules set out in the Multilateral Agreement on ministration had to be closed back in 2009, upon the Establishment of a European Common Avia- amendment of the Law on Civil Aviation. In reality, tion Area (ECAA). this never happened. According to Civil Aviation Law (Article. 4, 5 and 6), the civil aviation is regu- 1. Institutional reform lated and supervised by the Transport Agency and the Civil Aviation Authority - “de facto” non-exist- The institutional reform is a must. In line with best ent structures. In practice, certain functions are to international practices, air transport policy is un- be performed by CAA - a “de jure” structure. der the responsibility of ministries of transport, while regulations on fl ight safety and economic is- ICAO standards oblige the state to create “an em- sues are in charge of the Civil Aviation Authority powered body” responsible towards the interna- (CAA). Thus, like any regulatory and supervisory tional community that the aerospace agents of that agency, CAA should have full political and institu- state ensure fl ight safety and aviation security. The tional independence. Ministry of Transport and Road Infrastructure, i.e. the body empowered by the Republic of Moldova In Moldova, there have been made substantial must ensure performance of its duties in compli- changes in the structure of public administration ance with international standards, in particu- in civil aviation by means of the Law. 12-XVI of lar, the regulatory functions of the civil aviation. February 3, 2009: the State Administration of Civ- Given that aviation regulations are technical and il Aviation (ASAC), ie. the public administration normative documents that contain specifi c rules, body in the fi eld since 1997 was replaced by two standards, requirements and procedures, the new authorities: the Agency of Transportation and Ministry should have qualifi ed and experienced the Civil Aviation Authority. The Transport Agen- technical staff for each specifi c aspect of the civil cy has been attributed functions of State policy aviation system apart. These functions cannot be promoter in the area, while the Civil Aviation Au- performed by the 2-3 units planned for the Civil thority was designated policy implementation and Aviation Department of the Ministry of Transport supervision of fl ight safety and aviation security. and Road Infrastructure.

38 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

According to EC Study on Air Transport Liberali- ars remained after changing their intended use. At zation in the Western Balkans, the recommenda- the same time, Chisinau Airport has within its se- tions for this sector reform focused both on the curity zone storage spaces, which were initially set separation of AAC from the Ministry of Transport for transportation of fruits and vegetables. Today and separation of other operational functions, this hangar is private property. such as airlines, airports and ground-handling The reform will require external funding for services from the both institutions: AAC and the projects providing expansion / modernization. Ministry of Transport. These institutions will be The experience of Chisinau Airport confi rmed by transformed into joint stock companies to be mar- numerous similar cases of preferential fi nancing, keted and, where possible, privatized. demonstrates the ability of this segment of the avi- The institutional reform shall be consistently im- ation industry to capture the attention of foreign plemented through: investors and fi nanciers. EBRD and EIB are the most present institutions in fi nancing infrastruc- 1. amendments to the Civil Aviation Law and ture projects. The liberalization process will create Aviation Security Law in compliance with conditions for a “second chance” given to other the Airline Codes assigned by ICAO; airports in Moldova. In this regard, the capacity 2. separation in terms of scope of the two sec- of each airport to attract foreign investments or tors of civil aviation: Aviation Safety and Se- funding will determine the way the passenger fl ow curity (1) and Commercial Policy in the fi eld will be redistributed in Moldova. Any investment of Aviation (2). made in airport infrastructure in Moldova, especially those that are not operated due to lack of 2. Airport reform conditions to perform fl ights can be treated by external donors as an important step for regional de- Preparation of infrastructure to the expected velopment and improving business environment. gradual growth in passenger and cargo traffi c, and The forms that this process can take are different, adjustment to EU standards in this area will repre- but the ultimate goal is welcomed by European sent the cornerstone of the airport reform. Union. The liberalization process will primarily affect the Handling and catering services will also international airports in Moldova by increasing need reforming, following the liberalization of air the fl ow of passengers. transport market. Low cost operators will seek so- Changing the role of regional airports in lutions to reduce costs for these services; thus use Moldova will become a certainty upon entry of of online check-in systems is encouraged, impos- low cost operators on the market and increase of ing additional charges if the passenger wants to competition between airlines. In seeking solutions benefi t from traditional check-in at the airport. to mitigate the effect of increased competition, carriers will identify areas with lower density of Case study competition. BUSINESS STRATEGIES1 Upgrade of airport infrastructure will represent Another element of EasyJet changes is related to the cornerstone of the “ground” reform. In addi- SELF-CHECK-IN kiosks. If to review the situation tion to increasing the processing capacity of pas- 10 years ago, low cost operators have revolutionized senger traffi c in the Chisinau Airport and renova- the way air companies interact with passengers by tion of the runway-landing and refurbishment of accepting opportunities offered by Internet booking. platform, upgrade of the airport in Balti will be Now there is need for a new change in interacting with passengers. The airport services constitute demanded, as being most prepared for operating one of the big costs encountered by airlines are commercial fl ights. The infrastructure of Mar- their airport services, which amount to 30% of the culesti Airport is currently best-suited for cargo total cost, that is very much. As a result, solutions traffi c due to the existing track that can serve large capacity aircraft, combined with numerous hang- 1 Regional Airline World, volume 21, 2004, ”Low-fare business strategies”

39 Radu Bezniuc

are sought to reduce these costs. One of the major different: conditioned airport concession invest- elements of their service is ”passenger handling”. ments in infrastructure (Tirana), association with Customers are encouraged to use online check-in U.S. investors to build and operate a new cargo or check-in kiosks even for their luggage, the way center and renting all the shops and restaurants people were encouraged to use the Internet to make reservations. to a company in Switzerland (Belgrade). It is important that the privatization process takes place in a transparent and competitive manner. Many The on-line registration (check-in at home) major airports in the EU are already under private falls into the overall progress of low cost opera- ownership, including airports in London, Brussels, tors, which are part of the plan to transmit to con- Athens, Vienna and Rome. This trend extends to sumers as many functions as possible. Thus, the the Eastern Europe as well. At the end of 2005 the advantages of the available technology are used. Budapest Airport was sold to BAA (a UK airport op- These changes lead to removal of some companies’ erator) and Slovakia agreed to sell two of its largest handling services. After reducing costs, airlines airports to Vienna Airport, before the new govern- seek to turn the costs of their activities into activi- ment has revoked this Agreement. The interest of ties generating income. Catering on board is the international investors in this sector has facilitated most obvious case. the privatization efforts in Western Balkans.

Case study Air transport is a large credit consumer. The development of any sector of this industry is impossible BUSINESS STRATEGIES 2 without investments in modernization and renewal In the case of EasyJet: they do aim at offering lowest of equipment and machinery. Most of the resourc- costs and if passengers wish to purchase additional es are being absorbed by the airport in passenger services they have the option to do so. The customer has to decide whether a sandwich on the board has traffi c growth and the need to increase the traffi c the value of 3,5 Euro or not. If so, the passenger will capacity of service. In case of major investments, buy it, if not - he/she has the option to refuse it. loans may be secured to Moldova by a single bank. In these circumstances, it is recommended to use Development Strategy Reform for catering a consortium credit or external funding. The exter- operators is inevitable in this context. The signifi - nal funding, as it is the case of Chisinau Airport is cant increase in the share of low cost operators in cheaper in terms of costs, but require Government passenger traffi c at the airports in the Republic of guarantees. Foreign banking institutions such as Moldova will require the catering companies to ad- EBRD, have well structured credit management just their working model to the system operators’ and investment development monitoring systems, work. Carriers examine new ideas to generate rev- while the dialogue existing at the government level enue from products / services purchased on board. ensures removal of many bureaucratic barriers. The interest for this area of activity shows how important it is for many operators. In essence, these 3. State airline reform programs have become, in fact, part of the low cost Other countries’ experience show, undoubtedly, business model. that the most affected actors of liberalization are Liberalization of air transport will result in signifi - the state airlines. In the absence of alternative cant increase in passenger traffi c. This expected funding from the state, such companies are “put to growth will require over the medium term, expan- the wall”. If case of market liberalization the fi erce sion of airport capacity and attracting new invest- competition and the signifi cant reduction in rev- ment or fi nancing. Privatization of airports enue may stimulate mobilization of efforts within or public-private partnership can help to the state company to optimize costs and increase mobilize the necessary investment. The forms this effi ciency. According to Eugen Dvornic, Deputy process took in Western Balkan countries were Director General of CAA, “. . . the national operator Air Moldova will lose the air transport market, and 2 Regional Airline World, volume 21, 2004, ”Revenue opportu- Moldavian Airlines will be replaced, most likely, by nities”

40 Prospects for Development of Air Transport Sector Services in the Republic of Moldova its parent company CARPATAIR. Air Moldova will charter programs. In the second phase, the newly be released to privatization.” created company was to move slowly to the low cost service to serve destinations such as London, The optimization and objective decrease of Paris, Frankfurt. But LOT’s concerns were related state airlines costs can represent a survival so- to the risk of “cannibalizing” their own destinations lution for this type of air operators. In such condi- in this way. LOT’s plans were to informally tions, most national companies use to reduce costs prepare technical support and might even have to ensure leasing of aircraft to reduce risks and build and improve their effi ciency. confi dence in the new operator. LOT believes that their success lies in sales and market penetration. Case study The major opportunity for the low cost daughter company was the experience and data available to THE MOST FLEXIBLE SURVIVE 3 the LOT and the segments to be attracted and served In 2004, LOT had to face very serious and well were to be fi nalized. funded low cost operators, i.e. Wizz Air and Sky The low cost Golden Hen. The foreign investors Europe. Poland is also a target destination for have already shown their confi dence that Poland is “budget” operators, such as German wings, Easyjet “the golden hen” of the Central Europe. Moreover, to and Airberlin. It might be very surprising, but support this assertion, many have become skeptical LOT consider themselves besieged. In the position about investing resources in the traditional airlines, of market leader, you can not believe that this can and the newly established low cost operators happen even to you. According to Piotr Dubno, Vice- managed easily to attract funding. Thus, between President of LOT, two forces led low cost operators’ 2004-2005 SkyEurope has opened two basic interests in Poland: existing low cost operators were airports in Poland, i.e. Warsaw and Krakow-the trying to escape intense competition on the West result of a $ 20 million commitment supported by European market, addressing new markets and ABN-Amro and EBRD, as well as private sponsors. with a population of 40 million, Poland is by far The Wizz Air, which received a support of USD 49 the largest East European EU member state. On the million from the “Indigo Partners” private fund in other hand, probably only 5% of the population of the U.S. Similar did the same. Poland traveled by plane before 2004 and the poor quality of transport surface / transmission services In the opinion of the SkyEurope, it is important for and relatively low salaries in Poland predicted an each airline to reach the critical mass. To a certain attractive prospect for low cost fl ights. However, point there is an impression that the low-cost the low cost operators on the Polish market intend operators stimulate the air transport market. There to attract passengers on buses. With few secondary is a large number of people who travel by air for airports in Poland, the low cost operators will the fi rst time. In these circumstances one cannot be based in Warsaw and other major airports, say that passengers are stolen from other depriving LOT of potential diversifi cation benefi ts. operators. They are rather redirected from buses and trains. Protection interests. In the vision of LOT Vice- President Executive, in 2004 the game started. They Polish Demand. The low cost operators tend to saw an opportunity in the sense that, using market “democratize” air travel, and the load factor knowledge they could be quickly trained to provide shows a demand in this context. The most common low cost products according to customers’ wishes question among low cost operators was related to and best take advantage of their knowledge, while airports in Poland: are they equally prepared? One only low cost operators had to only accumulate of the aspects dealt with airports’ cost structure. experience. Thus, the LOT strategy envisaged The conclusion was that airports were not that creation of their own low cost operator, fully owned effective. The costs’ competition of airport services by the national operator but operating totally is essential for the low-cost operators, while upon independently. It was estimated that the investment opening of Polish market some services, such as would involve about 1 to 1.2 million Euro for the new fuel supply remained monopolized. Airports do not operator, which was to have two basis: in Warsaw benefi t much from the business class passengers. and Krakow. Originally the operator was supposed Together with development of the low cost network to use up to fi ve Boing 737 aircrafts transferred of operators, the cities in Poland expect to benefi t from the LOT basic fl eet. At the fi rst stage, this from better air connections. Thus, Wizz Air has new operator would launch as charter operator, demonstrated its fl exibility in selecting the city of managing the already existing traffi c under LOT Katowice as southern base of the company, while Gdansk covers the northern area. According to Wizz Air representatives, being a holiday destination, 3 Airline Business, October 2004, ”Survival of the fi ttest”

41 Radu Bezniuc

Katowice is from start more appropriate than can already undertake out of the market?...”. An- Krakow, pointing out that some 18 million people other item that was taken into account by Wizz Air live on an area of 200 km of Katowice, a much better in the fi rst period of their activity was lack of need fi gure than the population of Hungary. It was a to create a body proportion for each service. Thus, very good decision for Wizz Air to launch there. The airline can expect about 30% of the traffi c to come maintenance is carried out by Lufthansa Technik, from regions outside the base airport, but Wizz Air catering-by the Gate Gourmet and handling serv- has found out that this ratio was about 50%. The ices are offered by specialized companies in each passengers are ready to discover new destinations airport. The same goes with the administrative using low-cost operators. Thus, the Katowice Airport part: accounting is of outsourcing type and so does registered a 90% increase in passenger traffi c in IT in the most part. Thus, the core staff of the low 2004, as compared to 2003, after entry of low cost operators on this market. The perception of Wizz Air cost operator consists of a maximum 60-70 per- was that Poland reacted promptly to the entry of sons. low cost operators on the market. Following these In the opinion of EasyJet representatives one has to events, LOT revised their network strategy, focusing on basic routes and abandoning the stop-over fl ights implement what works best for the airline. A good like Poznan- Katowice- Brussels. example is maintenance, which is partly contracted by an external joint venture EasyJet with FLS The low cost airports. To reduce their costs, LOT refl ected on the possibility to transfer their services Aerospace. This service can be contracted totally to the low cost airports in Europe, such as changing externally, but this solution is very functional for the route Rome-Ciampino to Rome-Fumicino and EasyJet. The catering services are fully contract- moving from Paris Charles de Gaulle to Paris ed while handling services had a different trend. Bauvais. The strategic routes, such as Warsaw- When started to operate, EasyJet was making out- London, would have been served daily if there was sourcing for all their services, but in Summer of such an option. But those from LOT were aware at that time that three other low cost operators, 2000 they made in-sourcing for handling services including Easyjet, were serving this destination. in the Luton Airport. Later on, in 2004 the service In conclusion, the solution chosen by LOT was to was again contracted externally, but already in a fi nd new investors with know-how strategies and partnership with Menzies by means of creating a decisive initiatives to reduce costs in order to survive joint stock company. On the other hand, Air Ber- successfully. lin believes that outsourcing should be limited as much as possible. Air Berlin is trying to keep most The structural optimization is another ele- of its operations “at home” and to contract certain ment that can reduce airline operating costs. Low services only, such as maintenance.4 cost and low fare operators have demonstrated the possibility of conducting profi table activities where In case of Air Moldova, handling and catering there is structure and effi cient control over airline services are contracted from external operators. costs. It should be noted that the structure of low Moldavian Airlines has created its own ground cost operators varies from case to case, depending handling and catering services, and in some cases on the degree of external services contracted (out- these departments provide services to other air- sourcing). Application of business optimization lines, thereby transforming a cost center into a structure systems following the low cost model can revenue generator. generate signifi cant fi nancial savings. Decreasing operational costs. Aircraft main- Outsourcing benefi ts (outside contracted serv- tenance costs - maintenance (maintenance) is an ices). The degree of outsourcing varies from one important costs center of an airline. The solutions company to another. The choice for Wizz Air is to identifi ed by the low cost operators are different outsource as much as possible in order to concen- from negotiating extremely favorable conditions trate on core functions of the airline. Thus, Wizz in case of outsourcing, maintenance and partner- Air has pilots and fl ight attendants, while the rest ships with maintenance companies and up to crea- is covered from outsourcing. It is an approach that comes from the idea “. . . what can Wizz Air gener- 4 ate on their own and what are the products they Regional Airline World, volume 21, 2004, ”Benefi ting from outsourcing”

42 Prospects for Development of Air Transport Sector Services in the Republic of Moldova tion of their own centers. The fi rst two represent, ance as in case of the cost center within overall cost to the largest extent, cost savings on these services, structure varies depending on the fl eet structure. while the third one can be transformed from cost It’s more about the different insurance premia an center into a income generating center. An exam- airline pays depending on certain factors: the sta- ple of such a transformation is Croatia Airlines co- tus of aircraft owner, minimum insurance required operation with Lufthansa, which have built their by the countries the operator fl ies to, accessibility own maintenance facility at the airport in Zagreb, to a cheaper insurance market. Optimization of and due to the European JAR 145 certifi cation it is this cost element can be achieved, but it requires a also authorized to provide maintenance services to negotiation effort on behalf of the airline manage- third parties. Lufthansa was among the fi rst cus- ment. tomers, of course, which has diverted some of the Decrease of cost per fl ight hour by improving C-checks for A320 to the maintenance of Croatia aircraft rotation should become another airline’s Airlines. goal. The low cost operators seek to obtain high degree of aircraft rotation, so that it leads to lower Case study cost per chair/seat. This relationship is explained EasyJet and maintenance services5 very simply: suppose the depreciation / rent cost In late 2004, EasyJet considered all forms of of an aircraft is of 250.000 Euro per month, the heavy maintenance in Eastern Europe for the costs arising from depreciation / rent are 12. 500 rapidly expanding fl eet A319. Thus, the interested Euro per fl ight hour; if the degree of rotation / us- parties were contracted, including those in Turkey age increases to 300 hours per month, these costs to express their interest in the project and the are only about 8. 300 Euro per fl ight hour. In- investment incentives that they could provide. The project was designed to see how EasyJet can exploit creased use of the aircraft depends on both exter- the advantage of labor costs in the region, estimated nal factors, such as handling services capacity of at about half compared to that of Western Europe, the airports to process / service the aircraft within taking into account preparations to the maintenance extremely reduced time (30-45 minutes), and in- program for a number of 120 aircraft A319 and the ternal factors, such as fl ight network. fl eet that was to enter this process in a few years. Optimization of air fl ights network is an element of increased sensitivity to state airlines, Insurance costs is another sensitive cost center. which are often dependent on higher institutional The compulsory insurance for airlines for both pas- factor, i.e. policy. This aspect dictates, in some cas- sengers and third parties, represents a signifi cant es, operation of non-revenue or even loss fl ights, to fi nancial effort for the air operator. Depending on satisfy a “political need of the moment”. EC recom- the fl eet structure (type, property, fl ight destina- mendations on this are to launch the privatization tions), the amount of insurance is different. An process of this category of airlines. The private sec- aircraft taken on lease, which is not owned by the tor operates on principles of economic effi ciency airline that operates, can be subject to very high of operated fl ights. Upon market liberalization, insurance costs. This is because usually the aircraft optimizing the network of fl ights will involve iden- owner wants to cover the risks, particularly those tifying the pairs of cities with enough passenger relating to third parties. Thus, the limit of insur- fl ow for performing profi table fl ights under spe- ance may be at about 500.000.000 Euro for an cifi c competing conditions of a liberalized market. A320-type aircraft. The situation is different when A well-structured network of fl ights may increase the aircraft is owned by the airline, the insured the usability of airline fl eet and a satisfactory load amounts being several times lower. In Moldova factor. there is no single insurance company that could cover very large insured values on their own. In Reviewing relationships with travel agen- these conditions they use the services of the for- cies. In terms of participation in forming the fi nal eign reinsurance companies. The weight of insur- price of the ticket, the share of this cost center is a fee equivalent to the one enjoyed by travel agencies from Moldova, i.e. up to 9%. The level of commis- 5 Airline Business, December 2004, ”EasyJet looks east for maintenance”

43 Radu Bezniuc sion paid is determined by each airline individu- ated by liberalization of air transport market, it ally, depending on the existing market situation, could become real. competitive environment and the way their sales The new projects generating income are be- are promoted. The airlines’ intention to reduce the ing continuously sought by airlines, especially by commission given to travel agents and at the same low cost operators. They are sought both in areas time encouraging customers to use online reserva- visible to all operators and unexplored areas. tion systems can reduce this cost center level.

Funding for fl eet renewal. Experience from Case study other countries shows that it is practically impossi- SERVICES6 ble to access EU funds to upgrade the state airline New cash-fl ow. When talking about growth, Rya- fl eet. In these cases, the practice is to seek external nair is among the fastest. But at an average per year fi nancing on concessional terms guaranteed by the of about 20-25%, there is an industry that exceeds State. Also, refunding on favorable terms could re- even this outstanding performance, i.e. the auxiliary duce the costs of servicing for existing loans. services. The auxiliary services take various forms, from rental and transportation to the hotel to cate- Purchase of aircraft is a process with a more stress- ring services on board. With the notable exception ful fi nancial strain since, as a rule, the amounts are of food on board, this kind of business with a low to be paid in 2-3 installments. As airlines repre- hazard rate becomes more signifi cant for many low sent a higher risk for foreign donors in the absence cost operators. Those from Ryanair are busy with of State guarantees, the solution for operators is editing brochures for their activity / secondary business. These services record double income as compa- the national bank lending market, which increases red to the income from ticket sales. For some people the cost of borrowed resources. These costs are the offer is clear: customers pay the low basic price also refl ected in the fi nal prices of tickets. Grants for their armchairs/seats and then they pay addi- from EU institutions / organizations are targeted tionally for extra services such as food, beverages, in particular on upgrade of equipment (for ex. Air additional standing space, access to lounge room. Traffi c Control: for adjusting technical equipment According to Ryanair, this provides greater trans- parency to their product. As one of the largest low in accordance with the pan-European SESAR pro- cost operators, their web page is visited by a large gram) or improving basic infrastructure. number of people, which means that it has become a TAROM, which has benefi ted from Government powerful tool for selling ancillary products and ad- support to renew its fl eet before country’s acces- vertising services. A similar example represents the low cost operator German wings, which, following sion to EU in 2007 may be selected as a signifi cant the data registered upon accessing websites, became example of this effect. This aspect is important the sixth German travel portal. The Strong Sales from the perspective of EU restrictions on subsi- Channels. One of the major channels of distribu- dizing certain sectors of the economy, imposed to tion and advertising is subscription of millions of its Member States. With this acquisition / renewal passengers to receive Ryanair offers. It turned into a of TAROM fl eet , it takes certain market advantag- very strong distribution channel. However, operators have been quite slow in terms of understanding es, such as aircraft leasing costs or lower insurance the number of clients for sales purposes. Even the premiums (as aircraft owner). low-cost operators acknowledged that a few years Obtaining fi nancing for infrastructure ago they only “touched” the surface of what Inter- net can do. It is now obvious the way the low cost projects that are attractive for investments, can operators have intensifi ed their efforts to maximize be examined by the EBRD or EIB. The option to sales in this area. For many people, the Internet-ba- establish a maintenance center in Moldova has sed revenue is a minor cash-fl ow, while for low cost been repeatedly discussed by several private inves- operators this represents a challenge to transform tors and even Air Moldova intended to build such them into a form of sales “on board”. Some opera- a center. These initiatives have been delayed for tors focus on their own products (food and drink on board), duty-free sales and brand. Thus, the daugh- various reasons: political and institutional risks or ter-companies are created that focus exclusively on lack of available fi nancial resources for this project (Air Moldova). Perhaps, if to assess this project through the light of reforms that might be gener- 6 Airline Business, January 2005, ”New cash fl ows”

44 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

sales of this type, while the parent company can fo- towards those in Western Europe, aircraft leasing cus on passenger transport. Thus, the low cost ope- under ACMI is an important and steady source of rators aim at increasing their sales revenue ratio at revenue for some airlines in Eastern Europe. Bul- about 15% of total company sales, and „shopping on garia Air is a representative case. After successful board” is one of the elements to increase the share renewal of the fl eet and its extension, the Bulgar- ian operator decided to lease aircraft under ACMI Maintenance. The case of Croatia Airlines and to operators in Western Europe, such as Air Italy. Tarom is a practical example of transformation of a cost center, such as maintenance costs into a neu- According to Air Moldova representatives”... there tral or even revenue-generating one. An innovative is need for other measures that would mitigate the way of partnership association for providing main- negative impact on national operators, following tenance services was demonstrated by TAROM. the liberalization of air transport services: (i) au- This operator has placed a public announcement, thorization to quash old equipment; (ii) amending including in a specialized magazine in the fi eld of legal framework on taxation of operational leas- air transport, with the intention to fi nd a strategic ing transactions from non-residents; (iii) amend- partner to create a maintenance and repair facility. ing legal framework on taxation of transactions This type of activity has been developed by some for technical maintenance of aircraft abroad; (iv) operators (eg. Lufthansa, Air France) in an im- abolition of VAT on imports of aircraft”. portant source of income for the airline business, Finding new income opportunities from ancil- turning a cost center into a revenue generator. lary activities represent intermediate solutions of Wet lease means lease of aircraft under ACMI survival for some state air operators. At the same (aircraft, crew, maintenance, insurance). Likewise time, enhancing economic effi ciency by reducing for maintenance services, where labor costs repre- costs and optimizing business may be the radical sent an advantage for Eastern European operators solution for national companies

45 Conclusions and recommendations

The liberalization of air transport market will cre- Area. During negotiations the Government may ate conditions for increased competition between require: airlines and will allow low cost operators to entry - gradual liberalization of air transport market. the Moldovan market. This type of airlines is con- This can be achieved in three steps. In the fi rst sidered to be main generator of growth in passen- stage the third and fourth freedoms will be fully ger traffi c. liberalized. This means that all airlines licensed The main benefi ciaries of the liberalization process within the ECAA (European Common Avia- will be the PASSENGERS and the AIRPORTS from tion Area) can perform fl ights from one’s own Moldova. The big losers of the liberalization proc- country to any destination in the ECAA, with- ess will be NATIONAL OPERATORS and PAS- out any restrictions pertaining to frequency or SENGER LAND TRANSPORT. capacity. In the second stage the fi fth freedom will be fully liberalized (the right to carry pas- The liberalization process stimulates development sengers, cargo and mail from one’s country to of the regional airports and represents ”a new a third country). For a country to move from chance” for Balti, Marculesti and Cahul Airports. the fi rst step to the second one, it is necessary The attenuation of the negative impact of lib- to implement the basic package of the Acquis eralization on national airline operators can be Communautaire, which relates mainly to fl ight achieved through increasing airline companies’ safety and security. The third stage consists in fl exibility (by reorganizing each operator’s policy), opening the remaining freedoms and full trans- adopting a low-fare operation model, and diversi- position of the Acquis Communautaire. fying revenue sources. Establishing an extended period for use of air- Upon liberalization of access to European Com- craft of “Soviet” type in certain conditions of mon Aviation Area, airline companies from the geographical limitation. Republic of Moldova will be provided new devel- - providing technical support in the form of opment opportunities, gaining the possibility to training / education within the European in- operate on new markets. stitutions to CAA representatives who will be Alignment to the Acquis Communautaire will re- responsible to align their national legislation quire implementation of institutional reform pri- with the Acquis Communautaire. marily in the area of air transport. - funding by EU of a study on the impact and de- 1. Recommendations for the process of negotiations velopment strategy for Air Moldova from the to establish the Free Trade Agreement and relevant perspective of air transport liberalization. provisions for air transport services sector: - addressing the subject of preferential funding For a fast and effi cient process of liberalization it for air transport infrastructure sector: region- is recommended to the GOVERNMENT to sign al airports, air traffi c monitoring equipment, a separate PROTOCOL of Accession to Certain schooling to comply with EU standards. Conditions on the Multilateral Agreement on the - discussing the possibility for the state airline establishment of European Common Aviation Air Moldova to access preferential loans from

46 Prospects for Development of Air Transport Sector Services in the Republic of Moldova

European institutions / bodies under State AIR MOLDOVA guarantees for fl eet renewal and restructuring - must optimize their operational cost structure of current loans of Air Moldova. following the low-fare sample; - negotiating fair conditions to access EU liber- - must develop a strategy for the next three years, alized market by offering reasonable slots for through the light of air transport liberalization national operators. and entry of low cost operators on the market; - setting transparent defi nitions in protocol that - must develop the project on creating a mainte- would specify the “ground stop” conditions for nance center to attract participation / funding national aircraft operators, in order to elimi- by EU fi nancial institutions. nate the risk to misinterpretations by the parties. THE CHISINAU INTERNATIONAL AIR- PORT must prepare extension of processing ca- 2. Recommendations related to policy and regula- pacity of air traffi c passengers from about 2.5 to 3 tory framework on liberalization process and ad- million per year. justment of areas sensitive to the impact of services liberalization with the EU, in short and medium BALTI INTERNATIONAL AIRPORT should perspective. get prepared to start operation of fl ights expected after the liberalization of air transport market in THE GOVERNMENT the Republic of Moldova. - must complete the institutional reform on air transport; - must draft the Strategy for Privatization of Air Moldova; - must maintain the ownership of airports until their adequate capitalization; - must develop a transparent mechanism by means of which they will benefi t from profi ts generated by the state enterprises; - is in charge of maintaining a climate of fair competition between airports;

47 Bibliography

Willem Molle, (2009) ” The Economy of European Integration: Theory, Practice, Policy”, Epigraf Pub- lishing House Daniel Mьller-Jentsch, (2007) ”The European Common Aviation Area and the Western Balkans: Domestic Reforms and Regional Integration in Air Transport”, EC-WB Ofﬁ ce for South East Europe Grancay Martin, (2009) ”The Economic Impacts of Air Transport Liberalization”, Munich University InterVISTAS-ga, (2006) ”The Economic Impact of Air Service Liberalization” Piotr Trzepacz, (2007) ” Spatial Aspects of Air Transportation Liberalization – Changes in European Air- port Hierarchy”, Bulletin of geography, EUROSTAT Statistical books, (2009) „Panorama of Transport”, EUROSTAT Hubertus Cloodt, (2010) „Passenger Air Transport – Monthly Data for the First Half of 2009” Michael Smethers, 2002, ”Air Transport Liberalisation in Europe”, Seminar on arab air transport liberalisation: Dubai, 21-23 October 2002. Airline Business, Octomber 2004 Janes Airport, December 2004/ January 2005 Airline Business, December 2004 Jane’s Airport, June 2005 Regional Airline World, volume 21, 2004 Airline Business, August 2004 Jane’s Airport, February 2006

48 Methodology

To obtain a complete picture, the direct selective The informations for the study were obtained method of research was used for the study, by col- from statistical sources provided by the CAA, Air lecting information through direct research meth- Transport Intelligence, Eurostat (their offi cial ods. These methods have involved gathering infor- websites). mation directly from their carriers: institutional Forecasts for air transport market in the Republic users, generators of specifi c goods and services, of Moldova have been modeled in light of develop- individual/fi nal consumers, intermediaries. ments in other countr. Representatives of the following institutions/enterprises/bodies were interviewed for the survey: - Civil Aviation Administration of Moldova; - Governmental Commission for European Inte- gration of Moldova; - Air Moldova, Asutrian Airlines, Blue Air and Tarom airlines; - Chisinau International Airport; - MFAEI; People who were interviewed are: - Eugen DVORNIC, Vice-Director General, ASAC - Mircea MALECA, Financial Director, Air Moldova - Roman PODCORITOV, General Director, Chisinau International Airport - Veaceslav PITUSCAN, Head of Economic Rela- tions Department with EU, MFAEI - Nelu IORDACHE, Blue Air owner - Boris ROTARU, Operational Director, Blue Air - Eugen OLTEANU, Director, Legal Department, TAROM - Valentina MAMALIGA, Head of Legal Depart- ment, ASAC