What will the European Union's biggest expansion yet - taking in 10 countries to the east - mean for aerospace and aviation?
At the end of this week, the European Union will go through an historic enlargement when eight former Communist and two Mediterranean states join the 15-nation alliance. The move, which will increase the population of the union from 378 million to more than 450 million, will have major implications politically and economically, not least for the aerospace industry.
From 1 May, the EU's central tenet - free movement of labour and goods among members - will spread to the Central European countries of the Czech Republic, Hungary, Poland, Slovakia and Slovenia; former Soviet satellites Estonia, Latvia and Lithuania; and the island nations of Cyprus and Malta. In theory this will make it easier for manufacturers to transfer work to lower-cost countries in the east and for skilled aerospace engineers, pilots and air traffic controllers to compete for jobs in the west. It will also mean state-owned airlines and aerospace concerns in the so-called "accession countries" must now abide by the EU's laws on state aid, competition and labour.
With the exception of Poland, all the new countries are small - none has a population much greater than 10 million. They are also poorer, with a gross domestic product per person only 40% that of the EU average. Many have economies highly dependent on agriculture - often small-scale and inefficient by "western" EU standards - and are lumbered with Soviet-era smoke-stack industries, requiring investment and modernisation. Unemployment averages more than 15%.
These countries often cite the example of Ireland, which was transformed from a largely agrarian economy to the Celtic tiger of the 1990s, a world leader in IT and pharmaceuticals: its citizens' income soared from 60% of the EU average in 1973, to 120% today.
Other poor states have faired less well, however. Since joining in 1981 Greece's GDP per head is unchanged compared to the EU average, while Portugal's boom and bust has left it only slightly richer.
Low cost
Ireland has become a major player in aviation maintenance, repair and overhaul (MRO) and - as far as aerospace is concerned - many believe this will be the accession countries' strongest hand. According to Fergus Brennan, managing director of Lufthansa Technik Airmotive Ireland, the fact that 70% of maintenance costs are labour means countries with lower wage rates and the necessary skills have an obvious advantage. It is a phenomenon that is hitting Ireland's own MRO sector. "Ireland is not the low-cost economy it once was and lots of repairs are being done in eastern Europe, Asia and even Mexico," he says.
Kjell Fredheim, of airline strategy consultants Fredheim International, says low labour costs and flexibility may be the new member states' largest asset, especially considering most eastern European maintenance centres will be fully compliant with Joint Aviation Requirements (JARs). Fredheim advocates airline maintenance departments moving work to new member states. "Setting up in these countries would provide higher staff productivity and 20-40% lower costs," he says.
Fredheim, an ex-Scandinavian Airlines chief operating officer, is well placed to comment on the pros and cons of running airlines in Europe's lower cost areas; he was president and chief executive of Latvia's AirBaltic between 1995 and 1997. There, he found staff "keen to learn and extremely willing to work", with cabin crew and accounts personnel checking in passengers at peak times, and pilots assisting with aircraft loading. Many believe this "can-do" attitude is typical. Public enthusiasm for Europe in the new member countries is high, partly because of the history of oppressive Soviet domination but also because most people believe the economic opportunities vastly outweigh the inconveniences of sticking to the Union's rules.
The biggest challenge the new entrants could face is in modernising work practices. Without this, the lure of cheap labour will not be enough to attract companies from western Europe, says Klaus Ardey, managing director of aerospace consultants Avicon, which advises small- and medium-sized enterprises (SMEs) engaged in European Communities Aerospace Research (Ecare) programmes. "They have to get used to much higher quality standards, 365-day and 24/7 logistics," he says.
Under communism, airlines tended to hold large inventories of spares and have scores of underused aircraft - it meant a just-in-time philosophy has taken a long time to develop among component manufacturers and maintenance operations. Another problem is employees' lack of English: until the 1990s, Russian was the second language - the lingua franca - of eastern European aviation industries. "The workers will need substantial training in English as they must not only speak the language, but also understand complicated maintenance manuals," Fredheim says.
Of the accession countries, the Czech Republic and Poland both have established aircraft manufacturing industries and Hungary has been involved with space projects for decades, says Steven Tebbe, attach‚ general and external affairs manager of AECMA, the European Association of Aerospace Industries. AECMA has already admitted the Czech and Polish aerospace manufacturing associations, which are "by far the two largest aerospace and defence manufacturing nations [among the accession states]", although the association has an aim of signing up national associations from all 10.
Investments
AECMA figures show that Poland is the biggest aerospace player among the new members, with 10,500 people employed by 21 companies, followed by the Czech Republic with 36 aerospace companies employing 9,200. Western European countries already have significant investments in the region. Boeing currently owns 35% of Czech manufacturer Aero Vodochody, while Lufthansa Technik has subsidiaries in Hungary and Malta. EADS acquired Polish manufacturer PZL Warszawa-Okecie in 2001, renaming it EADS-PZL, and its Eurocopter division has manufacturing facilities in Romania - a candidate along with Bulgaria to join the EU in 2007.
According to EC economists, joining the European free trade zone will boost new members' economies much more than those of existing members, since 70% of accession countries' exports go to the EU, compared with only 4% in the opposite direction. The effect of customs-free exports could boost accession states' GDP by up to 10% in the short- to medium-term, according to the Bruges European Economic Policy unit, an EU thinktank. All have pledged to adopt the euro as their currency once they meet the conditions laid down by the European Central Bank. This will further integrate them into the European economy.
One opportunity that will open up to the aerospace industries of the new member countries is the EU's research and development funding. AECMA's AeroSME project aims to guide small firms through the sometimes labyrinthine application process. "The exchange of information is the most important part of our work," says AECMA.
AeroSME workshops, held so far in five new member states, are usually led by a large airframer. "Companies in the new member states are still on the learning curve, but at least now they have access to information about the EC research framework," says EADS senior vice president for NATO and European Union affairs Michel Troubetzkoy. "As a large company we have a duty to include companies coming from these countries," he adds.
One of the first opportunities new members will have to bid for grants will be an anticipated €65 million ($78 million) three-year security research programme set to be launched this year, which could lead to full scale security projects worth around €16 billion a year from 2007. The Czech Republic in particular has good capabilities in parapublic aerospace projects and politically these projects would also be of interest to the new members. There is also a Seventh Framework programme (FP7), which is expected to be "substantially larger" than the current FP6, which allocated €875 million of funds to aeronautics and €270 million to space projects.
As members of the EU, the accession states will automatically become members of the new European Aviation Safety Agency (EASA). This will affect certification procedures for aircraft. Troubetzkoy believes compliance with EASA certification standards will not prove too onerous, since most new members have adhered to Joint Aviation Authorities' standards for several years. However, a main concern of Jiri Fidransky, president of Czech business aircraft manufacturer Ibis Aerospace, is the merging of Czech airworthiness body UCL's aircraft approvals process into EASA's.
"I worry that in the initial period, the certification process will be longer and more expensive," he says. But he believes this could be offset by the fact that an EASA approval will be valid all over Europe, something he anticipates will lead to "instant sales throughout the continent" as well as eliminating extra costs associated with obtaining individual national certification.
Immediate effect
While the widening of the EU could have a long-term effect on aerospace manufacturing, the impact on the air transport sector could be more immediate. Under EU law, airlines can operate freely within the union, operating flights from any airport as long as slots are available. While this presents opportunities to ambitious central European carriers, it also brings a threat from Western European airlines that will now be allowed unfettered access to their home markets (although there are some temporary derogations on cabotage in seven of the new member states).
Several carriers from existing EU states are poised from 1 May to launch routes to the new member countries. However, Austrian Airlines is going further: it is planning to shift some low-yield routes to Bratislava's renamed Vienna Express Airport, 40km (26 miles) over the border in Slovakia from its main hub.
Among the new states, Poland's LOT Polish Airlines is the largest carrier, with 3.2 million passengers carried last year. CSA Czech Airlines is in second place and both are now alliance partners of Lufthansa and Air France, respectively. Hungary's Malév, Cyprus Airways and Air Malta follow closely behind and all carried over one million passengers last year. The fact that most of the new entrants' flag carriers are profitable - only Malév, Air Malta and probably Slovak Airlines (whose figures are not published) made a loss last year - is likely to make governments less likely to prop them up financially, which is illegal under EU law.
Analysts predict many of the new entrants' flag carriers will fall victim to an early round of consolidation. Slovenia is pinning its free-market credentials to its mast, refusing flag-carrier Adria Airways' requests for a transitional period of regulatory protection, after the EC declared the country's civil aviation sector "problem-free".
In Slovakia, flag-carrier Slovak Airlines has almost shrunk from the market; instead the country's undisputed aerospace success story is SkyEurope Airlines, now the biggest central European low fares airline after only three years of operation. It has just concluded talks for a new round of private equity financing that will allow the fast-growing airline, based in Bratislava, to fund its accelerated development in the region from 1 May, says Christian Mandl, SkyEurope chief executive. The airline sees huge opportunities in the region. "Poland is the largest country to join the EU, but it is as yet under-served by low-fare airlines," says Alain Skowronek, SkyEurope chairman. SkyEurope will start its Polish operations from Warsaw, "but is negotiating with more airports for additional bases". It is investing €20 million in its Polish operation with the aim of carrying 200,000 travellers to and from Poland this year.
In other accession countries, views differ about the long-term future for small flag carriers. Among the Baltic nations, Latvia, Estonia and Lithuania each have their own national airline and, apart from some air freight operations, have no other significant aviation industry. Scandinavian Airlines (SAS) owns minority stakes in Estonian Air and Latvia's AirBaltic and is eyeing a similar chunk of Lithuanian Airlines. After 1 May, the airline could acquire a majority stake in each and merge some operations. In the meantime the three airlines, having been forced to dispose of older ex-Soviet aircraft types to comply with EU noise regulations, are intent on taking advantage of the EU's open skies by starting new routes and adopting a flat fare structure.
Challenging
For the two more developed accession countries, the situation is equally challenging. Air Malta, for example, operating from a small home base, has decided to exploit its geographically position at the very centre of the Mediterranean Sea by offering flights from third countries, staring with a route from Catania, Italy to London Gatwick. As Cyprus is currently not an EU member, its flag carrier is prevented from owning more than 49% of Athens-based Hellas Jet, a situation it plans to remedy after 1 May.
However, according to some airline analysts, central and eastern Europe presents another boon for Western European carriers, beyond the enlarged market. Analyst Kjell Fredheim says major airlines could use the region to beat the low-cost carriers at their own game. "If I were one of the major carriers in Europe, I would start an airline in eastern Europe and run it as a [seat] production company." Such a subsidiary would compete on lucrative western European routes, but, by being registered, based and largely crewed in an eastern European country, its costs would be much lower.
"Half of the passenger market in Europe is looking for low fares," says Fredheim, who sees huge opportunities for tapping "cheap and willing labour" to create a step change in efficiency. "There's 10-20% unemployment so generally no union problems, and people are willing to work 40+ hours". He adds that airlines are as yet unwilling to take such a bold step. "It will take guts to go and establish such an airline and executives say there are too many obstacles. It will take some time to happen," says Friedheim. "But if Europe's airlines want to get out of the trauma they are in today, they will have to do something different."
JUSTIN WASTNAGE / BRUSSELS & MAX KINGSLEY-JONES / LONDON
ADDITIONAL REPORTING BY CHRISTINA MACKENZIE AND LUBOMÍR SEDLÁK
Source: Flight International
