EU Airlines Could Suffer From Russian Airspace Sanctions

By Caelainn Barr, Andrea Rothman and Christopher Jasper

Photographer: Andrey Rudakov/Bloomberg

A passenger jet, operated by OAO Aeroflot-Russian Airlines, Russia's biggest airline,... Read More

European airlines are confronting possible disruptions in service to northern Asia as Russia considers curbing flights across Siberia to retaliate for sanctions imposed because of the Ukraine crisis.
Trips to Japan and South Korea could be most affected, based on an analysis of routings on the Flightradar24 website, raising the prospect of costly rerouting of planes. At the same time, relatively few international carriers cross eastern Russia, in contrast with more crowded skies closer to Moscow.
“It could have consequences for a lot of the carriers that use that airspace and have hubs in Frankfurt, Paris or London for their different routes to Asia,” said Daniel Friedenzohn, an assistant professor at Embry-Riddle Aeronautical University in Daytona Beach, Florida. “It forces them to fly longer routes, forcing them to spend more on fuel.”
The threat was disclosed yesterday in a report by business newspaper Vedomosti, which cited people familiar with the matter as saying that Russia may
limit or ban trans-Siberian flights by European Union carriers. EU sanctions caused the suspension of flights at the Dobrolet discount unit of carrier OAO Aeroflot as European companies annulled leasing, servicing and insurance contracts.

Punishing Putin

Dobrolet’s grounding is among the most visible results of extended EU measures aimed at punishing Russian President Vladimir Putin for his support of anti-government separatists in Ukraine. European leaders and U.S. President Barack Obama have urged Putin to use his influence to curb rebel activities after the downing of Malaysian Air Flight MH17.
Possible retaliation is being discussed, Prime Minister Dmitry Medvedev said in a meeting with Aeroflot Deputy Chief Executive Officer Vadim Zingman and Transport Minister Maxim Sokolov, according to a statement on the government’s website.
The statement didn’t specify what the steps might be, and the transportation ministry and Aeroflot declined to comment on the Vedomosti report -- leaving carriers to wonder whether the increasing tension between Russia and the EU over Ukraine would ensnare the airline industry.
For EU airlines, a long denial of access to Siberian airspace would force them to consider adding stopovers and raising fares to cover higher fuel bills, Friedenzohn, who specializes in U.S. and international flight networks and planning, said in a telephone interview.

Liberalized Rules

For European carriers, flights over Siberia have been expanding in recent decades as Russia liberalized airspace rules after the collapse of the Soviet Union.
“This is airspace that used to be closed, so it could be closed again because you’re angry, to send a signal,” said Robert Mann, president of aviation consultant R.W. Mann & Co. in Port Washington, New York. “But that would be cutting off one’s nose to spite one’s face. These routes generate significant revenue for Russia in royalty payments.”
Aeroflot collects royalties from foreign carriers for Siberian overflights, receiving about $170 million in 2013, according to Irina Stupachenko, an analyst at Otkritie Capital in Moscow. Stupachenko said any restrictions would be “very negative” for the airline, for which the royalty payments are equal to 18 percent of full-year earnings.
Russia would also be disproportionately hurt by any tit-for-tat move from the European Union to close its own airspace to Aeroflot and peers, said Oliver Sleath, a Barclays Plc analyst in London.

‘Extremely Unlikely’

“This is extremely unlikely to happen because the response would be more crippling to the Russian economy,” Sleath said. Russian flights that cross EU airspace outnumber European carriers’ trips over Siberia, he said.
Shares of Aeroflot fell, sinking 5.9 percent to 46.97 rubles in Moscow, the lowest close since April 15. That dragged the stock’s decline this year to 44 percent. The six-carrier Bloomberg EMEA Airlines Index fell 1.7 percent.
Trans-Pacific travel could also suffer if the sanctions were extended to the U.S. Restrictions would predominantly impact trans-polar flights typically linking Asia with North America, consultant Mann said, with diversions likely to be so expensive as to render some routes uneconomical.
The spillover effect from any Russian sanctions on EU airlines may reach Asian carriers, too, because of agreements between the companies that let them book travelers on one another’s flights.
“Maybe the EU carriers say we’re not going to operate that non-stop route and have one stop along the way and passengers miss their connection,” Friedenzohn said. “Things are interconnected.”