SERBIAN CIVIL AVIATION, NOT MAKING HEADWAY

UNCLAS SECTION 01 OF 02 BELGRADE 000488

SENSITIVE
SIPDIS

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: ECON EAIR EINV SR MW
SUBJECT: SERBIAN CIVIL AVIATION, NOT MAKING HEADWAY

REF: STATE 33342

SUMMARY

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1. As the rest of the world moves to liberalize the aviation
market, Serbia's aviation industry remains at a standstill with
key civil aviation legislation stalled and privatization plans
grounded. A lack of political will, extended breakdowns of the
government, and the fallout over Kosovo independence continue
to, and will for some time, hinder progress on a U.S.-Serbian
Open Skies agreement. End Summary.



U.S. - SERBIAN OPEN SKIES NOT ON THE HORIZON

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2. While the U.S. and EU celebrate concluding an Open Skies
(OP) agreement, the prospect of a U.S.-Serbia agreement is
distant on the horizon. Even before the recent round of
political instability and cooling of diplomatic relations, the
GOS had been reluctant to move forward on measures needed to
re-establish direct flights between the United States and
Serbia, which had been suspended in the 1990's because of
sanctions against the Milosevic regime. The present day reality
for direct flights to resume is that the GOS must pass and
implement civil aviation legislation to upgrade the country from
Category 2 to Category 1 safety standards. Serbia responded to
the FAA's 2003 recommendation for new aviation oversight
legislation that would give independent authority and power to
the CAD with a draft Law on Civil Aviation. The draft, however,
has yet to move to parliament for approval. Weak political will
and pride are to blame. In a meeting with Econoff on January
22, 2008, the CAD Director Milan Mokovic argued that he had the
recommended level of authority as evidenced by JAA's (the
European equivalent of the FAA) laudatory feedback on Serbia's
progress on meeting JAA standards. Although Mokovic made it
clear he did not see why Serbia needed to jump through FAA hoops
to achieve a Category 1 rating, he was confident the draft law
would go to and be passed by parliament, eventually. Without
this legislation, even U.S. carrier code sharing with Serbian
carriers is not possible. Since the government most recently
dissolved in February of this year, the aviation law is one of
many stalled pieces of legislation.




3. A more contentious barrier to an OP agreement is the status
of Kosovo. Before the independence of Kosovo, Belgrade objected
to OP language that stipulated Serbian territory be defined in
accordance with applicable UNSC resolutions. Fearing future
UNSC resolutions would redefine its borders; the GOS would not
sign the proposed OP agreement. The U.S.-Yugoslavia bilateral
aviation agreement of 1978 is applicable to Serbia. However,
not even this bilateral agreement can be resurrected and put
into force without the civil aviation law.



JAT PRIVATIZATION ALSO GROUNDED

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4. Legislation and an OP agreement are not the only
aviation-related issues awaiting the formation of a new
government following the May 11 parliamentary elections. The
privatization of flag carrier Yugoslav Airlines (JAT) has also
been grounded. Under the advisory of American Rothschild
Consulting Group, a tender for JAT was to be offered in mid
April 2008. It is now scheduled for an undetermined date after
the May 11 elections. Miroslava Blazic, Vice President of
Citadel Financial Advisory (the contracting consulting firm
working on the JAT deal locally for Rothschild),in a
conversation with Econoff on April 23 said the political
situation is to blame for the lack of progress on JAT's
privatization. The government has not made key decisions on the
structure of the JAT or passed legislation that would allow for
the company to be sold. According to Blazic, Citadel can not
provide potential investors with key information on the
potential structure of the deal or a when the company will be up

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for sale. Access to the EU markets, pending the ratification of
the EU-Serbian OP agreement, is JAT's allure in spite of its
current dismal state. The average age of its fleet is 20 years
and it is $285 million in debt. There are an estimated 400
redundant workers.




5. Several airlines from around the world have expressed
interest in JAT including Air India, Icelandair, Air One
(Italy),Air Berlin, and the Russian carrier Aeroflot. A letter
of intent between Serbia and Air India signed in January 2007
seems to have been pushed aside when Moscow and Belgrade signed
a MOU of strategic partnership in June 2007. Aeroflot announced
plans to bid for JAT together with an EU partner in an
arrangement that would give Aeroflot a little under 50%
ownership, an arrangement would circumnavigate the Serbian-EU OP
clause prohibiting non-EU countries from acquiring a majority
share in any EU air carrier. To date, it appears Russian-Serbia
MOU has yielded no obvious cooperation between JAT and Aeroflot.




SERBIAN AVIATION LEADERS SAY THEY'RE ON BOARD

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6. On February 13, the DCM hosted a luncheon with leaders from
Serbia's aviation community which included CAD Deputy Director
Dragoljub Trgovcevic. Participants underscored the need and
desire for direct flights from Belgrade to the United States as
well as to other parts of the region with the dream of Serbia as
a regional hub. According to Rade Markovic, Senior Advisor to
JAT Airways, there is huge market potential for direct flights
between Chicago - where half a million Serbs and Serb-Americans
live - and Belgrade. Last year some 150,000 Serbs flew through
Frankfurt, Dusseldorf and Amsterdam to the US. According to the
Privatization Agency Director Vesna Dzinic, the Nikola Tesla
International Airport in Belgrade will not be privatized.
Instead 30% of its shares will be offered through an IPO in the
first half of 2009. Money from the sale will go into a joint
venture with a strategic partner to expand the airport and its
operations to become a regional cargo hub. The American firm
DynCorp withdrew from a similarly planned partnership in 2006.



COMMENT

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7. Although Serbian aviation officials say they want access to
more markets and to restore JAT to its former glory, their
actions suggest otherwise. Even the seemingly non-controversial
aviation law has not found its way to parliament in the last two
years. Serbia's airline industry must wait to see if it will be
a priority in the new government. A western-leaning democratic
government, in contrast to the Radicals, would be more willing
to pass aviation law legislation, ratify the EU-Serbia OP
agreement, and continue privatization in its quest to move
toward European integration. End Comment.
MUNTER