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RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVL #0086/01 0380856
ZNR UUUUU ZZH
R 070856Z FEB 07
FM AMEMBASSY VILNIUS
TO RUEHC/SECSTATE WASHDC 0988
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 VILNIUS 000086 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EAIR EINV ECON PREL LH LG EN EUN
SUBJECT: THE CURIOUS STATE OF LITHUANIA'S AIRPORTS 
 
¶1. (SBU) Summary:  Lithuania's main international airport in Vilnius 
is small, expensive, and inefficient, yet operates quite profitably. 
 The airport, like Lithuania's air transport sector in general, has 
tremendous potential for growth, but the airport's management is 
oddly indifferent to it, and the GOL seems disinclined to force the 
issue.  Low-cost carrier RyanAir has spurned Vilnius in favor of 
Kaunas's airport, which has seen its market share of Lithuania's 
passenger traffic increase by more than 450 percent in a year.  The 
air transport sector will continue to grow, but in spite of the 
GOL's strategies, not because of them.  End Summary. 
 
Vilnius Airport:  A Train Station with Planes? 
--------------------------------------------- - 
 
¶2. (U) Vilnius's tiny, four-gate airport (VNO) reminds one more of a 
well-kept train station than the main international airport serving 
a European capital city.  The airport is less than five kilometers 
from the city center and the process of checking-in, going through 
security, and walking to a gate can take less than 10 minutes if one 
arrives at an off-peak time.  Duty-free "shopping" consists of a few 
shelves along one wall displaying liquor, cosmetics, and chocolates. 
 The only consumable food or drink available to passengers once they 
have passed through security comes from a couple of vending machines 
and a spartan cafe.  The one reasonably high-quality amenity is the 
business-class lounge, a bargain at approximately USD 15 that 
includes leather couches, flat-screen televisions, wireless internet 
access, and unlimited drinks and snacks. 
 
¶3. (U) Two airlines dominate VNO, which sees about 300 regularly 
scheduled flights per week in the winter and 320 in the summer. 
Riga-based AirBaltic, which began serving Vilnius less than three 
years ago, is now the market leader, with a market share of 32 
percent.  The privatized remnant of the former national airline, 
FlyLAL, has 29 percent of the market.  Czech Airlines, British 
Airways, and Lufthansa all have single-digit shares of the market. 
No U.S. carrier flies to Vilnius. 
 
Filled to capacity, kind of 
--------------------------- 
 
¶4. (SBU) VNO is a textbook model of how state ownership inhibits 
efficiency.  An economy growing at more than seven percent per year 
and rapidly rising wages (nearly 16 percent in 2006) are increasing 
demand for air travel.  Passenger traffic through VNO increased 13.2 
percent in 2006 to 1.45 million, while the number of flights 
increased 0.5 percent to 29,300.  The Director of Civil Aviation 
told us that the airport is operating at about 95 percent capacity 
in terms of its ability to process passengers, but at only about 60 
percent in terms of its ability to handle aircraft traffic. 
 
Expansion plans:  Too little, too slow 
-------------------------------------- 
 
¶5. (SBU) Instead of investing heavily in expansion, however, the 
airport's leaders - who have worked at the airport since Soviet 
times -- are loath to expand at a rate that can accommodate the 
increasing demand.  The airport has chosen instead to focus on a 
necessary, but relatively modest, expansion of its terminal to allow 
it to meet its Schengen Treaty obligations, which require separate 
passenger-processing facilities for flights from non-Schengen 
countries.  This expansion, scheduled for completion in September, 
will double the airport's capacity, allowing it to handle three 
million passengers per year. 
 
¶6. (SBU) An AirBaltic executive told us, however, that within five 
years, this expansion will barely be able to handle the number of 
passengers that his company alone expects to serve, and complained 
that the airport's leadership has taken no steps to consider 
expansion beyond the current project.  Frustrated by the airport's 
unwillingness to consider a more ambitious expansion, FlyLAL 
announced plans to build its own terminal by 2009 that will serve up 
to 1.5 million passengers, a project that the AirBaltic executive 
told us his company is likely to join.  The airport's management, 
citing FlyLAL's debts to the airport, initially blocked the plan and 
refused to allow FlyLAL's contractors to enter the premises.  FlyLAL 
sued the airport and won a favorable decision in late December 2006, 
enabling the first phase of the project to move forward. 
 
¶7. (U) Even the GOL's Minister of Transportation (who ultimately 
shares the blame for the situation -- see para 14) has chided the 
lack of vision by those in charge of developing the airport. 
According to press reports, he told a group of MPs in November 2006 
that the expansion of the terminal "should have started earlier" and 
that it "could be bigger." 
 
Opportunity missed? 
------------------- 
 
¶8. (SBU) As recently as 2003, VNO was the largest of the three 
Baltic airports, serving nearly 720,000 passengers to Riga's (RIX) 
 
VILNIUS 00000086  002 OF 003 
 
 
711,000 and Tallinn's (TLL) 716,000.  Since then, VNO's passenger 
traffic has doubled.  TLL, however, has increased its passenger flow 
by nearly 125 percent, while RIX's volume surged 273 percent, making 
it easily the largest of the Baltics' airports (2.7 million pax in 
2006).  Tallinn now has the region's second busiest airport (1.6 
million pax in 2006), even though Lithuania is nearly 2.5 times more 
populous than Estonia. 
 
Bullish on growth 
----------------- 
 
¶9. (SBU) AirBaltic's General Manager for Lithuania told us that the 
ratio of passengers to population (pax/population, roughly the 
number of flights taken by each citizen per year) in Lithuania, when 
compared with the other Baltics, suggested that the Lithuanian air 
transport sector has plenty of opportunities for growth.  He said 
that the pax/population ratio for Estonia in 2006 was 1.19 and 1.15 
in Latvia. The ratio for Lithuania, in contrast, was a mere 0.42, 
indicating that there is a tremendous potential for growth in the 
Lithuanian air transport sector, even before factoring in the impact 
of rapidly rising wages and strong economic growth. 
 
An expensive place to do business 
--------------------------------- 
 
¶10. (SBU) For all its faults, VNO manages to make money hand over 
fist.  The airport recently announced a profit of approximately USD 
6.8 million for 2006, down from the USD 8.6 million profit the 
airport earned in 2005 on revenues of just under USD 39 million (a 
profit margin of more than 22 percent).  Potential investors need 
not apply, however, as Lithuania's "Law on Strategic Enterprises and 
Assets" requires the state to maintain 100 percent control of all 
three of Lithuania's airports. 
 
¶11. (SBU) Although the management of VNO told us that the airport's 
fees are "not particularly high," information from both industry and 
publicly available sources indicates that VNO's fees are the highest 
-- by far -- in the Baltics, and among the highest in the EU. 
AirBaltic told us, for example, that a Boeing 737-500 with 100 
passengers would pay 621 percent more in landing and passenger fees 
in Vilnius than it would in Riga.  A Fokker-50 with 40 passengers 
would pay 510 percent more in Vilnius.  AirBaltic receives a 
significant discount on the fees it pays in Riga (up to 80 percent 
on landing fees, for example).  Even without these discounts, 
however, a plane landing at RIX would pay less than 75 percent of 
the fees it would pay in Vilnius.  Fees in Tallinn are about 60 
percent of those at VNO. 
 
Other options 
------------- 
 
¶12. (SBU) Vidmantas Kairys, the director of Lithuania's Civil 
Aviation Department, told us that there are three main possibilities 
for the future of Lithuania's main international airport:  an 
expansion of VNO, converting the airport in Kaunas (one hour from 
Vilnius by car) into Lithuania's main airport, or building a new 
airport somewhere between the two cities.  Kairys told us in 
November that the GOL is still considering all of these options and 
will announce the terms of reference for a tender early in 2007 that 
will call for bids to conduct a feasibility to study the three 
options. 
 
¶13. (SBU) Kairys said that expanding VNO is still a serious option. 
Although many Lithuanians believe that VNO is unable to expand 
because of its proximity to the city, both Kairys and AirBaltic said 
that VNO's most pressing limitation is its ability to process 
passengers, not the size of the airport itself.  Kairys emphasized 
that VNO's current runway capacity was adequate for the airport to 
double or triple the number of passengers serviced.  AirBaltic told 
us that the only significant improvement VNO needed beyond a more 
efficient and larger passenger terminal is a runway extension that 
would allow the airport to install equipment permitting aircraft to 
land when there is fog, a phenomenon that seriously affects VNO's 
operations approximately four weeks per year.  The airport's 
management told us that it also supports this project and is 
currently conducting a feasibility study. 
 
What can be done? 
----------------- 
 
¶14. (SBU) None of our interlocutors had much positive to say about 
VNO's management; the adjective we heard most often was "Soviet." 
One industry executive told us that VNO's management appeared to be 
more interested in the company choir than in managing the airport's 
potentially bright future.  A mid-level Civil Aviation Department 
official told us that the Ministry of Transportation does not have 
the authority to replace the airport's management, explaining that 
doing so was a complex process controlled, at least in part, by the 
State Property Fund, which technically owns the airport on behalf of 
the Lithuanian Government.  He said that the Ministry of 
 
VILNIUS 00000086  003 OF 003 
 
 
Transportation, recognizing the growth potential of Lithuania's air 
transport sector, has been taking a very serious look at VNO's 
operations, and it was clear that he was familiar with complaints 
about VNO's management.  He was, however, non-committal when we 
asked if replacing VNO's management was high on the Ministry's 
agenda. 
 
Lituania's new number two airport 
--------------------------------- 
 
¶15. (U) Historically focused mainly on cargo flights, Kaunas 
International Airport (KUN) processed fewer than half the number of 
passengers of the tiny airport in Palanga until low-cost carrier 
Ryanair began flights to Kaunas from London in September 2005. 
Since then, the number of passengers using KUN has more than tripled 
(to 250,000 in 2006), as Ryanair added routes to Stockholm, Dublin, 
Liverpool, and Frankfurt-Hahn from KUN.  KUN's share of the domestic 
market swelled from 2.5 percent to 13.8 percent in 2006, easily 
making it the second busiest airport in Lithuania.  KUN officials 
told us that Ryanair wants to continue to grow its presence at the 
airport, and make it an important operational and maintenance hub 
for its fleet. 
 
¶16. (SBU) KUN officials jumped at the chance to work with Ryanair 
and have offered discounts on fees up to 86 percent for airlines 
serving more than 200,000 passengers per year.  VNO's management, in 
contrast, told us that it had "no interest" in working with low-cost 
carriers or offering any incentives to entice additional carriers. 
 
¶17. (SBU) KUN's management also told us that they would like to 
attract a U.S. carrier to fly directly to Kaunas from the United 
States, claiming that they had research suggesting that the market 
could support three direct flights per week.  (We have passed an 
introductory letter from KUN to the Air Transport Association of 
America.) 
 
Comment 
------- 
 
¶18. (SBU) Lithuania's air transport sector is ready to take off with 
or without the cooperation of VNO's management.  The GOL, which 
clearly recognizes the growth potential of the sector, is 
nonetheless doing little to press the issue with any urgency.  One 
option, privatizing the airports, is not a possibility at present 
because the airports are considered "strategic assets" under 
Lithuanian law, which prevents them from going private.  Replacing 
VNO's management would be a good (and seemingly obvious) place to 
start; the Ministry of Transportation's seeming reluctance to push 
this issue suggests a lack of a vision and interest.  Despite this 
suboptimal policy environment, this sector will remain a significant 
growth industry in Lithuania. 
 
KELLY