VZCZCXRO5866
RR RUEHBW
DE RUEHBW #0488/01 1370723
ZNR UUUUU ZZH
R 160723Z MAY 08
FM AMEMBASSY BELGRADE
TO RUEHC/SECSTATE WASHDC 0302
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEHBW/AMEMBASSY BELGRADE 0423

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 
 
------- 
 
 
 
¶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 
 
------------------------------------------- 
 
 
 
¶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 
 
-------------------------------- 
 
 
 
¶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 
 
BELGRADE 00000488  002 OF 002 
 
 
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 
 
--------------------------------------------- 
 
 
 
¶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 
 
------- 
 
¶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