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Questions and answers                 Warsaw,13 November 2009

Ladies and gentlemen,

In the document enclosed below I shall try to answer the most important questions I encountered when submitting Air Italy Polska and LOT's proposals of amending the existing aviation law. I hope that answers to the 16 fundamental questions will provide you with information on the situation of the national charter market and will help to understand the reasons for critical attitude of Polish carriers toward the existing regulations.

Yours sincerely,

Mariusz Szpikowski, President of the Management Board of  Air Italy Polska

1.      Is the charter air transport an important segment of national economy? What are its future perspectives?

The charter air transport is one of the most dynamic sectors of Polish economy. In 2008, while the total passenger air traffic grew by less than 8 percent, the charter passenger air traffic grew by over 45 percent and reached the level of 2.8 million passengers. The share of charter traffic in the total passenger traffic increased to 15.1 percent (from 11.6 percent in 2007), while all other segments showed a very small growth.  The 2008 growth in charter air traffic involved practically all Polish airports and recorded a significant increase, while none of the smaller airports recorded less than 100 percent growth. The most popular destinations were: Egypt, Turkey , Tunisia, Greece  and Spain.

Air traffic growth forecasts point out unanimously that its role as an important sector of the country's economy is going to be strengthened. The forecast prepared by the Civil Aviation Office indicates that in 2010, passenger traffic will amount to 20.4 million passengers, while in 2015 - it will total 31.7 million passengers and in 2020 - 41 million passengers. These forecasts correspond directly to forecasts relating to the growth of the charter transport market which additionally supports the growing share of charter traffic in the total passenger traffic.

It is worth emphasising that the Polish charter air transport market develops much faster than similar markets in other European countries. The reason lies in the steadily growing purchasing power of the Polish customers who are more willing to enjoy foreign package tours, while other parts of Europe witness a relative stagnation in this respect. Other markets seem to be rather saturated and their growth reflects the general growth of the entire economy.

At the same time, the Polish air carriers who were issued a license by the President of the Civil Aviation Office flew in total ca 620 thousand passengers, which constituted 22 percent of the total charter flight market and was one of the lowest figures in Europe. By the same token, almost 80 percent of the market segment has been handled by foreign carriers. The process of expansion of foreign charter carriers has been continuing for several years. However, it got stronger in 2007 -2008 due to an immense increase in demand for this type of transport in Poland. The pressure on the part of demand found an immediate response in the form of supply provided by foreign carriers and this should be considered as an absolutely normal market development. With the continuing and deepening crisis of the aviation sector and shrinking markets in their own countries, foreign carriers greedily reach out toward the developing markets and do it with the greater zest, the less the markets are protected.

One should not forget that the charter air transport market is highly seasonal. It is very big in summer and relatively small in winter.

2.      What are the current Polish aviation regulations concerning charter air transport?

The existing Polish legislation on the subject is ambiguous vague and frequently even contradictory, which we have often pointed out. The Civil Aviation Office is in charge of legal instruments which, depending on the individual interpretation of a single officer, make it possible for the Office i.e. the Polish air transport regulator, to take a very strict approach to market regulation (i.e. giving full protection to market by applying the no-objection rule  to Polish carriers and only later admitting other carriers) on the one hand, or to freely issue licenses without any requirements or restrictions, on the other. It is therefore  acceptable to apply, even alternately or simultaneously, the two extremes. And what is worse, in accordance with the existing law, today's policy of the Office may be changed at any moment, practically overnight, which makes the general environment for investing in charter air transport in Poland totally unpredictable and uncertain. When making long-term plans for accessing the Polish market, an existing or a prospective investor does not know whether in the nearest future he will be able to freely operate from abroad without having to maintain a daughter company in Poland (which happens to be the practise of many foreign carriers who are looking for market opportunities alone without being interested in the growth of the Polish market but only in a short-term operation and transfer of profits to their own countries) or whether he should invest in a daughter company in Poland and thus risk running into double costs within his Group (e.g. additional cost of maintaining even minimum infrastructure and employment, as required for receiving and holding a license).

A state administration agency of a democratic country should function in a manner that permits conducting business on the basis of reasonable analyses and forecasts and not on the basis of unpredictable attitudes of individual state officers.

3.      How are these issues regulated by the European Union and other European countries?

As far as air transport is concerned, we rely on two documents, although the list could be linger, if we want to enter into more details. These are:

a) Regulation (EC) No 1008/2008 of the European Parliament and of the Council of 24 September 2008 on common rules for the operation of air services in the Community (Recast)

b)  Regulation (EC) No 847/2004 of the European Parliament and of the Council of 29  April 2004 on the negotiation and implementation of air service agreements between Member Stets and third countries

The first document regulates the issues relating to  air services operated by Community air carriers starting and ending on the  territory of European Union, the Swiss Confederation or an  EFTA Member State - a party to the EEA Agreement, by lifting all restrictions.  The Community air carriers are entitled to freely operate air service, which is also reflected in the proposal of aviation law amendments.

The second document concerns negotiations and implementation of air service agreements between Member Stets and third countries, that is air services provided by Community air carriers outside the territory of the European Union, the Swiss Confederation or an  EFTA Member State - a party to the EEA Agreement. The purpose of this Regulation is the coordination of negotiations with third countries with a view to concluding air service agreements, the necessity of guaranteeing a harmonised approach in the implementation and application of those agreements and the verification of their compliance with the Community law. Moreover, pursuant to this Regulation, Member States have an obligation to establish non-discriminatory and transparent procedures for the distribution of traffic rights between Community air carriers.  Such equality rules should be applicable to all business entities established on the territory of a Member State irrespective of the legal form of such an establishment.  When an undertaking is established on the territory of several Member States, it should operate in a manner that does not result in any circumvention of national law of the country on whose territory it conducts its business and what is more, it should  fulfil all obligations which may be imposed on its activities by the applicable national law.  It is on the basis of this document that the EU countries prepare their legislation on air services from their territory operated by the Community and other air carriers to destinations outside the EU. The obligation to respect national law, included in the Regulation, is not incidental, as it provides instruments to protect national markets.

According to our survey of the charter air services market, the developed European countries such as Italy, Germany, UK, France, Greece, Belgium as well as those developing countries (e.g. Romania) for whom this market is very important - tend to protect it by applying the no-objection and reciprocity rules. Thanks to this policy, national charter airlines  have already developed or are beginning to develop in these countries together with the entire aviation sector (as it is there that the relevant know-how is transferred and developed, the infrastructure is being built, education  is developed and highly qualified aviation personnel is maintained); the states themselves are taking advantage of this development in the form of taxes. The most spectacular example of this policy (which we have already quoted before) is Lufthansa's need to form an business undertaking - Lufthansa Italy on the territory of Italy in order to gain a free access to Italian market. Should the Italian market be unprotected, the company could have functioned simply as a German company without any obligation to make any investments in Italy.  Incidentally, the Italians have won a double victory, since this turned out to be a natural opportunity to "re-direct" their own resources (including flying and technical personnel) from  Alitalia to Lufthansa Italy instead of the imminent bankruptcy of the Italian air carrier  and mass unemployment in the Italian aviation sector.

4.      What is the nature of the amendment proposed jointly by LOT and  Air Italy Polska?

First of all, the greatest change consists in elimination from the Polish legislation of the extreme discretion and introducing clear predictable and non-discriminatory rules in its place. This fact alone will provide the Polish charter air service market what it lacks most - i.e. predictability of the investment environment for investors.

Once we agree on this assumption, there are only two possible solutions:  either extreme market liberalisation or its protection by observance of the no-objection and reciprocity principles. We have jointly selected the second solution following the proven rules applicable in those European countries from whom it is worthwhile learning  (due to their achievements in the field).

The proposed solution will provide a free access to Polish charter air services market to all carriers who will be willing to invest on the territory of Poland.  These solutions will encourage foreign investors to invest in the Polish charter air services market by making this investment a pre-condition for the complete access to its resources.

5.      What is the no-objection rule and what does it mean?

The no-objection rule in case of charter air services means that an air carrier from a third country who applies for a license to operate flights from the territory of the Republic of Poland or a Community air carrier applying for a license to operate flights from the territory of the Republic of Poland to territories outside the European Union, the Swiss Confederation or an  EFTA Member State - a party to the EEA Agreement, shall receive such a license from the President of the Civil Aviation Office only when none of the Polish (i.e. licensed on the territory of Poland) air carriers states that it is incapable to or not interested  in operating the flight in question on the basis of information concerning terms and conditions of the said charter agreement.  Of course, some constraints are applicable: the flight in question has to follow the same route, it has to be performed using an aircraft of capacity appropriate for the requirements of the air transport contract and not earlier than two hours before and not later than two hours after the originally scheduled time. This rule shall be applicable jointly with reciprocity rule. Naturally, should no Polish carrier express an interest, due to lack of, for example, a proper aircraft,  unavailability of crew, or no interest in the destination, such a flight can be operated by any other non- Polish carrier without any limitations.

6.      What is the reciprocity rule and what does it mean?

Briefly, the point is that one should check whether in the country of the carrier who applied for  a license to operate flights from the territory of Poland, Polish air carriers are granted similar rights or receive other reciprocal benefits. This rule applies widely in the European Union countries. The question concerns the air transport law.  If a non-Polish air carrier applies for air transport license to/from Poland , the Civil Aviation Office should make sure that Polish air carriers have similar access to that market. By granting a license for a specific number of flights, it should make sure that Polish carriers would receive a license for the same number of flights in that country. That is why, generally speaking, the EU practice shows a 50 percent share of air carriers from a given EU country and of the other party, respectively. This is simply an element of struggle for access to protected markets of other countries. Naturally, if the capabilities or willingness of Polish air carriers make the 50 percent ratio impossible to achieve, then the Civil Aviation Office has a free hand in issuing licenses to air carriers from other countries.

The reciprocity rule requirement exists in the current regulations. Therefore it is clear that the makers of the existing law already intended to protect our market to a great extent while at the same time attempting to ensure access to other protected markets. Unfortunately, perhaps due to the inconsistency of the existing regulations, currently, this rule is not applied in Poland.

7.      What does the term „Polish carrier" mean? After all, Air Italy Polska is an "Italian" company.

A Polish carrier is simply a carrier who has a license and a permit issued by the President of the Civil Aviation Office in Poland. Apart from having formed a legal entity in the territory of Poland, the conditions for the license to be issued and held include several requirements specified in separate documents based on international regulations. These are, among others: creating an appropriate infrastructure, such as an operation base, ensuring certified aircraft technical maintenance service, having a minimum number of own duly qualified personnel, being constantly subject to  supervision on the part of the Civil Aviation Office and following a number of approved procedures and holding appropriate safety certificates, etc. All of it involves the need to lay out considerable capital expenditure in the territory of Poland, to recruit Polish personnel and to pay taxes. Naturally, in case of companies just starting their businesses in the aviation sector, projects like that call for incomparably larger capital expenditure. It is definitely easier for companies from a Group with some experience in the sector, since due to agreements reached at a Group level, the required guarantees for new purchases (e.g. additional aircrafts) are lower, shared resources can be optimized (e.g. management of tools and spare part warehouse) and, first of all, the Group's know-how can be utilized. That is why, it is rather the existing companies already operating in the aviation sector and looking for new markets and not companies starting their businesses from scratch that become potential investors. Thus, it should be clearly stressed that Air Italy Polska Sp. z o.o. is a Polish company and only its capital is Italian.

What is frequently disregarded is the fact that establishing a separate, licensed company brings about cost increase within the Group, due to the requirement of duplicating certain structures, systems or documents, all of which affects the final price of services offered.

8.      Why is AIP in favour of the full opening of the market?

What is important for us are clear and predictable legal regulations. The two extreme proposals for amending the aviation law, that is, the liberal one and that of market protection can hardly be reconciled, hence a choice is necessary. It seems to us most unlikely that Poland would fail to take advantage of the growth potential of the charter flights market which generates direct revenues to the State (it is easy to translate additional over 20 million passengers in the next ten years forecast into tax derived revenues). This would also generate the development of infrastructure and the growth employment and an upturn in the economy. The alternative for rescuing the State budget would be to drain taxpayers' wallets by raising tax rates or eliminating tax reliefs. On account of taxes on employed Polish personnel alone, in the last two years of our operation, as much as PLN 6.94 million was paid to the State (PLN 4.99 million as social security, PLN 1.77 million as PIT-4 and PLN 0.18 million  for PFRON). This was the reason why we were in favour of the market protection option.

However, I wish to stress clearly that our goal will also be reached, if legal regulations explicitly prescribe liberalization of the market. As a Group, we have not and still do not need to operate a licensed Polish entity such as Air Italy Polska Sp. z o.o., because today we can easily offer our services in the Polish market as an Italian company Air Italy S.P.A. This is what other carriers operating in the Polish market are doing. We can also follow their lead, if this is to be an element of Polish development strategy.

When we entered the Polish market in 2007 planning to stay there for a longer time, we had to analyze not only the current legal and economic situation (including the existing aviation law), but also a foreseeable trend of its development in the coming years.  We realized that charter flights market would witness a dynamic development, the way it had happened in other already developed European countries. Hence, we had to assume that Poland would perceive it too and take advantage of the fact. Practical solutions adopted at the time evidently indicated such a course of events. That is why we have decided to establish a daughter company, a Polish licensed carrier, in order to have full access to the market in exchange for the investment and payment of taxes.

9.      Following the introduction of the proposed amendments, would travel agencies practically have a choice of either LOT or Air Italy Polska, driving other airlines out of business?

Naturally not, if only due to the reciprocity principle. No one would dream of a market closure, but solely of the no-objection principle for Polish carriers.

First of all, however, it is a large fluctuation of demand between the summer season (high demand) and winter season (low demand) that plays a crucial role in this respect. Estimating the size of the aircraft fleet, Polish carriers will have to take into account their use in winter and, hence, they will not be able to guarantee full, available under the reciprocity principle, service in summer. The type of fleet is also vital. We shall not be able to follow the no-objection principle, if we are not in a position to provide the required capacity on a given date.

We assume that the dynamic growth of the market will attract new investors or, at least, will force the existing carriers to establish Polish entities. With the development of the market carriers will increase in numbers and the competition will be based on explicit, equal and non-discriminating rules. The market will stay open for anybody who would wish to invest there.

10.  How are the licensed airlines in Poland, i.e. LOT and Air Italy Polska at the moment, going to meet the demand of the market with a limited aircraft fleet? What are the fleet perspectives in the future?

As far as Air Italy Polska is concerned, we do not intend to service the whole market available under the reciprocity principle. We shall strive to secure an appropriate positioning of our offer in the market, the way we have been doing it until now. That is why we shall not try to handle low-budget vacation packages (low quality not only of flight itself, but also of hotels and other elements, in order to ensure adequately low price), leaving the segment to foreign entities. Fleet optimization is our goal. I hope that, due to a better use of aircrafts in winter, we shall be able to offer better prices in the summer season, because of the increase of activity resulting in lower fixed costs.

In the summer season, we are planning to introduce two new Boeing 737-800 aircrafts to our fleet (under the supervision of the Polish AOC). They will replace Boeings 757-200. Owing to the Group's resources, our access to the aircraft fleet is much easier.

11.  Is there a risk that airlines licensed in Poland would take advantage of the no-objection principle, in order to back out afterwards and to block other airlines?

Absolutely not. The amount of penalties and damages arising directly from our proposed regulations absolutely rules out such a possibility.

12.  Is a following scenario feasible, that airlines licensed in Poland would lodge a protest and, subsequently, get a foreign aircraft under ACMI lease (which means leasing foreign aircraft with foreign crew) for a given flight, asking high prices?

First of all, such an act is illegal. Under the existing regulations, an aircraft under ACMI lease may be taken as a "substitute" for a very short time, for example in case of an aircraft breakdown. The number of aircrafts in the fleet cannot be changed as a result of an ACMI agreement. That is why such a move is impossible.

13.  Is it true that due to those changes the number of the existing destinations will decrease and the market will not be serviced in full?

It is obvious that the number of destinations will not decrease. Unlike regular lines, in case of charter flights, it is not the carrier who decides about opening new destinations or closing down the existing ones, but travel agencies. It is travel agencies that draw up an offer of vacations tours, taking into account, primarily, the attractiveness of the region and the existing hotel base and infrastructure and only afterwards look out for carriers. Besides, it is irrelevant, if their chain is serviced by three or ten carriers, because anyway the number of destinations remains constant after they have been determined by travel agencies.

Naturally, as I have explained above, there will be no problem in servicing the charter flights market in full. In case of a flight with a Polish carrier, the Polish tourist will earn several additional hours of vacation, because such a carrier carries first the outgoing passengers and only afterwards - the incoming ones. In case of foreign carriers, it is vice versa.

14.  If the no-objection principle with respect to charter flights is introduced, will airports, ground handling agents and other related entities cease to develop?

Absolutely not. On the contrary, they should develop much faster taking full advantage of the dynamic growth of charter flights from which they benefit now in part only. As I have explained, the number of charter destinations will not drop, but will be serviced in a greater degree by Polish carriers. Polish carriers, having their base in Polish airports, consume a much larger range of services in Poland, that is, premises for technical maintenance, catering, a definitely wider array of services from ground handling agents, substantially greater amount of fuel due to higher refueling frequency in a given airport, aircraft parking, etc. Foreign carriers stay for only 40-60 minutes in Polish airports, that is, for a period needed for disembarking incoming passengers and for embarking departing passengers. That is why the range of services ordered by them is only elementary. Even foreign carriers, non-licensed, yet based in Polish ports, also order a smaller range of services, as they would rather have a fuller technical maintenance at their home airports.

15.  Will prices of vacation packages increase as a result of those amendments?

I would not expect it. Postulated changes will not translate into vacation packages price hikes, because the value of air transport services constitutes just a fraction of the total price, the fraction far from significant, as is the case of, for instance, differences in exchange rates or costs of infrastructure. It is a large seasonal fluctuation of the Polish tourist market and not air transport offer that determine package tour prices, that is, possibly the highest sales prices to be obtained by travel agencies. The price of the same vacation package is different in advance booking, in peak season and is also different for the so-called Last Minute bookings. The price is determined by the sales success of a given destination in a given season (higher demand = higher price, low demand = a sale). Application of reciprocity principle will still ensure a supply of cheap charter carriers (at the expense of low service quality) oriented to low budget customers.

16.  If these amendments are adopted, what will they mean for  the Polish passenger?

A Polish passenger means also a Polish taxpayer. If, in 2008, Centralwings and Air Italy Polska together transported 620 thousand passengers, while the total passenger traffic amounted to 2,800 thousand passengers, it is easy to estimate that, with a 50 percent overall index for respecting the reciprocity principle, ca 800 thousand passengers were transported by foreign airlines instead of, potentially, Polish airlines (the existing and the news ones which could have been established, if legal regulations were adequate). This would have meant a twofold increase of employment in the aviation sector, which easily translates into additional tax proceeds, taking for the sake of comparison the amounts paid by Air Italy Polska. There would be no talk about unemployment among flying personnel. Besides, this would entail other direct and indirect taxes, capital expenditure in infrastructure, extra indirect jobs and additional revenues from other Polish suppliers. An estimate like that performed for the charter market value forecast should truly stimulate the imagination. The market is nothing else but the resources of a given country, the same as natural resources. And yet, we do not hand them over to others for unlimited exploitation in return for small fees (would we do such a thing with e.g. the mines?). Larger revenues for the State, the increase of employment through the development of the Polish aviation sector, instead of its demise, all of these are the obvious benefits for Polish taxpayers, which, I hope, there is no need to explain any further. This is definitely a much better way of improving the financial condition of the country, than raising tax rates or eliminating tax reliefs which would affect all citizens.

From the point of view of the passenger, if the no-objection principle for the Polish carrier were applied for carrying those 800 thousand passengers, the passengers, in part at least, would have possibly taken the same airlines, but licensed in Poland, or some other newly established Polish airlines. Apart from an obvious advantage stemming from the fact that aircrafts would have been flown by Polish crews (which is particularly vital in critical circumstances, not to mention communication comfort), a larger number of Polish carriers competing on equal and non-discriminating terms, with stable, predictable rules based on legal regulations, would have hastened a steady rise of quality of offered services, extending the comprehensive offer related to the flight itself (e.g. introducing business class, additional packages in price at the airport, etc.). Keeping and raising quality standards involves the need to incur sizeable financial costs, which is even more difficult with the unpredictability of regulations and unequal competition. Finally, in my opinion, the amendments would not entail price hikes of vacation packages for the above mentioned reasons. There would still be a wide choice of low-cost, low-quality carriers, thus the range of products on the market would also be wide and accompanied by the growing purchasing power of Polish citizens. This is easy to verify by reference to other developed markets and by identifying the stage at which we, as a country, find ourselves and which path we want to take.

***
Air Italy Polska is a member of Air Italy Group. This carrier operates short and long distance charter flights. Air Italy Polska, with its base in Warsaw, cooperates also with regional airports.

For Air Italy Polska, the principal business guidelines are: keeping high safety standards, on-time performance and quality of services, as well as making sure that our partners do so.