Economic Integration Of The Baltic Sea Region

Economic Integration of the Baltic Sea Region
and the Passenger Traffic Issues

Helsingin Yliopisto
Baltic Cities
August 2000
Christopher Dahlstrand
and Devon Webster
Table of Contents:
II.Goals of Economic Integration2
IV.resund vs. Helsinki – Tallinn Link4
V.Aviation Development in Scandinavia7
VII.Works Cited11
I. Introduction
Economic integration is not an easy task. This is clearly evident by its nature, and even more so a problem in the Baltic region where there have been so many political changes in recent history. We have seen the formation of three newly re-independent states, Estonia, Latvia, and Lithuania. East and West Germany have been reunited to form a new nation. The communist governments of the former Soviet Bloc have been replaced by democracy. These changes have made economic integration not only more difficult, but also to some degree more necessary. Europe as a whole is becoming an economically integrated union, mainly in the nations of the European Union, but in non-member nations as well. Perhaps the best example of this phenomenon of economic integration is the introduction of a common European currency, the Euro. This more than anything signifies the changes and levels of increasing co-operation between European Union nations. A second example could be the creation of a common trade zone, with the creation of a common tax base and the abolition of import-export fees, and the creation of the common European market, where business effectively get to treat the entire European Union as one state.
Because economic integration has been a major issue in the new EU, there have been long lasting effects on the Baltic Sea region. For the purposes of this essay, we have chosen to examine the impacts of economic integration in the Baltic region in the transportation sector. This work will examine the meaning of economic integration, the VASAB 2010 project, and two case studies. These studies will be investigating aviation development in Scandinavia and its feasibility, as well as the possibility of a Helsinki- Tallinn link similar to the bridge-link opened in resund. Economic integration is impossible to address fully in a short essay, but hopefully this work will at least touch upon the important aspects effecting transportation issues with relation to economics in the Baltic Sea region.

II. Goals of Economic Integration
Economic integration can be defined as an economic alliance or network based on co-operation, collaboration, flexibility, adaptation, risk and cost reduction, shared interests and objectives, closeness, openness, and a commitment between different countries on an integrating, ongoing basis.
This rather technical definition essentially means that economic integration is the creation of a network of like-minded states who, together, design economic goals and work together to attain these goals. Economic integration can be accomplished on a case by case basis, or can be an ongoing collaboration between nations to enhance economic conditions over a long period of time. Perhaps it is best to explain with an example: that of the co-operation between Tornio in Finland and Haparanda in Sweden. In this instance, these two border towns have decided to co-operate on a number if issues to enhance the quality of life and economic activity in the region. Because of their co-operation, both cities have benefited from enhanced city-provided services, which each town on their own would not have been able to afford. These two cities have been successful enough in their economic integration that there are now talks about integrating the entire region straddling the Sea of Bothnia. This region of successful economic integration can be used as a model for other areas, both in Scandinavia and throughout the world.

Relation of Economic Integration to Land and Air Transportation
Economic integration and transportation are closely linked. Indeed, it is difficult to have integration of any sort, including economic, in an area without the ability to get from one location to the other. If a link is created between to previously unlinked areas, there are numerous economic consequences. An example timeline is increased tourism initially, followed by small-business investment, and ultimately the rise of co-operation in major projects. Transportation links create economic benefits for both of the linked areas, and transportation, in all of its forms, can therefore be said to be an important factor in creating the economic integration of an area.
As a supplementary issue to the larger topic of this paper, we will discuss VASAB 2010. In August of 1992, representatives from national and regional ministries of the Baltic Sea Region responsible for spatial planning and development met in Karlskorona in Sweden to discuss the future of spatial development for the Region. The outcome of this summitt was a permanent co-operation between the governments of the Baltic Sea Region in the field of spatial planning in the form of a program called Visions and Strategies Around the Baltic Sea 2010. (Westerman 169)
The program, or vision that is VASAB 2010 in its most basic form is aimed at improving the quality of life in the area of the Baltic Sea. Four more elements constitute the heart of the program, and give it purpose: (Westerman 171)
-development beyond economic growth and prosperity,
-economic, social and environmental sustainability,
-freedom pertaining to the ability to choose in accordance with regionalpreferences,
-solidarity, sharing benefits from economic development.

Since the first meeting in 1992, the 11 participating countries have met to discuss action plans on a regular basis. A list of priority actions was put together in 1996, highlighting projects that the VASAB countries agreed upon to be most critical at that time. (Westerman 172) Of this list, several of those endeavors have moved forward. Pilot projects focusing on transport corridors in fast developing areas such as Tampere-Helsinki-Tallinn-Riga, and the areas surrounding the Trans European Motorway have accelerated quite successfully.
The development of a transport network in the Baltic Sea Region has positive and negative effects on regional development. A better system of transportation would enhance economic development by increasing mobility opportunities, attracting capital and improving accessibility. At the same time, too intense development can jeopardize the preservation of natural resources, wildlife areas and the environment. Thus, harmony must be sought between the development of corridors and the preservation of sensitive areas.
VASAB 2010 recognizes that spatial planning and economic integration must shift its attention from solely the building of an infrastructure, to the analysis of green areas, preservation of resources and natural landscape, and a means of reconciling socio-economic development with nature and culture. VASAB 2010 is well on its way to achieving it goals of integration and peace by demonstrating that its programs can be carried out, while balancing economic development with environmentally and culturally sound means of land and water transport that will take the region well into the 21st century.
IV. resund vs. Helsinki- Tallinn Link
There are three questions I pose for this section, which compares the recently opened resund- Malm link, connecting the city and environs of Copenhagen with southern Sweden. These questions are: Would a link like resund be needed for Helsinki and Tallinn, would it be a practical project, and would it be feasible (meaning would it be a technical possibility)? As we will see, there are many similarities between Copenhagen and Malm and between Helsinki and Tallinn. For instance, the populations of the regions are remarkably similar, with each city pair containing around 1.5 million inhabitants. Another similarity is that it is anticipated that the resund link will cause 4,015,000 crossings a year, remarkably close to the 5 million that currently use the Helsinki- Tallinn links. (Janos 22) Are these similarities enough to cause the construction of the largest land link in history?
Is a Link Between Helsinki and Tallinn Needed?
This in an interesting question to pose, and there are definitely two sides to this issue. On one hand, we have upwards of 5 million Finns and Estonians making the crossing over the Gulf of Finland yearly. This would clearly indicate a strong demand for regional transportation links. On the other hand, we have to look at the reasons people are making the crossing, and what a new link would mean, or not mean, to them.
First lets examine the issue of the quantities of people making the crossing now. Since the fall of the Soviet Union and the independence of Estonia in 1991, there has been a dramatic increase in traffic between Finland and Estonia. Up until independence, it was extremely difficult to make the crossing without first going through an intermediary destination, such as Moscow or St. Petersburg. There have been ships crossing the Gulf of Finland since 1965, however, the traffic was heavily regulated by the Soviet government and was largely limited to the tourist trade. (Ruoppila 124) Since the first link was established after Estonian re-independence, and became increasingly popular, we now have around 5 million people making the crossing yearly. In the almost 10 year period there has been a tremendous growth rate in the crossing. If the trend continues, there would definitely be a demand for some sort of bridge or tunnel between Helsinki and Tallinn.
However, one must also look at the population of the region. In Helsinki and Tallinn combined, there are approximately 1,334,000 inhabitants. For the two countries, the combined population is just over 7 million people. For there to be up to 5 million crossings yearly, there either has to be a lot of repeat travellers, or practically every Finn making the crossing at least yearly. I think unless there is a great boom in tourism, above and beyond what it is now in the area, the growth rate of travel between Helsinki and Tallinn will gradually level off.
To take a second look at the issue, we need to examine why Finns and Estonians are making the crossing from one capital to the other. A majority of travellers between the two cities are Finnish. The main reason that Finns travel to Estonia is to shop and purchase duty-free items. (Ruoppila 125) There may be some element of tourism involved, with Finns, foreigners, and Estonians making the crossing merely to sightsee. For the purposes of this paper, I think most of the crossings are done as a matter of consumer consumption or business. The business aspect of the crossings cant be neglected, however, there is not a significant number of commuters on the Helsinki- Tallinn route. When compared to the need for an resund-type link over the Gulf of Finland, the commuter traffic wont play as large as role as it did in the Copenhagen- Malm region.
Goods and services are many times cheaper in Estonia, and for this reason I think there has been the great boom in travel between the two cities, especially for the Finns. They can make the crossing relatively cheaply, and if they purchase enough goods at lowered or duty-free prices, they can actually save money by making the journey. Tobacco and alcohol seem to be especially popular purchases, with savings over 20% off of normal, retail Finnish prices.

Combined, these two issues make for a strong demand for a Helsinki- Tallinn link. Unfortunately, I dont think there will be much more growth in terms of passenger traffic between the cities. One reason for this is the growth of the Estonian economy- at the current rate of growth it wont be too long before prices reach equilibrium in the Finnish and Estonian markets. As the Estonian economy strengthens, there will not only be less price motivation to travel, but also a standardisation of the goods and services available in the two countries will occur. Now well examine the practicality of a new link.

Is a Link Between Helsinki and Tallinn Practical?
A link between Helsinki and Tallinn would not be an inexpensive proposition. Currently there are approximately 20 ferries making the crossing in each direction each day, with an average cost of about 35 round trip. Included in this number of ferries are conventional ships, catamarans, and fast ships, all carrying automobiles as well as passengers. The costs of ferry crossings are kept artificially low, with the prices being subsidised by duty-free sales onboard. In addition to the ships, there are also 7 flights daily on Finnair, with costs of about 120 round trip. There has recently been added, in addition to the flights and the ferries, a new helicopter link between the cities 10 times daily, which takes about 18 minutes in one direction and costs just over 120 for a one-way journey. As we can see, there are more than ample opportunities for crossing the Gulf of Finland already, with prices and travel times to suit just about everyones needs. Would a new link be as popular as the current methods of transportation, and would the cost be competitive?
We have already established the main reason for the 5 million crossings yearly. If the main drive to go to Estonia is to shop, people would need a relatively inexpensive price, so as to keep their savings high enough to pay for the trip. The ferries today are mainly for these leisure shoppers, and the Finnair flights and the helicopter journeys are for the most part reserved for business travellers. However, the ferries certainly are the most popular method of travel, taking up to 1,000 passengers a trip, as opposed to less than 70 for Finnair and less than 10 for the helicopter service. This would indicate that ferries are by far the most popular way to cross the Gulf, and that most people arent going to be willing to pay more than the current 35 price for the journey. A bridge or tunnel, then, would have to be not more than this price.

On relatively minor issue to note is the fact that in particularly harsh winter conditions, the Gulf of Finland has a tendency to freeze. This limits the use of catamarans and fast ships, however, has little or no impact on the operation of conventional ferries.

A major issue in the construction of a Helsinki- Tallinn link is the costs. Historically, bridges and tunnels are very expensive. The Channel Tunnel, for instance, was built at a cost of 15 billion. The resund Bridge was constructed at a cost of 1 billion. The Gulf of Finland, however, is much wider than either the English Channel or the resund Strait. Considering this, the price would be necessarily more than the resund link if a bridge, and more than the Channel Tunnel if a tunnel.

In both the Channel Tunnel and the resund link, but countries have supported the project and shared costs. Since it would be a link between two countries, this is a reasonable stipulation to its construction. This could be problematic for both countries however: it is quite possible that Estonia would not be able to afford the construction of a link, and the entire or majority of the cost would fall on the shoulders of Finland. There is no doubt that a link would require intense deliberation on the issues of cost and payment. This alone may be deterrent enough for project realisation.
Is a Link Between Helsinki and Tallinn Feasible?
This is a question that is going to be difficult to answer without expertise in bridge or tunnel construction. Perhaps it would be best to compare what has already been built in Europe, and see how a new Helsinki- Tallinn link would differ.
The Channel Tunnel was built by the British and the French as a train link mainly between Paris and London. The link was completed at a cost of about 15 billion, and has yet to turn a profit. Indeed, it will take many years before the tunnel breaks even and becomes a source of revenue for the two counties. The tunnel is 31 miles long, 23 of which are under the English Channel. It was constructed at a depth of 50 meters under the surface, and took several years to build. The cost of using the Channel Tunnel is expensive, with the cheapest train tickets costing about 100.
The resund- Malm Bridge was completed in July 2000, and is 16 kilometres long. The bridge cost the Danish and Swedish governments about 1 billion, and there is little data available showing when the bridge will be able to turn a profit. It is estimated that the cost of a one way crossing will be around 40. (Greve 32)
When comparing the Gulf of Finland to these two bodies of water, it becomes apparent that a link between Helsinki and Tallinn would be more expensive and difficult that either of the two previous projects in Europe. The Gulf of Finland is about 50 miles between the two capitals, and has an average depth of about 37 meters. Since the distance is so great, I think it would be nearly impossible to support a bridge link, and therefore the link would have to be a tunnel, at least until some technological breakthroughs can be made in bridge construction. This would mean that the project would be larger even than the Channel Tunnel, with a cost far exceeding 15 billion.
Technologically, I think the project could be done, but the cost would be far too prohibitive. The price of the link would be almost impossibly high, and once completed, the price of using the new link would be enough to keep people using the ferries.
In conclusion, though there is already a very strong bond between Helsinki and Tallinn, I think there are not enough people or resources to warrant the construction of a link like resund. There is already a steady demand for trans-Gulf transportation, and more than enough ferries and air transportation to cater to that demand. I believe things are best left as they are, with the exception of possibly refining the links already in place.

V. Aviation Development in Scandinavia
When the United States Congress passed the Airline Deregulation Act in 1978, the Bill said that any community currently receiving scheduled airline service was eligible for participation in the Essential Air Service program. This meant that large and small cities alike would retain airline service as long as they were served before the Bill passed. Small communities and medium sized cities, unable to sustain the carriers service because of small passenger loads or limited funding were henceforth left without air transportation. The agency in charge, now called the Federal Aviation Administration (FAA), was prompted to broaden the scope of the Essential Air Service Act to those communities which lie in areas of limited air service. The EAS program now subsidises 104 communities in the United States and Alaska, providing funding to local airports and paying scheduled air carriers for their services. (U.S. Congress)
The question before us is whether or not a government mandated program, such as EAS, would work in the Baltic Sea area. Is it a necessary program to implement? Is a program of such magnitude the most practical way to intensify aviation services in the Baltic region? And would it be feasible?
Is Aviation Development in the Baltic Region Needed?
Focusing on Finland, Sweden and Estonia, we can factually say that each country has a state-owned or privatised national carrier. Finnair operates on behalf of Finland, SAS operates jointly on behalf of Sweden, Norway and Denmark, and Estonian Airlines operates under the flag of Estonia. The real question is whether the route structures that these scheduled air carriers operate under, in addition to the timetables of other flag carriers, private, charter, international and state-owned airlines operating in these countries is enough air service to sustain economic activity and promote growth in the Baltic.
Sweden probably has the most advanced air traffic system of the three countries, with over 40 airlines, air taxis, helicopter agencies, and for-hire charter companies registered in the country and operating within and across its boundaries. (Airlines Europe: R,S,T) Finland has 8 air carriers and 3 helicopter companies on its books, and Estonia, least developed with 4 airlines serving within its borders. (Airlines Europe: E,F,G)
To speculate on the development of air traffic within Sweden, I would say that the country already has a significant aviation infrastructure, capable, and vast-reaching air service, and has done a tremendous job building a strong aviation base, both domestically and internationally. Sweden owns a majority stake in SAS, and along with Norway and Denmark, has helped the airline to become one of the largest and most respected in the world. The route structure within Swedish airspace is massive, for the countrys size. Even in the most remote towns and communities lie within reasonable driving distance to an airport, usually feeding the Stockholm hub. In certain cases, the smaller villages may not have service on a daily basis, but on a bi-daily or weekend basis. Nonetheless, the service is provided, and more often than not, the residents of these far-flung regions can connect with domestic and international flights with minimal stops en-route. If we think of Stockholms Arlanda Airport as a wheel hub, then imagine its spokes reaching out toward areas in Scandinavia, North and South America, Asia and the rest of Europe. The relative distance between Swedens small cities and the rest of the world, via Stockholm, is minute considering their locations.
Finland and Estonia, on the other hand, have less developed aviation infrastructures, due in part to the relatively small size of their national and regional carriers and the smaller population density in rural areas. Let us speculate that, for the time being, populations in Finland and Estonias outlying communities will stay relatively the same over the next ten years. Residents of those communities have survived without air service for decades now, and without growth, they will continue to survive. Moreover, the distances between small communities and larger ones having airports is minimal. Finnair operates to 22 destinations within Finland, a remarkable number considering the countrys size. The graph on this page shows the current route map for Finnair domestic and its subsidiary, Golden Air, and breaks their destinations down by area. (Destinations in Finland) Geographically, the served destinations are limited to the areas with the greatest number of people, which also means that they are serving the economic hubs of Finland.
Estonian owned airline, Estonian Air serves only 10 destinations, all of which are large cities outside of its own country. However, like Swedish carrier, SAS, and like Finnair, Estonian Air has a subsidised regional carrier, Elk Airways. Elk flies small and medium sized propeller and jet aircraft to areas of low density, shuttling passengers between Tallinn and the rest of Estonia. Acting as a feeder for Estonian Air, Elk benefits by providing an essential service that can be found nowhere else. Thus, even though Estonias major carrier doesnt serve anywhere within its borders, the economy is fed by its smaller regional airlines.
Some may contend that there is simply not enough service in the Baltic region. I would argue that it is impossible to fly to every city, town and community without draining the already tapped resources. Why should the governments of these countries mandate the airlines to fly on unprofitable routes, with load factors of less than half, thus driving up the cost of a ticket per seat mile and costing the government and the airline valuable money and resources? The answer is, they should not. Scheduled air service is not obligatory; it is not an essential good, and therefore, need not be provided, to such ends that the airline and government become indebted in doing so.
Is Aviation Development in the Baltic Region Practical?
The European aviation infrastructure is far reaching and massive. Of the 25 or so European countries, at least half of them have reputable, global air carriers of their own. And of those half, nearly all of them have the majority of their fleet flying within the continent. This means that by far, Europe has the most vast and dynamic route structures for airline services in the world. The proximity of Europes countries affords even the smallest carriers to fly internationally.
In the Baltic Sea region, we can surmise that due to its northern orientation and low population density, many European airlines choose to serve only the hub airports in large cities, like Copenhagen and Helsinki. Unlike in France, where various international carriers may serve Paris, but also fly regularly to Nice, Calais, Toulouse, Lyon, and Bordeaux, the market for travel is also greater there.
The recommendation in reference to the practicality issue is to not spread the already existing air service too thin. Rather, if the cities can market themselves to the domestic and international carriers in a manner that lures them in, then chances are, the carriers will stay. It is just not practical, otherwise, for airlines to begin flying to cities unless there is a market niche for them there.

Is Aviation Development in the Baltic Region Feasible?
Money is always the bottom line in any business transaction. And setting up airline service between two cities constitutes just that. Airlines have limited resources that must be taken into account before any deal is finalised. Pilots, crew, aircraft, maintenance employees, spare parts and storage and a plethora of other logistical minutiae are all considered carefully before inaugurating service between new city pairs. If the airline is young and strapped for resources, they will focus all of their energy on an area where they know they can make a profit and serve the majority of their customers best. Usually, this is at a hub in a large city. This does not always have to be the case, however.
It takes a special leader, special employees, and a special vision to run an airline without a hub and make it work. Hubs are the lifeblood of a scheduled air carrier. The companys top executives, the fleet, the employees are all concentrated there for convenience purposes. And in terms of shuttling passengers around with the least amount of hassle, its the system that makes the most sense. Passengers are ferried in from all over the country, brought to a common airport, and ferried out again. Its a simple one-stop way of connecting passengers with their destinations.
Southwest Airlines operates as one of the best airlines in the United States, and it does not conform the hub and spoke system. Essentially, the airline operates from city to city, sometimes stopping 3 or 4 times before reaching its final destination. A system like that of Southwests is what would be necessary in the case of the Baltic region. Airlines with their bases in these areas are not capable, not strong or large enough to support a vast network of hub and spoke operations with their small fleets and limited human resources.
Feasible, yes. But difficult, indeed; and risky, too. Finnair, for example, would have to cease non-stop operations from Helsinki to Kittila, and instead, fly a route where the aircraft would make 3 stops before arriving. This would not, however, be a feasible plan, as the aircraft do not have the capacity to operate routes like that. Airlines also risk losing passengers to carriers who can get them to their destination without the hassle of having to stop. Thus, the feasibility of developing routes in the Baltic in this manner is closely linked with the carriers availability of resources, and is usually too great a risk to attempt.

VI. Conclusion
The necessity and feasibility of a link similar to that constructed between resund and Malm would not be practical for Helsinki and Tallinn, as closely linked and as co-operative as the two capitals are. There simply is not the demand nor the resources needed to complete such a major project. Passenger traffic flows are high enough to warrant a link, however, there is also currently more than enough methods of making the crossing than really needed. A new link would almost certainly be uneconomical, and would do little to enhance passenger traffic between Finland and Estonia.

In the arena of aviation in Scandinavia, the necessity and practicality of further aviation development in Finland and Estonia will not precipitate major changes in the transportation infrastructure of either country for some time. Currently, the areas served by both countrys air carriers are suitable, and in some cases, excessive for the number of passengers residing in areas of low population density and minimal economic activity. People tend to gravitate toward centers of high economic growth and development, and airports are placed in and around those areas to provide easy and ample access to those places. Thus, if the airports and carriers are already serving those areas which need it most, it would seem as though the government and private aviation companies have a firm grasp on things.

In conclusion, we have determined that there is little than can be done in terms of passenger traffic to enhance the economic integration of the Baltic Sea area, especially in and between Finland and Estonia. The low population of the area and the already adequate services further restrict the need for a greater transportation infrastructure in the area.
VII. Works Cited
Airlines in Europe Page: E,F,G. Airline Directory. 8 August 2000
Airlines in Europe Page: R,S,T. Airline Directory. 8 August 2000
Destinations in Finland Page. Finnair Oyj. 11 August 2000
Greve, Irene. The Best of Copenhagen and Malm. Highlife. July 2000, 28.

Janos, Nemes. Koppenhaga. Horizon. July 2000, 22.

Ruoppila, Sampo. Helsinki- Tallinna. Helsinki: The City of Helsinki, Information Management Centre. 1996: 124.

U.S. Congress on the Internet Page. Thomas Legislative Information. 10 August 2000
Westerman, Ralph. VASAB 2010: A Critical Analysis. 1998.

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