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Cablegate: Afghanistan: Pull the Plug On Ariana Airlines

VZCZCXRO1444
RR RUEHDBU RUEHIK RUEHPW RUEHYG
DE RUEHBUL #1935/01 1621237
ZNR UUUUU ZZH
R 111237Z JUN 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC 8647
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RHCUAAA/USCINCTRANS SCOTT AFB IL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC 0114
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC

UNCLAS SECTION 01 OF 02 KABUL 001935

SIPDIS

SENSITIVE, SIPDIS

STATE FOR SCA/FO SCA/A
STATE FOR EB/OTP EB/TRA/AN EB/CBA EB/IFD/OMA
STATE PASS USAID/ANE
STATE PASS OPIC:DZAHNISER
CENTCOM FOR CG CFC-A
COMMERCE FOR ITA/ACHAMS-EDDINE AND DFONOVICH
FAA FOR JHANCOCK AND RSMITH

E.O. 12958: N/A
TAGS: EAIR EFIN ECON EAID AF
SUBJECT: AFGHANISTAN: PULL THE PLUG ON ARIANA AIRLINES

Ref: A. Kabul 1090

B. Kabul 1914

This message is sensitive but unclassified--not for Internet
distribution.


SUMMARY
-------

1. (SBU) The IMF's recent mission report urging the GoA not to
rescue Ariana Afghan Airlines has kept the ongoing discussion about
what to do with Ariana before the GOA and the international
community. While the top level of the GoA agrees with the JCMB V
decision to seek Ariana's privatization, there is no such consensus
further down in the government. The popular GoA rationalization
that the market needs Ariana has become untenable: the market is
increasingly well served by new Afghan airlines--two are operating
now, with another two in the wings--and also by international
airlines. Boeing has recently clawed back a $2.5 million purchase
deposit to pay off Ariana's $2 million lease arrears, which clears
the way for us to support wholeheartedly the IMF message that the
GoA should not take on the failing airline's liabilities. END
SUMMARY.


IMF MESSAGE: DON'T BAIL OUT ARIANA
----------------------------------

2. (SBU) The IMF's May 10 mission report urging non-intervention in
Ariana has sparked further discussion is Kabul--and further
agonizing--over the fate of the troubled airline. The report notes
that, "Given Ariana's acute financial weaknesses and the lack of a
comprehensive restructuring plan, the mission urges the government
not to use its scarce resources to support it." The report goes
further, urging that the GoA not assume obligations for Ariana,
guarantee its debts, or pressure banks to provide loans or
guarantees.

3. (SBU) This unusually clear guidance, combined with the recent
decision at JCMB V to add privatization of Ariana to the list of
infrastructure benchmarks, has kept the question of what is to be
done with the airline before GOA policymakers and the international
community (ref A). While there may be consensus on this in the
forum of the JCMB, it is hardly a decided question at the
operational level (ref B). (NOTE: The new president of Ariana
reportedly refused the President's senior economic advisor's demand
that Ariana prepare a privatization plan. We have not yet heard
how--or whether--this impasse has been resolved. End note.) Some
within GoA have expressed concern that the privatization or
liquidation of the state airline will leave Afghanistan under-served
for public passenger air service. Of all the arguments against
privatization, this is perhaps the least tenable.


GOING TO KABUL? YOU'VE GOT OPTIONS
-----------------------------------

4. (SBU) Kam Air, the first viable post-Taliban private airline,
recently announced plans to begin a second daily flight between
Kabul and Dubai. The company now provides regular international
service to Almaty, Delhi, Istanbul, and Mashhad (Iran), and it is
the main domestic competitor for Ariana, with service between Kabul,
Herat, and Mazar-i-Sharif. We have recently heard that Kam Air is
shopping for more aircraft, including longer-range B-767s to augment
its mixed owned and leased fleet of B-737 and B-727 aircraft.

5. (U) Pamir Airways, which had earlier operated a small-scale
international service out of Kabul, has recently started daily
service to Dubai and plans expansion to other regional destinations.
Pamir's Dubai pricing ($315 r/t Kabul to Dubai) significantly
undercuts Kam Air's $400 fare. The United National Humanitarian Air
Service (UNHAS) has recently reduced its fares from $800 return to
$600, possibly in response to this downward pressure from the new

KABUL 00001935 002 OF 002


entrants. Like Kam Air, Pamir bases its aircraft in Dubai and
operates under ICAO-compliant safety oversight regimes.

6. (U) At least two other Afghan companies plan to start flying out
of Kabul soon. Safi Airlines hopes to start regional service in the
next few months, and the Alokozay company has similar plans and is
reportedly now shopping for aircraft. Both Safi and Alokozay have
already gone through the initial steps of registering their
airlines.

7. (U) In addition to the local start-ups, several international
airlines also serve the Afghan market. Azerbaijan Airlines has
resumed service to Kabul in the past few months; Indian Airlines and
Pakistan International Airlines fly into Kabul regularly.


COMMENT: IMF IS RIGHT: DON'T SAVE ARIANA
----------------------------------------

8. (SBU) This lively competitive scene leaves little room to think
that Afghans would be left short of air service if Ariana were to
dramatically reduce or close down its service. The GoA is therefore
in a good position to make a decision on the money-losing airline,
and the IMF's clear position on the issue should counter the
temptation of further subsidies. As reported in reftel, until
recently Ariana owed Boeing nearly $2 million in arrears on a
defaulted lease. Boeing has since clawed back a $2.5 million
deposit on the future purchase of four B-737s. While Boeing is
still balancing the overall account, we understand that Ariana is
not likely to have any sizable arrears. This clears any
reservations the USG might otherwise have had about emphasizing the
IMF's message.

WOOD

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