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Cablegate: Vietnam Airlines Will Equitise Partly in 2009

VZCZCXRO7614
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHHI #0029/01 0090945
ZNR UUUUU ZZH
R 090945Z JAN 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 6978
INFO RUEHHM/AMCONSUL HO CHI MINH 4136
RUEHZS/ASEAN REGIONAL FORUM COLLECTIVE
RUEHGP/AMEMBASSY SINGAPORE 2470

UNCLAS SECTION 01 OF 02 HANOI 000029

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS AND EEB/TRA
USTR FOR DBISBEE
USDOC FOR 4430/MAC/ASIA/OPB/VLC/HPPHO
SINGAPORE FOR FAA MARY WALSH

E.O. 12958: N/A
TAGS: EAIR ECON EIND EINV ETRD BEXP VM
SUBJECT: VIETNAM AIRLINES WILL EQUITISE PARTLY IN 2009

REF: HANOI 1974

HANOI 00000029 001.2 OF 002


1. (SBU) Summary: Vietnam Airlines' (VNA) new CEO Pham Ngoc Minh
told the Ambassador that VNA will partly equitise in 2009 and
revealed VNA's ambitious plan to become one of the preeminent air
carriers in Southeast Asia. The Ambassador thanked Minh for
Vietnam's recent purchase of Boeing aircraft and asked Minh to
consider equipping the new jets with GE Aviation's GEnx jet engine.
The Ambassador urged Minh to push Vietnam's Civil Aviation
Administration to procure funding for the final two phases of an
aviation safety upgrade project that would allow the carrier to
begin direct service to the United States. Minh asked the
Ambassador to press the GVN's Ministry of Transport to ratify the
Cape Town Convention, a risk mitigation treaty that would reduce the
cost of aircraft financing for Vietnam's air carriers. He also
asked the Ambassador to help smooth the way for Vietnamese pilots
and mechanics to obtain visas and enroll in aviation training
schools in the United States. End Summary.

2. (SBU) The Ambassador met with newly appointed CEO of Vietnam
Airlines Pham Ngoc Minh on January 7 to promote Boeing aircraft and
advocate for GE Aviation's GEnx jet engine. Minh takes over as CEO
from Nguyen Sy Hung, who remains the airlines' chair. Minh
previously served as VNA's influential vice-president and is also
the chair of the newly formed Vietnam Aircraft Leasing Company
(VALC), and is one of the architects in its formation.

VIETNAM AIRLINES TO EQUITISE
----------------------------

3. (SBU) Minh told the Ambassador that the state-owned airline would
partly equitise in 2009. He said VNA would issue a request for
proposal (RFP) in 2008 to hire a financial consultant and would
issue an IPO or choose a strategic partner early in 2009. Minh said
it was "too soon to say" which path the carrier would choose, but
noted that the right investor could help VNA realize its ambitious
plan to become one of the preeminent air carriers in Southeast Asia
along with Singapore Airlines and Thai Airways. Minh noted that the
United States is home to many of the world's top financial
consulting firms and mentioned Morgan Stanley, Citi, JP Morgan, and
Merrill Lynch as possible selections. Minh told the Ambassador that
VNA had receipts of $1.4 billion and carried 8 million passengers in
2007.

THANKS FOR BUYING BOEING
------------------------

4. (SBU) On November 16, 2007, Boeing and VNA signed an agreement to
purchase an additional four 787-8 "Dreamliner" aircraft. VALC
purchased 8 more, which it will lease to VNA (Reftel). VNA has now
procured twenty-one 787s (sixteen purchased and 5 leased) and has
ten Boeing 777 aircraft (5 owned and 6 leased). Anticipating larger
tourist and business traffic to Vietnam, VNA has said it will need
at least twenty-eight 787s by 2020. The Ambassador thanked Minh for
the purchase and said he hoped the airline and Boeing would have a
long and productive relationship.

PROMOTING THE GEnx
------------------

5. (SBU) GE Aviation (a U.S. company) is currently in a competition
with Rolls Royce (owned by BMW) to supply jet engines to VNA's
Boeing 787s. GE produces the GEnx, its new fuel-efficient composite
engine, while Rolls Royce offers the Trent 1000 for the Boeing 787
and the Trent XWB for the Airbus A350. The Ambassador advocated the
merits of the GEnx, citing the engine's lower fuel burn and
increased reliability. In response, Minh emphasized that the engine
procurement process would be "fair and transparent," a clear
reference to the 2004 corruption scandal that shook the airline.
Under former CEO Nguyen Xuan Hien, VNA officials allegedly
disregarded a GVN directive instructing the airline to equip VNA's
four 777 airplanes with long-range GE90 jet engines. Instead, VNA
chose a cheaper, medium-range Pratt & Whitney engine, which made the
jets unsuitable for many of the airlines' intended international
routes. Minh told the Ambassador that the airline is now evaluating
the GE and Rolls Royce bids and hopes to issue a decision by early
April. He said the chairs of VNA and VALC would study the proposals
and make a formal recommendation to the Prime Minister. In
addition, Minh said he hoped that Vietnam would be a destination for
a jet engine or spare parts maintenance or production facility. He
stressed that Prime Minister Dung is particularly keen on this idea,
calling it "critical" if Vietnam is to procure the GEnx engine.
(Note: The Chair of VNA, Nguyen Sy Hung, also made a point about
wanting to establish aviation maintenance facilities in Vietnam in a
recent meeting with the Ambassador. End note.) The Ambassador also

HANOI 00000029 002.2 OF 002


discussed GE Money and GE Energy's current and future investment
plans in Vietnam.

DELAYED FLIGHT
--------------

6. (SBU) On August 6, VNA filed an application with the U.S.
Department of Transportation for a foreign air carrier permit. The
filing states that VNA intends to begin commercial service to the
United States (HCMC-Osaka-Los Angeles) starting on October 28, 2008.
First, however, the Civil Aviation Administration of Vietnam (CAAV)
must upgrade its safety oversight capability to meet International
Civil Aviation Organization (ICAO) standards. CAAV has completed
the first phase of a $1.4 million project funded by the U.S. Trade
and Development Agency (TDA) to raise its safety standards to
Category 1, which would allow Vietnamese air carriers to fly to the
United States.

7. (SBU) TDA has asked CAAV to contribute a nominal $50,000 sum
toward the cost of the remaining two phases. While CAAV has
acknowledged the request, it has yet to allocate the money. As a
result, the project is now significantly behind schedule, possibly
delaying VNA's inaugural flight to the United States by six months
or more. Moreover, VNA will likely need to pick up passengers in
Osaka to ensure profitability on the route, which means the GVN will
need to negotiate "fifth freedom" passenger rights with Japan. The
Ambassador urged Minh to press CAAV to procure the funding, saying
the Embassy would work with Vietnam and the USTDA to facilitate
timely completion of the project.

CAPE TOWN CONVENTION
--------------------

8. (SBU) Minh asked the Ambassador to press Vietnam's Ministry of
Transport (MOT) and other relevant GVN ministries to ratify the Cape
Town Convention, a risk mitigation agreement that would reduce
financing costs on future aircraft deliveries to Vietnam's air
carriers. Minh expressed frustration over the Vietnamese
Government's inaction on the treaty, complaining that VNA and VALC
had to pay $24 million in 787 aircraft deposits as a result. (Note:
According to Embassy contacts, the treaty does not require
ratification by Vietnam's National Assembly. Rather, President
Nguyen Minh Triet will authorize the agreement once it reaches his
desk from the MOT. End note.)

New airport
-----------

9. (SBU) Minh informed the Ambassador that the GVN would build a
second international airport in southern Vietnam to supplant Ho Chi
Minh City's congested Ton Son Nhat International Airport. He
estimated that the new Long Thanh International Airport, 40
kilometers northeast of Ho Chi Minh City, would open in 5-8 years.
Finally, Minh asked the Ambassador to help smooth the way for
Vietnamese pilots and mechanics to obtain visas and enroll in
aviation training schools in the United States.

Follow-up
---------

10. (SBU) Embassy is seeking an appointment for the Ambassador to
meet with Minister of Transport Ho Nghia Dung in order to discuss
unresolved transportation issues, including the CAAV-TDA safety
upgrade, the Cape Town Convention, and negotiation of a U.S.-Vietnam
Open Skies Treaty.

MICHALAK

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