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Cablegate: Safi Aviation's Future in Afghanistan Uncertain

VZCZCXRO0451
RR RUEHBW RUEHIK RUEHPW RUEHYG
DE RUEHBUL #1056/01 1200944
ZNR UUUUU ZZH
R 290944Z APR 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC 3722
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0628
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEAIIA/CIA WASHINGTON DC
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 KABUL 001056

SIPDIS

DEPT FOR SCA/FO, SCA/RA, AND SCA/A
DEPT PASS AID/ANE
DEPT PASS USTR FOR GERBER AND KLEIN
DEPT PASS OPIC FOR ZAHNISER
DEPT PASS TDA FOR STEIN AND GREENIP
TREASURY FOR LMCDONALD, ABAUKOL, BDAHL, AND MNUGENT
COMMERCE FOR DEES, CHOPPIN, AND FONOVICH

SIPDIS

E.O. 12958 N/A
TAGS: EAIR PGOV AF
SUBJECT: Safi Aviation's Future in Afghanistan Uncertain

1. (SBU) Econoff met April 24 with Rami Alhmad, Dubai-based managing
director of privately held Safi Group and Safi Afghan Airways.
Alhmad fretted that Safi's business prospects were perilous but
possibly salvageable with a full reorganization. He said that Safi
is currently losing USD 12,000-15,000 daily for three reasons: 1)
use of a cost-inefficient long-haul aircraft (Boeing 767-200) on the
Dubai-to-Kabul short-haul route; 2) competition; and 3) what Alhmad
characterized as "the hostile business environment within
Afghanistan." Alhmad said that since its inception last year, Safi
Airways has been "a status symbol" for the Afghan based Safi-group.
The group wanted the best possible service to/from Kabul and had
"plunged into the market uneducated" with a long-range wide-body
Boeing 767 to offer service from Kabul to Dubai and London.
Unfortunately, Safi entered the market before it received European
Union approval for its U.K. routing, which is not forthcoming -- at
least in the foreseeable future -- because of the lack of security
and safety oversight capacity of the Afghan Ministry of
Transportation and Civil Aviation (MoTCA). This left Safi with only
the Dubai-Kabul route, on which it must compete both with
state-owned and subsidized Ariana Afghan Airlines and with KamAir,
the established private-market leader. Alhmad noted that if Ariana
went away, Safi would have a better chance of flying at capacity on
its single route, and filling service gaps left by the other two
private-sector airlines.

2. (SBU) The Safi Group, concerned about the performance of its
airline, used a corporate "headhunting" service to hire Alhmad, who
has a mandate to restructure the company. Alhmad said that after a
thorough examination of Safi's books, he advised Mr. Safi to
temporarily stop operations for three to six months while he
undertook the reorganization. Mr. Safi, however, had refused and
said that the group would underwrite the airline's debt for "a few
more months" to determine if reorganization was possible. Alhmad
stated that the reorganization was underway, with Safi arranging to
purchase two "more appropriate" Boeing 737-400 aircraft from Air
China; Safi was also looking at two additional Boeing 767-200
aircraft from a U.S. broker. Key to its plans had been intense
negotiations in Kuwait that would allow Kabul-Frankfurt and
Kabul-Paris flights, with a stop in Kuwait for a full security
screening. Alhmad said Safi was nearing agreement with the Kuwaiti
authorities and would begin the flights in the next few months if
they secured the aircraft. The final aircraft deals were contingent
on financing, and Safi was in negotiation with IFC and Pakistan Bank
(Kabul) for an immediate cash injection. Alhmad was also
negotiating with the Indian government to authorize Kabul to Delhi,
Mumbai, and Kolkata flights.

3. (SBU) The other part of the reorganization involved firing most
existing expatriate staff, which Alhmad alleged Mr. Safi had hired
with little examination of their qualifications. Alhmad said the
firings had caused some further staff to resign, but assured that he
was interviewing a new and more qualified staff from Russia, South
Africa, and the U.S. He was also re-interviewing cabin staff and if
possible, would hire and train Afghan nationals to supplement
existing cabin crew.

4. (SBU) Alhmad said the business environment in Kabul complicated
any plans, and was another reason the group had decided to "hub" out
of Kuwait. Safi spent considerable sums on providing its own ground
handling and private security at Kabul with the Afghan government
unable to provide most services. Alhmad frankly admitted that he
had never been to Afghanistan and was unaware of many problems at
Kabul Airport, but would shortly be taking his first trip to Kabul
to look at the situation. He said he planned to leave most dealings
with the Afghan government to Mr. Safi and "his connections."
Econoff scheduled a second meeting with the Safi Group in
Afghanistan in early May to further discuss restructurng plans.

5. (SBU) Comment: Safi Airways' stuation is perilous because of a
series of bad business decisions and because of the business climate
in Afghanistan. It is quite likely that Safi will soon withdraw
from the market. Its new business model depends on adding
passengers in Kuwait, and it maintains a Kabul route principally as
the Safi Group's contribution to Afghan development. Alhmad seems
successful, but his expertise is in Dubai real estate and he knows
very little about the Afghan civil aviation market. The other two
private Afghan air carriers also face considerable difficulty.
KamAir and Pamir Airways allege they are losing money because of
undercutting by state-wned and subsidized (insolvent) Ariana, and
because of high government fees that do not provide them necessary
ground services. KamAir remains marginally profitable only because

KABUL 00001056 002 OF 002


it continues to evade full payment of its taxes in Afghanistan.
Pamir has not been as successful at tax evasion, and has had its
bank account docked for back taxes. We suspect Safi manages to
avoid many taxes because of its connections; like KamAir, it is also
bankrolled by a successful business group with deep pockets. End
comment.

WOOD

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