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Cablegate: Argentina: Civair Tour D'horizon

VZCZCXRO5258
RR RUEHMT
DE RUEHBU #1409/01 2881336
ZNR UUUUU ZZH
R 141336Z OCT 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2234
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC//AWH-10//
RHMCSUU/FAA MIAMI SO IFO23 MIAMI FL
RHMFIUU/FAA MIAMI ARTCC MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE
RUEHMD/AMEMBASSY MADRID 2146
RUEHMT/AMCONSUL MONTREAL 0060

UNCLAS SECTION 01 OF 04 BUENOS AIRES 001409

SIPDIS
SENSITIVE

STATE EEB FOR TERRI ROBL, KRISTIN GUSTAVSON
TRANSPORTATION FOR BRIAN HEDBERG
FAA FOR BONNIE AHUMADA, ANNA SABELLA, KRISTA BERQUIST
FAA MIAMI FOR JAY RODRIGUEZ
BRAZILIA FOR SHARON WALLOOPPILLAI
MONTREAL PASS USMISSION TO ICAO

E.O. 12958: N/A
TAGS: EAIR ECON PGOV ELAB UY AR
SUBJECT: Argentina: Civair Tour d'Horizon

This cable contains sensitive information - not for internet
distribution.

Reftel: (A) Buenos Aires 1277
(B) Buenos Aires 241

1. (SBU) Summary. Argentine civil aviation authorities are slowly
working the transition from military to civilian control of
Argentine civil aviation with support from ICAO and the Mitre
Corporation, and the GoA hopes to sign a new technical assistance
agreement soon with the FAA. The profitability of U.S. air carriers
serving Argentina is being squeezed by still-high fuel costs and
slackening demand for travel, but American and Delta will
nevertheless soon be adding direct flights between Argentina and New
York. Flag carrier Aerolineas Argentinas's financial and
operational woes continue, and Ezeiza International Airport
expansion plans are being delayed due to increased financial costs.
End summary.

2. (SBU) Econoff met September 25 with Alejandro Orchansky, Vice
President of the GOA's airports regulator (ORSNA) and senior advisor
to the civil aviation authority (ANAC - National Civil Aviation
Administration). Econoff met September 29 with the country managers
of the four U.S. passenger carriers that operate in Argentina,
American, Continental, Delta, and United. Econoffs also met the
U.S.-based Sabre computer reservations system representative on
September 30, and the City of Buenos Aires Tourism minister Hernan
Lombardi on October 7.

--------------------------------------------- --------
Military to civilian transition: still needs more time
--------------------------------------------- --------

3. (SBU) As reported Ref B, the GOA's full transition from military
to civilian control of civil aviation continues at a very slow pace.
(The GOA created ANAC, the National Civil Aviation Agency, in March
2007.) Alejandro Orchansky told Emboff that ANAC is still a "shell
of an organization," and a full transition is still "a few more
years away." ANAC still has "almost no budget" and little legal or
operational authority. Orchansky confirmed that the GOA Air Force's
Air Regions Command (CRA) continues to exercise de facto control of
most, and certainly the most important, areas of civil aviation.
Orchansky said that one of the most contentious matters remains how
to deal with the labor aspect of any transition. Presently, about
80% of CRA's 6000-odd employees are military personnel, generally
with much lower salaries than any future ANAC civilian workers would
get. Unresolved questions include: will these CRA military
personnel be hired by ANAC, and if so, at what salary? Would they
be retired from the military first, or be transfered to ANAC?
Equally important, according to Orchansky: will civilian air traffic
controllers be allowed to strike, something the current military
controllers are not allowed to do (although they have exercised
"slowdowns" in the past)?

4. (SBU) Orchansky confirmed that the International Civil Aviation
Organization (ICAO) is providing assistance to support the GOA's
transition from military to civilian control of civil aviation. He
said that one task in particular that ICAO will help with is in
identifying which CRA military workers are qualified to be hired by
ANAC, and which are not. Orchansky acknowledged that this will be a
very sensitive task politically, and in the end will have to be a
political decision made by ANAC. Orchansky also confirmed that
U.S.-based Mitre Corporation also continues to be involved in
assisting the GOA in its transition efforts, but said that its role
will be "further down in the transition process," but did not
elaborate.

---------------------------------------------
Proposed MOU with FAA on technical assistance
---------------------------------------------

5. (SBU) The U.S. Federal Aviation Administration (FAA) and ANAC
have been discussing the possibility of signing a new technical
assistance agreement for FAA assistance with the GOA's transition

BUENOS AIR 00001409 002 OF 004


from military to civilian control of civil aviation, and aviation
safety oversight. After the FAA upgraded the GOA in 2005 to
Category I under the International Aviation Safety Assessment
Category (deeming GOA's civil aviation authority to license and
oversee air carriers in accordance with ICAO aviation safety
standards), the GOA engaged the services of the FAA to receive
assistance in aviation safety oversight. From 2002-2007, the CRA
received FAA technical assistance in the areas of operations,
airworthiness, and aviation safety oversight. This contract was
terminated in 2007.

6. (SBU) FAA presented ANAC with a draft of a new agreement several
months ago. ANAC head Rodolfo Gabrielli and Alejandro Orchansky
were in FAA/Washington and Miami in May 2008 where they discussed
this MOU. Orchansky said that ANAC is still "very interested" in
FAA assistance in the transition from military to civilian control
and aviation safety. He cited the usual "very slow bureaucracy" of
the GOA for the delay in the GOA signing the MOU, but said that he
expected this to be signed soon.

--------------------------------------------- ---
U.S. carriers squeezed, but still adding flights
--------------------------------------------- ---

7. (SBU) U.S. air carrier reps said that, with fuel prices still
historically high (albeit lower in recent weeks), local inflation
running at over 20%, and slowing economies in Argentina and the
United States affecting ticket sales, most of them are feeling the
strain in recent months. At the same time, American and Delta reps
confirmed they are taking a long-term view of market development and
are planning to add new direct flights to New York-JFK Airport in
December. American already flies to JFK daily, and will add five
more flights per week. Delta will fly five new flights to JFK, in
addition to their daily flights to Atlanta. In early September,
American terminated its daily direct flight to Chicago, which had
begun in December 2007 amidst great fanfare, due to high fuel
prices.

-----------------------------------
Aerolineas Argentinas woes continue
-----------------------------------

8. (SBU) Argentine aviation players contend that the financial and
operational problems of newly renationalized Aerolineas Argentinas
(AR) and Austral continue - and will likely worsen (ref A). In the
wake of the July 17 renationalization of the carriers, initial
estimates foresaw monthly losses of around $50 million (or $600
million annually, roughly 1% of 2008 primary expenditures). GOA
officials, media reports, and U.S. carrier reps now estimate that
losses could increase further, in the range of $1 billion annually,
and with no corresponding improvement in service. (Buenos Aires
Tourism Minister Lombardi told Embassy Econ and Commercial officers
that he believes AR will go bankrupt within the next year.) Of the
estimated $900 million debt that AR is carrying, Embassy contacts
indicate that AR owes around $200 million to private airports
operator AA2000, $17 million to U.S.-based Sabre for its computer
reservations system, and undisclosed amounts to the Amadeus e-travel
management company and to GE Commercial Aviation Services for
aircraft leases. Delta said that his company had suspended its
aircraft maintenance agreement with AR pending resolution of
outstanding payments. American said that they will no longer assist
AR to carry its passengers on overbooked flights unless they pay
cash. American said that due to non-payment of dues, AR several
years ago lost the use of the International Air Transport
Association (IATA) clearing house, used by the world's airlines and
airline-associated companies to settle their inter-company billings.
They noted that this limits the ability of some Argentine carriers
and hotels to book additional tourism-related business. Septel will
analyze the ongoing AR and Austral renationalization process in
light of recently-released (and widely divergent) assessed values of
the companies by the GOA's Valuation Tribunal and Credit Suisse, the
latter hired by AR's owners.

---------------------------------------------

BUENOS AIR 00001409 003 OF 004


Ezeiza Airport no match for regional airports
---------------------------------------------

9. (SBU) U.S. carrier reps told Emboff that they were "extremely
impressed" with the quality of the new airport in Lima, and that
Santiago and Lima have the "best airports in Latin America." They
compared them with the "pitiful" quality of Argentina's Ezeiza
airport, which they said was among the "worst" in Latin America -
congested, poorly run, and poorly built. They also noted again how
short-staffed the airport's police and immigration staffs are, which
negatively affect their passengers' arrival and departure waits.

-------------------------------
Problems with airports operator
-------------------------------

10. (SBU) Carrier reps again complained of the high costs, poor
service, and arbitrary decisions of Argentina's airports operator
AA2000. These reps also said that AA2000's highly publicized, $500
million Ezeiza airport expansion plans are now on hold, or at least
will be delayed, due to the worsening financial outlook. They said
that local banks had recently increased the interest rates on the
U.S. dollar loans for the project. These reps said that the airport
expansion delay will affect them as well: given Ezeiza's already
congested status, and with plans of American, Delta, Lufthansa, and
South African Air, among others, to increase flights into and out of
Buenos Aires, congestion will likely worsen.

--------------------------------------------- -------
U.S. carriers disappointed by recent GOA court ruling
--------------------------------------------- -------

11. (SBU) On August 25, the GOA Supreme Court upheld a controversial
lower court ruling that mandated carriers to pay higher rates for
airport services for international flights. U.S. reps told EconOff
that they were "extremely disappointed" with the court ruling.

12. (SBU) In early 2002, in the wake of Argentina's economic crisis
and ending its one-to-one peso-dollar link, the GOA Congress passed
a law requiring that public service tariffs formerly denominated in
dollars, including airport user fees, be paid in depreciated pesos,
which in effect decreased these charges by about one-third.
Following this action, President Duhalde issued a decree which
superseded that law and required that airport user charges for
international flights -- for landing, parking, and air traffic
control at Ezeiza Airport -- be paid in dollars, or about three
times the amount had they been paid in the equivalent amount of
pesos. Several airlines challenged the constitutionality of the
decree in Argentine courts, with different results. Aerolineas
Argentinas (AR) won an injunction against this measure, and to this
day still pays airport charges at discounted peso rates. U.S.-based
and other foreign carriers sought unsuccessfully the same relief in
different Argentine courts. As a result, since September 2002, AR
has been paying user charges at Ezeiza roughly one-third of what
U.S. carriers pay for the same services. Four U.S. carriers filed
complaints with the U.S. Department of Transportation, arguing that
the discrepancy in charges put the GOA in violation of the 1985
bilateral air transport services agreement, which states that
"airlines not be required to pay charges higher than those paid by
the airlines of the other party." These carriers also argued that
it constituted an "unreasonable discriminatory practice against"
U.S. carriers. The DOT agreed and imposed a countermeasure: AR was
required to deposit in an escrow account in the United States the
difference -- for each international flights landing at Ezeiza --
between the user fee it pays and the fee that U.S. carriers pay.
Today, this accumulated escrow account amounts to about $5 million.


13. (SBU) With the legal question surrounding this decree now
settled, the remaining unresolved issue is if or when the GOA will
ever discontinue AR's effective advantage it enjoys over its
international competitors.

---------------------------------------

BUENOS AIR 00001409 004 OF 004


GOA pleased with LAN's recent expansion
---------------------------------------

14. (SBU) Orchansky said that the GOA is "much more satisfied" with
Chile-based LAN airlines in recent months. (LAN entered the
Argentine domestic market in 2005, and their experience here has
been difficult at times, with LAN and the GOA often accusing each
other of unmet promises. The GOA says that LAN promised more planes
and routes than so far realized; LAN says that below-market fares
and unrealized tax and fuel rebates has stifled its desire/ability
to expand services.) Orchansky said that the Secretary of
Transportation was pleased that LAN has recently added new routes
and planes to Neuquen City, Rio Gallegos, and San Juan. He
acknowledged that GOA-sanctioned fare increases of almost 40% in
recent months has made LAN expansion easier.

--------------------------------------------- --------
Uruguayan flag carrier Pluna competing with local carriers
--------------------------------------------- --------

15. (SBU) U.S. air carrier reps praised the "good marketing
strategy" of Uruguayan flag carrier Pluna, and its decision to focus
on the regional market, including Argentina, after it cancelled
service to Madrid in September and put off expansion to other
long-distance markets. (Pluna is 75% owned and managed by Leadgate
Investments, a consortium of mostly U.S. investors, and 25% owned by
the GOU.) In recent months, Pluna purchased several new
Canadian-built Bombadier CRJ900s, and is moving to capture the
potentially rich market of bringing Argentine travelers from the
interior of Argentina who seek to go to Europe and the United
States, and want to avoid the congestion, delays, and thefts of an
intermediate stop at Ezeiza airport. From Montevideo, where the
Carrasco airport is nearing completion of a new terminal, long-haul
carriers such as American Airlines, Iberia, and Air France can then
take these passengers to the United States and Europe. (NOTE:
Embassy Montevideo reports that Pluna's financial losses and
subsequent termination of its loss-making Madrid route prompted an
ongoing dispute with GOU representatives on the board and labor
unions, who oppose the move because of workforce implications and
political sensitivity. Airline industry observers in Uruguay have
suggested that the GOU needs to choose whether Pluna will remain
privately managed in the image of LAN or if the government exerts
more control, as is the case with Aerolineas Argentinas. At this
point, it appears likely the LAN model will win out. END NOTE.)


WAYNE

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