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Cablegate: Argentine Congress Approves Goa Expropriation of Flag

VZCZCXRO4652
RR RUEHMT
DE RUEHBU #1746/01 3591346
ZNR UUUUU ZZH
R 241346Z DEC 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2774
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 2194
RUEHMT/AMCONSUL MONTREAL 0066

UNCLAS SECTION 01 OF 03 BUENOS AIRES 001746

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
BRASILIA FOR SHARON WALLOOPPILLAI
MONTREAL PASS USMISSION TO ICAO

E.O. 12958: N/A
TAGS: EAIR ECON EINV EIND PGOV ELAB AR
SUBJECT: Argentine Congress Approves GoA Expropriation of Flag
Carrier Aerolineas Argentinas

Reftel: (A) Buenos Aires 1277
(B) Buenos Aires 836

-------
Summary
-------

1. (SBU) On December 17, the Argentine Senate approved a bill to
expropriate the troubled national airline, Aerolineas Argentinas,
and its smaller sister carrier Austral. The action followed a lower
house vote on December 3, and marked the end of almost two decades
of Spanish control of the flag carrier. President Cristina
Fernandez de Kirchner is expected to sign the bill into law before
the end of the year. The bill justifies the takeover by declaring
the service provided by the carriers to be of vital public interest.
The purchase price was not included in the bill but will be set by
the GoA. The Senate's action took place after negotiations failed
between Spanish owner Marsans and the GoA. It also ends months of
bitter exchanges between Marsans and the GOA (and its union allies)
over who is responsible for the two carriers' collapse. Marsans has
indicated that the company will pursue international arbitration via
the International Center for the Settlement of Investment Disputes
(ICSID). Meanwhile, the two airlines continue to hemorrhage money,
with daily losses estimated at almost US$ 2 million. Many analysts
see this action as another example of the GOA's stealth policy of
increasing state or local investor participation in companies tied
to key economic sectors that were largely privatized during the
1990s (ref B). END SUMMARY.

-------------------------------------------
GoA Completes Expropriation of Flag Carrier
-------------------------------------------

2. (SBU) On December 17, the Argentine Senate voted 42 to 21 to
expropriate the troubled national flag carrier, Aerolineas
Argentinas, and its sister carrier Austral, marking the end of
almost two decades of Spanish control of the two airlines. The
Senate bill justifies the takeover by declaring the service provided
by the carriers to be of vital public interest, based on the vast
size of the country and the fact that the carrier is the only
airline providing service on numerous domestic routes. President
Fernandez de Kirchner is expected to sign the bill into force before
the end of the year, thus completing the expropriation of both
airlines from Spanish travel and tourism company "Marsans Group."
The bill does not set a purchase or compensation price.

-----------------------------
Senate Follows House Approval
-----------------------------

3. (SBU) The Senate vote followed the December 3 lower house
approval of the same measure (152-84, with one abstention). Local
media quoted the language in the bill as stating that the country
"cannot accept that public air transport in Argentina continues in
the hands of a company that operates with notable incompetence."
The bill further declares the company "of public utility and subject
to expropriation."

4. (SBU) The two carriers had been privatized in 1991 to Spanish
carrier Iberia, and sold in 2001 to Marsans. Aerolineas and Austral
control about 80% of the domestic air market and reportedly operate
all of their 33 routes at a loss. The two airlines employ some
9,000 workers combined. Aerolineas also flies to about 13
international destinations, depending on the season, although U.S.
and European carriers carry the majority of international traffic.

------------------------------------------
Vote Ends Months of Torturous Negotiations
------------------------------------------

5. (SBU) The Senate's action took place after months of deadlocked
negotiations involving the GoA, Marsans, and the Government of Spain
(GoS). Marsans agreed in principle July 17 to sell both airlines to

BUENOS AIR 00001746 002 OF 003


the GoA, at which point the GoA took over operational control (with
formal transfer pending resolution of the purchase price). Media
and industry contacts estimate that the GoA has since spent about
$220 million to cover payroll and other operating expenses. As part
of the July agreement, each side pledged to determine a value for
the companies or submit to third party review if they could not
agree on the purchase price.

6. (SBU) The GoA's Valuation Tribunal estimated Aerolineas' net
worth at negative US$ 832 million, in contrast to Marsans' estimate
of US$ 330-540 million (as assessed by Credit Suisse). The
Argentine Congress disallowed any third-party review in the final
version of the bill, and indicated that it alone would fix the
price. Nevertheless, the bill as passed does not establish a set
level of compensation for the expropriation. Members of Congress
and GoA officials have since been quoted in the press stating that
the GoA should not pay anything for the carriers, or even that
Marsans should pay the GoA for taking it over. Some legislators who
voted for the expropriation have publicly floated the idea of paying
Marsans a single peso (US$ 0.30) as a purchase price.

--------------
The Blame Game
--------------

7. (SBU) This action ends - for now - months of bitter exchanges
between the GoA and its union allies on one side, and Marsans
(supported by some opposition politicians and media) on the other,
over who is responsible for the two carriers' collapse, and how the
carriers could be on the verge of bankruptcy (with an estimated US$
890 million in debt). The GoA, supported by many legislators,
accuses Marsans of "hollowing out" the company (e.g., by selling
planes and leasing them back to the company, overbooking fares, not
fulfilling investment pledges, flying older and less fuel efficient
planes, and scaling back less profitable routes). Perhaps in an
effort to show that the GoA intends to invest in Aerolineas, the
company signed a letter of intent in mid-December to purchase two
Boeing 737-700s. (Note: funding for the purchase remains unclear.)
Marsans publicly denies that its actions have harmed Aerolineas'
financial position, and instead blames the GoA's own commercial air
transport policies, lack of proper oversight, and its mandate of
below-market tariffs (as set by the GoA). Marsans has also
criticized the GOA for allowing unions to stage frequent, crippling
strikes.

8. (SBU) While many GoA officials and union leaders are celebrating
this expropriation, some opposition and media figures argue that the
public is entitled to know how the airlines could have failed. They
point to the boom in international tourism to Argentina over the
last several years, Aerolineas' virtual monopoly on most domestic
routes, as well as its preferential airport service fees, fuel
subsidies, and its service in a country whose size and road
infrastructure shortfalls make flying the only transport option for
many travelers.

----------------
Marsans reaction
----------------

9. (SBU) Marsans has repeatedly accused the GoA of planning to
expropriate Aerolineas all along. Marsans alleges that the GoA
teamed up with unions to disrupt operations and make the airlines
virtually unmanageable, as a prelude to expropriation. In a
December 17 press release, Marsans called the takeover "arbitrary
and illegitimate" and stated its intention to sue the GoA under the
auspices of ICSID. Marsans corporate director Vicente Munoz told
local press the same day that the proper term for the GoA's action
was "confiscation" and that "you Argentines will be the ones who
have to pay for it." Munoz also noted that insufficient
compensation would violate the July agreement.

10. (SBU) Spanish Embassy contacts confirmed to Emboffs that Marsans
and the Spanish government officials are deeply angry at and

BUENOS AIR 00001746 003 OF 003


frustrated with the GoA over its actions. However, they also
confirm that Marsans acknowledged to the GoS months ago that it
intended to sell Aerolineas anyway. The same contacts indicated
that Marsans simply wants fair compensation for its assets.
Regarding the ICSID suit, they said that Marsans understands that
international arbitration could take years to complete, but that it
was a "card" to use in negotiations with the GoA. They also noted
that Marsans has many other interests in Argentina that it is keen
to protect, so it does not want to irreparably harm its relationship
with the GoA.

----------------------------
Money hemorrhaging continues
----------------------------

11. (SBU) Meanwhile, the GoA takeover has done little to address
Aerolineas' infamously poor service and chronic labor conflicts, and
both airlines continue to operate in the red. Aviation analysts and
media reports contend that the two carriers' financial and
operational problems will continue, and put daily losses at almost
US$ 2 million, or about US$ 700 million annually. Actual GoA
payments since the takeover of operations (noted para 6) represent
over $500 million annualized. Such expenses do not include the
reported debt of about $890 million that the GoA must assume.

12. (SBU) The same analysts say that Aerolineas' 9,200 employees
represent an employee per plane ratio of about 344, far higher than
the industry average of about 60-100. Media and Embassy industry
contacts report that in the run-up to the 2009 congressional
elections, GoA-run airlines may be pressured to hire even more
employees. Aerolineas has been plagued by workers' strikes, flight
delays, and cancellations for years. On the revenue side, according
to a recent study by local economists Marcelo Celani and Miguel
Kiguel, while the average airline tariff in Latin America runs $1.24
per mile, it is just 54 cents in Argentina. This same study also
found that since 2001, Argentina domestic aviation costs have grown
far more than tariff increases in nominal terms. For example, while
fuel costs rose 900% and salaries 200% since 2001, tariffs rose only
100%.

----------------------------
The "Argentinization" factor
----------------------------

13. (SBU) Many analysts have pointed to this action as another
example of the GoA's effort to increase state or local investor
participation in companies tied to key economic sectors that were
largely privatized during the 1990s (ref B). This has already
occurred in many sectors, including electricity, gas, water, rails,
ports, mail service, and airports, and follows the GoA's recent
nationalization of private pension fund assets.

-------
Comment
-------

14. (SBU) The expropriation marks the return of the once-vaunted
Argentine flag carrier to Argentine control, though the assignation
of blame for its failure in private hands is ongoing. While GoA and
union officials' accusations that Marsans ruined Aerolineas are to
be expected, increasingly common are allegations that Marsans'
failure is an example of the breakdown of the "jungle of
privatization" and unfettered deregulation. Although Marsans has
not gained much traction in blaming its troubles on GoA and labor
collusion and artificially low prices, it is noteworthy that since
the GoA took control of the two airlines in July, there have been no
strikes and on-time service has improved. While a purchase of
Boeing aircraft would be a silver lining for the United States, the
long-term impact of this action is probably deleterious for
Argentina, as it raises further concerns about the safety of
investing here.

WAYNE

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