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Cablegate: Colombian Aviation: The Only Way Is Up

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 BOGOTA 003676

SIPDIS

SENSITIVE

STATE PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: ECON ETRD EAIR CO
SUBJECT: COLOMBIAN AVIATION: THE ONLY WAY IS UP

Sensitive But Unclassified-- Please Protect Accordingly

1. (U) Summary: 2003 was a tough year for Colombian
airlines due to a drop in passenger traffic and high
operational and fuel costs. Avianca, the nation's largest
carrier, entered Chapter 11 reorganization in New York, and
is up for sale. A Brazilian consortium has offered to take
over Avianca, but Continental Airlines, working in
partnership with Panama's COPA airlines, also expressed
interest at the last minute. Local competitor Aerorepublica
seeks to challenge the majority position of Avianca and has
requested new routes. A new airline, Fenix, owned by 500
Colombian commercial pilots, hopes to begin operation in the
second quarter of 2004, further complicating the picture. The
only bright spot is in air cargo, fueled by an increase of
exports. Meanwhile, GOC officials are slowly examining the
possibility of an Open Skies agreement with the U.S. under a
12-month extension of the previous aviation agreement. End
Summary.

Performance of the Passenger Aviation Sector in 2003
--------------------------------------------- -------

2. (U) Colombian airlines continued to battle high fuel
prices and bankruptcy during 2003. Two of three companies in
the Avianca-led Alianza Summa alliance foundered in 2003.
The board of directors of ACES, a troubled junior partner
which served Miami, Santo Domingo, Lima and Quito, liquidated
the airline on August 20, 2003. ACES was unable to continue
operations due to financial difficulty. ACES routes were
redistributed among other companies such as Avianca, SAM,
Aerorepublica, Aires and Intercontinental.

3. (U) Avianca filed for Chapter 11 in the U.S., narrowly
avoiding harsher Colombian bankruptcy rules which might have
led to its closing. SAM, an Avianca subsidiary that saw a
boost in passengers and gross receipts in 2003, nonetheless
posted a US$16 million loss due to one-time pension costs.
Aerorepublica, Colombia's second largest airline, is hoping
to gain market share in passenger service. It has acquired
two new aircraft and is improving its customer service in
order to challenge Avianca's dominance of the market.

4. (U) Relative shares in the international passenger
market (all destinations) remained steady in 2003, with
Avianca decreasing slightly to 39 percent, American Airlines
up two percent to 11 percent, Panama's COPA at nine percent,
Delta at 7 percent and Continental at five percent of the
market. International travel decreased slightly during 2003
by two percent from 2002 levels, but year-end travel
increased 4.5 percent December 2003 over the previous year.

5. (U) Avianca dominated the 2003 domestic market with a 36
percent market share, followed by Aerorepublica with 21
percent. Domestic travel decreased from January to December
2003 by four percent from 2002 levels. In December 2003
alone, domestic passenger traffic decreased by seven percent
over December 2002. One of the key factors in the decrease
was the success of the Uribe Administration's effort to
secure key highways from the threat of armed groups, whose
roadblocks and kidnapping activities diminished road travel
considerably in previous years. The Viva Colombia Travel
program, administered jointly by transportation and military
authorities, organizes private vehicles into caravans and
provides military escorts in key travel periods. For the
first time in many years, travelers felt intercity road
travel was safe from illegal armed groups in 2003. The
success of the plan will likely continue to depress demand
for airline seats.

6. (U) Some 500 Colombian pilots formed Fenix Airlines and
applied to the civil aeronautics authority for 287 weekly
flights, 175 domestic and 122 international. Media reports
say the GOC intends to approve operations the in April for
domestic flights and international frequencies to the Andean
countries and Santo Domingo. Civiar authorities have denied
this, however. After approval, Fenix will have 180 days to
begin operating. Fenix pilots proposed an initial investment
of US$9 million, of which US$5.5 million would come from
shareholders and US$3.5 million would be borrowed.

Cargo Companies Benefit from Export Increase
--------------------------------------------
7. (U) International cargo rose in 2003 by 16 percent over
2002. Outgoing cargo increased 16 percent, while incoming
cargo increased 14 percent for the same period. The
increases reflect the country's nine percent jump in exports
during the year as well as the 18 percent increase in exports
to the U.S. Domestic cargo also rose nearly eight percent in
2003. Key providers include Aerosucre with 26.5 percent of
the market and LAS with 26 percent, down by five percent
during the year. Avianca is also an important player in cargo
services. Civil Aviation authorities assigned 20 new routes
to seven air cargo companies on March 24, 2004, including six
routes to one U.S. based carrier, Florida West International
Airways Inc.

Avianca's Bankruptcy
--------------------

8. (U) After years of troubled finances, Avianca's U.S.
subsidiary filed for Chapter 11 in New York in March of 2003.
The company filed in the U.S. to avoid stricter Colombian
laws which do not allow for reorganization. To date, Avianca
has restructured US$263 million in debt, and renegotiated
leasing agreements, insurance rates and cut marginal routes,
reducing operating costs by two percent and increasing
operating revenue by 11 percent to US$585.7 million.
Nevertheless, it reported a net loss of US$116.2 million for
2003. The U.S. bankruptcy court also granted Avianca a
series of extensions to identify a buyer that could supply
additional capital. The new owner will also take on
responsibility for Avianca's remaining US$300 million debt
(US$43 million in domestic debt, US$143 million in foreign
debt, and US$114 million in pension-related debt).

A Buyer for Avianca?
--------------------

9. (U) Following months of speculation and talks with a
series of unwilling suitors, Grupo Sinergy, a Brazilian oil
conglomerate that operates Brazil's largest regional airline,
reportedly agreed to purchase Avianca on March 18. Sinergy
offered to inject US$64 million in capital in addition to an
undisclosed sum in exchange for the 50 percent stake owned by
Colombian conglomerate Valores Bavaria. It would also
purchase half of the remaining stake owned by the Colombian
National Federation of Coffee Growers, which will retain a 25
percent share in the airline. Under the terms of the
reported agreement the Coffee Federation can exercise the
option to sell their stake to Grupo Sinergy after three
years. The Avianca subsidiary, SAM, would be included in the
sale. Reports of the deal failed to mention how much Sinergy
would pay for the airline, nor how it would handle Avianca's
existing financial obligations.

10. (U) Sinergy is owned by German Efromovich, a self-made
Brazilian oil magnate who reportedly is known for negotiating
last-minute, rock-bottom purchases of troubled companies and
then rebuilding them. Sinergy's worldwide holdings include
Maritima Petroleo, which generates some US$300 million a year
in oil revenues, including 6,000 barrels a day in Colombia.
It also owns a passenger airline in Brazil, OceanAir, which
is reportedly the fastest growing airline in Brazil. Sinergy
also owns interests in telecoms, power production and marine
construction.

11. (SBU) Continental Airways/COPA remains a potential
suitor, however. According to press reports in Colombia and
the U.S., a possible Continental/COPA deal was mentioned at
the March 2004 Chapter 11 hearing. In response, a press
release from the Brazilian group argued that it had a signed
contract with Avianca. Others knowledgeable about the
Sinergy deal, however, say that Sinergy signed a non-binding
letter of intent and that the deal was far from final. Under
Chapter 11, any deal, whether offered by Sinergy or
Continental/COPA, needs to be approved by the airline's
creditors and the presiding bankruptcy judge. The judge
extended to April 30 the current deadline for Avianca to
reorganize and present a new partner. The parties will meet
again April 20 to determine if the deadline needs to be
extended.

12. (SBU) Civil aviation authorities privately told EconOff
they strongly prefer that Continental and COPA purchase
Avianca. They believe Continental, the seventh largest
carrier in the world, offers strong experience in aviation
management as well as far greater access to international
connections and capital. The civil aviation officials also
said they hoped the number of hours flown by Avianca pilots
would increase under Continental, whose pilots log 20 percent
more flight hours per month than Avianca pilots. Avianca's
President, Juan Emilio Posada, credited Avianca's improved
performance for Continental/COPA's renewed interest.

Labor issues
------------

13. (U) Aviation labor disputes have continued to mark the
Colombian industry. In 2002, 84 Avianca pilots accepted a
company offer to take early retirement, increasing Avianca's
immediate pension obligations by 29 percent. The Colombian
Association of Civil Pilots (ADCAC) maintains, however, that
Avianca has not complied with the agreement and failed to
fund the pension obligations. A planned Easter week work
slowdown by pilots to protest the issue was canceled by the
union March 31 to await the outcome of the bankruptcy
hearings.

Open Skies Up In the Air
------------------------

14. (U) Post broached the offer of an Open Skies agreement
with GOC Civil Aviation authorities in late 2003 as the
existing bilateral air agreement was due to expire December
31. At that time, the authorities told EconOff that the
fragile financial state of Colombian aviation would not
permit national firms such as Avianca to face more
competition. The GOC then agreed to a year's extension of
the existing agreement. Civil Aviation contacts now indicate
they plan to initiate internal discussions on Open Skies
during 2004, but do not believe that they would be ready to
conclude an agreement this year.
WOOD

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