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Cablegate: Concerns From the U.S. Flag Carriers

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

UNCLAS SECTION 01 OF 02 BOGOTA 008906

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EAIR CO
SUBJECT: CONCERNS FROM THE U.S. FLAG CARRIERS

REF: A. REF A: BOGOTA 8026
B. REF B: BOGOTA 8515

Sensitive but unclassified -- please protect accordingly.

1. (SBU) Summary. At the midyear point, the three U.S. flag
airlines, American, Continental, and Delta, all report higher
earnings in 2004 than in 2003. All three managers voiced
concerns over the civil aviation authority, Aeronautica Civil
(CAA), the association of Colombian travel agencies (ANATO),
and the Avianca-Synergy deal. End Summary.

----------------------------------
Sales Increase But Problems Remain
----------------------------------

2. (U) 2004 is shaping up to be a good year for U.S. flag
carriers, with sales revenues up from five to ten percent
over 2003 levels. Local station managers attributed this
increase to sustained economic growth, an increase in foreign
investment, a rise in corporate, leisure and student travel,
and the free trade negotiations. The ramp up to the free
trade negotiations, as well as the negotiations themselves,
have significantly increased business travel not only from
Colombia to the U.S., but also from the U.S. to Colombia.
American Airlines' Manager informed Econoff that the increase
in business travel has allowed American to fly five times per
week to Medellin and directly compete against Avianca.
However, the airlines still face restrictions and expensive
tax legislation, high travel agency commissions, a new
administrative fee - (Ref B), and high fuel prices.

--------------------
CAA and the Airlines
--------------------

3. (SBU) All three U.S. carriers expressed discontent with
CAA's regulatory behavior. American Airlines is the most
vocal, stating Colombia is the most regulated airline market
in Latin America. CAA's regulatory behavior affects airline
fares for internet programs, gate access, routes, and
negotiations between private entities, such as travel
agencies and airlines (Ref B). Continental privately voiced
concerns with CAA's response time to Continental's official
complaints, pointing to one example where CAA responded to a
complaint only after the event was a non-issue. Continental
and Delta publicly state, however, they have good relations
with CAA. The airlines did note that CAA was helpful with
security and airport operations.

-----------------
ANATO's Influence
-----------------

4. (SBU) ANATO, the Colombian travel agency association, has
far greater influence with CAA than Colombia's airlines
associations, ALAICO and ATAC, because of strong relations
(and some business ties) with the Colombian Congress and the
travel agency industry's support for political campaigns.
ANATO's influence in CAA policy is readily seen in the rules
regulating internet tickets for airlines (long delays in
processing the requests) and in the newly created four
percent administrative fee for travel agents (Ref B).
ANATO's fight to survive in an era of internet tickets and
reduced commissions for travel agencies is clearly
demonstrated in an email, recently made public by American
Airlines. American's Station Manager in Colombia said the
email, authored by the VP of ANATO, stated ANATO members
should divert their sales principally towards Avianca and
Delta because of Avianca's support for ANATO and American's
lobbying efforts to lower travel agent commissions. American
Airlines has filed a lawsuit against ANATO as a result of the
communication.

---------------------------
Concern Over Avianca's Sale
---------------------------

5. (SBU) Avianca has been in Chapter 11 proceedings since
March 21, 2003 (Ref A). Avianca chose to pursue bankruptcy
protection in the U.S. because U.S. laws are more lenient and
less political than existing Colombian laws. Avianca's goal
was to search for a buyer that would absorb its debt,
currently over USD 300 million, inject capital to the
cash-strapped company, and install a better management team.
By April 2004, Avianca had two bidders, the Brazilian company
Synergy and Continental-Copa. According to American
Airlines' Station Manager in Colombia, Avianca chose Synergy
mainly because Avianca felt that Continental-Copa would
eventually absorb all of Avianca's operations and eliminate
Avianca altogether. Continental's Station Manager in
Colombia stated that the Avianca-Synergy deal is worrisome to
the Colombian aviation industry because Synergy has no real
experience in operating a major international airline and
fears that future Avianca-Synergy troubles may cause a
price-war, where all airlines will lose out (however, CAA
sets minimum and maximum price limits for the airline
industry). On 24 August, a New York Bankruptcy Court Judge
said Avianca's restructuring plan, featuring a purchase by
Synergy (which runs a successful regional airline in Brazil),
complied with the U.S. Bankruptcy Code. This crucial passage
allows Avianca to release the plan to its creditors on 3
September. The confirmation hearing will occur on 14 October
and Synergy hopes Avianca will exit Chapter 11 by the end of
the year. The judge granted 60 days for Avianca to obtain
the necessary votes from the creditors to approve the
restructuring plan.

6. (SBU) Comment. The CAA's efforts to protect Avianca and
ANATO are due to the political influence of both entities.
The CAA has repeatedly refused Open Skies negotiations for
fear that entering U.S. carriers would undermine Avianca's
chances of survival. In addition, it has not challenged even
the most self-serving requests from ANATO. Rumors in the
aviation community suggest that CAA's director Velez has
political aspirations (hoping possibly to follow in the
footsteps of another former CAA director, President Uribe)
and therefore does not want to burn any bridges with Congress
nor ANATO. End Comment.
DRUCKER

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