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Cablegate: Kamair Moves Forward On Safety but Warns of Bankruptcy

VZCZCXRO5071
OO RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #2964/01 2691233
ZNR UUUUU ZZH
O 261233Z SEP 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1677
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHAD/AMEMBASSY ABU DHABI 1993

UNCLAS SECTION 01 OF 02 KABUL 002964

SENSITIVE
SIPDIS

DEPT FOR EEB/TRA, S/SRAP, SCA/RA, SCA/A,
DEPT PASS TO FAA: RAY SMITH

E.O. 12958 N/A
TAGS: EAIR EFIN PREL AF
SUBJECT: KamAir Moves Forward on Safety But Warns of Bankruptcy

REF: A) 08 Kabul 496
B) 09 Kabul 2667

1. (SBU) Summary: Afghanistan's third largest private air carrier,
KamAir, has improved its safety procedures, but continues to lose
money. The company's president has long complained of unfair Afghan
Government support for state-owned Ariana Airlines, and believes
another rival sets artificially low prices with support from a bank
with questionable lending practices (a similar conclusion reached by
Safi Airline executives). A tax dispute with the Afghan Government
also contributes to KamAir's financial woes. The airline now loses
between $300,000 and $500,000 per month and its president warned of
impending bankruptcy. End Summary.

"We Have Two Enemies: The Afghan Government and Kabul Bank."
---------------------------------

2. (SBU) KamAir President Zamarai Kamgar told econoff September 16
Afghan Government support for Ariana and Kabul Bank's extensive
financial support of rival Pamir Air is pushing KamAir to the brink
of collapse. According to Kamgar, Pamir Air, owned by Kabul bank,
has regular onboard cash raffles on its Kabul - Dubai flight. Its
prices on this competitive route are consistently lower than rivals.
Kamgar alleged Kabul Bank is using its deposit base to subsidize
Pamir Air without its depositors' knowledge in an attempt to drive
rivals out of business. (Comment: other airlines have alleged Kabul
Bank illegally supports Pamir Air (Ref B). Emboffs have discussed
concerns about Kabul Bank's lending practices and unprofitable
business ventures with Ministry of Finance and Central Bank
officials. The International Monetary Fund has expressed similar
concerns. End comment.)

3. (SBU) Government support for state-owned Ariana Airlines further
erodes KamAir's earnings, Kamgar said. An agreement between
Afghanistan and India exempts state-owned airlines from taxes,
forcing KamAir to include taxes in ticket costs and to lose
passengers. He also protested Ariana's monopoly on ground handling
services at Kabul International Airport. KamAir and Safi Airlines
purchased their own ground handling equipment but are forbidden to
use it. (Comment: Airport ground handling services will soon be
privatized, but a single contractor will conduct all ground handling
services. KamAir did not bid on the contract. End comment.)

4. (SBU) Combined with increased competition from Ariana and private
airlines like Pamir Air, Kamgar said KamAir is in financial trouble
and only remains operational due to subsidies from owner Kam Group's
other businesses. He could not say how long the airline can
continue to operate at a loss.

Tax Troubles
------------

5. (SBU) Ministry of Finance officials said KamAir has not paid
taxes for the last two Afghan fiscal years. The Ministry cancelled
the installment payment plan for KamAir's back taxes in September
and initiated enforcement proceedings. Kamgar said the Afghan
Government has attempted to levy a 10 percent tax on each passenger,
which is illegal and has been referred to President Karzai for
resolution. He says KamAir will pay the tax when the rate is
reduced to 2 percent, which is what Ariana pays as a state-owned
airline. He added he is waiting for the Ministry of Public Works to
pay a $200,000 road paving bill to another Kam Group company, which
he will use to pay KamAir's back taxes.

Safety Certification Improves
-----------------------------

6. (SBU) After failing a Ministry of Transport safety audit
conducted by International Civil Aviation Organization (ICAO)
contracted inspectors early in 2009, the airline improved its
practices and was certified in compliance with Afghan and
international standards by the Ministry of Transport on September
16, Kamgar said. He introduced American Frank Nelson as KamAir's
new Director of Operations. Nelson noted he is exploring a
potential International Air Transportation Association (IATA) audit,
which would enable KamAir to join an airline alliance.

New Routes
----------

7. (SBU) Kamgar said he is not considering eliminating the
unprofitable Kabul - Dubai route at this time. The airline will add
service to Al Ain in the United Arab Emirates soon, and is applying
for landing slots at Amsterdam-Schiphol and London (although Kamgar
could not specify which London airport). The airline will also
expand its domestic routes, which should be profitable due to the
danger of road travel, Kamgar said. Ninety percent of the airline's
passengers are foreign.

KABUL 00002964 002 OF 002

8. (SBU) Comment: Kamgar blamed his competitors rather than his own
management decisions for KamAir's predicament. For example, he
appeared unknowledgeable about which KamAir routes generate more
revenue than others. His fixation on his competitors' alleged
misdeeds may well obscure a real problem, namely, KamAir's unpopular
routes and high operating costs. Compounding management problems,
his new Director of Operations (with whom he does not share a common
language) seemed unaware of the airline's financial problems. End
comment.

EIKENBERRY

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