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Cablegate: Brazilian Business Perspectives On Open Skies

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RR RUEHWEB

DE RUEHSO #0076/01 0321643
ZNR UUUUU ZZH
R 011641Z FEB 10
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 0333
INFO RUEHAC/AMEMBASSY ASUNCION
RUEHBO/AMEMBASSY BOGOTA
RUEHBR/AMEMBASSY BRASILIA
RUEHBU/AMEMBASSY BUENOS AIRES
RUEHCV/AMEMBASSY CARACAS
RUEHLP/AMEMBASSY LA PAZ
RUEHMN/AMEMBASSY MONTEVIDEO
RUEHRG/AMCONSUL RECIFE
RUEHRI/AMCONSUL RIO DE JANEIRO
RUEHSG/AMEMBASSY SANTIAGO
RUEHSO/AMCONSUL SAO PAULO

UNCLAS SAO PAULO 000076

SENSITIVE
SIPDIS
EEB/TRA/AN FOR DHUTCHENS
EEB/TRA/OTP FOR BSILER
STATE PASS TO TRANSPORTATION AND FAA

E.O. 12958: N/A
TAGS: EAIR ECON PGOV EINV ETRD BR
SUBJECT: BRAZILIAN BUSINESS PERSPECTIVES ON OPEN SKIES

REF: 09 BRASILIA 1319; 09 SAO PAULO 630

1. (SBU) Summary: In recent meetings with Brazilian flag carrier
TAM, low cost carrier Azul, U.S. airlines, Brazilian tour operator
Agaxtour, FEDEX and the GOB-owned airport concessionaire
(Infraero), representatives acknowledged the benefits of a
potential Open Skies Agreement (OSA) between the United States and
Brazil as bilateral economic ties grow and Brazil's expanding
middle class (ref B) travels more. They also cited many challenges
to an agreement including the competitive disadvantages of
Brazilian carriers, infrastructure limitations and a foreseeable
shortage of trained personnel to implement increased security and
safety requirements. ANAC's President Solange Vieira has also
expressed doubts regarding the feasibility of beginning OSA
negotiations in 2010. Nonetheless, with domestic demand for air
services growing 42 percent over the last year and low-cost
carriers Azul, Webjet and Oceanair gaining market share, business
interest in an OSA appears to be growing. Discussions with
industry contacts suggest that fostering nascent direct
partnerships between Brazilian and U.S. airports, exploring a cargo
OSA, or working toward expanding cargo and passenger frequencies
could create a foundation for moving forward on a comprehensive
OSA. End Summary

Growing Demand Spurs Interest as Fears Linger

2. (SBU) With Brazil's economy and middle class growing steadily
and major international events looming, (e.g. World Cup in 2014,
Olympics in 2016) demand for passenger and cargo services are
climbing. According to the Brazilian National Civil Aviation
Agency (ANAC), the number of domestic passengers has tripled within
the last decade to over 60 million per year. Consulate General Sao
Paulo became the busiest non-immigrant visa issuing post in the
world in FY-09. Brazilian airlines, tour agency, and Infraero
representatives we spoke with acknowledged that an Open Skies
Agreement would be a natural framework for promoting fair
competition. Nonetheless, contacts such as Infraero Director of
Operations at Guarulhos Airport, Percio Rosa da Silva, acknowledge
that insufficient infrastructure, restrictive labor laws and
onerous taxes, place local industry at a competitive disadvantage
to U.S. carriers. As such, Silva and others suggest that a lengthy
phase-in period or other staged implementation would be necessary
to reduce asymmetries. Jose Mauricio Mollo, the president of the
National Airline Union (SNEA), said that many Brazilian airlines
actually favor an Open Skies Agreement between South American
nations prior to one with North American or European airlines, as a
means of reducing the competitive disadvantages of Brazilian
carriers.

Clear Benefits

3. (SBU) While concerned about competitiveness challenges local
industry would face under an OSA with the United States, most
private sector contacts including Paulo Castello Branco of TAM and
Luiz Camillo of United Airlines also acknowledge the benefits of
increased trade and travel for lowering consumer costs, enhancing
productivity and spurring economic growth. Adalberto Febeliano of
Azul says that an OSA could also bolster tourism, already growing
annually at 5 percent. Brazilian contacts also expect
decentralization of the market to lead to partnerships and
eventually joint ventures, similar to those that exist between U.S.
and European carriers. While the American carriers are more vocal
proponents than the Brazilian carriers, all parties agree that
forming partnerships brings opportunity for competition. Brazilian
low cost airlines, in particular, are eager to partner with
American carriers on code-sharing to extend their internal routes

to U.S. destinations. Conversely, U.S. carrier representatives
such as Luiz Camillo of UAL view an OSA as key to competing for
slots in the tight Sao Paulo and Rio de Janeiro markets. U.S
companies cite their recent entries into Northeast Brazil, a
traditionally less competitive and profitable area, as evidence of
the growth potential unleashed with liberalized air frequencies.
Agaxtour owner, Aldo Leone, echoed the call for an OSA, saying the
competition and partnerships spurred by an OSA translate into lower
prices and more choices for the growing number of Brazilians with
disposable income for domestic and international travel.

But Challenges Remain

4. (SBU) Despite the clear benefits of an OSA, business contacts
foresee various impediments to liberalizing passenger and cargo
services in the near future. Brazilian airport infrastructure and
congestion pose a particular challenge. For example, a recent
realignment of 381 slots in Congonhas Airport designed to spur
competition may actually drive some of the low cost players out of
the airport. Guarulhos international airport is approaching its
limit even at non-peak times. A third Guarulhos terminal is
planned, but groundbreaking has not started even as the 2014 World
Cup and 2016 Rio Olympics approach. In the meantime, Azul, Gol and
other low-cost carriers have expanded their presence at nearby
Viracopos airport in Campinas. As a result, Viracopos will receive
an additional 6.5 million passengers per year beginning in 2010,
according to Azul President Pedro Janot. Though there are plans
for another airport in the GOB's national public infrastructure
investment program (PAC), Infraero Guarulhos Operations Director
Rosa da Silva said it is unlikely there will be any development
within the next four years. Under this extreme congestion, U.S.
carriers face significant challenges in expanding their routes to
the lucrative Sao Paulo market, even in partnership with the
Brazilian airlines.

5. (SBU) Infraero views potential partnering with U.S. carriers as
an opportunity to refine the Brazilian security requirements in
accordance with the stringent U.S. levels. Percio Rosa da Silva
emphasized that Brazil would be the ideal partner in Latin America
for an OSA, given the size and commonalities of both nations. He
added that Brazil is the regional leader, providing a model and
training for other Latin American nations. However, he said that
many more personnel trained in U.S. standards would be needed to
accommodate the increase in flights to/from the U.S. anticipated
under an OSA. Da Silva cited more training as a key requirement,
stressing the lack of a private sector institution in Brazil that
prepares flight controllers and administrators of airports. He
noted that Embry Riddle University of Daytona, Florida is in the
process of establishing an agreement to offer aeronautical training
courses in Brazil and suggested such educational cooperation would
be necessary to prepare for an OSA.

6. (SBU) In a recent Washington meeting between ANAC's President
Solange Vieira and DOS Aviation Negotiations Director Kris Urs,
Vieira expressed doubts about initiating OSA discussions with the
U.S.in 2010 given competing priorities at ANAC. Vieira explained
that ANAC was committed to concluding OSA negotiations with South
American partners and an Air Transportation Agreement (ATA) with
the European Union before beginning negotiations with the U.S.
Citing a passenger or cargo based OSA with the U.S. as a hard sell
within the GOB, Vieira suggested that the U.S. instead request
additional frequencies as needed under the current U.S./Brazil ATA.
When pressed about the difficulties in requesting additional
frequencies to Sao Paulo's Guarulhos airport, Brazil's largest and
most preferred international gateway, due to its operational

constraints, Vieira confirmed that the 45 flight per hour limit
imposed in 2009 by ANAC, would be managed under International Air
Transport Association (IATA) world scheduling guidelines, offering
a more reliable scenario for increasing there. (Note: DOT is going
to confirm this with IATA. End Note)

Moving forward...

7. (SBU) Business representatives tell us that moving an OSA
forward will require more dialogue among the airlines, consumers
and government. The airlines and tour companies, represented by
Agaxtour and Infraero, all point to Brazilian bureaucracy and
competition fears as major stumbling blocks towards implementing an
OSA. Nevertheless they say direct airport agreements, such as the
cooperative exchange program between Guarulhos and Miami
international airports have enhanced relationship building and
reduced Brazilian carriers' fears of competition. Such an
agreement aims to officially link both airports, committing each to
exchange information pertaining to passenger and cargo industries
as well as create working groups to promote additional areas of
cooperation. Infraero is already seeing the benefits from
information and security exchange, formulating a preliminary study
about broader airport cooperation. Shipping industry
representatives suggest another potential starting point for an OSA
could be cargo, as 50 percent of the cargo shipped from Brazil's
main cargo airport (Guarulhos) is destined for the United States.
Increased cargo options and simplified requirements under an OSA
would expedite delivery and reduce shipping costs - a major expense
for Brazilian manufacturers and importers.

8. (SBU) Cargo contacts, including FEDEX, are strong proponents of
an OSA. Jim Davis, of FEDEX's Sao Paulo office, stated that an OSA
would provide his cargo shippers flexibilities to expand their
networks. FEDEX currently has five frequencies per week between
Viracopos airport (in Campinas, an hour from Sao Paulo) and their
Memphis hub, in addition to intra-South American flights. Bruno
Ramon Ariki of Brazilian freight forwarder Expeditors
International, similarly told Econoff that enhanced code-sharing
would decrease freight rates while offering more variety for
Brazilian freight forwarders to use other airline routings. Ariki
said that Brazil's current restrictions on cargo routes major lanes
represent a major cost hurdle for shippers. In addition to airline
code sharing, Ariki envisions that Brazilian freight forwarders may
benefit from the possibility of sales offices in the USA, which
could convert earnings and remittances to Brazil without
restrictions.

COMMENT

-------

9. (SBU) The Brazilian civil aviation market has opened slowly in
recent years and an OSA would further decentralize the current
duopoly in passenger service (TAM and Gol posses 85% of market
share), which would benefit the Brazilian consumer. While
competitiveness concerns by Brazilian carriers and capacity issues,
derived mostly from infrastructural limitations, represent a
challenge to reaching an OSA, growing demand for air services in
Brazil and increased concerns about the global competiveness of
Brazilian manufacturers (e.g. shipping costs) provide a potential
foothold for U.S. airlines to enter the growing Brazilian market.
Above all, there is a need for increased dialogue among the
stakeholders, with the backing of the GOB (Reftel A), to advance an
OSA. Although 2009 saw a significant increase in civil aviation
security and safety cooperation between the USG and GOB, OSA

negotiations in the near-term appear unlikely. In the meantime,
as American carriers strive to increase their presence and profits,
building on nascent airport-to-airport partnerships and leveraging
increased demand for passenger and cargo services into additional
frequencies may be a means of moving forward. End Comment.

10. (U) This cable was coordinated/cleared by Embassy Brasilia.
White

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