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

C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 003106 
 
SIPDIS 
 
STATE PLEASE PASS TO USTR 
NSC FOR MIKE DEMPSEY 
DEPT OF TREASURY FOR FPARODI 
USDOC FOR 3134/USFCS/OIO/WH/EOLSON 
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD 
DOT FOR SUSAN MCDERMOTT, CAROLYN COLDREN 
STATE PLEASE PASS TO FAA MIAMI FOR MARK RIOS 
 
E.O. 12958: DECL: 12/17/2014 
TAGS: EAIR EINV BEXP ETRD BR FTAA
SUBJECT: BRAZIL: BOEING EXECUTIVES DISCUSS INVESTMENT, 
CIVAIR RESTRUCTURING, AND AIRCRAFT SUBSIDIES 
 
REF: BRASILIA 2939 
 
Classified By: DCM PHILLIP CHICOLA BASED UPON REASON 1.4(B) AND (D) 
 
¶1. (U) THIS CABLE IS BASED UPON INPUT PROVIDED BY ECON, POL, 
AND FCS SECTIONS AT AMEMBASSY BRASILIA AND AMCONSULATE SAO 
PAULO. 
 
¶2. (C) SUMMARY AND INTRODUCTION.  DURING A NOVEMBER 
30-DECEMBER FCS-ORGANIZED GOLD KEY MISSION, BOEING VICE 
PRESIDENT THOMAS PICKERING, ACCOMPANIED BY ALEXANDER WATSON 
(A CONSULTANT FOR THE FIRM), JOHN WOJICK (LATAM VP FOR 
SALES), AND JEFF JOHNSON (VP FOR BUSINESS DEVELOPMENT OF 
INTEGRATED DEFENSE SYSTEMS), MET WITH A SERIES OF BRAZILIAN 
GOVERNMENT AND PRIVATE SECTOR OFFICIALS IN VARIOUS MEETINGS 
IN SAO PAULO, SAO JOSE DOS CAMPOS AND BRASILIA.  TOPICS 
DISCUSSED DURING THE VISIT INCLUDED THE UPCOMING SHAKEOUT IN 
BRAZIL'S CIVAIR SECTOR, DEBT OWED TO BOEING BY VARIG, 
POSSIBLE PARTNERSHIPS WITH LOCAL FIRMS, AND POTENTIAL 
AIRCRAFT SALES.  IN ADDITION, IN THEIR TALKS WITH MFA 
INTERLOCUTORS, PICKERING AND WATSON OFFERED THEIR VIEWS ON 
ONGOING DISCUSSIONS BETWEEN THE U.S, AND THE EU ON AIRCRAFT 
SUBSIDIES AS WELL AS THE STATE OF U.S.-BRAZIL BILATERAL 
RELATIONS.  END SUMMARY AND INTRODUCTION. 
 
CIVAIR RESTRUCTURING 
 
¶3. (C) IN THEIR DECEMBER 2 MEETINGS WITH MINISTER OF 
DEVELOPMENT, INDUSTRY, AND COMMERCE FURLAN AND OTHER GOB 
OFFICIALS, PICKERING, WATSON, AND WOJICK OUTLINED THEIR 
THINKING ABOUT THE LIKELY FACTORS THE GOB WILL HAVE TO 
CONSIDER IN DECIDING WHETHER TO BAIL OUT THE AILING BRAZILIAN 
CARRIER VARIG.  VARIG'S TREMENDOUS DEBT BURDEN, THEY MADE 
CLEAR, WOULD MAKE IT DIFFICULT TO SAVE THE AIRLINE.  (THE 
BOEING TEAM'S OVERALL ANALYSIS ALONG THE LINES OF THAT 
CONTAINED IN REFTEL)  OVERALL, BOEING'S GOB INTERLOCUTORS 
WERE RELUCTANT TO COMMENT ON WHAT THEIR GOVERNMENT WOULD 
LIKELY DO, THOUGH THEIR BODY LANGUAGE INDICATED THAT VARIG 
WAS YET ANOTHER HEADACHE WHICH SOONER OR LATER THEY WOULD 
HAVE TO DEAL WITH. 
 
¶4. (C) GOB VICE-PRESIDENT (AND ALSO DEFMIN) ALENCAR HAD MORE 
TO SAY ABOUT THE VARIG PROBLEM.  IN HIS DECEMBER 2 MEETING 
WITH PICKERING, WATSON ET. AL., ALENCAR MADE THE FOLLOWING 
KEY POINTS: 
 
-- THE GOB WANTS VARIG TO SUCCEED, BUT THE SITUATION IS "VERY 
DIFFICULT."  ALENCAR SAID THAT HE HAD EXAMINED THE COMPANY'S 
BOTTOM LINE, AND IT WAS "A HORROR."  UNFORTUNATELY, THE 
COMPANY PRESIDENT AND THE FOUNDATION THAT GOVERNED VARIG WERE 
IN DENIAL, INSISTING THAT EVERYTHING WAS FINE AND REFUSING TO 
ENGAGE SUBSTANTIVELY ON POSSIBLE SOLUTIONS WITH GOB, 
CREDITORS, EMPLOYEE UNION AND GOL/TAM REPS.  IN A RECENT 
MEETING HOSTED BY THE GOB, VARIG MANAGEMENT REPS DID NOT SHOW 
UP. 
 
-- THE GOB CONTINUED TO BELIEVE THAT THE WAY OUT COULD WELL 
INVOLVE TEAMING VARIG UP WITH LOCAL CARRIERS GOL AND/OR TAM, 
WITH A PRACTICAL RATIONALIZATION OF DOMESTIC AND 
INTERNATIONAL ROUTES AND OTHER RIGHT-SIZING MEASURES. 
ALENCAR SAID THE SITUATION HAD REACHED A LEVEL OF GRAVITY 
WHERE IT MIGHT WELL BE NECESSARY TO CREATE AN ENTIRELY NEW 
SUCCESSOR COMPANY TO VARIG.  THE "OLD VARIG" WOULD REMAIN AS 
THE VEHICLE FOR JUDICIAL SETTLEMENTS AND LIQUIDATIONS, WHILE 
THE NEW COMPANY WOULD BECOME OPERATIONAL IN PARTNERSHIP WITH 
ONE/BOTH OF THE OTHER AIRLINES, THOUGH IT WOULD HAVE TO CARRY 
ON WITH SOME OF THE OUTSTANDING OBLIGATIONS. 
 
-- THE EMPLOYEE UNIONS AND MANAGEMENT MUST BECOME ENGAGED 
WITH EACH OTHER REALISTICALLY ON SUCH ISSUES AS TRANSFER OF 
POSITIONS FROM OLD COMPANY TO NEW, DOWNSIZING/BUY-OUT 
PROGRAMS, EMPLOYEE RIGHTS, ETC., AND ALENCAR THOUGHT THAT WAS 
NOT HAPPENING. 
 
-- ALENCAR WAS SURPRISED BY THE SIZE OF VARIG'S DEBT TO 
BOEING, AND STRONGLY URGED BOEING TO USE ITS LEVERAGE WITH 
VARIG MANAGEMENT TO URGE THEM TO BECOME SERIOUSLY ENGAGED IN 
A NEGOTIATION PROCESS WITH GOB, UNIONS, TAM/GOL WITH A VIEW 
TO FINDING A SOLUTION.  PICKERING AND WATSON UNDERTOOK TO DO 
SO. 
 
-- THE GOB, TOGETHER WITH ITS NATIONAL DEVELOPMENT BANK 
(BNDES), WOULD BE WILLING TO HELP BROKER A DEAL AND THEN 
PROVIDE FINANCING IF THE PROJECT LOOKED VIABLE.  THE GOB 
COULD MOVE WITH ALACRITY IF VARIG MANAGEMENT WOULD ONLY GET 
ENGAGED, ALENCAR SAID.  BUT THE GOB DID NOT/NOT INTEND AN 
OUTRIGHT BAIL-OUT OF VARIG JUST TO SAVE A GLORIOUS AVIATION 
NAME AND SYMBOL OF BRAZILIAN PRIDE, HE ADDED. 
 
¶5. (C) NOTE: BASED UPON RECENT PRESS REPORTING AND POST'S 
SUBSEQUENT CONTACTS WITH LULA'S CASA CIVIL, IT NOW APPEARS 
THAT THE GOB WILL MOVE WITH RESPECT TO VARIG SOON AFTER THE 
BEGINNING OF THE YEAR.  OUR CONTACTS WITHIN THE PRESIDENT'S 
OFFICE TELL US THAT THE GOB IS CURRENTLY CONSIDERING SEVERAL 
ALTERNATIVES.  THE FIRST WOULD BE ISSUANCE OF A PRESIDENTIAL 
DECREE ALLOWING THE GOB TO INTERVENE IN VARIG, BREAKING UP 
THE COMPANY AND DISPOSING OF ITS ASSETS.  ANOTHER OPTION 
UNDER CONSIDERATION, WE WERE TOLD, WAS A PRIVATE TAKEOVER, 
WITH TAM AND GOL DIVIDING UP AS MUCH OF THE COMPANY AS 
POSSIBLE.  STILL UNCLEAR IS WHETHER TAM/GOL WOULD INHERIT THE 
VARIG PENSION FUND (WHICH ITSELF IS IN DEFICIT) AND WHO WOULD 
PAY VARIG'S OUTSTANDING DEBT.  YET A THIRD VARIANT WOULD BE 
THE INVOLVEMENT OF A FOREIGN INVESTOR.  OUR SOURCE TOLD US 
THAT NEGOTIATIONS ARE ONGOING WITH AN UNNAMED MAJOR EUROPEAN 
CORPORATION WHICH IS INTERESTED IN PURCHASING AN INTEREST IN 
THE CARRIER.  PRESUMABLY THIS WOULD BE A MINORITY STAKE AS 20 
PERCENT 
IS THE MAXIMUM FOREIGN OWNERSHIP OF AN AIRLINE ALLOWABLE 
UNDER BRAZILIAN LAW.  WHILE ONE RECENT NEWSPAPER ARTICLE 
ASSERTED THAT PORTUGUESE CHARTER AIRLINE EURO ATLANTIC WAS IN 
DISCUSSIONS WITH BNDES FOR THE PURCHASE OF 20 PERCENT OF 
VARIG, GOB SPOKESMEN TELL US THAT EURO ATLANTIC IS NOW OUT OF 
THE PICTURE.  MEANWHILE, A LOCAL COURT HAS JUST RULED IN 
FAVOR OF VARIG IN THE LATTER'S 2.5 BILLION REAIS LAWSUIT 
AGAINST THE FEDERAL GOVERNMENT, ALTHOUGH THE GOB IS APPEALING 
THIS DECISION.  (VARIG'S TOTAL DEBT IS NEAR 7 BILLION REAIS). 
 
 
AIRCRAFT SUBSIDIES 
 
¶6. (C) ON DECEMBER 2, THE BOEING DELEGATION HAD A FRIENDLY, 
INFORMAL BREAKFAST AT THE MINISTRY OF FOREIGN AFFAIRS. 
PRESENT FOR THE GOB SIDE WERE AMBASSADOR RUY NOGUEIRA (U/S 
FOR COOPERATION AND COMMUNITIES ABROAD), AMBASSADOR ANTONIO 
DE AGUIAR PATRIOTA (THE FOREIGN MINISTER'S CHIEF OF STAFF), 
AMBASSADOR MARIO VILALVA (HEAD OF THE BUSINESS PROMOTION 
OFFICE), MINISTER PAULO CESAR DE MEIRA DE VASCONCELLOS (U/S 
NOGUEIRA'S DEPUTY),  COUNSELOR RALPH PETER HENDERSON (CHIEF 
OF THE IMMIGRATION DIVISION), AND FABIO MENDES MARZANO 
(ADVISOR TO U/S NOGUEIRA). 
 
¶7. (C) PICKERING MADE THE CASE FOR ELIMINATION OF GOVERNMENT 
SUBSIDIES TO AIRCRAFT MANUFACTURERS (I.E., AIRBUS) AND URGED 
THE GOB TO JOIN TALKS ON A MULTILATERAL OECD ACCORD ON 
AIRCRAFT SUBSIDIES.  SUCH AN ACCORD, PICKERING STATED, WOULD 
HELP FILL THE VOID LEFT AFTER THE USG'S RECENT ABROGATION OF 
A 1992 BILATERAL 1992 U.S.-EU UNDERSTANDING ON THIS ISSUE. 
(ABROGATION OF THE 1992 ACCORD COMES IN THE WAKE OF A 1994 
WTO DECISION BANNING AIRCRAFT SUBSIDIES AND A WTO CASED FILED 
BY THE USG THIS YEAR AGAINST EU SUBSIDIES IN VIOLATION OF 
THAT DECISION.)  PICKERING MADE CLEAR THAT BOEING HAD HAD 
EXTENSIVE CONSULTATIONS WITH USTR ZOELLICK ON THIS ISSUE AND 
THAT THE USG HAD BEEN SUPPORTIVE OF BOEING'S CONCERNS. 
NOGUEIRA STATED THAT THE GOB WANTED TO BE AT THE TABLE IF ANY 
MULTILATERAL ACCORD IS TO BE NEGOTIATED, ADDING THAT 
BRAZILIAN OFFICIALS WERE PRESENT AT RECENT 
MULTILATERAL/BILATERAL TALKS IN PARIS ON THIS ISSUE. 
 
U.S.-BRAZIL TRADE RELATIONS AND UNSC SEAT 
¶8. (C) SPEAKING PERSONALLY, PICKERING EXPRESSED GENERAL 
SUPPORT FOR THE GOB'S CAMPAIGN TO GET A PERMANENT UNSC SEAT 
AND NOTED THAT, BASED UPON HIS EXPERIENCE AS USUN PERM REP, 
HE THOUGHT THAT UNSC EXPANSION SHOULD BE ACCOMPANIED BY AN 
AGREEMENT (FORMAL OR INFORMAL) THAT NO UNSC MEMBER WOULD VETO 
A RESOLUTION NOT INVOLVING ITS OWN COUNTRY UNLESS AT LEAST 
THREE UNSC MEMBERS WERE PREPARED TO ALSO VOTE NO. 
 
¶9. (SBU) WITH RESPECT TO TRADE, PATRIOTA MADE CLEAR THAT THE 
GOB'S CURRENT PRIORITY WAS SUCCESSFULLY CONCLUDING THE DOHA 
ROUND.  HE SAID THAT PRIOR TO THE GENEVA MEETING EARLIER THIS 
YEAR, MANY WERE LOOKING AT THE G-20 AS AN OBSTRUCTIONIST 
ELEMENT -- BUT THAT VIEWS HAD CHANGED IN THE WAKE OF THE KEY 
ROLE THAT BRAZIL PLAYED IN ACHIEVING CONSENSUS ON THE GENEVA 
FRAMEWORK.  TURNING TO THE FTAA, PATRIOTA NOTED THAT TALKS 
HAD BEEN DIFFICULT UP TO THIS POINT.  HE OPINED THAT THERE 
WERE SEVERAL VIEWS WITHIN THE FOREIGN MINISTRY AS TO NEXT 
STEPS, BUT ADDED THAT THE PRESIDENT'S VIEW (AND THE VIEW THAT 
WOULD PRESUMABLY PREVAIL) WAS THAT THE FTAA AS IT CURRENTLY 
WAS SHAPING UP SIMPLY DID NOT OFFER BRAZIL ENOUGH.  IN 
RESPONSE TO A QUESTION FROM PICKERING ABOUT THE STATUS OF THE 
MERCOSUR-EU  TALKS, PATRIOTA SAID THAT THE SAME WAS TRUE WITH 
RESPECT TO THOSE NEGOTIATIONS.  PATRIOTA CLOSED BY NOTING 
THAT REPORTS OF DIFFERENCES BETWEEN THE VARIOUS GOB 
MINISTRIES ON TRADE POLICY (I.E., THE MINISTRIES OF 
AGRICULTURE AND DEVELOPMENT/COMMERCE VS. THE MFA) WERE A BIT 
OVERBLOWN.  TO THE EXTENT THAT DIFFERENT AGENCIES HAD 
DIFFERENT POSITIONS, HE SAID, THIS SIMPLY MIRRORED THE 
SITUATION IN THE U.S. 
 
DANILOVICH