VZCZCXRO3025
PP RUEHDBU RUEHIK RUEHYG
DE RUEHBUL #1090/01 0931333
ZNR UUUUU ZZH
P 031333Z APR 07
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 7266
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC 0110
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC

UNCLAS SECTION 01 OF 03 KABUL 001090 
 
SIPDIS 
 
SENSITIVE, SIPDIS 
 
DEPARTMENT FOR SCA/FO  SCA/A  EB/OTP  EB/TRA/AN  EB/CBA 
CENTCOM FOR CG CFC-A 
COMMERCE FOR ITA/BLOPP AND DFONOVICH 
FAA FOR JHANCOCK AND RSMITH 
 
E.O. 12958: N/A 
TAGS: BEXP EINV EAIR ECON AF
SUBJECT: ARIANA AFGHAN AIRLINE FINANCIAL CRISIS DEEPENS 
 
Ref: 2006 Kabul 0883 
 
This message is sensitive but unclassified--not for Internet 
distribution. 
 
This message contains an action request; please see paragraphs 1 and 
¶12. 
 
 
SUMMARY 
------- 
 
¶1. (SBU) Boeing recently notified the GoA that, absent immediate 
payment, it intends to terminate its lease contracts with Ariana for 
two B-757s on April 16; Ariana owes Boeing $1.8 million in arrears 
on the contracts.  Minister of Finance Ahady is reviewing his 
options for resolving the financial crisis, which include 
privatization or liquidation but for the moment do not include a GoA 
bailout; the USG is assisting with a consultant to help the MoF 
review Ariana's balance sheet.  The immediate crisis is due in part 
to Ariana's inability to fly the 757s to Europe for safety and 
security reasons.  The USG and other donors are helping to resolve 
these problems, but they will require considerable time to solve. 
The Embassy has been engaged with the GoA at a senior level to urge 
that it honor its commitments to Boeing.  Embassy requests that the 
Department convey to Ambassador Jawad our expectation that any 
buyout or liquidation process be fair and transparent.  End summary. 
 
 
 
CRUNCH TIME ON BOEING LEASE 
--------------------------- 
 
¶2. (SBU) In early March, Boeing issued default notifications for two 
B-757 aircraft leased by Ariana, with a deadline of March 30 for 
payment of $1.8 million (reftel).  No payment has been forthcoming, 
so on 30 March Boeing notified Ariana of its intent to terminate the 
lease agreement as of April 16.  Boeing and the Ministry of Finance 
have established direct contact and are trying to arrange a venue 
and date for a face-to-face meeting to discuss the situation. 
Boeing initially rejected as too late a proposed meeting with 
Minister of Finance Ahady in the U.S. on April 10, when Ahady will 
be attending IMF and World Bank spring meetings.  In a meeting with 
Embassy staff on April 1, Ahady indicated that he expects the April 
10 meeting to happen. 
 
¶3. (SBU) Ahady does appear to be trying in earnest to remedy the 
situation at Ariana and to be giving priority consideration to the 
Boeing obligations.  (In our most recent meeting, Ahady observed 
that the Boeing lease has a sovereign guarantee clause, but that the 
lease's terms do not accord with Ariana's charter.)  In mid-March, 
he asked the Cabinet for $2 million to begin paying Ariana's most 
urgent debts, which the Cabinet declined to do.  At the same time, 
Ahady approached the Embassy for assistance to the MoF in 
quantifying Ariana's assets and liabilities in order to clarify 
possible solutions to the financial crisis, including privatization 
or liquidation.  USAID has supplied a contractor from its 
privatization team to do the review.  Early last week, the Cabinet 
again declined a partial bailout for Ariana; it is scheduled to 
discuss the Ariana situation again on April 2. 
 
¶4. (SBU) At Boeing's request, the Embassy engaged with the GoA and 
Ariana beginning in early March to urge them to find a way to honor 
their financial commitment to Boeing and to do so in a timely 
manner.  We have made representations in support of Boeing at 
several meetings with Ahady, with Minister of Transportation and 
Civil Aviation Niamatullah Jawid, and with President of Ariana Abdul 
Mansoori.  It is clear from these conversations that Ahady is trying 
to understand both the immediate financial situation at Ariana and 
the longer-term prospects for the airline's survival in order to 
take quick action.  The USAID review of Ariana's balance sheet will 
certainly help with the first question, but the second will take 
longer to address. 
 
 
SAFETY AND SECURITY PROBLEMS 
---------------------------- 
 
 
KABUL 00001090  002 OF 003 
 
 
¶5. (SBU) At the root of Ariana's failure to produce revenue from the 
leased 757s are safety and security problems that prevent Ariana 
from flying between Afghanistan and Europe.  Ariana originally 
intended to use the Boeing planes to fly to Frankfurt and London, 
but it has been blacklisted in the EU for safety problems for over a 
year.  These problems reflect Ariana's own difficulties carrying out 
safe maintenance and operations, as well as the Ministry of 
Transportation and Civil Aviation's (MoTCA) inability to administer 
safety oversight.  The USG and ICAO have worked on improving safety 
oversight for some time, but it will take several years before MoTCA 
is fully ICAO compliant. 
 
¶6. (SBU) Ariana and Boeing had hoped to circumvent the safety 
shortfalls by having an ICAO-compliant company operate and maintain 
the aircraft under a third country's safety oversight.  This was the 
reasoning behind having the airplanes operated by Eagle Aviation, a 
French company which falls under French oversight and which had been 
operating the 757s out of Dubai.  However, the German airport police 
authority, which is responsible for approving the security regime 
for Germany-bound flights, has nixed the deal for security reasons. 
The German Ambassador has told the MoTCA that security conditions at 
Kabul International Airport are such that no commercial flight 
originating in Kabul may fly directly to Germany.  As with safety 
issues, the security problems are many and severe, and they will 
take some time to cure.  (NOTE: The Germans have unique insight into 
the security situation at Kabul International, since they are a 
primary provider of security assistance there.  End note.) 
 
¶7. (SBU) Between the safety and security problems, Ariana has little 
prospect of opening a direct route to Europe in the near future, and 
thus the economic logic of the 757 lease (and the follow-on purchase 
of four 737-700s) has crumbled.  Neither Ariana nor Boeing seems to 
have faced up to this until very recently, in part because few 
understood the depth of Ariana's financial crisis. 
 
 
A MEMORABLY UNLUCKY FORTNIGHT 
----------------------------- 
 
¶8. (SBU) The events of the last two weeks have hardly been kind to 
Ariana.  Shortly after Boeing issued its default notices, French 
operator Eagle Aviation grounded the one aircraft it was operating 
for Ariana; the airline had failed to pay for $2.5 million in 
operations charges accumulated since November.  (Eagle had earlier 
leased back the other aircraft for its own charter and wet-lease 
operations to defray part of Ariana's obligations.)  On March 22, 
the beleaguered president of Ariana, Abdul Ahad Mansoori, abruptly 
resigned.  On March 23, one of Ariana's three Airbus A-300s--the 
only one still flying--ran off the runway in Istanbul and was 
damaged beyond repair, although luckily no one was injured.  The 
same week, a UK arbitration decision found against Ariana for $9.5 
million in a contract dispute with a UK operations firm whose 
contract was apparently allowed to run uncancelled for a year, with 
no work being performed.  Ariana's London lawyers will not move on 
an appeal until Ariana pays their fees, which are overdue and 
reportedly amount to nearly $500,000.  To finish this disastrous 
month, on March 31, one of Ariana's 727s clipped a parked Ariana 
727's nose with its wingtip while taxiing in Kabul, damaging both 
airplanes and grounding them for the time being.  This leaves Ariana 
with total of two flight-capable aircraft until it can repair the 
two damaged planes. 
 
 
FINDING A WAY FORWARD 
--------------------- 
 
¶9. (SBU) In our latest meeting with Ahady on April 1, he was still 
groping for approaches to solve the problem.  He indicated that a 
prospective buyer or buyers had expressed an interest in acquiring 
Ariana for $20-30 million if the GoA will assume the airline's 
debts, provided both Boeing deals are still in place.  At this 
juncture, Ahady is wondering whether these prospective deals make 
financial sense.  With only rudimentary information so far on 
Ariana's assets and liabilities, and little sense of the 
profitability of the operations or the market value of assets such 
as ramp space, route structures, and the B-737 contracts, Ahady is 
finding it difficult to judge any offers that may present 
themselves.  USAID's inventory of assets and liabilities should 
 
KABUL 00001090  003 OF 003 
 
 
help, provided the information can be extracted from the thicket of 
unaudited and incomplete financial records at Ariana.  After two 
weeks there, the consultant still does not have all the information 
he thinks is necessary to complete the review. 
 
¶10. (SBU) While we have not heard the specific details, we have 
heard that Kabul Bank and the Alokozay company, both private sector 
Afghan interests, have separately expressed interest in buying 
Ariana.  Ambassador Jawad in Washington has reportedly encouraged 
Boeing to open talks with Alokozay, a large Afghan trading company. 
Neither of these prospective buyers has presence or experience in 
aviation or transportation, so at this point it is difficult to 
judge the seriousness of the interest.  Prospective bidders may well 
try to arrange an inside deal, as opposed to an open and transparent 
acquisition process. 
 
 
COMMENT AND ACTION REQUEST 
-------------------------- 
 
¶11. (SBU) Though the review of assets and liabilities is not yet 
complete, there seems to be little chance of anyone's discovering a 
trove of hidden value in Ariana.  The airline now has two operating 
aircraft and a famously inefficient operation that employs 1,800 
people.  It owes at least $14 million in immediate obligations and 
has a few routes serviced by aging and dangerously neglected 
airplanes.  Though Ahady would clearly prefer to sell Ariana as a 
going operation, he also appears to be willing to consider 
liquidation.  ("I just want it off my hands," was his exasperated 
expression at our last meeting.)  The reality of Ariana's 
predicament is slowly sinking in, and at this point there seems to 
be little inclination within the Cabinet to rescue it as an ongoing 
state enterprise with an injection of GoA money. 
 
¶12. (SBU) Whatever course this crisis follows, U.S. interest appears 
to lie in ensuring that the Boeing deals are not allowed simply to 
default without payment, and in ensuring that any buyout follows a 
transparent process.  At this point, we are agnostic on the question 
of whether Ariana should survive.  Obviously the GoA will have to 
determine the wisdom of keeping its deals with Boeing alive, but 
that question is separable from the necessity of paying its existing 
obligations.  The Embassy will continue to emphasize this point with 
the GoA.  On the question of the transparency of any buyout or 
liquidation, in view of the rumors of Ambassador Jawad's lobbying 
with Boeing, we request that the Department make clear to Jawad that 
the USG strongly encourages the GoA to undertake a fair, transparent 
process.  End comment and action request. 
 
 
NEUMANN