VZCZCXYZ0003
RR RUEHWEB

DE RUEHBU #2390/01 3611840
ZNR UUUUU ZZH
R 271840Z DEC 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 9972
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC//AWH-10//
RHMCSUU/FAA MIAMI SO IFO23 MIAMI FL
RHMFIUU/FAA MIAMI ARTCC MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6739
RUEHMN/AMEMBASSY MONTEVIDEO 6943
RUEHSG/AMEMBASSY SANTIAGO 0954
RUEHBR/AMEMBASSY BRASILIA 6622
RUEHQT/AMEMBASSY QUITO 1036
RUEHSG/AMEMBASSY SANTIAGO 0955
RUEHLP/AMEMBASSY LA PAZ DEC YEREVAN 0002
RUEHMT/AMCONSUL MONTREAL 0039
RUEHGL/AMCONSUL GUAYAQUIL 0099

UNCLAS BUENOS AIRES 002390 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE EEB FOR TERRI ROBL, JOEL REIFMAN, VIKI LIMAYE-DAVIS 
TRANSPORTATION FOR BRIAN HEDBERG 
FAA FOR CECILIA CAPESTANY, ANNA SABELLA, KRISTA BERQUIST 
FAA MIAMI FOR MAYTE ASHBY 
FOR USMISSION TO ICAO 
 
E.O. 12958: N/A 
TAGS: EAIR ECON PGOV AR
SUBJECT: Argentina: GoA Extends Airport Concession Contract, 
Fundamental Problems Remain 
 
Ref: (A) Buenos Aires 1629 
 (B) Buenos Aires 1456 
 (C) Buenos Aires 1070 and previous 
 
This cable contains sensitive information - not for internet 
distribution. 
 
¶1. (SBU) SUMMARY: On December 7, outgoing President Nestor Kirchner, 
in one of his final moves before leaving office, approved a 
modification of the GOA concession contract with Aeropuertos 
Argentina 2000 (AA2000), the company that operates the 33 major 
airports in Argentina.  The AA2000 concession has been extended 
through 2028 with a linked AA2000 commitment to invest $2 billion in 
infrastructure improvements.  In addition, AA2000's concession 
payments to the GOA have been changed from a fixed to a variable fee 
based on revenues.  To address an overhang of almost $400 million in 
accumulated AA2000 debt to the GOA, media reports that the agreement 
allows the GOA to swap this debt for an up-to-20% direct equity 
stake in AA2000 - another step in a trend towards more state 
ownership of productive assets.  For U.S. carriers, this deal offers 
a few positive measures, including a reduction in some airport fees, 
but AA2000's fundamental problems - high costs, poor services, an 
unhealthily cozy relationship with the GOA, and ever-changing rules 
- remain unresolved.  END SUMMARY. 
 
-------------------- 
Background on AA2000 
-------------------- 
 
¶2. (SBU) In 1998, the GOA awarded Aeropuertos Argentina 2000 
(AA2000) a 30-year concession to operate Argentina's major 33 
airports, including the two airports servicing Buenos Aires, Ezeiza 
International and Aeroparque.  AA2000 is also the owner of 
Argentina's airport duty-free operator, Interbaires.  AA200 was 
originally a consortium owned by Milan airport operator SEA (30%), 
U.S. ground-handling company Ogden (28%), and Corporacion America 
Sudamericana (32%), controlled by Argentine entrepreneur Eduardo 
Eurnekian.  By 2000, Eurnekian retained full control of the AA2000 
entity.  Through his Americas Corporation holding company, Eurnekian 
also operates the major airports in Montevideo, Uruguay; Guayaquil, 
Ecuador; and Yerevan, Armenia (where Eurnekian has ancestral ties 
and extensive business contacts). 
 
¶3. (SBU) The 1998 AA2000 concession contract called for an annual 
payment (called a "canon") to the GOA of 171 million pesos (then 
equal to $171 million, today roughly $55 million), general 
infrastructure investments of $562 million in the first four years, 
and $2.2 billion in total investments by 2015.  According to U.S. 
carrier representatives here, it was always understood that AA2000's 
smaller, loss-making regional airports would be subsidized by 
substantial fees generated from Ezeiza and Aeroparque, which 
together account for roughly 70% of total Argentine air traffic. 
AA2000 never came close to honoring these terms, having only paid 
the full canon the first year, and largely failed to fulfill the 
investment objectives.  As a result, AA2000 has accumulated a debt 
to the GOA of roughly $1.2 billion pesos (about $387 million). 
 
¶4. (SBU) AA2000's performance remains highly controversial.  Its 
management claims that the GOA has often changed contract rules and, 
after the fact, added new airports to its modernization mandate. 
AA2000 also argues that it has had to deal with the extraordinary 
impact on domestic air traffic of Argentina's 2001-02 economic 
collapse, the extended impact of 9/11 on international airline 
traffic, and slower-than-anticipated growth in passenger volumes. 
AA2000's detractors, including all international and domestic 
carriers operating here, contend that AA2000 won its concession bid 
by offering the GOA an unsustainably high annual payment with the 
 
intent, once it was comfortably in place, to renegotiate its 
contact.  They charge that AA2000's fees for landing, storage, and 
other services are among the highest in the world, while its 
services are of relatively low quality.  They also complain of 
arbitrary fees, changing rules, unrealized investment plans, lax GoA 
regulatory oversight of AA2000 management, and overly cozy relations 
with the Kirchner administration.  (Eurnekian frequently lends out 
his private plane to the Kirchners when official GOA planes are 
unavailable.) 
 
--------------------------------------- 
New Contract Extends Concession to 2028 
--------------------------------------- 
 
¶5. (SBU) On December 7, outgoing President Nestor Kirchner approved 
a modification and extension through 2028 of the GOA concession 
contract with AA 2000.  This new contract is the result of over a 
year of negotiations between the GOA and AA2000, with limited input 
from carriers and the International Air Transportation Association 
(IATA), the organization that represents over 270 carriers around 
the world.  (IATA has publicly and harshly criticized AA2000's 
performance, and charged that Ezeiza airport's infrastructure and 
operations as among the worst in the region, and even publicly 
called for the complete cancellation of the contract.  IATA has also 
expressed its concerns to the U.S. Department of Transportation.) 
 
¶6. (SBU) According to GoA Decree 1799/2007, starting in 2008, the 
GOA will reduce AA2000's canon from the fixed annual fee of Pesos 
171 million (roughly $55 million) to 15% of gross revenue.  (At 
present rates of operation, this translates to about $29 million, a 
reduction of about half.)  AA2000 will also maintain its original 
concession commitment to make $2 billion in infrastructure 
investments over the duration of the concession period.  Media and 
Embassy contacts also report that, in order to deal with the 
estimated $387 million in accumulated AA2000 debt to the GOA, the 
new contract envisions the GoA swapping all or a portion of this 
debt for up to a 20% equity stake in AA2000.  (Assuming a 
debt-equity swap of a 20% stake for $387 million in debt, this would 
value AA2000 equity at roughly $1.9 billion, a figure that some 
local analysts call extremely overvalued.) In addition, up to 30% of 
AA2000 is to be offered on the Buenos Aires stock exchange. 
 
¶7. (SBU) In response to complaints from international carriers of 
excessively high airport operating fees, the contract also calls for 
airlines to receive a minimum 25% discount on landing and parking 
fees for the first concession renewal year - with the caveat that 
AA2000 is permitted to recoup resulting lost revenue, perhaps via 
increased passenger departure fees.  If airlines surpass a certain 
annual passenger forecast, airlines will also receive an additional 
2% discount for every percentage the forecast is surpassed (up to a 
maximum 12%).  AA2000 will also reduce airline fees 15% the first 
year for those airlines increasing the frequency of their flights. 
 
 
-------------- 
The fine print 
-------------- 
 
¶8. (SBU) According to local aviation contacts, despite some positive 
aspects from the point of view of foreign carriers, the most serious 
concerns about AA2000 management - high costs, poor services, 
less-than-independent regulatory oversight of AA2000, and 
ever-changing rules - remain unchanged and unresolved.  The 
carriers' other big concern is that the new contract does not 
explicitly provide guarantees against other charges being 
arbitrarily added at any time, which they contend AA2000's close 
relationship with the GOA allows.  These potentially new charges 
 
could include facilities rent, fuel charges, fees for other 
services, and in the case of American Airlines, royalties charged to 
ground handling companies that do not use the state-owned 
ground-handling company Intercargo.  According to these contacts, it 
is entirely possible that AA2000 could increase such fees in order 
to pay for the discounts offered in other areas, actions that they 
have done in the past. 
 
------- 
Comment 
------- 
 
¶9. (SBU) With the concession renewals change in AA2000's annual 
payment to the GOA from a fixed to an initially smaller percentage 
of revenues, some skeptics will surely conclude that AA2000 has 
escaped serious repercussions from its non-compliant history of 
payments to the GOA.  As for the announced fee reductions for the 
airlines, including the six U.S. carriers operating here, only time 
will tell if this deal will benefit them, given AA2000's ability to 
add new fees without adequate carrier recourse.  Nevertheless, 
AA2000's underlying problems - poor service, high costs, an 
inappropriately cozy relationship with the GOA, and changing rules - 
remain.  And AA2000's lackluster performance constitutes only a part 
of even greater problems plaguing Argentina's aviation sector 
(reftels A and C), including frequent delays, tariff freezes that 
deter needed investments by carriers serving the domestic market, a 
theft-prone state-owned ground handling company (Intercargo), and a 
bloated, inefficient flag carrier (Aerolineas Argentinas) that 
dominates domestic air traffic.  These problems must be addressed if 
Argentina hopes to leverage its aviation sector to encourage new 
tourism, trade, and investment activity. 
 
¶10. (SBU) No less significant are media reports of the GOA's 
decision to exchange all or a part of this accumulated AA2000 debt 
in exchange for an up-to-20% stake in AA2000.  With this significant 
GOA stake, the GOA has signaled that it seeks to increase the 
state's role in strategic economic sectors.  In recent years, the 
GOA has increased the state role in a number of sectors, by either 
creating new state firms (Enarsa, oil and gas; Lafsa, airline); 
re-nationalizing companies that provide key public services (Correo 
Argentino, postal service; Aguas Argentinas, water company; Thales 
Spectrum, radio airways regulator; and Metropolitan, Buenos Aires 
train service); or increasing equity sakes in private firms such as 
Aerolineas Argentinas.  These actions speak to the GoA's belief that 
it has the capacity -- and public mandate -- to play a greater 
direct role in Argentina's economy. 
 
WAYNE