VZCZCXRO2010
RR RUEHMT
DE RUEHBU #1277/01 2562042
ZNR UUUUU ZZH
R 122042Z SEP 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2017
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION 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
RUCNMER/MERCOSUR COLLECTIVE
RUEHMD/AMEMBASSY MADRID 2116
RUEHMT/AMCONSUL MONTREAL 0056

UNCLAS SECTION 01 OF 04 BUENOS AIRES 001277 
 
SIPDIS 
SENSITIVE 
 
STATE EEB FOR TERRI ROBL, KRISTIN GUSTAVSON, VIKI LIMAYE-DAVIS 
TRANSPORTATION FOR BRIAN HEDBERG 
FAA FOR BONNIE AHUMADA, ANNA SABELLA, KRISTA BERQUIST 
FAA MIAMI FOR MAYTE ASHBY, JAY RODRIGUEZ 
MONTREAL PASS USMISSION TO ICAO 
 
E.O. 12958: N/A 
TAGS: EAIR ECON PGOV ELAB AR
SUBJECT: Argentina Renationalizes Flag Carrier Aerolineas Argentinas 
 
This cable contains sensitive information - not for internet 
distribution. 
 
Reftel:  (A) Buenos Aires 1236 
         (B) Buenos Aires 994 
          (C) Buenos Aires 572 
    (D) Buenos Aires 64 
 
¶1. (SBU) SUMMARY: On September 3, Argentina's Senate approved the 
re-nationalization of Aerolineas Argentinas (AR) and its sister 
carrier Austral, formally marking the return of the financially 
troubled flag carrier from the Spanish travel conglomerate Marsans 
Group to state hands.  In announcing this action, and reflecting the 
strong support from the GOA, unions, and most of the opposition, 
President Cristina Fernandez de Kirchner (CFK) vowed to again "make 
Argentines proud" of their national carrier.  The 46-21 vote 
followed an earlier Lower House approval, and gives the GOA the sole 
right to determine what price, if any, the GOA will pay Marsans for 
the carriers, and also ruled out any future privatizations.  The 
vote culminated recent conflict and exchanges of blame among and 
between the GOA, airline unions, Marsans, and the political 
opposition over the air carriers' financial woes, labor conflicts, 
and an estimated US$890 million in debt, and also raised questions 
about the GOA's own oversight role of the carriers in recent years. 
Opposition politicians have demanded to know why the airlines failed 
despite a near-domestic monopoly, advantageous international route 
rights, preferential airport fees, and while Argentina is enjoying 
the biggest tourism boom in its history.  Difficult decisions still 
remain unresolved: determining the financial situation of both 
airlines; deciding on a price to be paid to Marsans; and deciding 
how these carriers will be managed in the future.  Many local 
analysts doubt that this renationalization will guarantee improved 
carrier finances, union peace or better service.  It remains 
questionable to many observers here whether the GOA is financially 
or technically capable of running such an operation efficiently and 
effectively, especially in today's challenging global aviation 
market.  Pending GoA decisions on this will have important 
consequences in future tourism, trade, and investment prospects. 
Several U.S. companies are service and aircraft suppliers to the 
airlines and have had problems collecting monies owed.  Embassy will 
be alert to their interests.  END SUMMARY. 
 
--------------------------------------------- -------- 
Congress passes nationalization with key modifications 
--------------------------------------------- -------- 
 
¶2. (SBU) After weeks of debate, and the Lower House's own approval 
two weeks earlier, the Argentine Senate on September 3 approved the 
formal renationalization of flag carrier Aerolineas Argentinas and 
its sister carrier Austral.  The bill left unchanged the Lower 
House's bill that had been approved in late August, but is 
significantly different from the original proposed legislation CFK 
sent to Congress following the GOA-Marsans agreement signed on July 
17 (ref B).  The July 17 agreement envisioned the renationalization 
of the carriers and included a mechanism to determine the price the 
GOA would pay Marsans to buy out its equity in the carriers.  In 
place of the original bill's provision to have any disagreement over 
this price arbitrated by a third party, the final GOA bill calls for 
the GOA's Valuation Tribunal to determine the price, and that price 
to be approved by Congress.  Under the revised legislation, Marsans 
has no voice or vote in the matter. 
 
¶3. (SBU) Marsans has stated that it considers the July 17 agreement 
still legally valid, and has publicly threatened to take its case 
before either Argentine domestic courts or the International Center 
for the Settlement of Investment Disputes (ICSID), arguing that the 
GOA could exert unfair power to expropriate the firms or otherwise 
force unfavorable terms on Marsans.  Congress also struck out 
another key passage of the original GOA bill that allowed for an 
eventual re-privatization of the carriers.  (Although the 
possibility still exists that the carriers can be run by a 
concession.) 
 
------------------------------------- 
 
BUENOS AIR 00001277  002 OF 004 
 
 
A bitter divorce and exchanging blame 
------------------------------------- 
 
¶4. (SBU) The vote follows months of blame games and reprisals 
between the GOA, unions, Marsans, and opposition politicians about 
how the carriers have arrived at bankruptcy's door (with an 
estimated $890 million debt), along with their infamous poor service 
and chronic labor conflicts (refs B, C, and D).  While many GoA and 
union leaders celebrated this re-nationalization, some opposition 
figures and representatives from the media questioned the rationale 
for a takeover now, before the carriers have resolved the debt and 
labor issues.  The opposition has also claimed that the public is 
entitled to know how such an airline could have failed.  They point 
to the ongoing boom in international tourism, the airline's virtual 
monopoly on most domestic "cabotage" routes, preferential airport 
service fees, fuel subsidies, and its service in a country whose 
size and road infrastructure shortfalls make flying the only 
transport option for many travelers.  AR and Austral together 
control about 85% of the domestic market, and AR holds lucrative 
route rights to many parts of the world. 
 
¶5. (SBU) The GOA and many opposition politicians accuse Marsans of 
having "hollowed out" the company (selling planes and converting 
them to leases, selling valuable office real estate holdings), 
overbooking fares, failing to fulfill investment pledges, flying 
older and less fuel efficient planes, and scaling back less 
profitable routes.  Marsans has publicly denied these charges, and 
placed the blame squarely on the GOA's own commercial air transport 
policies, lack of proper oversight of this important public service, 
and regulated below market tariffs.  Marsans and opposition 
politicians have criticized the GOA for allowing unions to stage 
regular crippling strikes (ref D), and Marsans has also criticized 
the GoA for vetoing its repeated attempts to trim the carriers' 
staffs (AR has 200 employees per plane vs. the regional average of 
100). 
 
¶6. (SBU) Former Marsans chief executive Antonio Mata characterized 
Transportation Secretary Ricardo Jaime's re-nationalization push as 
the actions of someone who "started a fire so that he can appear as 
a fireman saving the company," and said that Argentina's commercial 
aviation policies are "30 years behind the international norm." 
According to a recent study by local economists Marcelo Celani and 
Miguel Kiguel, the average tariff in Latin America is $1.24 per 
mile, vs. 54 cents in Argentina (with recent tariff increases 
included, ref B).  This same study also found that since 2001, 
Argentina domestic aviation costs have grown far more than tariff 
increases: in nominal terms, while fuel costs rose 900% and salaries 
200%, tariffs rose only 100%. 
 
------------------------------ 
More difficult steps lie ahead 
------------------------------ 
 
¶7. (SBU) Congress's nationalization action marks just the initial 
phase of this process, and the GOA faces more difficult decisions 
ahead.  According to local analysts, there is a three-step process 
that must be accomplished in order for the nationalization to be 
concluded: (1) determining the true financial status of the 
carriers; (2) coming to an agreement with Marsans on the price to be 
paid for AR and Austral; and (3) deciding how these carriers will be 
managed in the future. 
 
¶8. (SBU) Determining the carriers' financial status has already 
proven to be difficult and contentious.  According to local aviation 
group Consultair, a few months ago, before the decision was made to 
re-nationalize the carriers, PriceWaterhouseCoopers (PWC) reported 
that the airlines had a positive net worth of about $20 million. 
Later, PWC presented new statements showing the net worth at about 
negative $30 million.  To add to this confusion, these figures did 
not take into account still-pending 2007 financial statements of the 
carriers.  In recent weeks, Marsans and AR officials have agreed 
that estimated outstanding debts total about $890 million, with 
about $270 million in "urgent" and overdue debts (for fuel, fleet 
rentals, and service providers).  Once Marsans presents the final 
2007 figures, the numbers will be audited by the GOA's Valuation 
 
BUENOS AIR 00001277  003 OF 004 
 
 
Tribunal. 
 
¶9. (SBU) Once the financial status of the firms is determined, the 
nationalization law calls for the Valuation Tribunal to calculate 
these firms' combined value and report this figure to Congress for 
approval or rejection.  Many GOA lawmakers and officials, including 
Transportation Secretary Jaime, have said that the outstanding 
deficits are so great that the question will not be how much Marsans 
gets paid by the GOA, but whether the GOA will claim that Marsans 
should simply hand over the companies for nothing - and maybe even 
demand that it pay all or part of the $890 million debt.  Although 
the GOA could in theory simply expropriate both companies, this 
option could lead to a long legal battle that the GOA would likely 
prefer to avoid, both for legal reasons and its own investment 
climate reputation. 
 
¶10. (SBU) Finally, the GOA must decide how the airlines will be 
managed in the future, including deciding on fleet composition and 
routes.  Currently, day-to-day decisions are being made by the team 
designated by GOA and Marsans as a result of their July 17 accord, 
whose 60-day mandate runs until September 16 (but could be extended 
if needed).  As the Congress ruled out the possibility of 
re-privatizing the carriers (although it was always doubtful that 
they could attract any serious investors), one possibility that has 
been discussed in the media is the carriers being managed via a GOA 
concession, as is the case with the major airports.  These same 
analysts point out the GOA manifestly lacks the expertise and 
capacity to run the airlines itself. 
 
¶11. (SBU) Another point of discussion is whether the two carriers 
might be merged, presumably to reduce costs, or keep them separate. 
This is not an easy matter: the airlines have very different 
backgrounds, management styles, unions, routes, and fleets. 
Aerolineas was established in 1950 as a government carrier, while 
Austral was formed as a private carrier.  Aerolineas has both 
domestic and international routes, while Austral focuses on the 
domestic market.  Once this issue is decided, the carriers would 
need to decide on the appropriate aircraft types on which it will 
focus in the future.  The interim management team, however, has 
decided to accelerate some of the fleet consolidation decisions. 
For example, older models such as AR's Boeing 747-200s, 747-400s, 
737-200s, and Airbus 310s are reportedly set to be withdrawn from 
service, either to be sold or scrapped locally.  Austral, which 
flies almost exclusively the older and less fuel-efficient MD-80s, 
is also reported to be considering a fleet upgrade.  Media reports 
in recent days indicate that Argentina is considering Brazilian 
aircraft manufacturer Embraer as a possible small jet supplier, but 
no details have emerged regarding possible financing or delivery 
times.  If Argentina does pay its Paris Club debts (reftel A), this 
might open the door for possible favorable loan terms for 
U.S.-manufactured plane sales. 
 
--------------------------------------------- ---------- 
No guarantee of better finances, service or union peace 
--------------------------------------------- ---------- 
 
¶12. (SBU) According to local analysts and media reports, the GOA 
appears resigned to spending up to $50 million a month, or about 
$600 million annually (roughly 1% of 2008 primary expenditures) to 
keep the companies in operation.  The GOA has already pumped in 
about $130 million since mid-July to cover current expenses for 
salaries, fuel, leases, and spares.  Some media reports have 
expressed the hope that with this re-nationalization and support for 
the carriers, the unions might start providing improved service. 
According to the Argentine Tourism Rights Association (AADETUR), in 
the first half of 2008, AR and Austral were on time only 53% of the 
time, compared to 79% for flights in the United States. 
 
¶13. (SBU) One industry representative told Emboff that, on the 
contrary, unions could "very easily" push for even more jobs, 
influence and concessions, and that despite this "victory," sooner 
or later they will be demanding more concessions, when they realize 
that state ownership might not be all that they had hoped for.  The 
local trade publication "Aviation News" reported on September 10 
that AR's pilot union is already planning to hire 200 new pilots in 
 
BUENOS AIR 00001277  004 OF 004 
 
 
the coming weeks.  According to media reports, AR pilots have 
already gained some job advantages that had been the subject of 
slowdowns and strikes: they have reverted back to a 35-hour work 
month, versus the regional norm of 80 hours, and will go from three 
to four pilots for long international flights, one above the 
international norm.  During last week's Senate debate, a Marsans 
representative complained that "with pilots only working 35 hours 
per month, we cannot be competitive while LAN pilots here work 80 
hours."  The same representative said that from 2001 to 2008, the 
total number of AR and Austral pilots employed increased from 500 to 
921, while the number of operational planes has declined to 26 
today. 
 
¶14. (SBU) According to local analysts, this domestic aviation 
turmoil will likely not affect Argentine passengers' access to 
international destinations: although AR flies to some regional Latin 
American destinations, Miami and Europe, these destinations are 
already covered in sufficient numbers by U.S., Chilean, Spanish, 
British and other competitor carriers. 
 
¶15. (SBU) Several U.S. companies are service and aircraft suppliers 
to the airlines and have had problems collecting monies owed, 
including Sabre Travel Network and GE Capital.  Embassy will be 
alert to their interests and to help if needed. 
 
------- 
Comment 
------- 
 
¶16. (SBU) Given the bitter relationship in recent years that has 
existed between the GOA and unions on one side, and Marsans on the 
other, many observers saw this divorce as inevitable.  Now that the 
renationalization has been approved by Congress, it is up to the GOA 
and unions to decide whether they can or will work to reform AR and 
Austral into reasonably good domestic carriers, or whether Argentina 
will continue to suffer sub-par, unreliable and strike-prone 
services.  They will need to decide on a series of economic and 
political trade offs, including on domestic fare price increases and 
subsidies, quality of service, and number of employees.  In the 
interim, the GOA will likely continue to be on the hook for around 
$50 million per month in subsidies, and this is above and beyond 
announced plans for more planes, more routes, and the "recuperation" 
of AR and Austral's "former greatness."  It remains questionable to 
many observers here whether the GOA is financially or technically 
capable of running such an operation efficiently and effectively, 
especially in today's challenging global aviation market.  Pending 
GoA decisions on this will have important consequences in future 
tourism, trade, and investment prospects.  END COMMENT. 
 
WAYNE