VZCZCXRO2238
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #1113/01 2700944
ZNR UUUUU ZZH
P 260944Z SEP 08
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC PRIORITY 8540
INFO RUEHHM/AMCONSUL HO CHI MINH 5164
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHGP/AMEMBASSY SINGAPORE 2646
RUEHKO/AMEMBASSY TOKYO 5909

UNCLAS SECTION 01 OF 03 HANOI 001113 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS AND EEB/TRA 
STATE FOR EEB/TRA TERRI ROBL AND VIKI LIMAYE-DAVIS 
SINGAPORE FOR FAA MARY WALSH 
USTR FOR DBISBEE 
USDOC FOR 4430/MAC/ASIA/OPB/VLC/HPPHO 
 
E.O. 12958: N/A 
TAGS: ECON EAIR EIND EINV ETRD VM
SUBJECT: VIETNAM CIVAIR: SCENESETTER FOR OCT 6-8 OPEN SKIES TALKS 
 
HANOI 00001113  001.2 OF 003 
 
REF: 
(A) HANOI 2678: "U.S. AND VIETNAM INITIAL AIR AGREEMENT"; 
(B) HANOI 0029: "VIETNAM AIRLINES WILL EQUITISE"; 
(C) HANOI 1974: "BOEING INKS AGREEMENT WITH VIETNAM AIR"; 
(D) HANOI 0814: "SAFETY ISSUES COULD RESULT IN BLACKLIST" 
 
(U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION. 
 
¶1. (SBU) Summary and Comment:  Vietnam's civil aviation negotiator 
for upcoming negotiations with the U.S. stated that he is willing to 
discuss Open Skies, but noted that fifth freedom passenger services 
between Japan and Vietnam continue to be a concern.  All-cargo 
liberalization is less problematic.  As part of its ambitious 
expansion plans, Vietnam Airlines (VNA) wants to begin direct 
service to the U.S.  It is also considering joining a major airline 
alliance and an American airline member of that alliance has told 
VNA that agreement to Open Skies is a prerequisite.  At the same 
time, safety problems will delay any U.S. direct service and VNA is 
concerned about competition from U.S. carriers and the lack of fifth 
freedom rights from Japan for flights to the U.S. 
 
¶2. (SBU) Comment:  Vietnam's willingness to talk about Open Skies is 
positive, as is the apparently more open attitude toward cargo 
services.  A key consideration for Vietnam and VNA in the upcoming 
talks will be balancing the benefits of joining a major passenger 
services alliance with the greater competition that Open Skies would 
bring.  End summary and comment. 
 
¶3. (SBU) The Embassy welcomes a civil aviation delegation to Hanoi 
from October 6-8, 2008 to conduct bilateral Open Skies talks with 
the Government of Vietnam (GVN).  In 2003, the United States and the 
GVN entered into a five-year Air Transport Agreement that, while 
maintaining restrictions, contains many Open Skies provisions.  The 
main impediment to full liberalization in 2003 was disagreement over 
fifth freedom passenger rights over Japan (REF A). 
 
GVN WILLING TO NEGOTIATE; JAPAN 5ths A PROBLEM 
--------------------------------------------- - 
 
¶4. (SBU) During a September 12, 2008 meeting with the Embassy, the 
Civil Aviation Administration of Vietnam's (CAAV) Deputy Director 
General, Lai Xuan Thanh, said that Vietnam is willing to discuss 
Open Skies (Thanh will head Vietnam's delegation at the upcoming 
talks).  However, an exchange of fifth freedom rights for passenger 
services, particularly related to Japan, "remains difficult."  Thanh 
stated that an agreement to liberalize all-cargo services could 
bring benefits to Vietnam's export-led economy since Vietnam does 
not have a competitor to the major U.S. express cargo carriers. 
 
¶5.  (SBU) Thanh said flag-carrier VNA is interested in expanding its 
network of codeshare agreements, including with U.S. carriers (VNA 
currently has a codeshare agreement with just one U.S. carrier, 
American Airlines).  He noted that VNA was considering joining the 
Sky Team airline alliance, and had been told by alliance member 
Northwest Airlines that Vietnam needs an Open Skies agreement with 
the U.S. as a prerequisite.  Thanh cautioned that CAAV's concern 
about Japan passenger routes would remain despite VNA's final 
position on Open Skies.  CAAV had to consider the possibility that 
another Vietnamese carrier might want to operate Vietnam-Japan 
services in the future and might not be able to compete if the route 
was fully opened for U.S. airlines. 
 
VIETNAM AIRLINES HAS AMBITIOUS PLANS BUT FIFTHS A PROBLEM 
--------------------------------------------- - 
 
¶6. (SBU) The Embassy also met with VNA's Trinh Ngoc Thanh, Director 
of Marketing and Planning and the carrier's representative at the 
upcoming talks.  He said that VNA planned to begin flights five 
times per week from Ho Chi Minh City (HCMC) to Los Angeles (LAX) "in 
mid-2010."  He stated that Vietnam has no fifth freedom agreement 
with Japan and that VNA has just 11 landing slots at Narita Airport. 
 He noted this in contrast with Northwest Airlines, which has 360 
slots.  Without the right to pick up Japan passengers, the HCMC-LAX 
route would likely be unprofitable.  Thanh, however, said VNA would 
adopt a "long-term vision" over short-term profit on the route. 
 
¶7. (SBU) Thanh said the current bilateral agreement with South Korea 
gives VNA just three landing slots per week at Seoul's Incheon 
Airport.  He also confirmed that VNA was considering joining the Sky 
Team Alliance and made the same point that VNA was being told that 
agreeing to Open Skies was a condition.  He noted that while VNA is 
committed to opening up routes, the airline is worried about 
 
HANOI 00001113  002.2 OF 003 
 
 
competition with other Asian and U.S. carriers between Vietnam and 
Japan. 
 
CIVIL AVIATION: HIGHS AND LOWS 
------------------------------ 
 
¶8. (U) The upcoming civil aviation talks occur against the backdrop 
of a rapidly growing Vietnamese commercial aviation sector.  VNA, 
which plans to "equitize" by selling a 20 percent stake in 2009 (REF 
B), has ambitions to become one of the preeminent air carriers in 
Southeast Asia.  It has a fleet of 49 aircraft, and anticipating 
increased tourist and business traffic to Vietnam, plans to expand 
its fleet to 104 aircraft by 2015 and 150 by 2020.  VNA carried a 
record 4.43 million passengers in the first half of 2008, up 15 
percent from the previous year, with revenues up 28 percent to $733 
million.  Due to high fuel prices and government-set price controls, 
however, VNA announced a net loss of $5 million for the period. 
 
¶9.  (SBU) After a slew of high-profile corruption allegations at VNA 
over the last decade, including questionable aircraft and engine 
purchases, newly appointed CEO Pham Ngoc Minh seems to have induced 
a measure of accountability at the airline.  Minh is spearheading 
modernization at the carrier, including the upgraded fleet, the 
recent purchase of a multimillion-dollar reservations system from 
U.S.-based Sabre Airline Solutions, and new and expanded routes. 
 
CAUTIOUS EXPANSION IN PRIVATE AIRLINE SECTOR 
-------------------------------------------- 
 
¶10. (U) The GVN is attempting to spur, albeit cautiously, expansion 
in Vietnam's nascent private airline industry.  It has abolished the 
former 15 percent import tax on jet fuel and allowed three new 
airline applications through 2010. 
 
¶11. (U) The combination of high fuel prices and domestic fare caps, 
however, has slowed what looked to be an ambitious year of expansion 
in the private air sector.  Vietnam's sole budget carrier, JetStar 
Pacific, was formed in 2007 when Australia's national flag-carrier, 
Qantas, purchased an 18 percent stake in Vietnamese state-owned 
budget carrier Pacific Airlines.  Qantas plans to increase its 
ownership to 30 percent by 2010.  Owing to high fuel prices, JetStar 
recently slashed its domestic service by 30 percent and postponed 
plans to increase the size of its fleet from five to 14 aircraft by 
the end of 2008.  Despite the domestic route cuts, JetStar plans to 
launch regional service to Bangkok, Siem Reap and Singapore in late 
¶2008. 
 
¶12. (U) Vietnam's first two privately owned carriers, VietJet Air 
and Air Speed Up had been scheduled to begin service in late 2008. 
VietJet, however, recently fired its newly hired CEO and other 
executives, and shelved plans to begin flights and postponed leasing 
its first aircraft.  Air Speed Up is still planning to initiate 
service in late 2008, although the company is attempting to change 
its name.  In addition, a third startup, Mekong Air, recently filed 
an application to begin domestic service. 
 
U.S. CARRIERS 
------------- 
 
¶13. (SBU) United Airlines, which operates daily flights to HCMC via 
Hong Kong, is currently the only U.S. carrier to offer direct 
service from the United States to Vietnam using its own equipment. 
Cargo operators UPS and Federal Express each have operations in 
Vietnam, although only FedEx flies its own aircraft (once daily) 
into HCMC.  Both companies are restricted by the inability to 
conduct fifth freedom and all-cargo seventh operations.  FedEx's 
Vietnam representative told the Embassy that while the company has 
workarounds to meet its needs in Vietnam, it would prefer to have 
seventh cargo freedoms. 
 
REGULATOR FAILS TO KEEP PACE 
---------------------------- 
 
¶14. (SBU) Although Vietnam Airlines has enjoyed an accident-free 
safety record over the last decade, Vietnam's civil aviation 
regulator, the CAAV, has failed to keep pace with the country's 
rapidly expanding commercial air traffic.  A December 2007 audit by 
the International Civil Aviation Organization (ICAO) found serious 
shortcomings with Vietnam's aviation safety system (REF D). 
According to the ICAO report, the CAAV has insufficient resources to 
hire and retain qualified inspectors and experienced aviation safety 
technical staff and has no fulltime inspectors.  The report also 
said that Vietnam's national civil aviation law does not empower the 
 
HANOI 00001113  003.2 OF 003 
 
 
CAAV to regulate and oversee aviation safety, including inspections 
of aircraft and aviation facilities. 
 
¶15. (U) The CAAV hopes to correct many of the problems through its 
work on a $1.4 million technical assistance project funded 
principally by the U.S. Trade and Development Agency (TDA).  The 
project, scheduled to wrap up in mid-2010, will help the CAAV 
upgrade its aviation safety oversight role and may help Vietnam 
secure an FAA Category I safety rating, allowing VNA to open service 
on its long-planned HCMC-LAX route. 
 
AVIATION INFRASTRUCTURE 
----------------------- 
 
¶16. (U) Rapid growth has imposed strains on Vietnam's outmoded 
system of transportation infrastructure and the GVN is racing to 
upgrade its aviation facilities.  Vietnam will spend $850 million to 
build a second terminal at Hanoi's Noi Bai International Airport, 
increasing capacity from six million to sixteen million passengers 
per year.  The GVN will also build a second international airport in 
southern Vietnam to supplant Ho Chi Minh City's congested Ton Son 
Nhat International Airport.  The new facility, Long Thanh 
International Airport, will be located approximately 40 kilometers 
northeast of HCMC and will serve 50-80 million passengers per year 
when it opens after 2012. 
 
COMMENT: DECISION MAKING AND ECONOMIC OUTLOOK 
--------------------------------------------- 
 
¶17. (SBU) The GVN retains a top-down decision-making process, 
despite independence at the mid and lower levels of the bureaucracy. 
 In cases where the bureaucracy takes the lead, Vietnam relies on a 
consensus decision-making process, which often results in a slow and 
cautious approach to commercial decisions and policy issues. 
 
¶18. (SBU) The United States is currently Vietnam's largest export 
market and third largest overall trade partner.  Two-way trade in 
goods with the United States in 2007 was $12.53 billion, up 29 
percent from 2006.  While the great majority of experts consider 
Vietnam's long-term economic prospects to be bright, short-term 
macroeconomic imbalances are worrying investors.  Vietnam's current 
turmoil is rooted in high inflation (28 percent year-on-year in 
October), a large current account deficit, and inefficient 
allocation of resources, which is particularly obvious in the 
disproportionate amount of state resources devoted to powerful State 
Owned Enterprises (SOEs). 
 
MICHALAK