VZCZCXRO4652
RR RUEHMT
DE RUEHBU #1746/01 3591346
ZNR UUUUU ZZH
R 241346Z DEC 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2774
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 2194
RUEHMT/AMCONSUL MONTREAL 0066

UNCLAS SECTION 01 OF 03 BUENOS AIRES 001746 
 
SIPDIS 
SENSITIVE 
 
STATE EEB FOR TERRI ROBL, KRISTIN GUSTAVSON 
TRANSPORTATION FOR BRIAN HEDBERG 
FAA FOR BONNIE AHUMADA, ANNA SABELLA, KRISTA BERQUIST 
FAA MIAMI FOR JAY RODRIGUEZ 
BRASILIA FOR SHARON WALLOOPPILLAI 
MONTREAL PASS USMISSION TO ICAO 
 
E.O. 12958: N/A 
TAGS: EAIR ECON EINV EIND PGOV ELAB AR
SUBJECT: Argentine Congress Approves GoA Expropriation of Flag 
Carrier Aerolineas Argentinas 
 
Reftel:  (A) Buenos Aires 1277 
         (B) Buenos Aires 836 
 
------- 
Summary 
------- 
 
¶1. (SBU) On December 17, the Argentine Senate approved a bill to 
expropriate the troubled national airline, Aerolineas Argentinas, 
and its smaller sister carrier Austral.  The action followed a lower 
house vote on December 3, and marked the end of almost two decades 
of Spanish control of the flag carrier.  President Cristina 
Fernandez de Kirchner is expected to sign the bill into law before 
the end of the year.  The bill justifies the takeover by declaring 
the service provided by the carriers to be of vital public interest. 
 The purchase price was not included in the bill but will be set by 
the GoA.  The Senate's action took place after negotiations failed 
between Spanish owner Marsans and the GoA.  It also ends months of 
bitter exchanges between Marsans and the GOA (and its union allies) 
over who is responsible for the two carriers' collapse.  Marsans has 
indicated that the company will pursue international arbitration via 
the International Center for the Settlement of Investment Disputes 
(ICSID).  Meanwhile, the two airlines continue to hemorrhage money, 
with daily losses estimated at almost US$ 2 million.  Many analysts 
see this action as another example of the GOA's stealth policy of 
increasing state or local investor participation in companies tied 
to key economic sectors that were largely privatized during the 
1990s (ref B).  END SUMMARY. 
 
------------------------------------------- 
GoA Completes Expropriation of Flag Carrier 
------------------------------------------- 
 
¶2. (SBU) On December 17, the Argentine Senate voted 42 to 21 to 
expropriate the troubled national flag carrier, Aerolineas 
Argentinas, and its sister carrier Austral, marking the end of 
almost two decades of Spanish control of the two airlines.  The 
Senate bill justifies the takeover by declaring the service provided 
by the carriers to be of vital public interest, based on the vast 
size of the country and the fact that the carrier is the only 
airline providing service on numerous domestic routes.   President 
Fernandez de Kirchner is expected to sign the bill into force before 
the end of the year, thus completing the expropriation of both 
airlines from Spanish travel and tourism company "Marsans Group." 
The bill does not set a purchase or compensation price. 
 
----------------------------- 
Senate Follows House Approval 
----------------------------- 
 
¶3. (SBU) The Senate vote followed the December 3 lower house 
approval of the same measure (152-84, with one abstention).  Local 
media quoted the language in the bill as stating that the country 
"cannot accept that public air transport in Argentina continues in 
the hands of a company that operates with notable incompetence." 
The bill further declares the company "of public utility and subject 
to expropriation." 
 
¶4. (SBU) The two carriers had been privatized in 1991 to Spanish 
carrier Iberia, and sold in 2001 to Marsans.  Aerolineas and Austral 
control about 80% of the domestic air market and reportedly operate 
all of their 33 routes at a loss.  The two airlines employ some 
9,000 workers combined.  Aerolineas also flies to about 13 
international destinations, depending on the season, although U.S. 
and European carriers carry the majority of international traffic. 
 
------------------------------------------ 
Vote Ends Months of Torturous Negotiations 
------------------------------------------ 
 
¶5. (SBU) The Senate's action took place after months of deadlocked 
negotiations involving the GoA, Marsans, and the Government of Spain 
(GoS).  Marsans agreed in principle July 17 to sell both airlines to 
 
BUENOS AIR 00001746  002 OF 003 
 
 
the GoA, at which point the GoA took over operational control (with 
formal transfer pending resolution of the purchase price).  Media 
and industry contacts estimate that the GoA has since spent about 
$220 million to cover payroll and other operating expenses.  As part 
of the July agreement, each side pledged to determine a value for 
the companies or submit to third party review if they could not 
agree on the purchase price. 
 
¶6. (SBU) The GoA's Valuation Tribunal estimated Aerolineas' net 
worth at negative US$ 832 million, in contrast to Marsans' estimate 
of US$ 330-540 million (as assessed by Credit Suisse).  The 
Argentine Congress disallowed any third-party review in the final 
version of the bill, and indicated that it alone would fix the 
price.  Nevertheless, the bill as passed does not establish a set 
level of compensation for the expropriation.  Members of Congress 
and GoA officials have since been quoted in the press stating that 
the GoA should not pay anything for the carriers, or even that 
Marsans should pay the GoA for taking it over.  Some legislators who 
voted for the expropriation have publicly floated the idea of paying 
Marsans a single peso (US$ 0.30) as a purchase price. 
 
-------------- 
The Blame Game 
-------------- 
 
¶7. (SBU) This action ends - for now - months of bitter exchanges 
between the GoA and its union allies on one side, and Marsans 
(supported by some opposition politicians and media) on the other, 
over who is responsible for the two carriers' collapse, and how the 
carriers could be on the verge of bankruptcy (with an estimated US$ 
890 million in debt).  The GoA, supported by many legislators, 
accuses Marsans of "hollowing out" the company (e.g., by selling 
planes and leasing them back to the company, overbooking fares, not 
fulfilling investment pledges, flying older and less fuel efficient 
planes, and scaling back less profitable routes).  Perhaps in an 
effort to show that the GoA intends to invest in Aerolineas, the 
company signed a letter of intent in mid-December to purchase two 
Boeing 737-700s.  (Note: funding for the purchase remains unclear.) 
Marsans publicly denies that its actions have harmed Aerolineas' 
financial position, and instead blames the GoA's own commercial air 
transport policies, lack of proper oversight, and its mandate of 
below-market tariffs (as set by the GoA).  Marsans has also 
criticized the GOA for allowing unions to stage frequent, crippling 
strikes. 
 
¶8. (SBU) While many GoA officials and union leaders are celebrating 
this expropriation, some opposition and media figures argue that the 
public is entitled to know how the airlines could have failed.  They 
point to the boom in international tourism to Argentina over the 
last several years, Aerolineas' virtual monopoly on most domestic 
routes, as well as its 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. 
 
---------------- 
Marsans reaction 
---------------- 
 
¶9. (SBU) Marsans has repeatedly accused the GoA of planning to 
expropriate Aerolineas all along.  Marsans alleges that the GoA 
teamed up with unions to disrupt operations and make the airlines 
virtually unmanageable, as a prelude to expropriation.  In a 
December 17 press release, Marsans called the takeover "arbitrary 
and illegitimate" and stated its intention to sue the GoA under the 
auspices of ICSID.  Marsans corporate director Vicente Munoz told 
local press the same day that the proper term for the GoA's action 
was "confiscation" and that "you Argentines will be the ones who 
have to pay for it."  Munoz also noted that insufficient 
compensation would violate the July agreement. 
 
¶10. (SBU) Spanish Embassy contacts confirmed to Emboffs that Marsans 
and the Spanish government officials are deeply angry at and 
 
BUENOS AIR 00001746  003 OF 003 
 
 
frustrated with the GoA over its actions.  However, they also 
confirm that Marsans acknowledged to the GoS months ago that it 
intended to sell Aerolineas anyway.  The same contacts indicated 
that Marsans simply wants fair compensation for its assets. 
Regarding the ICSID suit, they said that Marsans understands that 
international arbitration could take years to complete, but that it 
was a "card" to use in negotiations with the GoA.  They also noted 
that Marsans has many other interests in Argentina that it is keen 
to protect, so it does not want to irreparably harm its relationship 
with the GoA. 
 
---------------------------- 
Money hemorrhaging continues 
---------------------------- 
 
¶11. (SBU) Meanwhile, the GoA takeover has done little to address 
Aerolineas' infamously poor service and chronic labor conflicts, and 
both airlines continue to operate in the red.  Aviation analysts and 
media reports contend that the two carriers' financial and 
operational problems will continue, and put daily losses at almost 
US$ 2 million, or about US$ 700 million annually.  Actual GoA 
payments since the takeover of operations (noted para 6) represent 
over $500 million annualized.  Such expenses do not include the 
reported debt of about $890 million that the GoA must assume. 
 
¶12. (SBU) The same analysts say that Aerolineas' 9,200 employees 
represent an employee per plane ratio of about 344, far higher than 
the industry average of about 60-100.  Media and Embassy industry 
contacts report that in the run-up to the 2009 congressional 
elections, GoA-run airlines may be pressured to hire even more 
employees.  Aerolineas has been plagued by workers' strikes, flight 
delays, and cancellations for years.  On the revenue side, according 
to a recent study by local economists Marcelo Celani and Miguel 
Kiguel, while the average airline tariff in Latin America runs $1.24 
per mile, it is just 54 cents in Argentina.  This same study also 
found that since 2001, Argentina domestic aviation costs have grown 
far more than tariff increases in nominal terms.  For example, while 
fuel costs rose 900% and salaries 200% since 2001, tariffs rose only 
100%. 
 
---------------------------- 
The "Argentinization" factor 
---------------------------- 
 
¶13. (SBU) Many analysts have pointed to this action as another 
example of the GoA's effort to increase state or local investor 
participation in companies tied to key economic sectors that were 
largely privatized during the 1990s (ref B).  This has already 
occurred in many sectors, including electricity, gas, water, rails, 
ports, mail service, and airports, and follows the GoA's recent 
nationalization of private pension fund assets. 
 
------- 
Comment 
------- 
 
¶14. (SBU) The expropriation marks the return of the once-vaunted 
Argentine flag carrier to Argentine control, though the assignation 
of blame for its failure in private hands is ongoing.  While GoA and 
union officials' accusations that Marsans ruined Aerolineas are to 
be expected, increasingly common are allegations that Marsans' 
failure is an example of the breakdown of the "jungle of 
privatization" and unfettered deregulation.  Although Marsans has 
not gained much traction in blaming its troubles on GoA and labor 
collusion and artificially low prices, it is noteworthy that since 
the GoA took control of the two airlines in July, there have been no 
strikes and on-time service has improved.  While a purchase of 
Boeing aircraft would be a silver lining for the United States, the 
long-term impact of this action is probably deleterious for 
Argentina, as it raises further concerns about the safety of 
investing here. 
 
WAYNE