VZCZCXRO8611
RR RUEHRG
DE RUEHBR #0303/01 0721049
ZNR UUUUU ZZH
R 131049Z MAR 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 3769
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 7410
RUEHSO/AMCONSUL SAO PAULO 3699
RUEHRG/AMCONSUL RECIFE 9218

UNCLAS SECTION 01 OF 02 BRASILIA 000303 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EEB/TRA, WHA/BSC, WHA/EPSC 
 
E.O. 12958: N/A 
TAGS: EAIR EINV ECON BR
SUBJECT: BRAZIL: LIFTING OF OPERATIONAL RESTRICTIONS AT RIO'S SANTOS 
DUMONT AIRPORT UNLEASHES ANGRY REACTION 
 
SENSITIVE BUT UNCLASSIFIED 
 
REF: A) BRASILIA 0016 B) BRASILIA 0076 C) 08 BRASILIA 1621 
 
¶1. (SBU) Summary: Brazil's Agency for Civil Aviation Regulation 
(ANAC) announced March 4 that it would lift operational restrictions 
placed on Rio's Santos Dumont airport.  The decision opened a 
torrent of angry and combative comments by Rio's Governor Sergio 
Cabral and Rio's Mayor Eduardo Paes, who had been fighting ANAC, the 
Minister of Defense Nelson Jobim, and new market entrant Azul 
Airlines to stop this measure from going forward.  The governor and 
mayor argue that this action would devalue Galeao at a time when its 
privatization is being pursued as a lead up to Brazil hosting the 
2014 World Cup.  ANAC's announcement is not the last move in this 
politically charged debate - the governor has threatened to, and 
can, use state tax and licensing authorities to thwart the 
successful expansion of Santos Dumont.  End Summary. 
 
ANAC'S DECISION 
---------------- 
 
¶2. (U) Regulation 187/05 restricted passenger service at Santos 
Dumont to propeller service, maximum carrying capacities of 50 
people, and permitted service primarily to Sao Paulo's Congonhas 
airport, creating what is called the Rio-Sao Paulo air bridge (Note: 
while the Rio-Sao Paulo route is the most popular at Santos Dumont, 
the airport also services other domestic routes.  End Note).  The 
restrictions, imposed in 2005 by the former civil air regulator, the 
Department of Civil Aviation (DAC), were designed to increase air 
traffic at Rio's larger Galeao airport and elevate it to hub status. 
 In justifying its decision to lift the restrictions, ANAC explained 
that this action was consistent with their mandate of fostering 
greater competition in the civil aviation sector as long as capacity 
and safety requirements were satisfied.  ANAC made its decision 
after evaluating comments received during a contentious public 
hearing held in Rio two months earlier. This decision also came on 
the heels of a Federal court ruling that favored upstart Azul 
airline's claim that the restrictions fostered an uncompetitive 
business environment where 90 percent of Santos Dumont's air traffic 
was on domestic carriers Gol and TAM.  ANAC announced that it would 
meet with airlines interested in expanding their services to Santos 
Dumont once 187's revocation is officially published, which should 
occur within one week. Based on the airline's requests, ANAC will 
then determine slot distributions at Santos Dumont, which, according 
to ANAC, could increase its 120 daily flights to 200.  ANAC expects 
that low-cost carriers such as Azul, A Trip, Webjet and OceanAir 
will aggressively pursue this option together with TAM, despite 
TAM's strong opposition to ANAC's decision.  ANAC plans to authorize 
service between Santos Dumont and Belo Horizonte, Salvador and 
Brasilia in the near future. 
 
RIO DE JANEIRO REACTION 
----------------------- 
 
¶3. (SBU) ANAC's decision has caused local politicians including Rio 
Governor Sergio Cabral and new Rio Mayor Eduardo Paes significant 
frustration.  State and municipal authorities see the development of 
Galeao, Rio's only international airport, as the priority in light 
of Brazil's commitment to host the 2014 World Cup and Rio's 
candidacy for the 2016 Olympics.  State and municipal authorities 
have been working to attract investment for Galeao's eventual 
privatization, an initiative which has required substantial 
political capital on the part of Cabral. ANAC's move to expand 
Santos Dumont airport is seen as undermining those efforts.  The 
governor and mayor argue expanding Santos Dumont service would 
devalue Galeao by taking service from it at a time when Galeao's 
value needs to be enhanced to attract potential investors. (Comment: 
Conflicts still exist within the Gob whether airport privatization 
through concessions will in fact occur any time soon (Reftel C). 
Brigader Cleonilson Nicacio Silva, president of INFRAERO, Brazil's 
airport infrastructure management company, was recently quoted in 
the press as being opposed to the idea of privatizing INFRAERO, a 
key element in an eventual privatization model.  Defense Minister 
Jobim responded the next day in the press that Silva did not have 
the authority to make such comments and that the privatization of 
INFRAERO and the concession initiative for airports Galeao in Rio, 
Viracopos in Sao Paulo and a third airport in Sao Paulo to be named 
later, could still begin this year. End Comment). 
 
¶4. (U) Cabral has accused ANAC of not respecting his and Mayor Paes' 
political authority by opening Santos Dumont.  Calling ANAC's 
decision cowardly and absurd, Governor Cabral vowed to fight the 
expansion of Santos Dumont in the judiciary.  Mayor Paes is also 
publicly committed to fighting against any new flights at Santos 
Dumont.  In a March 4th article in national newspaper O Globo, 
Cabral accused ANAC of ceding to the pressures of Azul's owner David 
Neeleman, who Cabral labeled as a "lobbyist," "liar" and "gringo" 
 
BRASILIA 00000303  002 OF 002 
 
 
(Note: Neeleman, founder of U.S. airline Jet Blue, is a dual 
American/Brazilian citizen.  Cabral mocked his American accent in 
the same article. End Note).  Cabral has threatened to impede new 
flights at Santos Dumont by increasing the state tax on aviation 
kerosene from 4 percent to 18 percent.  Cabral also has raised the 
possibility of not issuing new environmental licenses required for 
the proposed service expansion at Santos Dumont, which would blunt 
low-cost carriers' ability to use the airport as a regional hub and 
would preserve TAM and Gol's duopoly there. 
 
¶5. (SBU) Cabral also targeted Minister of Defense Jobim, criticizing 
him for appointing Solange Vieira as ANAC's president.  Cabral 
claimed that Jobim is no longer willing to talk with him about 
Santos Dumont, forcing Cabral to pursue drastic measures that could 
lead to an increase in hostilities and operational challenges at 
Santos Dumont.  (Note: Industry contacts of consulate Sao Paulo have 
suggested that Cabral's vehement opposition to Santos Dumont's 
expansion is linked to his alleged connections to special interests 
that would benefit financially from the revitalization of Galeao, 
estimated to cost over USD 40 million. Post has not been able to 
confirm such allegations.  End Note). 
 
AZUL'S RESPONSE 
--------------- 
 
¶6. (U) In responding to the opposition to the expansion of services 
at Santos Dumont, Azul referenced President Lula's recent 
unsuccessful attempts to convince Brazil's largest plane 
manufacturer, Embraer, to cancel their plans to lay off 4,000 
employees and his urging of Brazilian airlines to buy Embraer 
planes.  Azul's president, Pedro Janot, commented in a March 4th 
article in national economic newspaper Valor that Azul was the only 
Brazilian airline to buy Embraer planes, and that Embraer models 
190/195 were ideal planes for airports with operational capacities 
like Santos Dumont.  He added that Azul's 78 Embraer orders were 
earmarked for use at Santos Dumont and that he could not understand 
why Cabral and Paes would obstruct the President's efforts to 
stimulate Embraer sales while addressing the domestic effects of the 
global economic crisis. 
 
¶7. (SBU) Comment:  Given the strong opposition to this measure by 
Rio's state and municipal officials, there are sure to be continued 
attempts to thwart the implementation of ANAC's decision. 
Nonetheless, ANAC's measure regarding Santos Dumont represents a 
small, yet significant step toward achieving the agency's mandate to 
create greater competition within the Brazilian civil aviation 
sector. This measure also incorporates an important public relations 
effort that was crucial for ANAC, given its false starts in 
implementing other liberalization measures, such as international 
airfare deregulation, which led to legal battles over the 
requirement for public hearings.  By communicating directly to the 
public the benefits of increased aviation competition, ANAC is 
attempting to fulfill its other mandate as defender of passenger's 
rights.  Public perception of ANAC's liberalizing efforts will be an 
important factor in determining whether ANAC has the domestic 
political strength at the federal level to push through its proposed 
reforms in the face of state/municipal opposition.  In this case, 
the governor has plenty of tools at his disposal, including state 
fuel taxes and state environmental license authority, to slow roll 
or stop the attempt to expand Santos Dumont operations.  End 
Comment. 
 
¶8. (U) This message was coordinated with Consulates Rio and Sao Paulo. 
 
 
KUBISKE