VZCZCXRO4337
RR RUEHRG
DE RUEHBR #0395/01 0892111
ZNR UUUUU ZZH
R 302111Z MAR 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 3930
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 7486
RUEHSO/AMCONSUL SAO PAULO 3785
RUEHRG/AMCONSUL RECIFE 9291

UNCLAS SECTION 01 OF 02 BRASILIA 000395 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EEB/TRA, WHA/BSC, WHA/EPSC 
 
E.O. 12958: N/A 
TAGS: EAIR EINV ECON BR
SUBJECT: Brazil: Open Skies and Privatization Update 
 
SENSITIVE BUT UNCLASSIFIED 
 
REF: A) 08 BRASILIA 1621, B) BRASILIA 0016, C) BRASILIA 0076, D) 
BRASILIA 0303 
 
¶1. (SBU) Summary: The president of Brazil's Agency for Civil 
Aviation Regulation (ANAC), Solange Paiva Vieira, outlined a 
detailed strategy for Open Skies negotiations with the U.S. during a 
March 26 meeting with Ambassador Sobel.  The process involves ANAC 
reviewing a U.S. provided Open Skies economic impact study, hosting 
an Open Skies seminar that would bring together stakeholders from 
the private and public sectors of both countries with extensive 
press coverage, and finally initiating the negotiations, that, 
according to Vieira, would most likely involve an initial meeting of 
the teams (in either Brazil or the United States) to discuss 
objectives and expectations, followed by another session to further 
develop these themes.  Vieira also expressed willingness to revisit 
the current U.S./Brazil civil aviation memorandum of understanding 
(MOU) in order to increase airline frequency allocations.  In 
commenting on the GOB initiative to privatize civilian airport 
management through concessions, Vieira said that the deadline for 
the final model's submission for President Lula's review was still 
July 2009.  She believed GOB was most likely to decide to privatize 
the profitable airports, in view of the need to move forward quickly 
on upgrades given the 2014 World Cup and Rio's bid for the 2016 
Olympics. On pricing liberalization, Vieira asserted firmly ANAC's 
intentions to implement the initiative.  End Summary. 
 
Open Skies Roadmap 
------------------ 
 
¶2. (SBU) Vieira stressed a pragmatic approach to Open Skies 
negotiations.  Vieira is cognizant of strong TAM opposition to 
further liberalization of the Brazilian air services market, and 
aware that TAM has plenty of friends in Congress and elsewhere ready 
to support TAM's interests (see Sao Paulo septel). With that firmly 
in mind, Vieira clearly has a strategy to overcome domestic 
opposition to Open Skies and to position ANAC to be able to 
negotiate an agreement Congress will ratify.  The first step in this 
process, in Vieira's view, is to build public support for Open Skies 
via a public diplomacy strategy.  Key to launching this process, 
Vieira noted, is receiving the Open Skies impact study the USG has 
committed to provide.  With that study in hand, ANAC is positioned 
to address accusations that Open Skies is bad economically for 
Brazil or somehow not to Brazilian consumers' advantage. 
 
¶3. (SBU) Once ANAC has its key talking points from the Open Skies 
impact study, Vieira proposed the USG and ANAC work together to host 
a public seminar to highlight the benefits of an Open Skies 
Agreement between the United States and Brazil.  Vieira suggested 
that the seminar include USG civil aviation officials, U.S. aviation 
economists, GOB counterparts and key stakeholders from Brazil's 
private sector.  The seminar would be open to press and would likely 
take place in Rio in order to maximize positive and sympathetic 
press coverage.  Vieira envisions the seminar focusing on the 
important societal benefits Open Skies creates such as operational 
efficiency and lower ticket prices.  The extensive press coverage 
would allow ANAC to build momentum toward Open Skies.  In 
recognizing the strong opposition to Open Skies from Brazilian 
domestic carriers TAM and GOL, Vieira emphasized that ANAC's public 
relations approach will be critical to ANAC's ability to cultivate 
enough domestic support to be able to conclude an Open Skies 
agreement.  She envisioned that, due to this strong opposition, an 
Open Skies agreement may require more than one meeting to finalize. 
Vieira reconfirmed that ANAC director Ronaldo Seroa Da Motta will 
lead the ANAC Open Skies negotiations delegation. 
 
MOU Revisited- More Frequencies? 
-------------------------------- 
 
¶4. (SBU) In recognizing the fact that demand exceeded supply during 
the recent allocation of 2009 frequencies under the MOU, Vieira 
agreed she is open to a review of the MOU to increase the airline 
frequencies available.  Specifically, Vieira offered that Rio's 
Galeao and Sao Paulo's Viracopos airports are capable of handling 
more flights, but she wasn't sure if U.S. carriers were interested 
in using Viracopos given its distant location from downtown Sao 
Paulo.  Vieira commented that a review of the frequency allocations 
could potentially be done during the same time period as the Open 
Skies seminar in Rio, or sooner if wanted. 
 
Pricing Liberalization /Privatization Schedules 
--------------------------------------------- -- 
 
¶5. (SBU) Vieira mentioned that ANAC will be very busy completing the 
proposed concession based airport management privatization model in 
June, in order to meet a July deadline to provide recommendations to 
President Lula.  Vieira did not comment specifically on the 
 
BRASILIA 00000395  002 OF 002 
 
 
likelihood of Rio's Galeao and Sao Paulo's Viracopos being chosen as 
candidates for privatization by Lula, but did indicate that GOB was 
likely ultimately to decide to move forward on privatizing 
INFRAERO's profitable airports.  In addition, she asserted that all 
newly constructed airports will operate under this model.  These 
comments indicate that GOB may in fact proceed with a piecemeal 
approach to privatization implementation versus a sector wide 
approach that would have grouped profitable airports with 
unprofitable ones (reftel B). 
 
¶6. (SBU) In addressing the contentious issue of international 
airfare liberalization, an ANAC initiative designed to gradually 
eliminate the GOB's minimum pricing regime for international flights 
with destinations outside South America, Vieira asserted that this 
would be concluded soon, despite the vehement opposition from 
Brazil's primary domestic airlines TAM and GOL and Brazil's National 
Aeronautical Union (SNEA). (Note: ANAC counters TAM's and GOL's 
claims that neither would survive in a liberalized market 
environment and that both would need 10 years to effectively compete 
against foreign carriers, by arguing that a 30% reduction in 
international airfares would add an additional 2 million travelers 
to the current 6 million annual Brazilian international passengers, 
enhancing both carriers' revenues.  ANAC addressed TAM and Gol's 
resistance by further arguing that both companies' revenues are 
predominately derived from domestic routes (TAM 70%, GOL 90%) and of 
the international routes they operate, 40% service South American 
destinations where pricing is already liberalized.  ANAC also notes 
that, according to their internal studies, both companies are among 
the top ten most profitable airlines in the world. ANAC suffered a 
setback in the plan's implementation when the Brazilian Federal 
Appeals Court rejected ANAC's appeal of an earlier federal court 
decision that delayed the plan's implementation due to ANAC not 
having a required public audience (Note: ANAC chose to have the 
public audience through the internet with the intention of reaching 
a larger citizenry.  End Note.)  Besides requiring that ANAC have 
the public audience, the judge also suggested that this pricing plan 
would cause public harm and damage Brazil's economy.  The lawyers 
for SNEA that filed the original injunction seized upon this ruling 
and accused ANAC of not following legally established procedures and 
lacking transparency.  ANAC has since held the public hearing in Rio 
in February and is currently examining the comments received. End 
Note.)  In commenting on ANAC's resolve to overcome these obstacles 
and implement full international pricing liberalization in 2009, 
Vieira asserted firmly and beyond a doubt in the meeting that, "It 
WILL happen." 
 
¶7. (SBU) Comment:  ANAC has made slow, yet steady progress in its 
attempts to liberalize the Brazilian civil aviation sector, as seen 
through their most recent success in lifting operational 
restrictions at Rio's Santos Dumont airport despite strong 
opposition from Rio's governor, mayor and TAM (reftel D).  Vieira's 
insistence that international pricing liberalization will take place 
and her willingness to review the MOU to open more frequencies for 
U.S. carriers points to ANAC's commitment to a liberalized market 
approach.  Vieira recognizes that TAM is the primary obstacle in 
successfully implementing Open Skies, and the importance of winning 
the public relations battle with TAM will prove critical.  Post 
believes that it is important to seize this opportunity to broaden 
civil aviation market liberalization, especially critical given the 
fact that Vieira was nominated to her position by an administration 
whose term will expire in 2010.  End Comment. 
 
SOBEL