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DE RUEHSO #0192/01 0901154
ZNY CCCCC ZZH
P 311154Z MAR 09
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 9072
INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 3701
RUEHBR/AMEMBASSY BRASILIA PRIORITY 0216
RUEHBU/AMEMBASSY BUENOS AIRES PRIORITY 3454
RUEHCV/AMEMBASSY CARACAS PRIORITY 0798
RUEHLP/AMEMBASSY LA PAZ PRIORITY 4080
RUEHMN/AMEMBASSY MONTEVIDEO PRIORITY 2875
RUEHSG/AMEMBASSY SANTIAGO PRIORITY 2701
RUEHRG/AMCONSUL RECIFE PRIORITY 4327
RUEHRI/AMCONSUL RIO DE JANEIRO PRIORITY 9084
RUEAWJF/DEPT OF JUSTICE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/CDR USSOUTHCOM MIAMI FL PRIORITY
RUEAIIA/CIA WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 SAO PAULO 000192 
 
SIPDIS 
 
STATE FOR WHA/BSC,EEB/TRA, WHA/EPSC 
STATE PASS FOR DUCKWORTH 
NSC FOR ROSSELLO 
FAA FOR BAHUMADA, CTFRANCESCHI, KBERQUIST 
DEPT OF TRANSPORTATION FOR BHEDBERG 
SOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 03/14/2018 
TAGS: EAIR ECON BR
SUBJECT: TAM AIRLINES PANICS AS ANAC PLANS TO LIFT PRICE 
FLOORS 
 
REF: A. BRASILIA 303 
     ¶B. BRASILIA 0076 
     ¶C. BRASILIA 0016 
 
Classified By: Consul General Thomas White; Reasons 1.4 (b) and (d). 
 
¶1.  (C) Summary:  International flights originating from 
Brazil have long been subject to price floors, resulting in 
high profit margins for airlines.  The Brazilian Aviation 
Agency (ANAC) has announced that it intends to gradually 
remove these price floors in 2009. In a March 6 meeting with 
Brazilian airline TAM CEO David Barioni, the Ambassador heard 
TAM's views opposing price liberalization.  While TAM has 
long maintained it requires market protection to survive, 
ANAC is ready to manage TAM opposition and is determined to 
move forward with full international price liberalization 
this year (reftel B and C and septel).  End Summary. 
 
¶2.  (C) TAM CEO David Barioni told the Ambassador that he has 
argued repeatedly to the GOB that his company needs market 
protection to survive.  In his private conversations with 
President Lula, Defense Minister Nelson Jobim, and ANAC 
President Solange Vieira, Barioni claimed that each GOB 
official had expressed sympathy and support for his 
viewpoint.  Despite their apparent agreement, Barioni 
asserted that ANAC has continued to move forward on lifting 
the price floors.  (Note:  In separate conversations with 
Delta's country director, Luiz Texeira, Delta has indicated 
it believes that Barioni has lost favor with GOB 
interlocutors and that he therefore no longer effectively 
represents TAM's interests with the government.  Certainly in 
Embassy Brasilia's meetings with ANAC President Solange 
Vieira and others, it is clear that TAM's efforts to resist 
competition and to rely on a protected market are receiving 
little sympathy.  At the same time, ANAC is aware that TAM is 
an important and powerful domestic stakeholder, whose 
resistance to market liberalization, whether on pricing, 
frequencies, or other civair issues, must be managed 
carefully and strategically.  End Note.) 
 
¶3.  (C) Both Barioni and Texeira opined that if ANAC were to 
immediately liberalize pricing, TAM would collapse.  Barioni 
complained to the Ambassador about ANAC's new "neo-liberal 
obsession," saying the agency is about to cost the country 
24,000 jobs with TAM.  He speculated that it would be more 
than 10 years before TAM was ready for price liberalization. 
(Note:  Since 2005, ANAC has gradually begun to liberalize 
airline ticket pricing in Brazil.  ANAC started initially by 
liberalizing pricing on domestic routes, opened up pricing 
competition on South American routes last year, and is the 
final step to complete international price liberalization by 
the end of 2009.  End Note.) 
 
¶4.  (C) David Barioni further blamed the so-called "Custo 
Brazil" for extra costs that TAM incurs because it is 
domiciled in Brazil.  He explained that every year, there is 
a major strike in Brazil, one that seriously affects 
company operations.  Last year, for example, all customs 
inspectors went on strike and imports into Brazil were 
effectively shut down for nearly one month.  Because of this, 
TAM stockpiles a 30-day supply of parts, maintaining more 
inventory than TAM's U.S. competitors.  This additional cost, 
in his view, warrants protection from the free market.  With 
other airlines able to manage the challenges of operations in 
Brazil more efficiently, both Teixeira and ANAC 
representatives have strongly disagreed with TAM's view that 
it is particularly disadvantaged and deserves protection from 
market forces. 
 
¶5.  (C) Teixeira told EconOff that ANAC President Solange 
 
SAO PAULO 00000192  002 OF 003 
 
 
Vieira is an economist by training, which partly explains 
ANAC's recent push to open competition in the aviation 
sector.  He complained, however, that Solange lacks 
experience in the sector.  Texeira predicted that when 
Defense Minister Jobim resigns, Solange would follow suit. 
(Note:  MOD oversees ANAC and much of the aviation 
safety/security portfolio.  Solange is a close friend and 
ally of Jobim's.  Solange Vieira has a merited reputation as 
a person with the ability to get the tough jobs done, despite 
entrenched interests--Vieira was several years ago the person 
brought in to push through politically unpopular, but 
necessary, social security reforms in Brazil.  End Note.) 
 
¶6.  (C) ANAC representatives told Brasilia EconOff that they 
see no economic basis for TAM's opposition to price 
liberalization.  They estimate liberalization would generate 
an additional two million international passengers in Brazil, 
an increase of 33 percent.  The additional passenger traffic 
could help offset the 30 percent cut that Brazilian carriers 
would need to implement in order to match foreign 
competitors' fares.  According to ANAC, international routes 
account for 30 percent of TAM's revenue, and 40 percent of 
the revenue from those international routes already comes 
from flights in a liberalized price environment.  ANAC does 
not think that the impact of price liberalization on the 
remaining 18 percent of TAM's revenue would lead to 
bankruptcy, especially since the proposed pricing 
liberalization model calls for a gradual implementation by 
incrementally increasing maximum allowable discounts 
throughout the year.  ANAC's internal studies show that TAM 
is among the 10 most profitable airlines in the world, and 
thus capable of competing in the free market. 
 
¶7. (SBU) Amid this speculation, Delta continues to seek new 
opportunities, having recently announced two new direct 
routes in Brazil:  Sao Paulo to Los Angeles (a new route) and 
Brasilia to Atlanta (a redirection of an existing route). 
Luiz Texeira hopes to use Los Angeles as a hub for Brazilians 
that wish to visit other locations in the Western United 
States, such as Las Vegas, or to fly onward to Asia.  He 
believes that many of the travelers on the Atlanta-Brasilia 
route will also use Brasilia as a regional hub to other 
destinations in Brazil.  In contrast, Barioni said that his 
company cannot fly directly to Los Angeles, because it is not 
profitable unless they can offer an onward flight to Asia, 
which they cannot. 
 
¶8.  (C) Comment:  Brazilian airlines have long benefited from 
two-fisted market power: limited bilateral aviation 
agreements that restricted foreign carrier access to Brazil, 
and pricing controls that further limited free price 
competition for travel originating in Brazil.  That market 
power is now in jeopardy, and TAM is complaining accordingly. 
 The 2008 U.S.-Brazil bilateral aviation accord increases 
U.S.-Brazil routes by 50 percent over three years.  ANAC's 
policy of progressive price liberalization in the air travel 
segment is finally reaching international routes beyond South 
America.  Although TAM cries foul, the firm has had well over 
a year to get ready, and could benefit from the increased 
traffic that price cuts will bring.  Brazilian consumers are 
certainly ready for some relief--Brazil-U.S. airfares are 
routinely 30-50 percent more expensive than the corresponding 
U.S.-Brazil fares.  The challenge for TAM is to learn to 
survive and grow in this new market environment.  ANAC's 
Solange Vieira strategy for managing TAM, and the domestic 
political interests in congress and elsewhere that support 
those interests, as we prepare to move toward further 
bilateral civair liberalization, will be reported septel. 
END COMMENT. 
 
 
SAO PAULO 00000192  003 OF 003 
 
 
¶9.  (U) This cable was coordinated with and cleared by 
Embassy Brasilia. 
WHITE