VZCZCXRO0478
RR RUEHRG
DE RUEHBR #0896/01 1981916
ZNR UUUUU ZZH
R 171916Z JUL 09
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 4709
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 8000
RUEHSO/AMCONSUL SAO PAULO 4318
RUEHRG/AMCONSUL RECIFE 9749

UNCLAS SECTION 01 OF 03 BRASILIA 000896 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EEB/TRA, WHA/BSC, WHA/EPSC 
STATE PASS USTDA FOR NYOUNG 
STATE PASS USDOC FOR LFUSSELL 
STATE PASS USDOT FOR BHEDBERG 
STATE PASS FAA FOR BAHUMADA 
 
E.O. 12958: N/A 
TAGS: EAIR EINV ECON BR
SUBJECT: Brazil: Liberalization, Possibility of Expanded Frequencies 
and USTDA Cooperation in Civil Aviation 
 
SENSITIVE BUT UNCLASSIFIED 
 
REF: A) BRASILIA 0016, B) BRASILIA 0076, C) BRASILIA 0303 D) 
BRASILIA 0395 
 
¶1. (SBU) Summary: The president of Brazil's Agency for Civil 
Aviation Regulation (ANAC), Solange Paiva Vieira, provided a 
detailed update of Brazil's civil aviation sector during a July 8 
dinner hosted by Ambassador Sobel that was also attended by several 
of Brazil's leading investment bankers.  Vieira outlined new ANAC 
sponsored market liberalization initiatives aimed at increasing 
competition, provided updates on an airport concession model (reftel 
D) to be delivered to Brazil's President Lula in August, detailed 
the role management consulting firm McKinsey & Company has in 
developing organizational and operational strategies aimed at 
ensuring ANAC operates successfully in a more liberalized aviation 
market environment, and discussed areas of opportunity and 
engagement between Brazil and the U.S.  Vieira was receptive to 
Ambassador Sobel's request that ANAC consider authorizing additional 
frequencies beyond the numbers established in the current U.S. / 
Brazil civil aviation memorandum of understanding (MOU) and 
recommended that the USG initiate dialogue on this topic directly 
with ANAC. Vieira also agreed to meet with Nathan Young, USTDA's 
regional director for Latin America, during his next visit to Brazil 
to explore additional areas of cooperation in aviation related 
infrastructure projects. End Summary. 
 
ANAC's Legislative Initiatives 
------------------------------ 
 
¶2. (SBU) Vieira highlighted a July 8, 2009 decision by Brazil's 
Civil Aviation Council, whose membership consists of 10 Brazilian 
federal agencies including ANAC, to increase foreign ownership in 
Brazilian airlines from 20% to 49%, and to facilitate quicker entry 
of new airlines into the Brazilian market by no longer requiring 
that they sign a public concession contract with limited validity. 
Instead, ANAC would simply authorize, without an expiration date, 
the new entrant's aviation license once they meet the established 
financial, safety and operational requirements. Vieira noted that 
this new proposal, which has been presented to the President's 
office for approval and will then travel to the Congress for 
passage, will significantly increase the potential growth in the 
aviation sector while streamlining the market access process. 
Vieira explained that these new rules would simplify the often 
confusing and conflicting public service contracts that many 
airlines operate under today, and eliminate what the Brazilian 
Governmental Accounting Office described as irregular contractual 
situations.  Vieira revealed that during the final discussions, ANAC 
proposed that foreign ownership be unlimited for those companies 
from countries that have existing bi-lateral aviation agreements 
with Brazil.  Vieira mentioned that this concept could face some 
hurdles in the Congress, but that ANAC is in support of this clause. 
 Nonetheless, Vieira believes that there is sufficient support in 
Congress to pass this proposal by year's end. 
 
ANAC's Operational Initiatives 
------------------------------ 
 
¶3. (SBU) ANAC will be pursuing two operational initiatives aimed at 
increasing competition in Brazil's civil aviation sector. The first 
goal is to lift the operational restrictions at Pampulha airport in 
Brazil's third largest city, Belo Horizonte, in the the state of 
Minas Gerais.  This issue is identical to the lifting of operational 
restrictions that ANAC achieved at Rio's Santos Dumont airport 
(reftel C), which, as the smaller of the city's two airports, was 
subject to operational restrictions designed to promote the city's 
other larger, international airport.  The initiative faces stern 
opposition from Minas Gerais State Governor Aecio Neves, who is 
currently focused on expanding the airport infrastructure at Belo's 
larger Confins airport to increase its capacity to hub status. 
However, Vieira does not think that ANAC will face the same 
resistance from Neves as it did from Rio's state governor Sergio 
Cabral because Pampulha, once its restrictions are lifted, would 
still be operationally limited to 1 takeoff and 1 landing per hour 
given its small passenger terminal.  This would result in very few 
routes siphoned from Confins for Pampulha.  The second operational 
initiative involves the reallocation of slots at Sao Paulo's 
Congonhas airport, the only airport whose slots are completely 
saturated.  ANAC's proposal is to re-allocate, every 2 years, 20% of 
the airport's slots to those airlines whose operational performance 
warrants such rewards.  The performance criteria used by ANAC will 
be the airline's schedule regularity and punctuality, and adherence 
to established safety standards. According to Vieira, this would 
 
BRASILIA 00000896  002 OF 003 
 
 
enhance competition among the airlines and possibly lead to new 
entrants at Congonhas.  The initiative's two year window has been 
criticized by many airlines for being too short to properly evaluate 
an airline's performance, and specifically, by Brazilian airline 
GOL, whose purchase of Brazil's Varig airline in 2007 was partially 
driven by their desire to capture Varig's coveted slots at 
Congonhas. 
 
 
ANAC CONTRACTS CONSULTING FIRM 
------------------------------ 
 
¶4. (SBU) Vieira announced to the group, whose participants included 
Managing Director Roderick Greenless from Merrill Lynch Brazil, 
Director Daniel Sonder from Brazil's Credit Suisse Global 
Structuring Unit, and Citi's Managing Director in Brazil Jairo 
Loureiro, that the consulting firm of Mckinsey & Company has been 
contracted by ANAC to assist in the development of an organizational 
and operational structure suited to a more liberalized market. 
Antonnaldo Neves, McKinsey's lead in working with ANAC, advised that 
he has been working with Vieira for 2 months and is expected to 
submit organizational and operational strategy papers by October 
¶2009.  Neves also revealed that he has been consulting ANAC on the 
concession airport infrastructure model (reftel A, D) that is now 
scheduled to be presented to President Lula at the beginning of 
August 2009.  Vieira explained that the model will no longer 
recommend incorporating specific airports into the concession model, 
but instead provides general criteria that should be used in 
determining whether an airport should be included in the model.  The 
findings of the latest research, according to Vieira and Neves, 
recommend that any Brazilian airport with over one million annual 
passengers be considered suitable for the model.  This would 
encompass 20 airports and leave INFRAERO, the government-funded 
airport infrastructure and operations management company, with the 
responsibility of running the remaining 47 airports.  When pressed 
by Loureiro from Citi about the fate of INFRAERO, Vieira said that 
INFRAERO's operational capacities appear to fail at the one million 
passenger level and that its internal structure and business model 
were not compatible with a growing, more liberalized aviation 
market. Vieira also revealed that a separate evaluation of INFRAERO 
was being performed by an unnamed consulting firm.  Vieira informed 
the group that there would be no cap on the level of foreign 
investment in the proposed concession model.  Although the model is 
on schedule for delivery next month to President Lula, Vieira 
commented that the political decision of which airports to choose 
will be very time consuming given the elections in 2010 and the 
complicated web of stakeholders involved. 
 
AREAS FOR US/BRAZIL ENGAGEMENT 
------------------------------ 
 
¶5. (SBU) While conceding that an Open Skies (OS) agreement will most 
likely not occur during the Lula administration, Vieira recommended 
that both parties adhere to the agreed OS strategies (reftel D). 
Ambassador Sobel commented that demand for frequencies had already 
exceeded supply in each of the last 2 rounds of frequency 
allocations authorized by the DOT and that ANAC should be receptive 
to more frequencies, noting that several other US airlines were 
interested in starting or expanding service in Brazil.  Vieira 
suggested that the USG contact ANAC's Director of International 
Relations, Ronaldo Da Motta, and his assistant, Superintendent Bruno 
Dalcolmo to discuss increasing frequencies.  Vieira pointed out that 
Rio's Galeao airport and the entire group of airports located in the 
northeast are operationally capably of handling additional 
international frequencies, but in Sao Paulo, only Viracopos airport 
is viable given the operationally restrictions still in place on 
adding additional international frequencies to Guarulhos airport 
based on the MOU signed in 2008, and the fact that Congonhas is a 
domestic airport.  However, Viracopos' distance from Sao Paulo (62 
miles) makes it unattractive to US carriers.  Ambassador Sobel 
offered ideas of engagement involving USTDA funded studies in 
airport infrastructure expansion, citing the USD 573,000 USTDA grant 
signed earlier this year that will fund a study to determine and 
recommend various options available to Brazil as it invests $1.3 
billion in upgrading and expanding the Tancredo Neves International 
Airport in the Brazilian city of Belo Horizante.  Vieira agreed to 
meet with USTDA Regional Director Nathan Young on his next visit and 
also recommended reaching out to the state governments.   Vieira 
spoke proudly of ANAC's performances during recent safety audits by 
both ICAO and the FAA in May and referenced ANAC's collaboration 
with the TSA in scheduled TSA security visits in August and 
September 2009 as a testament to ANAC's cooperative spirit and 
capabilities. 
 
BRASILIA 00000896  003 OF 003 
 
 
 
 
¶6. (SBU) Comment:  ANAC continues to be committed to market 
liberalization in Brazil's civil aviation sector and given its 
recent successes in lifting operational restrictions at Rio's Santos 
Dumont airport, the successful implementation of international 
airfare deregulation, and impressive marks from the two safety 
audits in May, ANAC is an emboldened agency that is pressing its 
liberalization agenda with greater force and confidence.  Vieira 
commented on the late hours that she and her staff were working in 
achieving these successes, despite continued sectoral and political 
opposition.  However, with the 2010 election year approaching, 
ANAC's abilities to implement new market liberalization measures may 
be tested. End Comment. 
 
 
Kubiske