VZCZCXRO3060
PP RUEHDBU RUEHPW RUEHSL
DE RUEHBUL #3346/01 2920335
ZNR UUUUU ZZH
P 190335Z OCT 09
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 2356
RUEHBS/USEU BRUSSELS
RUEHLO/AMEMBASSY LONDON 3868
INFO RUCNAFG/AFGHANISTAN COLLECTIVE

UNCLAS SECTION 01 OF 02 KABUL 003346 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EEB/TRA, S/SRAP, SCA/FO, SCA/RA, SCA/A 
DEPT PASS FAA FOR RAY SMITH 
 
E.O. 12958 N/A 
TAGS: EAIR PGOV AF
SUBJECT: ARIANA: SAFER, PROFITABLE BUT STILL FINANCIALLY CONFUSING 
 
REF: (A) 07 Kabul 1090 
 (B) 09 Kabul 2964 
 
¶1. Action request for USEU and AmEmbassy London - please see 
paragraph 4. 
 
¶2. (SBU) Summary:  Afghanistan's largest airline, state-owned Ariana 
Airlines, is a leader in market share and profitability despite an 
EU flight ban and an aging fleet.  Its energetic president, M.K. 
Wardak, has improved safety, is again interested in a relationship 
with Boeing, and may soon be allowed to resume direct service to EU 
countries.  Planning for this year's Hajj is underway and Ariana has 
already used Hajj revenues to purchase new planes.  However, the 
company will have to devote more attention to its inadequate 
accounting system if it wishes to erase its "Scariana" financial 
planning reputation.  Wardak's weak grasp of the airline's financial 
situation must improve as well in order to realize his plans for the 
airline's expansion and privatization.  End summary. 
 
OPERATIONS 
- - - - - - 
 
¶3. (SBU) Ariana operates the country's largest commercial fleet, 
flying to five domestic and 15 international destinations and 
carrying nearly half of all international passengers to and from 
Afghanistan.  The European Union forbids Ariana-operated flights 
from entering its airspace due to safety concerns.  However, the 
carrier has leased an Airbus 310-300 from a Turkish company for its 
Kabul to Frankfurt flight.  This European flight is reportedly its 
most profitable route (although cost data are unavailable). 
 
¶4. (SBU) Ariana President Wardak says he expects EU regulators to 
remove Ariana from the safety blacklist in November and has applied 
for a landing slot at London Gatwick.  London used to be the 
airline's most popular destination.  (Note: the last Ariana flight 
to London was the result of a hijacking in 2000 that ended with no 
casualties.  Wardak was the pilot on that flight.  End note.)  The 
EU banned Ariana from its airspace in 2006, citing safety concerns. 
Wardak noted the airline has significantly improved its safety since 
he became president in 2008 and has spent $3 million to train pilots 
and cabin crew.  Ariana has also compiled procedural manuals for the 
first time in its history.  (Action Request USEU and London: Would 
appreciate your views on possible EU action on Ariana.) 
 
SURPRISINGLY PROFITABLE 
- - - - - - - - - - - - 
 
¶5. (SBU) Ariana earned a $1.1 million profit on $97.3 million in 
revenues during the Afghan fiscal year that ended on March 21, 2009, 
according to USAID's recently completed Land Titling and Economic 
Restructuring (LTERA) project study.  Nearly 20 percent of Ariana's 
gross revenue came from its Hajj business; this is the second year 
the Afghan government has awarded Ariana the exclusive carrier for 
the Hajj.  The Ministry of Hajj is Ariana's single largest customer. 
 Although Ariana also transports cargo and provides ground handling 
services at Kabul International Airport (KIA), passenger flights 
account for 93 percent of revenue.  The LTERA study credits the 
company's aggressive handling of accounts receivable for its strong 
balance sheet.  Additionally, while Ariana's administrative staff is 
bloated, salaries and pension costs are relatively low.  On balance, 
the carrier has $45 million in current net assets. 
 
THE HAJJ: FEWER PROBLEMS AHEAD? 
- - - - - - - - - - - - - - - - 
 
¶6. (SBU) As of October 7, the Saudi government had awarded Ariana 67 
of the 150 slots it needs for Hajj flights.  The gap is much smaller 
than at this point last year and, as a result, Wardak says he is 
confident this year's Hajj will go more smoothly than in years past. 
 While the Afghan Government awarded Ariana this year's Hajj 
traffic, it also ordered the airline to lease planes from rival 
commercial carriers, Wardak said.  Unable to conclude those 
agreements, Wardak says he will instead rely on Ariana's four Airbus 
310s and lease a fifth from a United Arab Emirates-based airline. 
(Note: Ariana has used the government pre-payment for this year's 
Hajj passengers to repay the Ministry of Finance (MOF) for two 
Airbus 310s the Ministry had bought on the state airline's behalf to 
replace older, relatively fuel-inefficient Boeing 727s. 
International Monetary Fund regulations prohibit the Afghan 
Government from subsidizing Ariana, but Wardak said the MOF 
purchased the planes and Ariana repaid the Ministry.  He did not 
mention any interest on the loan.  End note.) 
 
BOEING LEASES? 
- - - - - - - - 
 
¶7. (SBU) Wardak said the company needs capital to replace aging, 
 
KABUL 00003346  002 OF 002 
 
 
fuel-inefficent aircraft on both domestic and international routes. 
While preferring to purchase these aircraft outright, he noted 
Ariana will likely lease most of its future fleet.  Wardak added he 
will also approach Boeing to lease and purchase used aircraft. 
EconOff pointed out that Boeing may be cautious given Ariana's 2007 
default on a lease agreement (ref A) and suggested Ariana prepare 
audited financial statements to demonstrate its ability to meet 
obligations.  Wardak blamed his predecessor and said Ariana now 
makes a $10 million profit per year.  As a major cost-savings 
measure, he said he had cut staff from 1700 to 1250.  Wardak 
stressed this effort is ongoing -- the airline should ultimately 
employ between 400 and 600 people at peak efficiency.  Nonetheless, 
Wardak could not break down his overall profit sources nor give 
greater visibility to Ariana's revenue stream. 
 
OWNERSHIP CLEARER ... OR IS IT? 
- - - - - - - - - - - - - - - - 
 
¶8. (SBU) Ariana's articles of incorporation state the Ministry of 
Transportation and Civil Aviation (MOTCA) owns 38 percent of the 
company's shares, followed by the Ministry of Finance (38 percent), 
the Ministry of Commerce (13 percent), and state-owned Pashtany and 
Milli banks (6 percent each).  The MOTCA claims to have transferred 
its shares to the Ministry of Finance, but the General Assembly of 
Shareholders never approved this transaction, thus making it void 
under the company's bylaws.  The lack of share documentation is a 
greater problem; Ariana management admitted ownership generally 
reflects a "verbal" agreement and LTERA could not locate any share 
certificates except those held by the two banks.  If the Afghan 
Government decides to privatize Ariana, this lack of formal 
ownership will present a major obstacle.  In addition, LTERA found 
the Airline's General Assembly of Shareholders, its Board of 
Directors, and Supervisory Board meet infrequently if at all and do 
not keep written records of their proceedings. 
 
¶9. (SBU) Wardak said a British buyer recently had offered $150 
million for a 49 percent stake in Ariana.  Finance Minister Omar 
Zakhilwal expressed interest in the sale, he said, but the deal fell 
through when the buyer insisted on setting aside a 2 percent share 
for an unnamed third party.  Wardak said he would prefer to trade 
shares for planes and training rather than cash, but national 
sentiment makes privatization difficult. 
 
COMMENT: SAME PROBLEMS AS THE COMPETITION, AND THEN SOME 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶10. (SBU) Ariana faces many of the same challenges as its private 
sector rivals, including access to capital, nervous leasors, and 
overcapacity on certain routes.  Wardak echoed others' complaints 
about Pamir Airline's below-cost tickets (ref B).  He said no 
airline can last more than three to four years in the Afghan market 
without state support and suggested KamAir will be the next to fold. 
 Other Afghan airline executives, however, would disagree that state 
support is inevitable and say GIRoA subsidies are essential to 
Ariana's own future.  A career pilot, Wardak has made impressive 
progress in Ariana's operations.  However, his weak grasp of the 
airline's financial situation will limit expansion and 
privatization.  End comment. 
 
EIKENBERRY