VZCZCXRO2583
PP RUEHCI
DE RUEHKT #1046/01 3231148
ZNR UUUUU ZZH
P 191148Z NOV 09
FM AMEMBASSY KATHMANDU
TO RUEHC/SECSTATE WASHDC PRIORITY 1039
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEHBJ/AMEMBASSY BEIJING 7198
RUEHBS/AMEMBASSY BRUSSELS 0279
RUEHKA/AMEMBASSY DHAKA 2876
RUEHLO/AMEMBASSY LONDON 6683
RUEHNE/AMEMBASSY NEW DELHI 3334
RUEHFR/AMEMBASSY PARIS 0187
RUEHCI/AMCONSUL KOLKATA 4840
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 KATHMANDU 001046 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAIR ETRD PREL PTER NP
SUBJECT: CONTROVERSY SWIRLS AS NEPAL AIRLINES INKS MOU 
 
REF: A. KATHMANDU 979 
     ¶B. KATHMANDU 529 
     ¶C. KATHMANDU 431 
     ¶D. KATHMANDU 202 
 
Summary 
-------- 
¶1. (U)  The Nepal Airlines Corporation (NAC) and Airbus 
announced they have signed a memorandum of understanding 
under which the national flag carrier will purchase two 
aircraft from the European aircraft manufacturer.  The 
announcement was made two days after a local newspaper 
reported that, due to concerns about NAC mismanagement, the 
Ministry of Finance is unlikely to approve the financially 
ailing airline's request for a USD 134-million loan guarantee 
needed for the purchase to move forward.  It also came at a 
time when Post has been urging Prime Minister Madav Nepal to 
support Boeing's request for an opportunity to present its 
proposal at an open hearing before the government decides 
whether to provide the loan guarantee. 
 
NAC Airbus Announce MOU 
----------------------- 
¶2. (U)  On November 17, the NAC and Airbus announced the 
signing of a memorandum of understanding under which the 
state-run airline will purchase one narrow-body and one 
wide-body aircraft, a sale for which Boeing was also 
competing.  The announcement, made at the Dubai Air Show, did 
not include a purchase price.  However, the state-run airline 
reported earlier that it was paying USD 92.8 million for the 
wide-body aircraft and USD 41.3 million for the smaller 
aircraft. 
 
Needed Loan Guarantee in Question 
--------------------------------- 
¶3. (U)  The Employees' Provident Fund, the country's largest 
non-financial lender, has agreed to extend a loan to the NAC 
for the purchase, but only if repayment was guaranteed by the 
Government of Nepal.  Two days before the MOU was announced, 
a local newspaper reported that the Ministry of Finance was 
unlikely to recommend that the Cabinet approve the request 
due to serious questions about NAC's current management, 
which has borne much of the blame for the airline's growing 
operating losses.  The report quoted an anonymous 
high-ranking Ministry official who said the guarantee would 
be useless unless the NAC's core management problems are 
addressed. 
 
Many Cast Doubt on Wide-Body Purchase 
------------------------------------- 
¶4. (U)  Boeing declined to bid on the sale of the wide-body 
aircraft, saying the sale would be a "recipe for (financial) 
suicide" for the NAC.  Similar concerns about the financial 
viability of the purchase of a wide-body aircraft were also 
raised by the Center for Asia Pacific Aviation (CAPA), an 
aviation market analysis firm hired by the NAC to assist it 
in reviewing the bid proposals. The report by CAPA, whose 
clients include Airbus, spurred the parliament's Public 
Accounts Committee (PAC) in mid-September to order the NAC 
not to move ahead with the purchase of the wide-body aircraft 
until it developed a detailed business plan for its 
operation.  The PAC, however, lacked the authority to enforce 
its order. 
 
Post Kindles Boeing's Hopes 
--------------------------- 
¶5. (SBU)  After the NAC's October 26 decision to approve the 
purchase of Airbus aircraft, Boeing sent a letter to the 
airline's Executive Chairman requesting that it be given a 
chance to present its proposal at an open hearing before the 
Cabinet took action on the loan guarantee request.  The 
company argued that, while the purchase price of its 
narrow-body aircraft was higher, the NAC would still save 
more than USD 10 million due to lower operational and 
maintenance costs.  It also reiterated its concerns about the 
economic viability of the wide-body aircraft. On October 29, 
the Charge sent a copy of Boeing's letter to the Prime 
Minister, and, in separate cover letter, urged him to support 
the company's request for a hearing to validate its 
performance and economic data. 
 
¶6. (U)  The day after the NAC and Airbus announced their MOU, 
the largest Nepali-language newspaper and its 
English-language sister publication ran front-page articles 
 
KATHMANDU 00001046  002 OF 002 
 
 
detailing the controversy surrounding the purchase.  The 
articles quoted from the letter the Charge sent to the Prime 
Minister, which the reporter had obtained from sources 
outside the Embassy. 
 
Comment 
------- 
¶7. (U)  The controversy surrounding the Airbus purchase is 
likely to continue to grow, especially now that the PAC has 
scheduled another hearing for November 23 at which NAC 
executives are expected to be grilled again about the 
proposed  purchase and their failure to address the 
Committee's earlier concern.  Boeing's best hope is for the 
purchase to become so controversial that the Cabinet refuses 
to provide the loan guarantee needed for the deal to be 
completed, which would require the NAC to restart the bidding 
process. 
BERRY