Cablegate: Armenia's Main Air Carrier Scotches Plans

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 YEREVAN 000812

SIPDIS

SENSITIVE

DEPT FOR EUR/CACEN, EB/TRA/OTP

E.O. 12958: N/A
TAGS: EAIR ECON RS AM
SUBJECT: ARMENIA'S MAIN AIR CARRIER SCOTCHES PLANS
FOR EUROPEAN ORIENTATION

1. (U) This cable is sensitive but unclassified. Please
protect accordingly.

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SUMMARY
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2. (SBU) Completely reversing its previous investment
policy, Armenia's main flag carrier, Armavia Airlines, is
halting its plans to expand towards Europe and move to
European standards and is replacing its modern aircraft with
older Soviet models in an effort to reduce costs. The move
is a breach of Armavia's agreement with the Government of
Armenia and is a vote of no confidence in the commercial
viability of a modern airline servicing European routes from
Yerevan. END SUMMARY.

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ARMAVIA AIRLINES REVERSES INVESTMENT STRATEGY
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3. (SBU) Bob Chaplin, a British consultant who has been
managing Armavia, told us that Armavia's directors have
decided that the investments necessary to expand Armavia's
service to European cities were not justified.
Specifically, he said that they were unwilling to accept
losses in the initial years of investment and preferred to
pocket the earnings from cheap but profitable point-to-point
flights in the CIS. According to Chaplin, for the moment
Armavia will continue to operate its current European
flights to Frankfurt and Amsterdam in order to avoid
forfeiting its exclusive licenses to the routes, for which
the company paid USD 14.5 million. Chaplin noted that these
routes will remain profitable through summer, but after that
he expects that Armavia will probably try to sell the
licenses or liquidate during next winter.

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GETTING OUT OF EUROPE
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4. (SBU) The sudden reorganization of Armavia's assets
signals a clear exit strategy from the European routes.
Armavia will transfer three of its five Airbus 320s to
Siberian Airlines in Russia and replace them with old Soviet
planes that are not allowed to land in European Airports.
(Note: Siberian Air owns a controlling share of Armavia
Airlines. End Note.) The airline has also halted
negotiations with Lufthansa on interline connections through
Frankfurt and have withdrawn their bid for International Air
Transport Association (IATA) certification.

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"TOO RUSSIAN"
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5. (SBU) "The directors are too Russian," Chaplin told us
when asked why Armavia had failed in its plan to become a
western airline. The expense of meeting European standards
had proven to be far more than the directors anticipated or
were willing to bear. He higlighted as examples the fact
that the directors refused to fly scheduled flights when
they were not full, refused to contract an attorney to
negotiate interline agreements, and refused to open their
aircraft and their books to inspection by third parties.

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CHANGES A BREACH OF CONTRACT
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6. (SBU) Armavia's withdrawal from its strategy puts it in
breach of several investment conditions of its contract with
the GOAM: it is not yet clear how the government will
react, however. In case of a material breach the government
has the right to cancel Armavia's licenses and resell them
to another airline. According to Viktor Mnatsakanian, the
legal advisor to Minister of Justice David Harutunyan, the
Minister is aware of Armavia's move but the government has
not yet taken any decision on how to respond.

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COMMENT
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7. (SBU) If the GOAM were to revoke Armavia's licenses it
could exacerbate the situation considerably: Armavia's USD
14 million loss would likely send danger signs to potential
investors. The reversal of Armavia's strategy is a serious
blow to Armenia's civil aviation industry, suggesting that
Armenia cannot support an airline that meets modern Western
standards and depriving a land-locked country of vital
transportation links.
ORDWAY

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