VZCZCXYZ0003
RR RUEHWEB
DE RUEHBU #2390/01 3611840
ZNR UUUUU ZZH
R 271840Z DEC 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 9972
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC//AWH-10//
RHMCSUU/FAA MIAMI SO IFO23 MIAMI FL
RHMFIUU/FAA MIAMI ARTCC MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6739
RUEHMN/AMEMBASSY MONTEVIDEO 6943
RUEHSG/AMEMBASSY SANTIAGO 0954
RUEHBR/AMEMBASSY BRASILIA 6622
RUEHQT/AMEMBASSY QUITO 1036
RUEHSG/AMEMBASSY SANTIAGO 0955
RUEHLP/AMEMBASSY LA PAZ DEC YEREVAN 0002
RUEHMT/AMCONSUL MONTREAL 0039
RUEHGL/AMCONSUL GUAYAQUIL 0099
UNCLAS BUENOS AIRES 002390
SIPDIS
SIPDIS
SENSITIVE
STATE EEB FOR TERRI ROBL, JOEL REIFMAN, VIKI LIMAYE-DAVIS
TRANSPORTATION FOR BRIAN HEDBERG
FAA FOR CECILIA CAPESTANY, ANNA SABELLA, KRISTA BERQUIST
FAA MIAMI FOR MAYTE ASHBY
FOR USMISSION TO ICAO
E.O. 12958: N/A
TAGS: EAIR ECON PGOV AR
SUBJECT: Argentina: GoA Extends Airport Concession Contract,
Fundamental Problems Remain
Ref: (A) Buenos Aires 1629
(B) Buenos Aires 1456
(C) Buenos Aires 1070 and previous
This cable contains sensitive information - not for internet
distribution.
1. (SBU) SUMMARY: On December 7, outgoing President Nestor Kirchner,
in one of his final moves before leaving office, approved a
modification of the GOA concession contract with Aeropuertos
Argentina 2000 (AA2000), the company that operates the 33 major
airports in Argentina. The AA2000 concession has been extended
through 2028 with a linked AA2000 commitment to invest $2 billion in
infrastructure improvements. In addition, AA2000's concession
payments to the GOA have been changed from a fixed to a variable fee
based on revenues. To address an overhang of almost $400 million in
accumulated AA2000 debt to the GOA, media reports that the agreement
allows the GOA to swap this debt for an up-to-20% direct equity
stake in AA2000 - another step in a trend towards more state
ownership of productive assets. For U.S. carriers, this deal offers
a few positive measures, including a reduction in some airport fees,
but AA2000's fundamental problems - high costs, poor services, an
unhealthily cozy relationship with the GOA, and ever-changing rules
- remain unresolved. END SUMMARY.
--------------------
Background on AA2000
--------------------
2. (SBU) In 1998, the GOA awarded Aeropuertos Argentina 2000
(AA2000) a 30-year concession to operate Argentina's major 33
airports, including the two airports servicing Buenos Aires, Ezeiza
International and Aeroparque. AA2000 is also the owner of
Argentina's airport duty-free operator, Interbaires. AA200 was
originally a consortium owned by Milan airport operator SEA (30%),
U.S. ground-handling company Ogden (28%), and Corporacion America
Sudamericana (32%), controlled by Argentine entrepreneur Eduardo
Eurnekian. By 2000, Eurnekian retained full control of the AA2000
entity. Through his Americas Corporation holding company, Eurnekian
also operates the major airports in Montevideo, Uruguay; Guayaquil,
Ecuador; and Yerevan, Armenia (where Eurnekian has ancestral ties
and extensive business contacts).
3. (SBU) The 1998 AA2000 concession contract called for an annual
payment (called a "canon") to the GOA of 171 million pesos (then
equal to $171 million, today roughly $55 million), general
infrastructure investments of $562 million in the first four years,
and $2.2 billion in total investments by 2015. According to U.S.
carrier representatives here, it was always understood that AA2000's
smaller, loss-making regional airports would be subsidized by
substantial fees generated from Ezeiza and Aeroparque, which
together account for roughly 70% of total Argentine air traffic.
AA2000 never came close to honoring these terms, having only paid
the full canon the first year, and largely failed to fulfill the
investment objectives. As a result, AA2000 has accumulated a debt
to the GOA of roughly $1.2 billion pesos (about $387 million).
4. (SBU) AA2000's performance remains highly controversial. Its
management claims that the GOA has often changed contract rules and,
after the fact, added new airports to its modernization mandate.
AA2000 also argues that it has had to deal with the extraordinary
impact on domestic air traffic of Argentina's 2001-02 economic
collapse, the extended impact of 9/11 on international airline
traffic, and slower-than-anticipated growth in passenger volumes.
AA2000's detractors, including all international and domestic
carriers operating here, contend that AA2000 won its concession bid
by offering the GOA an unsustainably high annual payment with the
intent, once it was comfortably in place, to renegotiate its
contact. They charge that AA2000's fees for landing, storage, and
other services are among the highest in the world, while its
services are of relatively low quality. They also complain of
arbitrary fees, changing rules, unrealized investment plans, lax GoA
regulatory oversight of AA2000 management, and overly cozy relations
with the Kirchner administration. (Eurnekian frequently lends out
his private plane to the Kirchners when official GOA planes are
unavailable.)
---------------------------------------
New Contract Extends Concession to 2028
---------------------------------------
5. (SBU) On December 7, outgoing President Nestor Kirchner approved
a modification and extension through 2028 of the GOA concession
contract with AA 2000. This new contract is the result of over a
year of negotiations between the GOA and AA2000, with limited input
from carriers and the International Air Transportation Association
(IATA), the organization that represents over 270 carriers around
the world. (IATA has publicly and harshly criticized AA2000's
performance, and charged that Ezeiza airport's infrastructure and
operations as among the worst in the region, and even publicly
called for the complete cancellation of the contract. IATA has also
expressed its concerns to the U.S. Department of Transportation.)
6. (SBU) According to GoA Decree 1799/2007, starting in 2008, the
GOA will reduce AA2000's canon from the fixed annual fee of Pesos
171 million (roughly $55 million) to 15% of gross revenue. (At
present rates of operation, this translates to about $29 million, a
reduction of about half.) AA2000 will also maintain its original
concession commitment to make $2 billion in infrastructure
investments over the duration of the concession period. Media and
Embassy contacts also report that, in order to deal with the
estimated $387 million in accumulated AA2000 debt to the GOA, the
new contract envisions the GoA swapping all or a portion of this
debt for up to a 20% equity stake in AA2000. (Assuming a
debt-equity swap of a 20% stake for $387 million in debt, this would
value AA2000 equity at roughly $1.9 billion, a figure that some
local analysts call extremely overvalued.) In addition, up to 30% of
AA2000 is to be offered on the Buenos Aires stock exchange.
7. (SBU) In response to complaints from international carriers of
excessively high airport operating fees, the contract also calls for
airlines to receive a minimum 25% discount on landing and parking
fees for the first concession renewal year - with the caveat that
AA2000 is permitted to recoup resulting lost revenue, perhaps via
increased passenger departure fees. If airlines surpass a certain
annual passenger forecast, airlines will also receive an additional
2% discount for every percentage the forecast is surpassed (up to a
maximum 12%). AA2000 will also reduce airline fees 15% the first
year for those airlines increasing the frequency of their flights.
--------------
The fine print
--------------
8. (SBU) According to local aviation contacts, despite some positive
aspects from the point of view of foreign carriers, the most serious
concerns about AA2000 management - high costs, poor services,
less-than-independent regulatory oversight of AA2000, and
ever-changing rules - remain unchanged and unresolved. The
carriers' other big concern is that the new contract does not
explicitly provide guarantees against other charges being
arbitrarily added at any time, which they contend AA2000's close
relationship with the GOA allows. These potentially new charges
could include facilities rent, fuel charges, fees for other
services, and in the case of American Airlines, royalties charged to
ground handling companies that do not use the state-owned
ground-handling company Intercargo. According to these contacts, it
is entirely possible that AA2000 could increase such fees in order
to pay for the discounts offered in other areas, actions that they
have done in the past.
-------
Comment
-------
9. (SBU) With the concession renewals change in AA2000's annual
payment to the GOA from a fixed to an initially smaller percentage
of revenues, some skeptics will surely conclude that AA2000 has
escaped serious repercussions from its non-compliant history of
payments to the GOA. As for the announced fee reductions for the
airlines, including the six U.S. carriers operating here, only time
will tell if this deal will benefit them, given AA2000's ability to
add new fees without adequate carrier recourse. Nevertheless,
AA2000's underlying problems - poor service, high costs, an
inappropriately cozy relationship with the GOA, and changing rules -
remain. And AA2000's lackluster performance constitutes only a part
of even greater problems plaguing Argentina's aviation sector
(reftels A and C), including frequent delays, tariff freezes that
deter needed investments by carriers serving the domestic market, a
theft-prone state-owned ground handling company (Intercargo), and a
bloated, inefficient flag carrier (Aerolineas Argentinas) that
dominates domestic air traffic. These problems must be addressed if
Argentina hopes to leverage its aviation sector to encourage new
tourism, trade, and investment activity.
10. (SBU) No less significant are media reports of the GOA's
decision to exchange all or a part of this accumulated AA2000 debt
in exchange for an up-to-20% stake in AA2000. With this significant
GOA stake, the GOA has signaled that it seeks to increase the
state's role in strategic economic sectors. In recent years, the
GOA has increased the state role in a number of sectors, by either
creating new state firms (Enarsa, oil and gas; Lafsa, airline);
re-nationalizing companies that provide key public services (Correo
Argentino, postal service; Aguas Argentinas, water company; Thales
Spectrum, radio airways regulator; and Metropolitan, Buenos Aires
train service); or increasing equity sakes in private firms such as
Aerolineas Argentinas. These actions speak to the GoA's belief that
it has the capacity -- and public mandate -- to play a greater
direct role in Argentina's economy.
WAYNE