Cablegate: Argentina Renationalizes Flag Carrier Aerolineas Argentinas

Published: Fri 12 Sep 2008 06:54 PM
DE RUEHBU #1275/01 2561854
R 121854Z SEP 08 ZDK
E.O. 12958: N/A
SUBJECT: Argentina Renationalizes Flag Carrier Aerolineas Argentinas
This cable contains sensitive information - not for internet
Reftel: (A) Buenos Aires 1236
(B) Buenos Aires 994
(C) Buenos Aires 572
(D) Buenos Aires 64
1. (SBU) SUMMARY: On September 3, Argentina's Senate approved the
re-nationalization of Aerolineas Argentinas (AR) and its sister
carrier Austral, formally marking the return of the financially
troubled flag carrier from the Spanish travel conglomerate Marsans
Group to state hands. In announcing this action, and reflecting the
strong support from the GOA, unions, and most of the opposition,
President Cristina Fernandez de Kirchner (CFK) vowed to again "make
Argentines proud" of their national carrier. The 46-21 vote
followed an earlier Lower House approval, and gives the GOA the sole
right to determine what price, if any, the GOA will pay Marsans for
the carriers, and also ruled out any future privatizations. The
vote culminated recent conflict and exchanges of blame among and
between the GOA, airline unions, Marsans, and the political
opposition over the air carriers' financial woes, labor conflicts,
and an estimated US$890 million in debt, and also raised questions
about the GOA's own oversight role of the carriers in recent years.
Opposition politicians have demanded to know why the airlines failed
despite a near-domestic monopoly, advantageous international route
rights, preferential airport fees, and while Argentina is enjoying
the biggest tourism boom in its history. Difficult decisions still
remain unresolved: determining the financial situation of both
airlines; deciding on a price to be paid to Marsans; and deciding
how these carriers will be managed in the future. Many local
analysts doubt that this renationalization will guarantee improved
carrier finances, union peace or better service. It remains
questionable to many observers here whether the GOA is financially
or technically capable of running such an operation efficiently and
effectively, especially in today's challenging global aviation
market. Pending GoA decisions on this will have important
consequences in future tourism, trade, and investment prospects.
Several U.S. companies are service and aircraft suppliers to the
airlines and have had problems collecting monies owed. Embassy will
be alert to their interests. END SUMMARY.
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Congress passes nationalization with key modifications
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2. (SBU) After weeks of debate, and the Lower House's own approval
two weeks earlier, the Argentine Senate on September 3 approved the
formal renationalization of flag carrier Aerolineas Argentinas and
its sister carrier Austral. The bill left unchanged the Lower
House's bill that had been approved in late August, but is
significantly different from the original proposed legislation CFK
sent to Congress following the GOA-Marsans agreement signed on July
17 (ref B). The July 17 agreement envisioned the renationalization
of the carriers and included a mechanism to determine the price the
GOA would pay Marsans to buy out its equity in the carriers. In
place of the original bill's provision to have any disagreement over
this price arbitrated by a third party, the final GOA bill calls for
the GOA's Valuation Tribunal to determine the price, and that price
to be approved by Congress. Under the revised legislation, Marsans
has no voice or vote in the matter.
3. (SBU) Marsans has stated that it considers the July 17 agreement
still legally valid, and has publicly threatened to take its case
before either Argentine domestic courts or the International Center
for the Settlement of Investment Disputes (ICSID), arguing that the
GOA could exert unfair power to expropriate the firms or otherwise
force unfavorable terms on Marsans. Congress also struck out
another key passage of the original GOA bill that allowed for an
eventual re-privatization of the carriers. (Although the
possibility still exists that the carriers can be run by a
BUENOS AIR 00001275 002 OF 004
A bitter divorce and exchanging blame
4. (SBU) The vote follows months of blame games and reprisals
between the GOA, unions, Marsans, and opposition politicians about
how the carriers have arrived at bankruptcy's door (with an
estimated $890 million debt), along with their infamous poor service
and chronic labor conflicts (refs B, C, and D). While many GoA and
union leaders celebrated this re-nationalization, some opposition
figures and representatives from the media questioned the rationale
for a takeover now, before the carriers have resolved the debt and
labor issues. The opposition has also claimed that the public is
entitled to know how such an airline could have failed. They point
to the ongoing boom in international tourism, the airline's virtual
monopoly on most domestic "cabotage" routes, preferential airport
service fees, fuel subsidies, and its service in a country whose
size and road infrastructure shortfalls make flying the only
transport option for many travelers. AR and Austral together
control about 85% of the domestic market, and AR holds lucrative
route rights to many parts of the world.
5. (SBU) The GOA and many opposition politicians accuse Marsans of
having "hollowed out" the company (selling planes and converting
them to leases, selling valuable office real estate holdings),
overbooking fares, failing to fulfill investment pledges, flying
older and less fuel efficient planes, and scaling back less
profitable routes. Marsans has publicly denied these charges, and
placed the blame squarely on the GOA's own commercial air transport
policies, lack of proper oversight of this important public service,
and regulated below market tariffs. Marsans and opposition
politicians have criticized the GOA for allowing unions to stage
regular crippling strikes (ref D), and Marsans has also criticized
the GoA for vetoing its repeated attempts to trim the carriers'
staffs (AR has 200 employees per plane vs. the regional average of
6. (SBU) Former Marsans chief executive Antonio Mata characterized
Transportation Secretary Ricardo Jaime's re-nationalization push as
the actions of someone who "started a fire so that he can appear as
a fireman saving the company," and said that Argentina's commercial
aviation policies are "30 years behind the international norm."
According to a recent study by local economists Marcelo Celani and
Miguel Kiguel, the average tariff in Latin America is $1.24 per
mile, vs. 54 cents in Argentina (with recent tariff increases
included, ref B). This same study also found that since 2001,
Argentina domestic aviation costs have grown far more than tariff
increases: in nominal terms, while fuel costs rose 900% and salaries
200%, tariffs rose only 100%.
More difficult steps lie ahead
7. (SBU) Congress's nationalization action marks just the initial
phase of this process, and the GOA faces more difficult decisions
ahead. According to local analysts, there is a three-step process
that must be accomplished in order for the nationalization to be
concluded: (1) determining the true financial status of the
carriers; (2) coming to an agreement with Marsans on the price to be
paid for AR and Austral; and (3) deciding how these carriers will be
managed in the future.
8. (SBU) Determining the carriers' financial status has already
proven to be difficult and contentious. According to local aviation
group Consultair, a few months ago, before the decision was made to
re-nationalize the carriers, PriceWaterhouseCoopers (PWC) reported
that the airlines had a positive net worth of about $20 million.
Later, PWC presented new statements showing the net worth at about
negative $30 million. To add to this confusion, these figures did
not take into account still-pending 2007 financial statements of the
carriers. In recent weeks, Marsans and AR officials have agreed
that estimated outstanding debts total about $890 million, with
about $270 million in "urgent" and overdue debts (for fuel, fleet
rentals, and service providers). Once Marsans presents the final
2007 figures, the numbers will be audited by the GOA's Valuation
BUENOS AIR 00001275 003 OF 004
9. (SBU) Once the financial status of the firms is determined, the
nationalization law calls for the Valuation Tribunal to calculate
these firms' combined value and report this figure to Congress for
approval or rejection. Many GOA lawmakers and officials, including
Transportation Secretary Jaime, have said that the outstanding
deficits are so great that the question will not be how much Marsans
gets paid by the GOA, but whether the GOA will claim that Marsans
should simply hand over the companies for nothing - and maybe even
demand that it pay all or part of the $890 million debt. Although
the GOA could in theory simply expropriate both companies, this
option could lead to a long legal battle that the GOA would likely
prefer to avoid, both for legal reasons and its own investment
climate reputation.
10. (SBU) Finally, the GOA must decide how the airlines will be
managed in the future, including deciding on fleet composition and
routes. Currently, day-to-day decisions are being made by the team
designated by GOA and Marsans as a result of their July 17 accord,
whose 60-day mandate runs until September 16 (but could be extended
if needed). As the Congress ruled out the possibility of
re-privatizing the carriers (although it was always doubtful that
they could attract any serious investors), one possibility that has
been discussed in the media is the carriers being managed via a GOA
concession, as is the case with the major airports. These same
analysts point out the GOA manifestly lacks the expertise and
capacity to run the airlines itself.
11. (SBU) Another point of discussion is whether the two carriers
might be merged, presumably to reduce costs, or keep them separate.
This is not an easy matter: the airlines have very different
backgrounds, management styles, unions, routes, and fleets.
Aerolineas was established in 1950 as a government carrier, while
Austral was formed as a private carrier. Aerolineas has both
domestic and international routes, while Austral focuses on the
domestic market. Once this issue is decided, the carriers would
need to decide on the appropriate aircraft types on which it will
focus in the future. The interim management team, however, has
decided to accelerate some of the fleet consolidation decisions.
For example, older models such as AR's Boeing 747-200s, 747-400s,
737-200s, and Airbus 310s are reportedly set to be withdrawn from
service, either to be sold or scrapped locally. Austral, which
flies almost exclusively the older and less fuel-efficient MD-80s,
is also reported to be considering a fleet upgrade. Media reports
in recent days indicate that Argentina is considering Brazilian
aircraft manufacturer Embraer as a possible small jet supplier, but
no details have emerged regarding possible financing or delivery
times. If Argentina does pay its Paris Club debts (reftel A), this
might open the door for possible favorable loan terms for
U.S.-manufactured plane sales.
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No guarantee of better finances, service or union peace
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12. (SBU) According to local analysts and media reports, the GOA
appears resigned to spending up to $50 million a month, or about
$600 million annually (roughly 1% of 2008 primary expenditures) to
keep the companies in operation. The GOA has already pumped in
about $130 million since mid-July to cover current expenses for
salaries, fuel, leases, and spares. Some media reports have
expressed the hope that with this re-nationalization and support for
the carriers, the unions might start providing improved service.
According to the Argentine Tourism Rights Association (AADETUR), in
the first half of 2008, AR and Austral were on time only 53% of the
time, compared to 79% for flights in the United States.
13. (SBU) One industry representative told Emboff that, on the
contrary, unions could "very easily" push for even more jobs,
influence and concessions, and that despite this "victory," sooner
or later they will be demanding more concessions, when they realize
that state ownership might not be all that they had hoped for. The
local trade publication "Aviation News" reported on September 10
that AR's pilot union is already planning to hire 200 new pilots in
BUENOS AIR 00001275 004 OF 004
the coming weeks. According to media reports, AR pilots have
already gained some job advantages that had been the subject of
slowdowns and strikes: they have reverted back to a 35-hour work
month, versus the regional norm of 80 hours, and will go from three
to four pilots for long international flights, one above the
international norm. During last week's Senate debate, a Marsans
representative complained that "with pilots only working 35 hours
per month, we cannot be competitive while LAN pilots here work 80
hours." The same representative said that from 2001 to 2008, the
total number of AR and Austral pilots employed increased from 500 to
921, while the number of operational planes has declined to 26
14. (SBU) According to local analysts, this domestic aviation
turmoil will likely not affect Argentine passengers' access to
international destinations: although AR flies to some regional Latin
American destinations, Miami and Europe, these destinations are
already covered in sufficient numbers by U.S., Chilean, Spanish,
British and other competitor carriers.
15. (SBU) Several U.S. companies are service and aircraft suppliers
to the airlines and have had problems collecting monies owed,
including Sabre Travel Network and GE Capital. Embassy will be
alert to their interests and to help if needed.
16. (SBU) Given the bitter relationship in recent years that has
existed between the GOA and unions on one side, and Marsans on the
other, many observers saw this divorce as inevitable. Now that the
renationalization has been approved by Congress, it is up to the GOA
and unions to decide whether they can or will work to reform AR and
Austral into reasonably good domestic carriers, or whether Argentina
will continue to suffer sub-par, unreliable and strike-prone
services. They will need to decide on a series of economic and
political trade offs, including on domestic fare price increases and
subsidies, quality of service, and number of employees. In the
interim, the GOA will likely continue to be on the hook for around
$50 million per month in subsidies, and this is above and beyond
announced plans for more planes, more routes, and the "recuperation"
of AR and Austral's "former greatness." It remains questionable to
many observers here whether the GOA is financially or technically
capable of running such an operation efficiently and effectively,
especially in today's challenging global aviation market. Pending
GoA decisions on this will have important consequences in future
tourism, trade, and investment prospects. END COMMENT.
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