USG SUCCESS STORY: PANAMA REGAINS CATEGORY 1 FOR

UNCLAS SECTION 01 OF 03 PANAMA 000906

SIPDIS


STATE FOR WHA A/S NORIEGA AND EB A/S WAYNE
FAA FOR ADMINISTRATOR BLAKEY
STATE PLEASE PASS USTR - JWOLFE
COMMERCE FOR USDOC4332/ITA/MAC/WH/OLAC/MGAISFORD


E.O. 12958: N/A
TAGS: EAIR ECON ETRD BEXP CASC PM ECONOMIC AFFAIRS
SUBJECT: USG SUCCESS STORY: PANAMA REGAINS CATEGORY 1 FOR
AIR SAFETY OVERSIGHT


REF: SECSTATE 82097



1. Summary: The Federal Aviation Administration (FAA)
downgraded Panama in 2001 for not complying with
international air safety standards. Over the past 18 months,
the Embassy has worked to focus the GoP's highest levels on
making needed changes to its aviation authority to regain the
status. The GoP signed a technical agreement with the FAA
last year to strengthen its oversight efforts. Based on the
successful implementation of that agreement, the FAA reviewed
Panama's entire oversight program on April 14 and found it to
be once again in compliance. The economic benefits to both
the United States and Panama are significant: local airline
Copa may now exercise an option to purchase as much as $354
million of aircraft from Seattle-based Boeing. Continental
Airlines, which owns 49% of Copa, will also profit from
increased codesharing opportunities. This success is a prime
example of USG teamwork to strengthen safety of the traveling
public, with significant benefits to U.S. companies. End
Summary.


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Panama's Air Safety Program Starts out Dismal
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2. In April 2001, the FAA determined that Panama was not
complying with minimum international standards for air
safety, and downgraded Panama to Category 2 under the
International Aviation Safety Assessment (IASA) program,
freezing Panamanian carriers' routes and frequencies to the
United States and banning U.S. carriers form codesharing with
Panamanian ones. The GoP's aviation laws and regulations
were seriously out of date; the AAC had poor infrastructure
and its personnel lacked proper training; inspector guidance
and records of airline certification, of surveillance, and of
corrective actions were inadequate and disorganized. In
essence, the AAC was deficient in all aspects of airline
safety oversight, and local airlines simply ignored the
Authority.


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Ambassador and Embassy Bring Political Pressure to Bear
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3. Immediately after arriving at Post in December 2002, the
Ambassador and Econoffs pressed Panamanian President Moscoso
and Ministers of Economy and Finance (MEF),Commerce (MICI),
and Government and Justice (MOGJ),plus the Comptroller
General to provide the political and financial support
necessary for Panama,s Civil Aviation Authority (AAC) to
better its infrastructure, human resources, and oversight
generally. The Ambassador emphasized the importance of
keeping the flying public safe through appropriate oversight,
and pointed to the clear economic benefits that would result
by maintaining high levels of safety. She added the air
safety oversight issue to the list of investment disputes
before the Embassy-GoP Ad Hoc Investment Committee that she
chairs with the Minister of Commerce, which ensured that the
issue received recurring and intensive review in succeeding
months.



4. She also urged members of the board of directors of Copa
Airlines (Panama's leading airline) to change the carrier's
culture of unwillingness to comply with AAC directives,
pointing out that the long-term profits from increased
traffic to the United States would far outweigh the
short-term costs of implementing changes that the AAC might
demand--no matter how frivolous the airline felt those
demands to be. In addition, the Embassy,s economic section
maintained almost daily contact with key working level
contacts in the GoP and COPA to ensure constant focus on the
issue, and also communicated regularly with the FAA.


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FAA Technical Assistance Agreement Signed
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5. Converting political will into finite action takes more
than the power of fiat, however. Recognizing the FAA as the
clear experts, the GoP formally requested a technical
assistance program with the FAA in May 2003. Through careful
coordination at FAA Headquarters' Flight Standards Division
and Office of International Aviation, the FAA Southern Region
division and the associated Miami International Field Office
(IFO),and the Eastern Region Flight Standards Division
Technical Branch, the FAA provided a comprehensive technical
assistance package for one week per month for six months in
specific areas where the AAC was especially deficient. In
December 2003, the FAA and AAC agreed to extend the
assistance program through June 2004.


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FAA's Successful Efforts Result in Formal Consultations
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6. From March 23-26, an FAA legal team reviewed Panama's new
and improved civil aviation law (passed in 2003) and
regulations (refined as a direct result of the technical
assistance program),and found both to be in compliance with
international standards. During the March 29-April 2
technical visit under the terms of the agreement, FAA
inspectors witnessed the AAC certification of Copa and also
closed out all remaining action items. During March 29-31,
senior officials from the Miami IFO conducted a management
review of the AAC and determined that a formal IASA review of
Panama,s air safety program would be appropriate.



7. On April 14, the USG via the Embassy requested formal
bilateral consultations in accordance with Article 6 of the
1997 Air Transport Agreement between the USG and GoP. Senior
officials from FAA's Southern Region and from FAA HQ
conducted an IASA program review of the AAC. Based on the
clear technical standards laid out in the IASA program, the
team determined that Panama was ahead of the game in many
areas of flight safety, and had implemented innovative
systems that were far ahead of neighboring countries. All
major concerns noted in the April 2001 downgrade notice had
been addressed, and in many cases, Panama's standards far
exceeded minimum requirements. On this basis, the FAA
advised the AAC of its decision to return Panama to Category
1 status.


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Follow Up and Next Steps
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8. During the consultations, the FAA and AAC agreed to
extend the technical assistance agreement through January
2005 to ensure that the AAC does not backslide from its
success, and also to provide technical continuity in the
period following Panama's May 2 general elections that may
have some effect on the AAC,s political leadership after the
new government assumes office on September 1. The continued
agreement will also help address the very minor areas for
improvement observed during the last review, such as ensuring
operations inspectors increased their attention to detail;
that the inspectors received some additional training on how
to write simpler enforcement reports, to strengthen guidance
and refine "On-the-Job" training for inspectors, to implement
a system to apply constant changes in international law
directly to the AAC's regulations, and to raise fines for
noncompliance to higher levels.


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Economic Impacts of Panama's Category 1
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9. Though strictly a technical issue, the economic impacts
of Panama's return to Category 1 cannot be overlooked. Copa
officials have told the Embassy that as a result of Panama's
designation that they intend to begin daily flights to New
York-JFK on June 17, and also plan to add two more daily
frequencies (for a total of four) to its lucrative Miami
route soon. U.S. carriers also will benefit. Continental
Airlines, which also owns 49% of Copa, will begin codesharing
on Copa flights soonest (Copa estimates that the codeshare
will bring $12 million in immediate revenue to Continental
with the potential for much higher returns soon after),and
Delta and Northwest also intend to codeshare with Copa later
this year. Copa and Continental also announced on April 19
that they intend to acquire a controlling interest in
Colombian airline Avianca. Colombian cities such as
Barranquilla, Cartagena, Cali, Medellin, and Bogota provide
important feeder traffic to Copa and Continental on
continuing flights to the United States, and Copa is looking
to increase the frequencies it flies on each of these
Colombian routes.



10. In order to service these new routes and frequencies,
Copa is expected to exercise a contract option with Boeing
for four 737-700's and two 737-800's. Boeing, whose sole
current commercial customer in Latin America is Copa,
estimates the deal to be worth $354 million.


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Comment: A Win for the United States and Panama
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11. Panama's return to Category 1 is a win for both Panama
and the United States. Though implementing international
safety standards the ultimately the decision of the GoP, it
was truly a USG team effort that effectively focused the GoP
on achieving and maintaining these standards to protect the
traveling public. The FAA's professionalism and adherence to
strict technical guidelines and the Embassy's constant work
at the political level achieved the right result. These
actions will reap substantial economic benefits not only in
Panama, but also for U.S. businesses like Boeing and
Continental. This is a successful and significant example of
USG efforts for U.S. business promotion.
WATT