REHABILITATING STATE-RUN ARIANA AIRLINES

UNCLAS SECTION 01 OF 04 KABUL 005033 SIPDIS SENSITIVE DEPARTMENT FOR SA/FO, SA/A, EB/OTP, EB/CBA NSC FOR AHARRIMAN, AMEND CENTCOM FOR CG CFC-A TREASURY FOR PARAMESWARAN COMMERCE FOR AADLER TRANSPORTATION FOR DMODESITT FAA FOR JHANCOCK AND TMARZIN E.O. 12958: N/A TAGS: EAID EAIR ECON AF SUBJECT: REHABILITATING STATE-RUN ARIANA AIRLINES REF: A) KABUL 4701 B) KABUL 4327 -------------- Summary -------------- ¶1. (SBU) The President of state-owned flag carrier Ariana, Nadir Atash, has ambitious plans to revamp the airline by upgrading its personnel, aircraft, systems and maintenance. Today Atash confronts a large and largely ineffective workforce, massive corruption and persistent nepotism. Even with significant Ministry of Transport protection against private sector competitors, Ariana is a long way from being able to operate at international service and safety standards. Afghanistan's best hope for a viable civil aviation sector lies with new private sector airlines. End summary. -------------- Atash's Ariana -------------- ¶2. (SBU) In a discussion with Econoffs, Ariana President Nadir Atash laid out his vision for the future of Afghanistan's flag carrier. He credited Minister of Transportation Qasimi with beginning the process of reform at Ariana and noted that the Minister had recruited him in June 2005 and given him a mandate to continue and expand this effort. Atash readily admitted that corruption, nepotism and ineptitude are rampant in the Ariana, a company that had not produced a profit/loss statement in over 15 years. He expects to have an audited Ariana account statement completed for Afghan FY 045/05 (the fiscal year ending March 21, 2005) by March 2006, followed by an FY 05/06 statement two to three months later. ¶3. (SBU) Atash outlined an ambitious plan for turning Ariana into a competitive airline. He highlighted the need for the right tools for success: "better personnel, aircraft, systems and maintenance." He stressed the need to stem what he called "funding leakage," noting that often expected revenues do not arrive from remote ticketing offices in Ariana's coffers. While Atash went into detail on each of his four tools for success, he did not outline a clear plan for dealing with pervasive corruption. -------------- Building Ariana's Human Capacity -------------- ¶4. (SBU) Ariana was originally set up in the 1960s as a joint venture between the GoA and PanAm. After PanAm withdrew in the 1970s, Ariana became a wholly state-owned enterprise. The company is presented by the Ministry of Transportation, as a private sector entity, albeit one with the GoA as its principal shareholder. As such, its employees are not considered to be government civil servants and so Ariana is not required to submit formal "rightsizing" plans to the GoA civil service reform initiative. Atash noted that "This [the airline industry] is a service industry," and lamented that concepts such as "after sales service" were virtually unknown to his staff. Atash proudly explained his new campaign to hire staff proficient in English and computer skills. To date, Ariana has hired 340 new employees via an English and computer proficiency test. He added that he has recruited new "ladies" for cabin service because "men don't know how to serve." Still, Atash has no plans to reduce the existing 1700 person staff. In fact, he plans to pay many of them to stay home rather than coming to work (Ref A). He believes that the USD 1.2 million cost of this program is worth it to prevent the strikes and violent demonstrations that layoffs would cause. ¶5. (SBU) Atash counts 120 Ariana pilots, including flight engineers. Of these, less than 20 are fully certified. Ariana is retraining many of these pilots. Eight of the best will train to fly new long range planes that Ariana plans to lease, but poorly coordinated changes in leasing plans mean that these pilots have been on hold waiting to train until the type of craft they will fly is confirmed. -------------- Upgrading the Fleet -------------- ¶6. (SBU) Ariana's current fleet includes three Boeing 727s, three A300 B4s and one Antonov 24. (Note: One of the A300 B4s has been grounded for years and will likely never fly again. The Antonov has been ordered grounded by the Ministry of Transport, but Ariana continues to use it for domestic flights. End note.) Ariana recently signed a deal to lease two 757s from Boeing beginning in December. This deal with Boeing will allow Ariana to purchase four 737-700 aircraft from Boeing beginning in 2009. Ariana is also currently leasing two A310s. Thus, by the end of 2006, Ariana hopes to have five long range aircraft: the two Boeing 757s, the two A310s and one other plane to be determined. (Note: As noted Ref A, Atash views these leases as economically viable with a 75 percent passenger load. However, Ariana has yet to perform any economic feasibility studies on future routes, so this number is entirely Atash's creation. Ariana's Lufthansa Consulting advisors recommend basing new route feasibility studies on a more conservative 65 percent occupancy rate, though they suggested that even that would be optimistic initially. End note.) Still, according to the Embassy FAA expert, even though the A310s have been delivered and the 757s will arrive shortly, it will be months before Ariana will have the pilots, maintenance contracts and landing slots to put these planes in the air. -------------- Systems -------------- ¶7. (SBU) Atash believes that modern internal accounting and management systems are essential to transform Ariana into an effective, efficient and competitive carrier. He plans to purchase new accounting, reservation and ticketing software suites that will require a computer and English literate staff. Atash is particularly interested in acquiring the Saber reservation and ticketing system to allow more flexible pricing of tickets and increased customer service. However, Ariana does not have its own generators, relies on the GoA for its power supply and, like the Ministry of Transportation and much of the rest of Kabul, is frequently without power needed to run these systems. -------------- Maintenance -------------- ¶8. (SBU) While Atash emphasized the importance of strong in- house maintenance, he admits that Ariana is still struggling in this regard. Under PanAm's tutelage, Ariana's engineers used to perform maintenance in line with international standards. Many of those engineers still work for Ariana, but they have not had updated training since the 1979 Soviet invasion. Currently, Ariana can perform only the most basic maintenance operations in-house and maintains few paper records of aircraft maintenance regardless of where it was performed. -------------- Domestic Service -------------- ¶9. (SBU) Atash admitted that Ariana does a poor job with domestic service. He noted that domestic service used to be provided by a stand-alone state-owned enterprise Bakhtar that was later folded into Ariana. Atash favors splitting domestic service off from Ariana to allow Ariana to focus on what he views as its core mission, international flights. -------------- Competitive Disadvantage? -------------- ¶10. (SBU) Atash argues that Ariana is at a competitive disadvantage versus other international carriers and insists that Indian Airlines' recent expansion of its Delhi-Kabul service to thrice weekly has hurt Ariana's revenue (Ref B). Chief among Atash's concerns are ISAF-imposed operating restrictions that limit civil aviation to landing and taking off at Kabul International Airport between sunrise and sunset. (Note: As all civil air service into and out of Kabul faces the same restrictions, it is hard to see how this limits Ariana's competitiveness. Additionally, ISAF will allow flights to operate between 5:00am and 11:00pm local time during the Hajj. The Ministry of Transportation will request that these operating hours remain in effect after Hajj as well. End Note). Atash also notes that Ariana is exposed to currency risk because of GoA requirements that it sell tickets in Afghanis even though most of its expenses are in US dollars. Further, the poor condition of Kabul's airport and terminal limit secondary revenue opportunities from restaurant and vender leases. Also, Ariana has neither a cargo terminal nor its own fuel farm. (Note: Embassy's FAA expert observed that the Ministry of Transport would allow Ariana to make any reasonable terminal improvements provided that Ariana pays for them. Similarly, there are no restrictions against Ariana building its own fuel farm. End note). ¶11. (SBU) Finally, as Afghan-licensed planes cannot fly into European airports (because Afghanistan is not a Category 1 country according to IATA ratings),Ariana wet- leases a number of planes to operate its European routes. Each of these contracts requires adherence to the licensing standards of each aircraft's country of registration. Managing these different sets of requirements takes considerable management resources. (Note: While Atash complains about managing multiple wet-leases, he has consistently balked at making the kind of reforms necessary to raise Afghanistan's IATA ratings, such as true maintenance oversight. End note.) -------------- Bio Info -------------- 12 (SBU) At the request of the Minister of Transportation, American citizen Nadir Atash recently returned to Afghanistan from the U.S. where he ran a chain of Jiffy Lube franchises. Though Atash professes to be a staunch proponent of the development a free markets in Afghanistan, he is close to the Minister of Transportation and admits that he has prevailed upon the Minister to protect Ariana by restricting the access of potential competitors - both start- up domestic carriers and established foreign carriers - to the Afghan civil aviation market. -------------- Comment -------------- ¶13. (SBU) While all carriers flying into Afghanistan face significant challenges, Ariana carries considerable baggage from its history as a state-owned enterprise. New private sector players such as Kam Air who do not carry the aging fleet, the scores of workers with little or no recent training, and the outdated facilities that Ariana does are in a better position to operate consistent with international standards. Thus far, the Ministry of Transportation's reaction to this situation has been to curtail the activities of private sector carriers (see Ref B for Ministry of Transport limitations on Kam Air's international routes) and to offer protection to Ariana. Without such protection, Ariana may indeed fail. But in the medium term, private air carriers appear better positioned that Ariana to fill Afghanistan's civil aviation service gap with higher quality and safer air service. NEUMANN