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

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Summary
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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.


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Atash's Ariana
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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.

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Building Ariana's Human Capacity
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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.

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Upgrading the Fleet
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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.

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Systems
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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.

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Maintenance
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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.

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Domestic Service
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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.

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Competitive Disadvantage?
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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.)

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Bio Info
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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.


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Comment
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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