Identifier
Created
Classification
Origin
05MAPUTO653
2005-05-26 09:49:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Maputo
Cable title:  

MOZAMBIQUE - RIVAL AIRLINES VIE FOR DOMESTIC MARKET

Tags:  EAIR ETRD MZ 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 MAPUTO 000653 

SIPDIS
SENSITIVE
STATE FOR AF/S - TREGER
DAKAR FOR FAA REP ED JONES
E.O. 12958: N/A
TAGS: EAIR ETRD MZ
SUBJECT: MOZAMBIQUE - RIVAL AIRLINES VIE FOR DOMESTIC MARKET

REF: 04 MAPUTO 1658

UNCLAS SECTION 01 OF 02 MAPUTO 000653

SIPDIS
SENSITIVE
STATE FOR AF/S - TREGER
DAKAR FOR FAA REP ED JONES
E.O. 12958: N/A
TAGS: EAIR ETRD MZ
SUBJECT: MOZAMBIQUE - RIVAL AIRLINES VIE FOR DOMESTIC MARKET

REF: 04 MAPUTO 1658


1. (SBU) Summary. The ongoing fare war between
government-owned Linhas Aereas de Mocambique (LAM) and
upstart private airline Air Corridor has quickly turned
Mozambique from one of the most expensive places in Africa
for domestic flights to one of the cheapest. While consumers
benefit, the highly contentious public rivalry raises
questions about the safety of each airline, the ability of
the Mozambican government to regulate competition in the
airline industry, and future prospects for air transport
privatization. Post has requested an FAA staff visit to
Mozambique for June 2005 to assess airline safety and GRM
regulatory capacity. End Summary.

--------------
Air Corridor
--------------

2. (SBU) Air Corridor, owned by Mozambican citizens of South
Asian origin, opened for business in August 2004 and became
the first airline to compete directly with the state-owned
airline LAM on its principal domestic routes. Air Corridor
early on experienced several in-flight incidents widely
reported in the local press (reftel). These consisted of a
dangerous approach when Air Corridor and another plane
attempted to land simultaneously on the same strip and
another in which the company's one Boeing 737-200 sucked a
bird into one of its engines, causing a two-day service
shutdown. Based on the potential seriousness of the
incidents, and with guidance from the Department, the Embassy
issued a warden system advisory in December 2004 notifying
the American community of our decision not to use Air
Corridor for official travel.


3. (U) There have been no more safety incidents reported
since then. In fact, subsequent discussions with GRM
authorities suggest that other airlines and airport
maintenance staff may have caused the 2004 incidents (see
reftel). In any case, consumers have been happy to take
advantage of Air Corridor's low prices, which are 65 to 70
percent below those charged by LAM in 2003-2004. (LAM has
responded by cutting its own fares to levels slightly above
Air Corridor prices.) For example, a one-way Air Corridor
ticket from Maputo to Air Corridor's home city of Nampula now
costs only $60, which is only $20 more expensive than the
bone-crunching 40-hour bus ride. Air Corridor is starting to
see the benefits of its pricing policy; company officials

indicated to Emboff that occupancy rates were steadily
rising, and averaged nearly 60% in March/April 2005 - up from
an estimated 45% in October 2004. The approximately 100
Amcits in and near Nampula have also noticed. Several
Nampula-area Amcits recently contacted by the Embassy have
told us they have used the airline, found it generally
superior to LAM, and have recommended further travel with Air
Corridor.

--------------
Is This Fair Competition?
--------------

4. (SBU) It is unclear how Air Corridor and LAM are able to
charge such low prices and survive. To a certain extent,
each company could justify slashing fares due to the
strengthened Mozambican metical, which rose against the
dollar from 24,000 mt/$ to 19,000 mt/$ during the latter half
of 2004, permitting the companies to purchase fuel much more
cheaply. This year, however, the metical has lost nearly
all it had gained, causing gas prices to climb again and
squeeze profit margins. LAM believes that current airfares
are unreasonable and, in various public statements, has
charged Air Corridor with "dumping." LAM Managing Director
Jose Viegas told Emboff that Air Corridor is pricing tickets
well below cost, considering together the costs of general
insurance, fuel, fuel insurance, salaries, airport fees, and
the $300,000 per month cost of wet leasing a Boeing 737-200
from Phoenix Aviation. He believes Air Corridor provided the
GRM with false insurance papers, and really does not carry
insurance that properly reflects post-911 premiums and
coverage. Another critic, Segundo Alves Gomes, president of
the Association of Mozambican Airline Operators, believes the
GRM,s agreement to license Air Corridor was illegal because
the proper paperwork was not filed.


5. (U) (Note: LAM, for its part, dry leases its fleet of
three Boeing 737-200s. Two of these are from a US company,
International Aviation Partners, Inc. Viegas said that he is
negotiating to lease an additional Boeing 737-200 from this
company when the lease on his third airplane ends in October

2005. Dry leases, unlike wet leases, do not include payments
for crew and maintenance, and generally run $50-65K per
month, according to Viegas. End Note.)


6. (U) The broadside fired by LAM has started a discussion
within the GRM and the industry about what constitutes fair
competition. Both LAM and Air Corridor agree the industry
needs better regulations, and each has written to the Civil
Aviation Institute of Mozambique (IACM) with their requests
for an improved legal and institutional structure. In recent
conversations with Emboff, Antonio Pinto, director of IACM,
lamented the GRM,s lack of relevant laws defining rules of
competition in the marketplace and the lack of economic
expertise necessary to determine whether "dumping" has taken
place. He asked for USG technical assistance in developing
an improved regulatory structure, whether from FAA, USAID, or
other sources.

--------------
Privatization Issues
--------------

7. (U) The sudden, fierce competition between LAM and Air
Corridor has pre-empted the decade-old debate of whether,
when, and how LAM should be privatized. LAM, owned 80% by
the GRM and 20% by its employees, has long been considered by
the GRM to be a strategic company that should not be
privatized. International financial institutions, however,
have been urging its sale. But with long-standing
multi-million dollar debts to Boeing and a 750-employee
workforce considered by the World Bank to be more than twice
as large as necessary, attractive suitors for LAM have been
few and far between. Air Mauritius made the last serious
offer for LAM, offering $3.6 million in 1997, which the GRM
turned down. Given today's high fuel prices and insurance
premiums, compounded by the loss of LAM,s monopoly,
well-placed observers in both the World Bank and the airline
doubt the GRM could even give LAM away for free today.


8. (SBU) While LAM privatization is on hold indefinitely,
privatization of airport services apparently is only on hold
temporarily. On January 13, 2005, a few weeks before the
Chissano government left office, the Council of Ministers
approved a 25-year concession of the Maputo airport to
Airports Company South Africa (ACSA). ACSA won a competitive
bidding process on airport services carried out in 2003. The
agreement would have given ACSA 70% stake in airport
services, leaving the government with the rest. ACSA, in
turn, would have secured a $30 million loan to upgrade Maputo
airport. In late March 2005, incoming Minister of
Transportation Antonio Munguambe de-authorized the Council of
Ministers, concession. (Comment: Post understands that this
is a legal maneuver under Mozambican law.) According to LAM
and the Ministry, Munguambe decided the concession needed to
be re-negotiated, considering that Maputo is the only one of
the country's 18 airports that turns an annual profit.
Moreover, its revenues have historically been used to finance
minimal upgrades at the other airports, something the
concession appeared to overlook. Both of the major domestic
airlines and several new cabinet ministers, many of whom have
just returned to Maputo after stints as governors or
high-ranking officials in faraway central and northern
provinces, have backed Munguambe's decision. These same
sources indicate that the Ministry of Transportation is
actively negotiating with ACSA, and they expect a new deal to
be struck sometime soon.

--------------
FAA Visit
--------------

9. (SBU) Post will continue the monitor economic and security
issues in the Mozambican airline industry, but we do not have
the technical expertise to assess a particular airline's
safety record. Therefore we have asked the FAA regional
representative in Dakar to come to Mozambique to evaluate Air
Corridor and LAM, preferably in late June. In the meantime,
post has requested from IACM the latest reports from the ICAO
and IATA. IATA staff visited Mozambique in April 2005 and
made a cursory review of LAM and Air Corridor; Air Corridor
hopes for a full inspection by IATA sometime soon as a
precursor for gaining membership. ICAO visited Mozambique in
late 2004. When post receives the documents requested, we
will forward them to FAA-Dakar and the Department.
Dudley