LAN CHILE - OPEN SKIES POSTERCHILD

UNCLAS SECTION 01 OF 02 PRETORIA 001134

SIPDIS

SENSITIVE

STATE FOR AF/EPS AND AF/S/TCRAIG AND KGAITHER
DEPT FOR EB/TRA/AN/CDEMARS, LFAUX-GABLE, ESMITH
TRANSPORTATION FOR SMCERMOTT, KBHATIA, GRETCH

E.O. 12958: N/A
TAGS: EAIR ETRD ECON SF
SUBJECT: LAN CHILE - OPEN SKIES POSTERCHILD

(U) Sensitive but Unclassified. Not for Internet
Distribution. Please protect accordingly.


1. (SBU) SUMMARY. U.S. Department of Transportation
officials facilitated a conference call between senior
executives from the Chilean airline, Lan Chile; U.S. State
Department and DoT officials; and South Africa,s Director of
Air Transport Regulation and chief aviation negotiator
Godfrey Selepe. The Lan Chile officials compared Chile to
South Africa and attributed much of their success and
Chile,s economic growth to the Open Skies agreement signed
with the United States in 1997. The officials felt that a
step-by-step liberalization of the aviation regime would not
have brought Chile the same economic benefits as an Open
Skies agreement. In addition, they said that Open Skies
provides a more flexible business environment which
especially benefits smaller firms. Selepe said that
President Mbeki,s policy has been one of managed
liberalization. In this context, he said that South
Africa,s aviation policy is not necessarily pro-Open Skies,
but doesn,t prohibit it either. He added that South
Africa,s aviation policy must consider the administration,s
main priorities of alleviating poverty and creating jobs.
Selepe said that he had hoped to remove some restrictions
during the last round of negotiations in 2000 and looks
forward to following up on this angle during the current
negotiations. END SUMMARY.


2. (U) U.S. Department of Transportation (DoT) Deputy
Assistant Secretary for Aviation and International Affairs
Susan McDermott facilitated a January conference call between
senior executives from the Chilean airline, Lan Chile; U.S.
State Department and DoT officials; and South Africa,s
Director of Air Transport Regulation and chief aviation
negotiator Godfrey Selepe. Lan Chile executives included
President and CEO Luis Ernesto Videla, General Counsel Juan
Carlos Mencio, Director of Commercial Planning Jorge
Grainger, and Director of Commercial Analysis and Development
Raquel Galarza. South Africa,s Minister of Transport
Jeffrey Radebe and South African Airways officials were
unable to participate in the call.

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SIMILARITIES BETWEEN CHILE AND SA
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3. (U) Videla began by comparing Chile to South Africa. He
described Chile as a small, liberal economy distantly removed
from the world,s most important economic regions. He said
that in the 1990s Chile was looking to grow its economy and
viewed its relationship with the United States as a means to
accomplish that. Videla admitted some fear at the thought of
competing head-to-head with the larger U.S. airlines.
However, the opportunity to gain greater access to the larger
U.S. market outweighed Lan,s reservations and they supported
the move to an Open Skies (OS) agreement with the United
States in 1997. Raquel Galarza said that Open Skies is
important to countries like Chile and South Africa because it
provides the flexibility that is necessary for smaller
companies to rapidly change their operational plan according
to market conditions.

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PROOF IS IN THE PUDDING
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4. (U) Jorge Grainger commented that Latin American
countries with OS agreements produce stronger airlines. He
pointed out that Chile has over 100 frequencies with
Argentina, 59 with Brazil, and 24 with Peru. On the other
hand, there are just 14 frequencies between Brazil and Peru
and 24 between Argentina and Peru. Grainger,s point was
that despite restrictive agreements with its neighbors, Chile
enjoyed a net advantage in frequencies because Chile is
liberalizing its economy more rapidly.


5. (U) Grainger continued that in the seven years since
Chile and the United States signed an OS agreement, Lan Chile
has enjoyed the following successes:

- Passenger load has increased 1.6 times
- Cargo load has increased 1.7 times
- Direct flights to U.S. cities increased from 3 to 6
- Increased codeshare services have added 29 U.S. cities and
7 Chilean routes to Lan Chile,s service.
- Lan Chile,s frequencies have increased 60 percent
- Lan Chile has 70 percent more seats
- U.S./Chilean carriers have increased in direct flight
market share from 86 to 98 percent


6. (U) Videla added that removing restrictions on air
transport has been directly related to the successful
development of Chile,s broader economy. In 1990, exports by
air were almost zero. Today, Chile exports more than 120
tons of goods per year on 300 freighters and Lan Chile has
become the most important cargo company between the U.S. and
South America with the liberalization of 7th freedom rights
under Open Skies. Grainger added that agreeing to a full
Open Skies agreement has helped Chile develop its
telecommunications and IT industries with an influx of
reservation and call centers.


7. (U) Juan Carlos Mencio said that OS has strengthened
relations between the two countries and ushered in an era of
greater cooperation on transportation and aviation matters.
The agreement allowed the United States to offer training to
Chilean officials that was not available under the old
aviation regime.

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CAN OPEN SKIES BE PHASED IN?
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8. (U) Videla was doubtful when asked whether Chile would
have benefited as much from a step-by-step liberalization of
its aviation industry. He said Lan Chile feared that an
incremental approach may have resulted in something less than
Open Skies. Galarza said that Open Skies creates a climate
where companies can determine how they will respond to
rapidly changing market conditions as opposed to an industry
controlled by government-imposed conditions. Non-OS regimes
inhibit the ability of companies to exploit changing
circumstances and the bureaucratic process moves too slowly
to meet the demands of industry.

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SELEPE,S RESPONSE
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9. (SBU) Selepe described the conference call as more
operational than regulatory in nature. He regretted that
South African Airways representatives were unable to
participate in the call and said that they &missed a lot.8
Selepe said that South Africa is still a young and
inexperienced democracy. Unlike Chile, he explained that
South Africa is not yet a completely liberal regime and
President Mbeki,s policy has been one of managed
liberalization. In this context, he said that South
Africa,s aviation policy is not necessarily pro-Open Skies,
but doesn,t prohibit it either. He added that South
Africa,s aviation policy must consider the administration,s
main priorities of alleviating poverty and creating jobs.


10. (SBU) Selepe pointed out that all stakeholders in South
Africa (i.e., tourism, SAA, international airlines operating
in South Africa, etc.) would participate in the Open Skies
discussion, but that no one specific party exercised decisive
influence on the outcome. At the end of the day, South
Africa,s Department of Transport would decide whether or not
to adopt an Open Skies agreement with the United States.
Selepe said that he feels South Africa enjoys good relations
with the United States via the International Civil Aviation
Organization (ICAO). He said that while the current
bilateral agreement with the United States has some
restrictions, it is certainly not the most protectionist.
Selepe said that he had hoped to remove some restrictions
during the last round of negotiations in 2000 and looks
forward to following up on this angle during the current
negotiations.
FRAZER