SURINAME SEEKS OPEN SKIES (SORT OF)

UNCLAS SECTION 01 OF 03 PARAMARIBO 000080 SIPDIS SIPDIS DEPT FOR WHA/CAR: LLUFTIG, EB/TRA: JHORWITZ, EB/CBA: NSMITH-NISSLEY, TSA: LMCNEIR AND FAA: JWALTZ E.O 12958: N/A TAGS: EAIR ECON PBTS PGOV NS SUBJECT: SURINAME SEEKS OPEN SKIES (SORT OF) REF: 04 PARAMARIBO 643 PARAMARIBO 00000080 001.4 OF 003 -------------- Summary -------------- ¶1. Suriname's Minister of Transportation Amafo has indicated that an Open Skies Agreement with the United States is possible, but her comments suggest Suriname is anxious to preserve CARICOM's dominance on intra-Caribbean routes. This pronouncement comes at a time when the national carrier, Suriname Airways (SLM),will be facing increased competition and mounting economic pressures to modernize and right size its operations, with uncertain prospects for competing successfully as more than a regional carrier. SLM is considering leasing both Airbus and Boeing aircraft to compete in its new business environment. End summary. Open Skies ¶2. CARICOM states are obligated to notify the CARICOM Secretariat before negotiating any bilateral agreements in SIPDIS order to prevent harm to other members. Referring to that point in responding to a question about the possibility of Open Skies agreements with the United States, Minister of Transportation, Communication and Tourism, Alice Amafo gave an ambiguous reply: "There will be an open sky agreement [with the U.S.], with each (CARICOM) country determining for itself how open this will be." She continued, "since CARICOM can't coerce the U.S. to allow Caribbean carriers to operate flights between destinations in the U.S., CARICOM should ensure that U.S. airline companies don't operate on the Caribbean intra-regional air transport market." ¶3. Suriname currently faces major changes in its aviation market. As of May 1, the so-called "mid-Atlantic" route between Paramaribo and Amsterdam will be liberalized. This will bring to an end decades of a duopoly arrangement between Suriname Airways and KLM on SLM's busiest and most profitable route. By the end of February, the governments of Suriname and the Netherlands can each introduce two new carriers on the route, bringing the total number to six possible carriers in this market. The decision to liberalize this route was prompted by a directive from the Dutch Antitrust Authority (Nederlandse Mededingingsautoriteit NMa),which required that the carriers not renew their tariff sharing arrangement when it expires at the end of February 2006. SLM's New Corporate Strategy ¶4. In a recent meeting with Suriname Airways executives, SLM President Henk Jessurun told the Ambassador and econoff that SLM had in fact signed an open skies agreement with the Netherlands three years ago, but the older joint venture for sharing the mid-Atlantic route along with its accompanying high tariffs had effectively remained in force. (Note: the Paramaribo - Amsterdam route is considered one of the most expensive in the world. End note.) Because of a confluence of forces with the expiration of the joint venture agreement, the entering into force of the Dutch-Surinamese open skies agreement, and the examination of their joint venture as a possible "abuse of a dominant position," by Dutch Antitrust Authorities, a mutually amicable decision was made to let the joint venture expire and open the mid-Atlantic route to competition beginning May 2006. Lease of New Aircraft: Boeing vs. Airbus ¶5. SLM has been flying its fully owned plane (Boeing 747- 300) on the mid-Atlantic route since August 2004 (see reftel) but has decided, due to high fuel and maintenance costs, to replace the equipment within the next two years. The Director of Corporate Planning, Angela Landburg, has been in negotiations with both Airbus and Boeing to determine which aircraft will best serve SLM's major routes (mid-Atlantic and regional Caribbean/Northern Brazil). Future aircraft will be acquired under a lease agreement lasting 3 to 5 years and a decision is expected by March ¶2006. SLM is in the process of re-examining its corporate strategy for 2007 to 2010, which sees its business as PARAMARIBO 00000080 002.4 OF 003 divided between flying the mid-Atlantic route and being a "regional carrier." SLM envisions dividing the regional route between Caribbean and northern Brazilian airports in partnership with Air Jamaica, Brazil's TAF airline, and a newly proposed "Insel Air" out of Curacao. Mid-Atlantic Route ¶6. Currently SLM flies 3 times a week with its 747 between Paramaribo and Amsterdam but would like to increase to 4 times a week. The plane flies at about 70 percent capacity (out of total 300 seat capacity) and SLM wants to increase capacity to 85 percent in the high season (June to September). They are considering leasing an Airbus 340 for this route and expect it to be in service by April 2007. The company also expects between 2 to 3 outside European competitors vying for the same route. The company claims it must maintain 40 percent of market share to make flying this route profitable. Regional Route ¶7. Currently, the SLM regional route consists of Port of Spain, Belem, Curacao and Aruba, on which it operates an MD82 aircraft. The company is considering leasing a Boeing 737 (500 or 600) to replace the MD82 when the lease expires in August 2006. The company is very upbeat about possibly working with Boeing because they claim it will help strengthen their own organizational dynamics when it comes to maintenance and support of the aircraft. It is also planning on entering into joint ventures with Air Jamaica, Brazilian TAF, and a soon-to-be-formed InselAir out of Curacao. The routes covered will be the greater Caribbean, northern Latin American airports, i.e., Belem to Georgetown, and other northern Brazilian cities. The expected increase in trade with Brazil and the growing Brazilian population within Suriname, as well as Brazilians wishing to fly from Europe to Brazil via Suriname should support more capacity on these routes. It is envisioned that the company, in addition to servicing Port of Spain, Curacao and Jamaica, will be able to send its passengers to the U.S. through its partnership with Air Jamaica. [Note: The Boeing 737 is the front-runner for the regional route not only because of the aircraft's positive reputation and improved maintenance scenario but also because it further offers the possibility of better integration with the Air Jamaica fleet. End Note] Rationalization of the Company ¶8. Currently, SLM employs 500 people as ground crew, baggage, ticketing and flight attendants for 2 aircraft, along with an additional 30 pilots. This level of overhead reflects the inefficiency that is attributed to government meddling in the operations of the national carrier. The current president, Jessurun maintains that he has an understanding from the current government that there will be no intervention in the future business operations of the airline. He has set out to rationalize the operations by reducing the number of airline employees to 300 and share the "excess" pilots with Air Jamaica. ¶9. SLM has already begun to rationalize through the privatization (i.e., creation of independent subsidiaries) of its baggage handling and catering functions, which it expects to be fully operational by March 2006. It hopes to be able to transfer some of the redundant employees into these operations as a result. Additionally, the impetus to privatize ground handling (movement of passengers from terminal to plane) comes on the heels of the GOS signing a State Decree on January 6 requiring domestic regulations to conform to the standards of the CARICOM Single Market Economy (CSME). SLM's monopoly position as the "general ground agent" was one of several issues hindering Suriname's full participation in the CSME. Other companies would then have an opportunity to offer the same services at the airport (e.g., KLM). Furthermore, SLM has a 75 percent partnership in two hotels: the Residence Inn in Paramaribo and the Residence Inn in the western border city of Nickerie. In addition, SLM owns 99 percent of an eco- tourism company, METS, which arranges tours to the interior. The company plans to shift approximately 200 redundant workers into these various operations. PARAMARIBO 00000080 003.4 OF 003 Comment ¶10. The equation that SLM has devised to reach rationalization of its business model is complex and full of unproven assumptions. Maintaining a 40 percent share of the mid-Atlantic route at 70 to 85 percent capacity is extremely optimistic if 3 or 4 new carriers enter this market. Minister Amafo's comments regarding a less than fully open skies agreement with the U.S. reflects Suriname's attempts to keep as much unwanted competition as possible at bay while it struggles to come to terms with increasing costs and diminishing market share. Alas, the consumer is not part of this equation. BARNES