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


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Summary
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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

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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.

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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