DESPITE PROBLEMS, BRAZILIAN AIRLINES OPTIMISTIC

UNCLAS SECTION 01 OF 03 SAO PAULO 000915

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/EPSC AND EEB/TRA
STATE PASS USTR FOR KATE DUCKWORTH
FAA FOR CCAPESTANY, GBURDICK DEPT OF TRANSPORTATION FOR BHEDBERG
BUENOS AIRES FOR TSA ATTACHE
MEXICO CITY FOR TSA ATTACHE MGALVAN
USDOC FOR 4332/ITA/MAC/WH/OLAC
USDOC ALSO FOR 3134/USFCS/OIO
NSC FOR TOMASULO
TREASURY FOR JHOEK
SOUTHCOM FOR POLAD
USAID FOR LAC/AA

E.O. 12958: N/A
TAGS: EAIR PREL MARR PGOV ECON EINV BEXP BR
SUBJECT: DESPITE PROBLEMS, BRAZILIAN AIRLINES OPTIMISTIC

REF: Brasilia 290
SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY


1. (SBU) Summary. Ambassador Sobel met with the Presidents of the
two leading Brazilian airlines TAM and Gol on October 22 to discuss
developments in the aviation sector. Both firms noted that Brazil's
underdeveloped infrastructure is buckling under increased air
traffic in recent years. The TAM and Gol executives expressed hope
that the new Minister of Defense would promote private investment
into infrastructure and suggested that several Brazilian firms are
willing to support this development. The limited number of aircraft
is a constraint for international expansion; TAM and Gol first are
trying to utilize rights to European destinations via Brazil's
bilateral aviation agreements, and then will pursue additional
flights to the U.S. market, where Brazilian carriers have unused
frequencies. Although both companies are receptive to expanding
flights to/from Northeast Brazil, they are likely to focus their
limited aircraft fleets on the traditional destinations of New York
and Miami via Sao Paulo and Rio de Janeiro in the short-term. End
Summary.

Infrastructure Constraints Limiting Growth in Industry
--------------

2. (SBU) The Presidents of TAM Airlines (TAM),Marco Antonio
Bologna, and Gol Airlines, Constantino de Oliveira Junior, told
Ambassador Sobel in separate meetings on October 22 that the growing
air traffic demand is stretching Brazil's aging and underdeveloped
aviation infrastructure. TAM said industry priorities for
infrastructure in Sao Paulo are the third runway and additional
terminal at Sao Paulo's main international terminal at Guarulhos, as
well as developing a third airport in the greater Sao Paulo area.
Gol's Oliveira told the Ambassador that privatizing the existing
Viracopos Airport in Campinas is the best option because of
available space and its existing infrastructure. [Note: Viracopos
is about 40 miles outside of downtown Sao Paulo, and currently
services mostly private aircraft and cargo. End Note.] Oliveira
also emphasized the need to modernize SP's commuter airport,
Congonhas, by extending the runway, which would require invoking
eminent domain to condemn nearby property.


3. (SBU) Marco Antonio Bologna of TAM noted the need for
significant private investment to meet Brazil's infrastructure
needs. He complained that despite Minister of Defense (MOD) Nelson
Jobim's apparent openness to private investment, the Brazilian
government is dumping money into the MOD's budget rather than
encouraging private participation. The Ambassador underscored the
lack of a strong investment framework for foreign investors in
Brazil, including the inconsistent regulatory framework, lack of
transparency, and uncertain return on investment. Both Bologna and
Oliveira expressed interest in investing in private terminals and
airports, and stated that several financing firms share their
interest.

Industry Positive about New Leadership
--------------

4. (SBU) TAM and Gol were upbeat about the new faces at the
National Agency of Civil Aviation (ANAC) and Infraero, the
government agency that manages airports. TAM said the GoB's
appointment of Minister Jobim demonstrates a positive step toward
reforming management of the sector, and that his involvement in the

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regulatory framework should help; however, TAM continued to expect
any measurable improvements in overall performance to take a long
time. Oliveira also noted that Jobim is a man of action, and hoped
to see him begin reforming the sector when the Senate approved the
recently nominated ANAC Board of Directors. He said Solange Vieira,
who he expected to be confirmed as Chairman, is dynamic and
intelligent. Ambassador Sobel agreed that Jobim's appointment is a
positive step. He hopes to encourage Jobim to meet with both
Department of Defense and aviation sector leaders when he visits
Washington in January.

Reforms in Sector Needed
--------------

5. (SBU) Bologna told the Ambassador that although both civil and
military air traffic control systems can work, it is easier to
increase incentives for civilian controllers than for their military
counterparts, and he believes military controllers are more
concerned about their careers than the sector's performance.
Bologna suggested using the more than USD 600 million in tariffs the
industry collected last year for technological upgrades. He told
the Ambassador that the GoB had created a framework of 18
resolutions in 2003 to improve the sector; however, the GoB has done
nothing to address them.

Aircraft Shortage Dictates Strategic International Expansion
--------------

6. (SBU) TAM and Gol confirmed press reports that worldwide the
industry's major restraint is that demand for larger aircraft is
outstripping supply. Bologna said TAM is unable to fulfill its
international expansion plans and expects aircraft shortages through

2008. Oliveira also noted that fleet size is Gol's primary
constraint, especially large aircraft for transoceanic flights to
Europe and the U.S. As a result, the airlines have to husband their
resources carefully. Both TAM and Gol are currently trying to
secure as many of Brazil's rights in Europe as possible because
Brazilian bilateral agreements with European countries provide for
more limited weekly flight frequencies. [Note: Brazil's bilateral
agreement with the U.K. allows for 14 frequencies per week, while
the U.S. agreement grants 105 per week. In April 2006, the GoB
canceled all allocations for the defunct airline, Varig, and then
reallocated 29 frequencies to the new Varig-Gol and 28 to TAM. In
October last year, the GoB increased TAM's allocation to 35
frequencies. On October 25, the USDOT had a preliminary meeting
with Varig-Gol, during which Varig-Gol expressed its intention to
apply as a new company. If that happens, it would need to
renegotiate any flight frequencies directly with the GoB at that
point. It does not currently operate flights to the U.S.
Therefore, the bottom line is that Brazilian carriers are currently
using only 35 of its available 105 frequencies, and TAM is using
them all. End Note.] When asked about Open Skies, Bologna said the
trend is moving toward multilateral agreements over the next 5-10
years. He did not think TAM could be receptive to such an agreement
before then.


7. (SBU) Both TAM and Gol told the Ambassador they will turn their
attention back to U.S. destinations in 2008. TAM will use its new
partnership with United Airlines to launch a new route to Los
Angeles International Airport, followed by additional routes to
Miami and New York from Rio. Gol launches flights to London, Mexico
City and Madrid from Sao Paulo this year and plans to add routes to

SAO PAULO 00000915 003 OF 003


New York and Miami from an as-yet undetermined destination in Brazil
early next year. Oliveira told Ambassador Sobel that Gol plans to
keep Gol as the low-cost carrier and maintain Varig as its
full-service carrier. Oliveira also outlined an unorthodox strategy
to develop routes to non-traditional U.S. cities such as Boston, LA,
Dallas, DC and Orlando via a Central American hub (similar to
Panama's Copa Airlines),allowing Gol to continue to operate smaller
and shorter range jets.


8. (SBU) Both companies indicated that service between the U.S. and
Brazil's Northeast is of interest, but a lower priority. Gol said
Varig is exploring a longer-term code sharing arrangement with Delta
or American Airlines, but it is not feasible right now. Gol also is
considering a direct U.S. flight from Brasilia (not clear to where),
as well as Brasilia-Manaus-U.S. and Brasilia-Fortaleza-U.S.
services.

We Need Help
--------------

9. (SBU) Bologna requested that U.S. Mission Brazil help encourage
the GoB to stay focused on civil aviation problems and on increasing
markets for passenger and cargo transport. Bologna also supported
encouraging Minister Jobim to change Brazilian laws to increase
flexibility for private investment. Gol encouraged U.S.-Brazilian
technical exchanges, and suggested the USG reinforce the GoB's need
for outside support to address deficiencies. "Brazil cannot do it
alone," Oliveira stressed. Gol also suggested the Mission persuade
U.S. aircraft parts suppliers to open facilities in Belo Horizonte.


Comment
--------------

9. (SBU) Gol and TAM Airlines painted a positive outlook despite
existing bottlenecks in the Brazilian aviation sector. Although
both companies are actively developing expansion strategies, the
limited availability of aircraft over the near term is likely to
delay the launch of new U.S. service. These capacity and financing
constraints will limit Brazilian airlines' ambitions at bilateral
negotiations in December as well as the likelihood of their
introducing new U.S. routes from cities in Brazil's Northeast over
the medium term. For the immediate future, Brazil may look to U.S.
carriers to fulfill any hope for new air service to the country's
Northeast. End Comment.


10. This cable has been drafted and coordinated with Embassy
Brasilia and was approved by Ambassador Sobel.

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