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 SAO PAULO 00000915 002 OF 003 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. WHITE