Turbulence Ahead for Mongolia's Airline Sector?

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000297

SIPDIS

SENSITIVE
SIPDIS

STATE PASS EXIMBANK AND OPIC
STATE PASS TO AID/ANE, EB/TRAN/AN AND EAP/CM
TOKYO, BEIJING AND SINGAPORE FOR FAA REP

E.O. 12958: N/A
TAGS: EAIR PGOV ECON MG
SUBJECT: Turbulence Ahead for Mongolia's Airline Sector?

ULAANBAATA 00000297 001.2 OF 002


SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION

Ref: A) Ulaanbaatar 245 B) 05 Ulaanbaatar 59


1. (U) This is an action cable. See action requested in of the FAA
in para 12.


2. (SBU) SUMMARY. The General Director of Mongolia's Civil Aviation
Authority (MCAA) dismissed reports that Aero Mongolia is suffering
serious financial difficulties, despite a series of safety related
incidents and swirling rumors of impending bankruptcy. The official
praised the country's newest domestic airline, EZnis as a model
company. He complained to Econoff recently that the U.S. Embassy's
continuing ban on the use of MIAT's domestic service by U.S.
government personnel has damaged the company's reputation and
revealed that MIAT would soon purchase two or more ATRs to replace
its aging Antonov-26 in hopes of reinserting itself into the
domestic air market. MCAA reps also asked for assistance in
developing a closer working relationship with the FAA and in
locating training opportunities for MCAA staff in the U.S. END
SUMMARY


3. (SBU) Econoff met with the MCAA General Director Batmunkh on May
22 to discuss the general health of Mongolia's aviation sector and
ask about recent reports that one of the country's two private
domestic airlines, Aero Mongolia (AM),could be facing bankruptcy.
The airline has suffered a series of safety-related mechanical
incidents recently and it continues to be dogged by rumors of wobbly
finances. MCAA's Director of Foreign Relations, J. Tsolmon, and
Aviation Economist D. Bayasgalan also attended the meeting.


4. (SBU) Post recently learned from a source (albeit a competitor)
that three of AM's four aircraft had been grounded for safety or
financial reasons. One plane was undergoing its (longer than
expected) annual "C" check in Germany, a second plane was grounded
by MCAA for improper maintenance, and a third had had its wheels
locked after the company failed to make monthly payments on its
lease. If true, AM would have only one aircraft at its disposal
during the height of the June to August tourist season, constricting
revenue inflows and putting the company's ability to remain
financially airborne at risk. It is hard to see how the company
could keep revenues at sustainable levels, the source surmised.


5. (SBU) Batmunkh assured Econoff that AM was alive and well and it
was meeting all international safety standards. "You can take my
word on it," he said. As for its finances, as far as he knew, AM had
experienced past problems but now he felt that the airline's flight
frequency was appropriate to keep it afloat. He confirmed that the
MCAA had grounded one of AM's aircraft because it had not gone for
its C check at the required time. Apparently, AM was pushing the
outside of the envelope by keeping one plane flying past its
expiration date while another was unavailable as it was undergoing a
C check. Once the first plane returned from its C check, which he
expected would happen in short order, the grounded plane could then
be sent off to Germany for its annual check and would then be back
on line.


6. (SBU) Because MCAA focuses on safety issues, Batmunkh demurred on
speaking to AM's failure to make timely lease payments on another of
its aircraft.


7. (SBU) Turning to MIAT, Mongolia's state-owned airline, Batmunkh
announced that the airline was looking to effectively re-enter the
domestic market with the purchase of two or more European built,
twin-turboprop short-haul ATRs. (Note: American Eagle Airlines
currently has a fleet of 39 such aircraft.) Although he seemed to
lack details about MIAT's plans, he felt that the national carrier
would move forward with the purchase soon.


ULAANBAATA 00000297 002.2 OF 002



8. (SBU) COMMENT: Batmunkh hyped MIAT's efforts to reenter the
domestic market by saying, "We want there to be competition, we do
not want there to be only one domestic airline," leaving the
impression that, despite his cheerleading for Aero Mongolia, he did
not hold out strong hope for the airline's long term survival. END
COMMENT.


9. (U) Batmunkh praised Mongolia's newest airline, EZnis (ref A),
saying it had excellent financial backing, excellent management and
was performing well in its first few months in service. As a recent
start-up, he believed the airline was likely losing money.
Nevertheless, he was impressed with the company's emphasis on safety
and opined that EZnis' current fleet of two Saab 340Bs purchased
from American Eagle last year represented the perfect kind of
aircraft for Mongolia.


10. (SBU) D. Bayasgalan asked whether the U.S. Embassy-imposed ban
on U.S. government personnel flying MIAT domestically (ref B) might
soon be lifted, saying the move had damaged MIAT's the reputation.
(Note: U.S. Government employees are prohibited from flying on MIAT
domestically; internationally, MIAT flies Boeing and Airbus planes
and is fine.) Econoff responded that questions surrounding the
age-out status, maintenance records and "uninsurability" of MIAT's
one remaining aircraft for domestic flights, an aging Russian-built
military specifications Antonov-26, had led to the decision two
years ago and that, since nothing had changed in the interim, the
decision was not likely to be overturned. (Note: Although MIAT
admits the Antonov is nearing the end of its useful life-span, it
insists the actual logged flight hours of the plane are relatively
low, that maintenance is top-notch, and that insurance is proper and
up to date. Nevertheless, MIAT has been unable to present
documentary proof of these claims to Embassy staff when asked.)


11. (U) Finally, Batmunkh asked Econoff for assistance in
establishing contacts with appropriate U.S. counterparts who could
assist MCAA with capacity building. He also stressed the need for
more MCAA staff, particularly air-traffic controllers, to attend
training in the U.S. so they could acquire the right English
language skills. He asked for help in finding good schools for
aviation industry employees as well as assistance with visas.
Sending staff to Singapore for training, he said, was not meeting
MCAA's needs.


12. (U) ACTION: Request FAA review MCAA's requests and consider a
visit sometime soon to help flesh out these needs and possible areas
for training and technical cooperation.
Goldbeck