AIR BAGAN SPIRALS DEEPER INTO DEBT

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000022 SIPDIS SIPDIS STATE FOR EAP/MLS, INR/EAP, EEB/TFS, EEB/TRA PACOM FOR FPA TREASURY FOR OASIA E.O. 12958: DECL: 09/21/2016 TAGS: ECON PREL PGOV EAIR BM SUBJECT: AIR BAGAN SPIRALS DEEPER INTO DEBT REF: A. 07 RANGOON 1048 ¶B. 07 RANGOON 1095 ¶C. RANGOON 004 RANGOON 00000022 001.4 OF 002 Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4 (b and d) ¶1. (C) Summary. Bad management decisions and the cumulative effect of targeted U.S. sanctions have caused Air Bagan to lose close to $7 million since May 2007. Crippled by costly airplane leases and lack of passengers, Air Bagan's General Manager complained that because the company will not post a profit in FY07-08, it must depend on resources from Tay Za's other companies to continue operations. Noting that the lack of tourists was one reason for Air Bagan's financial woes, he also reiterated that U.S. sanctions caused Air Bagan to stop flights to Singapore. Air Bagan officials, who are trying to distance the company from Tay Za's other companies, may consult with a lawyer to petition OFAC to remove the company from the list of targeted U.S. sanctions. End Summary. Still Flying, For Now -------------- ¶2. (SBU) We met with Air Bagan General Manager Aung San on January 11 to discuss how Air Bagan's operations have been affected by U.S. sanctions. After lamenting U.S. sanctions, Aung San attempted to distance Air Bagan from Tay Za's other companies, noting that Air Bagan provides a vital service to the Burmese people, does not make a profit, nor supports the government. He explained that Air Bagan continues to fly to 17 domestic destinations (Ref A),although it must often cancel flights due to low passenger demand or plane maintenance. Air Bagan also flies to Bangkok three times a week, using a Fokker 100 instead of the larger, more expensive A310. Air Bagan has yet to resume its flight to Singapore, which it cancelled in late October. No Profits To Be Made -------------- ¶3. (C) Aung San told us that Air Bagan will not make a profit in FY07-08 (April 1,2007-March 31, 2008) for three reasons: fewer tourists traveling to Burma, poor management decisions, and U.S. sanctions that limit Air Bagan's ability to conduct financial transactions and obtain spare parts. Because the majority of Burmese people cannot afford air travel, Air Bagan (and other airlines) must depend on tourists to earn income, Aung San stated. In 2007, Air Bagan's passenger loads were an average 70 percent lower than 2006 levels. With the high costs of fuel, Air Bagan must fill 80 percent of its seats on its smaller planes (ATR42s and ATR72s which service domestic flights) in order to break even. Air Bagan expects more tourists in 2008, and has already seen a 20 percent increase in bookings in January. ¶4. (C) Air Bagan's poor management decisions have cost the company more than $8 million since May 2007, approximately $1 million each month, Aung San told us. Air Bagan in May leased two A310s for its daily flights to Bangkok and Singapore. The company failed to do adequate cost analysis before leasing these planes, he explained, noting that each gas-guzzling plane costs $11,000 an hour in fuel costs. To break even on international flights, Air Bagan needed to fill 70 percent of the 228 seats. Before the September crisis, Air Bagan sold an average of 100 seats on its Singapore flight and approximately 70 seats on its Bangkok route. The company, losing money hand over fist, reduced its international flight schedule in an effort to stop the revenue loss, Aung San explained. RANGOON 00000022 002.4 OF 002 ¶5. (C) The cancellation of the Singapore flight in October further hit the company's finances, he noted. Because of targeted U.S. sanctions, Singaporean banks would no longer offer Air Bagan a line of credit nor allow financial transactions. Air Bagan was forced to ground both A310s in November, although it had to pay $1 million a month in lease costs and parking and maintenance fees. Air Bagan continues to fly to Bangkok three times a week, but uses the smaller Fokker 100 to cut down on costs. Nevertheless, Aung San declared, Air Bagan is losing money on its international flights and may stop them altogether after Myanmar Airways International begins its flights to Bangkok on January 15 (Ref C). Looking Toward the Future -------------- ¶6. (C) 2008 will be a crucial year for Air Bagan, Aung San declared. Tay Za's other companies, primarily Htoo Trading, are covering Air Bagan's losses and may provide the company with additional funds for future programs. Aung San told us that Air Bagan has put its 2008 expansion plans -- which included additional domestic flights as well as flights to Siem Riep, Cambodia and Kunming, China -- on hold for now, but may consider new flights in 2009. ¶7. (C) In order to bring in some revenue, Air Bagan will continue to offer charter flights to various destinations in Asia. The thrice-weekly flights to Seoul (Ref C) will continue through mid-February. Air Bagan also wants to sublease its two A310s, which will bring in approximately $600,000 a month and help to defray the high overhead costs. Air Bagan, however, has yet to find a company willing to lease the plans; Aung San noted that Air Bagan's inclusion the targeted U.S. sanctions list deters other companies from doing business with it. Request to Lift Sanctions -------------- ¶8. (C) At the end of the meeting, Aung San again reiterated his request to remove Air Bagan from the U.S. sanctions list, noting that the company does not make any money nor financially supports the government (Ref A). We pointed out that Tay Za, who earns his money through his connections with the regime, not only owns the company, but uses his personal finances to keep Air Bagan afloat. Aung San hinted that Air Bagan may consult a lawyer to petition OFAC to remove it from the list. We explained that the company has the right to do so, but noted that given Air Bagan's current circumstances, OFAC was unlikely to de-list the company. Comment -------------- ¶9. (C) Tay Za knows that any effort by Air Bagan to request removal from the targeted sanctions list is futile. While Aung San tried to explain why Air Bagan was different from Tay Za's other companies, he could not deny that it is owned and operated with funds acquired from Tay Za's crony relationship with the regime. Air Bagan's experiences show that the sanctions are clearly working. We should further strengthen the sanctions by targeting other known cronies who make their money on the backs of the Burmese. VILLAROSA