BURMA: MYANMAR AIRWAYS INTERNATIONAL DOWN, BUT NOT

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000307

SIPDIS

SIPDIS

STATE FOR EAP/MLS, INR/EAP, EEB/TRA
PACOM FOR FPA
TREASURY FOR OASIA

E.O. 12958: DECL: 05/02/2018
TAGS: ECON PREL PGOV EAIR BM
SUBJECT: BURMA: MYANMAR AIRWAYS INTERNATIONAL DOWN, BUT NOT
OUT

REF: A. RANGOON 004


B. 7 RANGOON 1098

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Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4
(b and d)


1. (C) Summary. Myanmar Airways International (MAI),one of
Burma's two international airlines, recently lost one of its
planes due to the sudden cancellation of its wet-lease
contract and was forced to halt flights to Bangkok and Kuala
Lumpur beginning on April 24. Although it just signed a
one-year lease for an A319 with Bhutan-owned Druk Airlines in
January, Druk Air cancelled its contract for political
reasons. According to MAI General Manager Aung Gyi, the King
of Bhutan, who was a personal friend of Aung San Suu Kyi and
her husband when he lived in England, refused to support the
contract because of his disapproval of the GOB's continued
house arrest of ASSK. Aviation contacts intimated that MAI
lost its contract because it could not pay Druk Air its
monthly fee of $100,000. Despite alleged financial
difficulties, MAI on April 26 secured a new one-year contract
for an MD-83 with Orient Thai and will to resume flights on
May 3. Aung Gyi complained about U.S. sanctions, noting that
MAI continues to have problems with financial transactions
and must use Singapore dollars to circumvent sanctions. End
Summary.

Easy Come, Easy Go
--------------


2. (C) Myanmar Airways International (MAI),a joint venture
between the Burmese Government and Singapore company Region
Air, once again lacks an airplane to fly to Bangkok and Kuala
Lumpur. Last October, MAI was forced to halt its
international flights when it could no longer afford to pay
its aircraft leases and insurance premiums (Ref B). After
receiving an injection of capital from Region Air, MAI
secured a one-year wet-lease for an Airbus 319 from
Bhutan-owned Druk Airlines (Ref A). MAI resumed its flights
in mid-January, and boasted an average passenger load of 50
percent -- enough to turn a slight profit. However, in
mid-April, MAI received notice from Druk Airlines that it was
canceling the contract due to political concerns. MAI once
again halted flights to Bangkok and Kuala Lumpur on April 24,
shuffling passengers to Thai Airways, Air Bagan, and
Malaysian Airlines.


3. (C) MAI General Manager Aung Gyi explained that while the
owners of Druk Airline supported the lease, the King of
Bhutan, who was a personal friend of ASSK and her family when
he lived in England, forced the company to suspend the
contract because he disagreed with the GOB's continued house
arrest of ASSK. Region Air officials attempted to persuade
Druk Air officials to change the King's mind, arguing that
MAI received no funds from the GOB even though the GOB owned
51 percent of the company. The pleas fell on deaf ears, Aung
Gyi lamented. Although the contract stipulated a one-month
advance notice for contract cancellation, Druk Air gave MAI
only two weeks notice, he stated.


4. (C) Several aviation contacts hinted that there were
other reasons for Druk Air's decision to cancel the contract.
Thai Airways Manager Surariddhi Boon-Long told us that MAI
was losing money hand over fist, and that it had been late in
paying its catering and airport fees in both Burma and
Thailand. He indicated that MAI was also several months
behind in paying Druk Air the monthly rental fee of $100,000.
Druk Air decided to cut its losses before it lost any more

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money, he opined.


5. (C) Despite the two-week notice, MAI quickly secured
another plane lease, signing a wet-lease contract for an
MD-83, three Thai pilots, and a maintenance contract with
Orient Thai on April 26. MAI paid a $400,000 deposit and
will pay monthly rental costs of $80,000 a month under this
lease, Aung Gyi told us. MAI officials already secured
landing permits from the civil aviation authorities in
Thailand and Malaysia, and recently recieved insurance
confirmation from Lloyds of London. MAI will resume flights
to Bangkok on May 3; flights to Kuala Lumpur should resume by
May 5.

MAI in Financial Dire Straights?
--------------


6. (C) Aung Gyi told us that given recent events, it would
be difficult for MAI to turn a profit in 2008. MAI hopes
that Druk Air will return its $400,000 deposit, which it will
put toward the cost of the new lease. However, the MD-83
will be more expensive to operate, he noted, since it
consumes 40 percent more fuel than the newer A319
(approximately 1000 gallons an hour versus 650 gallons per
hour). As a result of higher fuel consumption and the
inability to raise ticket prices (competition in the
Rangoon-Thai market is stiff),MAI will have a substantially
lower profit margin. Aung Gyi commented that it would have
to increase its passenger loads on its flights to Singapore,
a code-share with JetStar, in order to cover the costs of
flying to Bangkok and Kuala Lumpur. This, he noted, was
unlikely, so MAI will probably be in the red by the end of

2008. To stay operational, MAI may look for another
injection from Region Air in 2009, he hinted.


7. (C) In addition to high costs and lower profits, MAI has
also experienced difficulties recently with its financial
transactions out of Singapore. Aung Gyi noted that MAI
maintains an account with UOB with little problem and that it
can remit payments to its creditors. However, two weeks ago,
an MAI payment to Thailand (in US dollars) bounced back to
UOB without explanation. MAI changed the dollars into
Singapore dollars and paid its bill with no problem, but had
to pay high transaction and exchange costs. Additionally,
MAI is unable to transfer money from its IATA Clearinghouse
account in the U.S. to Singapore, probably due to U.S.
sanctions, Aung Gyi lamented. While keeping the money in the
IATA account was not a problem for MAI since it can be used
to pay any international aviation fees, he questioned why his
company was being targeted even though it was not on the U.S.
sanctions list. We explained that sanctions banned financial
transactions to Burma or to Burmese companies. He questioned
the efficacy of U.S. sanctions, noting that legitimate
Burmese businesses and the Burmese people were affected
rather than the senior generals.

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


8. (C) This is not the first time that MAI has had banking
and financial difficulties, nor will it be the last. While
MAI considers itself to be a private company because the GOB
is an owner in name only, the reality is that it is a joint
venture with the government. We expect that as MAI continues
to find its financial transactions blocked or "bounced back",
it will move toward using Singapore dollars to circumvent the
sanctions. However, it will still face difficulties in
covering its expenses, so its prospects remain doubtful.

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VILLAROSA