THE SKY IS FALLING ON BURMA,S AVIATION INDUSTRY

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000664

SIPDIS

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

E.O. 12958: DECL: 08/15/2018
TAGS: ECON PREL PGOV EAIR BM
SUBJECT: THE SKY IS FALLING ON BURMA,S AVIATION INDUSTRY

REF: A. RANGOON 307

B. RANGOON 167

C. 07 RANGOON 1102

D. 07 RANGOON 1098

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Classified By: CDA Tom Vajda for Reasons 1.4 (b and d)


1. (C) Summary. Burma's five domestic and international
airlines continue to struggle, as a 50 percent reduction in
tourism levels since 2007 and skyrocketing fuel costs have
made it harder for them to turn a profit. In the past three
months, Burmese airlines have significantly reduced domestic
flight frequency and two airlines - Air Bagan and Air
Mandalay - halted all international service. Air Bagan and
Yangon Airways have laid off staff and reduced work hours as
cost-saving measures. While airlines are publicly optimistic
that the sector will rebound with the start of tourism season
in October, company officials admit privately that rising
fuel prices and reduced tourism will require additional
downsizing. End Summary.

Burma's Decrepit Aviation Industry
--------------


2. (SBU) Although Burma was the aviation hub of Southeast
Asia fifty years ago, local airlines now struggle to service
the domestic and international markets. Burma has four
domestic airlines - flag-carrier Myanmar Airways; Air Bagan,
owned by regime crony Tay Za; Air Mandalay, a joint venture
between the GOB, the Government of Singapore, and
Malaysian-owned Premier Airlines; and Yangon Airways, a joint
venture between the GOB and Krong-Sombat Company of Thailand.
All four companies are flailing economically, and three have
known maintenance problems (Ref C).


3. (SBU) Air Bagan, with is fleet of five operational
planes, dominates the domestic market with a 40 percent
market share. Air Mandalay holds 25 percent of the market,
flying three planes primarily to tourist destinations.
Myanmar Airways and Yangon Airways combined service less than
10 percent of the market. Burma's domestic airlines report
higher profits during tourist season (November-March),and
traditionally reduce flight frequency during the monsoon
season (June-October) to cut costs.


4. (C) Burma also has a fledgling international aviation
sector. Two domestic airlines, Air Bagan and Air Mandalay,
also offer international service to Thailand. Myanmar
Airways International (MAI),a joint venture between the GOB
and Singapore-owned Regent Air, is Burma's third
international carrier, offering scheduled flights to
Thailand, Singapore, and Malaysia. Upon demand, Air Bagan
will charter flights to Seoul and Beijing. Despite having
lower prices, these airlines cannot compete with foreign
carriers Thai Airways or Silk Air in terms of quality,
reliability, or service. Air Bagan and MAI have had
significant maintenance problems in the past; while MAI has
addressed concerns by leasing newer planes and renegotiating
maintenance contracts, Air Bagan has blamed U.S. sanctions
for its inability to purchase spare parts (Ref D).

Lack of Tourists Hurting Domestic Airlines
--------------


5. (C) According to aviation insiders, the 50 percent
decline in tourists to Burma thus far in 2008, due largely to
the September 2007 government crackdown and Cyclone Nargis,
significantly hurt the domestic aviation sector. Myanmar
Airways, Yangon Airways, Air Mandalay, and Air Bagan recently

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suspended flights, citing reduced passenger traffic.
Mandalay Managing Director Kuma Silva told us he was
pessimistic the airline industry could recover from a year or
more of sustained financial loss. According to Silva,
airlines, which depend on tourism season revenues to
subsidize losses during monsoon season, had yet to recoup
shortfalls associated with last year's decline in tourism.
The further drop in 2008 tourism has put increasing financial
pressure on domestic airlines; they thus opted to reduce
flight frequency in April and May (two months earlier than
usual monsoon-season cutback in flights),as a cost-saving
measure, Silva said.


6. (C) In 2008, domestic airlines reduced the number and
frequency of flights by 40 percent, Air Bagan General Manager
U Zaw Win told us. While Air Bagan advertised that it now
flew to 14 rather than 17 destinations, U Zaw Win admitted
that Air Bagan serviced only two destinations daily, flew to
the other 12 destinations once or twice a week, and regularly
canceled flights if less than 40 percent of seats are sold.
In April, Air Mandalay grounded one of its planes due to lack
of passengers, and reduced service from ten to five
destinations. Yangon Airways and Myanmar Airways had also
cut flights, with the former servicing two destinations
instead of six and the latter flying to seven locations
rather than eleven, Silva told us (Ref C).


7. (C) Burma's domestic aviation industry historically does
not turn a profit, and the airlines' accumulated debt has
started to catch up with them. According to Air Mandalay
General Manager Kuma Silva, in 2007, Air Mandalay was the
only airline to break even financially; Myanmar Airways and
Yangon Airways each received an injection of cash from the
government, and Air Bagan's owner Tay Za subsidized his
airline with profits from his other businesses. According to
Silva, however, 2008 had been the first year the airlines had
laid off employees. Yangon Airways cut its staff by 30
people. Air Bagan, despite Tay Za's deep pockets, fired 41
employees and reduced the work hours of more than 50 others.
Air Mandalay had yet to dismiss staff, although Silva hinted
that if the tourism situation did not improve, all airlines
would have to downsize.

Fuel Prices, Lack of Tourists
Affect International Market
--------------


8. (C) MAI Managing Director Aung Gyi noted that while
Burma's worsening economy and reduced tourism were factors in
the airlines' decisions to suspend flights, skyrocketing fuel
costs, up more than 35 percent since last year, was the real
reason. Although Burma heavily subsidizes jet fuel for
domestic airlines, charging $3.00 a gallon, international
airlines must pay substantially higher prices. According to
Silva, the GOB set jet fuel prices for international carriers
at $4.80 a gallon, while the airports in Bangkok and Kuala
Lumpur charged $3.85 and $3.95 a gallon, respectively. MAI
often refueled overseas to save money, but Air Mandalay did
not have a contract to do so, he noted. Tay Za's Air Bagan,
benefiting from his relationship with the senior generals,
refueled its planes in Rangoon, but paid a special price of
$2.50 a gallon, Aung Gyi lamented. The higher fuel prices in
Rangoon further cut into the international airlines' ability
to make a profit.


9. (C) U Zaw Win noted that due to higher fuel prices, Air
Bagan must carry a passenger load of 90 percent on
international flights to break even. Since the average Air
Bagan flight to Bangkok was only 40 percent full, the airline

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was hemorrhaging money and had thus decided to suspend
flights temporarily. Aung Gyi told us that MAI, which flew a
MD-82 until July 28, paid up to $500,000 a month in fuel
costs. By limiting flights to three days a week, MAI saved
up to $200,000 a month in fuel costs. MAI further cut costs
by severing its MD-82 lease at the end of July, signing a new
lease with NOK Airlines for a Boeing 737. The airline was
now saving roughly $1,000 a month in lease costs and another
$60,000 in fuel costs, he declared.

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


10. (C) As tourists shy away from Burma and the price of
fuel rises, Burma's decrepit airline industry will continue
to falter financially. Even Air Bagan, which depends on Tay
Za's deep pockets and regime connections to survive, has felt
the pinch, laying off staff and suspending its international
operations. There is little reason to expect Burma's
airlines will see a turnaround in their fortunes anytime
soon.

VAJDA