BURMA: GOB PROPPING UP AIR BAGAN

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000717

SIPDIS

SSTATE FOR EAP/MLS, INR/EAP, EEB/TRA
PACOM FOR FPA
MONTREAL FOR ICAO REPRESENTATIVE
TREASURY FOR OASIA, OFAC

E.O. 12958: DECL: 09/11/2018
TAGS: ECON PREL PGOV EAIR BM
SUBJECT: BURMA: GOB PROPPING UP AIR BAGAN

REF: A. RANGOON 693

B. RANGOON 710

C. RANGOON 664

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

Summary
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1. (C) Air Bagan, owned by regime crony Tay Za, continues
to suffer financially due to loss of insurance, lack of
customers, and international sanctions. Nevertheless, the
GOB refuses to allow Air Bagan to collapse. Air Bagan
recently obtained Russian reinsurance after Lloyds of London
underwriters declined to extend insurance on September 1.
While Air Bagan has halted all international flights, it
continues to fly domestically, albeit to only six
destinations. In early September, the GOB provided Air Bagan
with a USD 6 million contract to be the sole operator for
ground-handling at the Rangoon International Airport. End
Summary.

Flying Domestically, For Now
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2. (C) Aviation insiders confirm that Air Bagan's financial
woes continue, due to lack of passengers and international
sanctions. On September 1, Lloyds of London syndicate
companies RFIB Group Limited and Munich Re declined to extend
Air Bagan's $750 million reinsurance policy (Ref A). Brett
Melzer, owner of aviation company Balloons Over Bagan, told
us that Air Bagan quickly obtained underwriters insurance
from Russian company Malakut Insurance. However, the loss of
British insurance forced Air Bagan to ground its two leased
ATR planes, since the French company requires European or
American insurance. Consequently, Air Bagan now only
operates three of the four planes it owns -- two ATRs and one
Fokker 100 -- and has been forced to halt all international
service until further notice. To earn some money, Air Bagan
recently leased its other Fokker 100 to Myanmar Airways
International (MAI),a joint venture between the GOB and
Singapore-owned Regent Air (Ref B). Air Bagan has yet to
announce publicly a drop off in domestic service, although we
confirmed with ticketing agents that since September 1, Air
Bagan only services six destinations, rather than the 14
destinations advertised (Ref C).


3. (C) According to MAI Managing Director Aung Gyi, Air
Bagan fired an additional 100 staff in the past month in an
effort to cut costs. He noted Air Bagan was looking to lease
its other Fokker 100 because it could earn more in lease
payments than in ticket sales. Aung Gyi added that the GOB
prefers Air Bagan to continue flying to as many domestic
destinations as possible because of its close connections to
the regime, limiting the number of planes Air Bagan can put
up for lease. (Note: According to Air Bagan officials, Daw
Kyaing Kyaing, Than Shwe's wife, personally requested that
Tay Za start Air Bagan. They claim that this is the reason
why Air Bagan will not be allowed to go under, despite
continued financial losses. End Note.)

New Contract for Big Bucks
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4. (C) Aung Gyi told us that the GOB announced on September
1 that effective immediately, Air Bagan would be the sole
provider of ground-handling services for both domestic and

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international flights. These services previously had been
performed by the Rangoon Airport, MAI, and state-owned
Myanmar Airways. The contract is worth up to USD 6 million a
year, depending on how many flights land in Rangoon annually,
according to Aung Gyi. He added that although Air Bagan has
yet to take over ground-handling services due to lack of
experienced staff, the GOB currently requires requiring MAI
and Myanmar Airways to turn over 40 percent of their revenues
from ground-handling services to Air Bagan. He noted that
eventually both MAI and Myanmar Airways will have to lay off
more than 100 ground operations staff due to the loss of this
contract.


5. (C) According to Aung Gyi, MAI, Air Mandalay, Myanmar
Airways, and Yangon Airways complained to Minister of
Transport Major General Thein Swe on September 3. The
Minister acknowledged the problem but explained he was
powerless to reverse the decision. Senior leaders had
ordered Ministry of Transport officials to assist Air Bagan
with ground handling procedures.

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


6. (C) Air Bagan continues to operate in the red, leasing
planes that it cannot fly (two ATRs and two A310s) and paying
staff who cannot work. Nevertheless, the company has yet to
go belly up, due in large part to the GOB's insistence that
the airline continue flying. Tay Za foots most of the bill,
subsidizing Air Bagan with revenues from his other, more
successful companies. The new ground- handling contract
should earn the company some revenues, although not enough to
cover its losses. It remains to be seen whether Air Bagan
can handle its new duties, or whether the GOB will force MAI
and Myanmar Airways to do all the work and turn over their
profits to Air Bagan. The fact that the GOB would
voluntarily divert profits from state-owned companies to
privately-owned Air Bagan defies logic but shows the regime's
favoritism toward Tay Za.

DINGER