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 RANGOON 00000717 001.2 OF 002 Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4 (b and d) Summary -------------- ¶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 -------------- ¶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 -------------- ¶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 RANGOON 00000717 002.2 OF 002 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