U.S. AIRLINES DIFFER AHEAD OF BILATERAL NEGOTIATIONS

UNCLAS SECTION 01 OF 03 SAO PAULO 000301

SENSITIVE
SIPDIS

STATE FOR WHA/EPSC AND EEB/TRA - TROBL, YVLIMAYE-DAVIS
STATE PASS USTR FOR KATE DUCKWORTH
FAA FOR BAHUMADA, CTFRANCESCHI
DEPT OF TRANSPORTATION FOR BHEDBERG
BUENOS AIRES FOR TSA ATTACHE
MEXICO CITY FOR TSA ATTACHE MGALVAN
NSC FOR GTOMASULO
TREASURY FOR JHOEK
SOUTHCOM FOR POLAD
USAID FOR LAC/AA

E.O. 12958: N/A
TAGS: EAIR PREL PGOV ECON EINV BEXP BR
SUBJECT: U.S. AIRLINES DIFFER AHEAD OF BILATERAL NEGOTIATIONS

SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY

REF: A) SAO PAULO 090; B) BRASILIA 0222


1. (SBU) SUMMARY: U.S. aviation companies are of a mixed mind
about expanded passenger routes between the United States and
Brazil. On the one hand, rising fuel prices and a tightening market
globally are weighing on the business decisions of the four U.S.
carriers operating in Brazil (American, Delta, United, Continental).
On the other hand, supply and demand fundamentals are out of
balance, with passenger demand for flights to the U.S. at an all
time high and some U.S. carriers reporting that their seats are sold
out well in advance. ConGen Sao Paulo contacts with the U.S.
carrier local representatives reveal that they are not likely to
speak with a unified voice ahead of the bilateral negotiations
scheduled for June 24-25. END SUMMARY.

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DELTA POISED TO EXPAND
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2. (SBU) Of the three airlines' local representatives ConGen Sao
Paulo has spoken to in recent weeks, Delta Airlines appears best
positioned to seize on additional frequencies to the North and
Northeast of Brazil. Luiz Henrique Teixeira, Delta's Country
Manager for Brazil, told the Consul General that Delta is prepared
to begin operating flights to Manaus and Fortaleza with available
Boeing 757 aircraft. Teixeira reported that Delta's headquarters
has agreed to the plan for five weekly flights Manaus-Atlanta and
three weekly Fortaleza-Atlanta. Delta envisions eventual onward
flights from Manaus to Brasilia.


3. (SBU) In addition to Sao Paulo and Rio de Janeiro, Delta is
focusing on the following cities in order of priority: Manaus,
Fortaleza, Salvador, Recife, Brasilia, Curitiba and Belo Horizonte.
Because Delta only has 757's available right now for new routes,
Manaus and Fortaleza are most realistic in the short-term. Teixeira
said that Delta has been in touch recently with the governors of
Amazonas (Manaus),Ceara (Fortaleza),Pernambuco (Recife),and Bahia
(Salvador) to encourage them to take an active role in encouraging
Brazil's National Civil Aviation Agency (ANAC) to agree to
additional frequencies to their respective states. Teixeira
expressed concern, however, about rumors he has heard that the
negotiations will result in USDOT earmarking any new frequencies for
low-cost carriers.


4. (SBU) Longer haul flights would require a 767 or 777, which
would have to be taken from existing routes. Delta's country office
recognizes that this would require negotiating with Delta's
headquarters, but the country office envisions twice-daily
Rio-Atlanta flights year-round in the future. Also prominent on
Delta's wish-list are direct flights to Orlando from Brazilian
cities, as New York and Orlando are Delta's two most profitable
destinations.

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AMERICAN & UNITED CAUTIOUS
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5. (SBU) American Airlines (AA) and United Airlines (UAL) told the

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Consul General that high fuel prices and the general feeling of
crisis in the U.S. aviation market translates into less
opportunities for their companies in Brazil. UAL's General Manager
for Latin America, Josue Meza, said that if negotiations succeed in
obtaining additional frequencies for U.S. carriers, it would be a
"tough decision" for UAL to dedicate additional aircraft to Brazil.
(Note: In the event that UAL's situation globally changes, their
priority cities in Brazil, in order of importance, would be: Sao
Paulo, Rio, Belo Horizonte, and Porto Alegre. End Note.) Given the
growing demand for flights, and the Brazilian market's role as UAL's
most important in Latin America, UAL is planning to expand their
service by making the non-stop Rio-Dulles permanent by September and
upgrading the aircraft for the Sao Paulo-Dulles route to a 777.
This will expand UAL's service by 67 percent, adding 300 additional
seats a day, without increasing frequencies or aircraft.


6. (SBU) AA's Country Manager Erli Rodrigues told Econoff that
"with fuel prices so desperate, American globally is looking to take
drastic measures. The timing of the negotiations is difficult
unless the route is really appealing." (Note: Rodrigues told
Econoff that American's headquarters will be sending the Department
of Transportation a letter outlining their position on the
negotiations in the coming days. End Note.)

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CODE-SHARING
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7. (SBU) On code-sharing, UAL noted that they are pleased with
their current code-share arrangements with TAM and are hopeful that
TAM will join the Star Alliance. Delta's Teixeira told the Consul
General that he expects by the end of 2008 that Delta will have
code-sharing with Varig and that Varig will be a member of the Sky
Team (of which Continental is also a member). If these negotiations
proceed as expected, American would be the one U.S. carrier that
does not have a code-share or alliance arrangement in place or under
negotiation with a Brazilian carrier.

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VISAS
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8. (SBU) The transit visa issue is one that weighs equally on the
U.S. and Brazilian carriers. United told the Consul General that
given UAL's expansion into the Asian market, the transit visa is
problematic. Delta noted the issue as a consideration, but said
that they are still eying Brazil-to-Asia passengers. In fact,
Teixeira noted that there are four new Chinese factories going into
Manaus and Delta is envisioning linking passengers
Manaus-Atlanta-Shanghai.

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GUARULHOS PARKING DISPUTE STILL ALIVE
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9. (SBU) With regards to the Guarulhos airport parking fee dispute
(REF B),UAL said that while the issue still remains unresolved, it
has "calmed down." Delta's Teixeira said that none of the airlines
are "comfortable with where things are" and said that ANAC appears
to be in waiting mode. Teixeira said that ANAC was planning to
visit IATA in the coming weeks to look at best practices for

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handling airport congestion. Teixeira said that ANAC's Director
Solange Vieira recently told the industry that no definitive
decision should be expected before September or October when
complete fare deregulation for flights to Europe and the U.S. is
expected to come into effect. (Note: This will be the third
extension of ANAC's own deadline. Initially a decision was expected
by March, then extended to May. End Note.)


10. (SBU) Of the three carriers ConGen Sao Paulo contacted,
American Airlines expressed the most frustration with ANAC's delay
in resolving the dispute. Rodrigues told Econoff: "Although
indications are that [the proposed drastic fee increase] is not
going to happen, we are not going to talk about new investments with
something like that still in the air. We need a decision from ANAC."


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COMMENT
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11. (SBU) Based on our discussions locally, Delta appears to be the
only U.S. airline in a position to take quick advantage of eventual
new routes to the North and Northeast. UAL is expected to
concentrate on adding seats by upgrading their service on existing
routes, but is not likely to seize on new opportunities. The timing
is inauspicious for American to seize on additional routes, and
American is the only one of the four that does not have a code-share
or alliance arrangement in place or under negotiation with a
Brazilian carrier. American's current commanding position as the
lead U.S. carrier in Brazil, coupled with the fact that they are in
a difficult situation globally, may mean that AA stands to gain the
least from adding additional frequencies at this juncture. It is
noteworthy that the airline that is most outspoken on the parking
issue is also the one that currently is least prepared to take
advantage of increased liberalization. END COMMENT.


12. (U) This cable was cleared by and coordinated with the Embassy
in Brasilia.

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