ROK, CHINA EYE EXPANDED AIR LINKS WITH MONGOLIA

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000081

SIPDIS

SENSITIVE
SIPDIS

STATE PASS EXIMBANK AND OPIC
STATE PASS TO AID/ANE, EB/TRAN/AN AND EAP/CM
TOKYO, BEIJING AND SINGAPORE FOR FAA REP

E.O. 12958: N/A
TAGS: EAIR PGOV ECON MG
SUBJECT: ROK, CHINA EYE EXPANDED AIR LINKS WITH MONGOLIA

Reftel A: 07 ULAANBAATAR 257
B: 05 ULAANBAATAR 081
C: 07 ULAANBAATAR 297

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: During a February 13 courtesy call on the
Ambassador, the new CEO of Mongolia-based EZnis Airways revealed
that the South Korean Government and China's Civil Aviation
Authority have made informal inquires to the Mongolian Government
regarding the possible expansion of air services agreements with
Mongolia. Glenn Pickard noted that although current bilateral
agreements allow for one carrier from each country to fly to the
other, the ROK and China are interested in expanding the agreements
to include two air carriers from each country. So far, the
Mongolian Government has been latently hostile to the idea, viewing
increased competition as a threat to its national carrier, MIAT. If
the air service agreements were expanded and EZnis were to be
awarded these valuable international routes, it would need to expand
its short-range fleet to include jet aircraft, generating a possible
business opportunity for Boeing. Pickard also revealed that EZnis'
key domestic rival, Aero Mongolia, is experiencing financial and
insurance difficulties. END SUMMARY.


2. (SBU) The Ambassador met on February 13 with Glenn Pickard, the
new CEO of EZnis Airways (reftel A) and B.Enkhbat, the company's
Commercial VP. Pickard revealed that there has been informal
interest expressed by the South Korean Government, and separately by
China's CAA, to liberalize air traffic between Mongolia and the two
countries. In place of the current bilateral agreements, which
allow for just one carrier from each country to fly to the other, an
expanded agreement would permit two carriers from each country to
make the same trip. If such a change is made, Korean Air and
Asiana, for instance, could fly between Ulaanbaatar and Seoul, and
in return MIAT and (most likely) EZnis could fly the same route.

Increasing Demand, Limited Seats
--------------


3. (SBU) While not exactly an Open Skies Agreement, this
liberalization could benefit both sides by increasing competition
and passenger loads between Mongolia and Korea. Enkhbat noted that
some 30,000 Koreans fly to Mongolia every year, and that demand is
growing. Enkhbat indicated that Asiana Airlines is chomping at the
bit to launch service to Mongolia. The limited number of seats and
the relatively high demand has allowed KAL to charge excessive
prices for this route, and it has become a big money-maker for that
airline. Profit margins would remain large, he said, even with the
introduction of two new airlines servicing the route.

GOM Suspicious of Liberalization
--------------


4. (SBU) EZnis, for its part, fears that the GOM will try to block
or stall any such expansion agreement, in a misplaced attempt to
protect MIAT from increased competition. Pickard noted that the
General Director of Mongolia's Civil Aviation Authority, S.
Batmunkh, said as much when they recently discussed the subject.
Transport Minister Rash has apparently expressed similar sentiments.
(Note: This protectionist stance has characterized the GOM's
unwillingness to join any open skies agreement. End Note.)
Unsurprisingly, plans to privatize MIAT, which have gone nowhere for
five years, have slipped once again as June 2008 parliamentary
elections approach and the GOM fears that increased competition
could hurt MIAT's sale price. EZnis has already positioned itself
as MIAT's most likely buyer once it becomes privatized. However,
MCAA DG Batmunkh recently told Econoff that the GOM expects to
retain at least 40% of the airline after privatization.


ULAANBAATA 00000081 002 OF 002



5. (SBU) Pickard said that over the coming six to seven months he
envisions EZnis struggling with the GOM and MIAT to convince them
that this agreement would be win-win-win, and that new agreements
could be tailored (for instance, with limited landing slots) to
address GOM concerns. EZnis hoped that the USG would convey this
message to our contacts within the GOM, or at least continue with
our traditional advocacy of open skies. Pickard admitted that, even
without GOM opposition, negotiating such an agreement might take a
year or more.

Opportunities for Boeing?
--------------


6. (SBU) If EZnis were to start flying to Seoul or Beijing, it would
need to expand its current fleet of three Saab 340B propeller
aircraft to include larger jet aircraft. This could produce new
business opportunities for Boeing. Pickard noted EZnis' interest in
obtaining one or more 737-800's. (Note: Econoff provided contact
information for Boeing's Asia Pacific Sales Manager after the
meeting. End Note.)


7. (SBU) Then, offering their thoughts on EZnis' domestic
competition, Pickard and Enkhbat said MIAT's one domestic aircraft,
an Antonov 26, would reach its flight-hour limit by late spring, and
that MIAT lacks the US$400,000 needed for necessary overhauls to
keep it flying for another 18 months or so. (Note: In 2005, safety
concerns prompted the Embassy to prohibit USG personnel from flying
MIAT domestically; reftel B.)

Aero Mongolia Difficulties
--------------


8. (SBU) Another Mongolian airline, Aero Mongolia, recently had its
suspension lifted by MCAA (reftel C) and one of its aircraft is
operating. The leasers of a second aircraft originally held up
delivery from Germany (where it underwent a C-check) because the
company had not paid its bills. Aero Mongolia finally came up with
the money and the plane was only recently released for service.
Pickard said, without providing details, that Aero Mongolia has been
blacklisted by Lloyds of London for payment and safety violations,
and that it is now insured by a Russian company. We plan to follow
up with Aero Mongolia later this week.

Minton