CAAC REJECTS FEDEX SUMMER SCHEDULE, REQUESTS

UNCLAS SECTION 01 OF 02 BEIJING 000795

SENSITIVE
SIPDIS

STATE FOR EEB/TRA/AN ROBL AND LIMAYE-DAVIS
STATE FOR EAP/CM FLATT
DEPT OF TRANSPORTATION FOR KEITH GLATZ

E.O. 12958: N/A
TAGS: EAIR KTIA CH
SUBJECT: CAAC REJECTS FEDEX SUMMER SCHEDULE, REQUESTS

REFILING

REF: A. STATE 24279

B. STATE 26667

C. MARCH 2009 ROBL/LIMAYE-DAVIS - KACHUR EMAILS


1. (SBU) SUMMARY. On March 25, Civil Aviation Authority of
China (CAAC) officials told Econ M/C that the conditional
operating approval for FedEx,s Guangzhou hub is justified
under the U.S.-China Air Transport Agreement (ATA) as a
technical measure given airspace constraints between Zone 1
airports. Dept. of International Affairs and Cooperation
Deputy Director General Han Jun stated that the Dept. of Air
Transport is responsible for interpretation of the ATA, and
any accommodation of FedEx,s schedule must be handled
directly with them. In a separate phone call, a Dept. of Air
Transport representative reiterated the justification of the
operating approval as a technical measure given airspace
constraints. She emphasized that given FedEx,s prior
agreement to the operating approval, there is no possibility
of provisional approval of FedEx,s summer schedule by CAAC.
CAAC stated that FedEx will need to refile their schedule
without the violating flights, and that the Dept. of Air
Transport will do "everything in its power" to see that
regular services are not disrupted when the summer schedule
starts on March 29. CAAC has not yet formally responded to
the Nelson/McDermott letter (reftel B),and was informed that
given this preliminary response the U.S. would be requesting
consultations. In all conversations, Emboffs emphasized that
if FedEx did refile its schedule, it would be without
prejudice as to their rights under the ATA, as affirmed in
our demarche and letter. END SUMMARY.


2. (SBU) Econ M/C met with Deputy Director General HAN Jun of
CAAC,s Department of International Affairs and Cooperation
on March 25 to present the talking points from the
Nelson/McDermott letter to Vice Minister YANG Guoqing (reftel
B). Mr. Han was accompanied by staff from the International
Affairs Division and the Foreign Affairs Division, which both
report to him. Although the initial demarche (reftel A) had
been delivered in person and in writing on March 16, the
Nelson/McDermott letter had been faxed to CAAC on March 23,
and EconOff had been requesting a meeting since March 19, DDG
Han stated he had only had a chance to review the letter just
prior to the meeting. DDG Han noted that this issue was
essentially handled by the Department of Air Transport, and
then proceeded to explain in exhaustive detail the history
of the hub Operating Approval and that CAAC had "reached
prior agreement" with FedEx. He claimed CAAC was puzzled by
the latest controversy, and could not understand why FedEx
brought the U.S. government in at such a late moment when
they had two months to resolve the issue directly with the
Dept. of Air Transport.


3. (SBU) DDG Han explained that CAAC believes the conditional
operating approval is consistent with the conditions of the
Air Traffic Agreement (ATA),which allowed for exceptions for
"customs, technical, operational, or environmental reasons,"
(ref. July 24, 2007, Protocol to Civil Air Transport
Agreement, Article 11 bis (2)(a)). Specifically, CAAC
believes the there is a technical reason, namely the limited
airspace between the most crowded Zone 1 airports (Beijing,
Shanghai, and Guangzhou). He clarified that landing slots
remain an issue at some airports, particularly Shanghai, and
he understood that the proposed flight doesn,t alter the
number of arrivals or departures in Shanghai. However, the
justification was airspace limitations, not landing slots.


4. (SBU) DDG Han belabored the point of why FedEx would
"fully agree" to the hub operating approval, and then without
any notice or discussion request USG intervention to overturn
it. EconOff explained that with the global economic crisis,
companies were under intense pressure to cope. Given these
unprecedented circumstances, it was entirely understandable
that both Chinese and foreign airlines were making
operational changes on short notice, in most cases
retrenching. FedEx,s change, however, is a demonstration of
confidence in the Chinese market which would bring business
to China. What the industry needed now was flexibility, not
constraints. Furthermore, FedEx filed its China schedule
with the Dept. of Air Transport on February 18. Thus, there
was evidence of early communication from FedEx to CAAC
regarding this inconsistency.


5. (SBU) Econ M/C reiterated that regardless of FedEx,s
actions, for the USG the conditional operating approval is
essentially inconsistent with the ATA. Econ M/C noted the
flight represents a considerable volume of business for

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FedEx, and that the airline now faces the March 29 opening of
the summer season without an approved schedule. DDG Han
explained that this would need to be negotiated directly with
the Dept. of Air Transport, since the International Affairs
Division under his control handles ATA negotiations, but the
Dept. of Air Transport has authority for the agreement,s
interpretation. Econ M/C affirmed that if FedEx was forced
to refile their schedule, this would only be done without
prejudice to their rights under the agreement, as stated in
the letter to Vice Administrator Yang Guoqing. DDG Han,s
staff then provided the telephone number of Ms. BAI Wenli of
the Dept. of Air Transport for follow up. He assured Econoff
that the Nelson/McDermott letter had been shared with them.


6. (SBU) EconOff subsequently contacted Director Bai Wenli of
the Dept. of Air Transport by phone, but in spite of DDG
Han,s assurances she did not have a copy of the
Nelson/McDermott letter and requested it be faxed to her
office. Ms. Bai conducted a long re-explanation of CAAC,s
position that FedEx had essentially accepted the conditional
operating approval. Ms. Bai restated the CAAC position that
the ATA allows for conditional approval based on technical
reasons, which in this case is the limited airspace between
Zone 1 airports. She expressed irritation that FedEx would
have agreed to these conditions which "were discussed in many
meetings," and subsequently file a schedule which violated
this condition. Given FedEx,s prior agreement to the
operating approval, she stated there was no possibility of
provisional approval at this point.


7. (SBU) Ms. Bai states that FedEx will need to refile their
schedule without the violating flights in order to fly during
the summer season, which starts March 29. Although there are
only a few days left, and even though the normal procedure
requires 60 days notice, she affirmed that the Dept. of Air
Transport would do "everything in its power" to see that
regular services are not disrupted should FedEx refile.
Econoff noted that if FedEx did this, it would be without
prejudice to their rights under the agreement as outlined in
the Nelson/McDermott letter.


8. (SBU) Econoff spoke with FedEx Vice President for
International Affairs, Alan Turley. Turley regretted that
more progress could not be made, but thanked the Embassy for
it advocacy efforts. He stated FedEx would file its revised
schedule with CAAC on Thursday morning. Turley noted that
FedEx has been given little room for negotiation when the
conditional operating approval for their hub had been forced
on them by CAAC on February 6. He stated that Guangzhou city
officials would meet tonight with Director General WANG
Ronghua of CAAC,s Dept. of Air Transport, Ms. Bai,s boss,
and emphasize the commercial importance of FedEx,s hub to
their city. Turley believes CAAC,s intransigence on this
issue stems directly from CAAC Administrator Li Jiaxiang,s
desire to win a larger share of the international air cargo
business for Chinese carriers. He also noted CAAC,s
decision will strengthen existing doubts that FedEx corporate
management have of CAAC,s willingness to live up to its
commitments under the ATA.
PICCUTA