SAUDI PROPOSED OPEN SKIES AGREEMENT

C O N F I D E N T I A L SECTION 01 OF 02 JEDDAH 000444 SIPDIS DEPT FOR NEA/ARP (HARRIS),EEB/TRA/AN (FINSTON) E.O. 12958: DECL: 11/19/2019 TAGS: CVIS EAIR ECON KTIA PREL SA SUBJECT: SAUDI PROPOSED OPEN SKIES AGREEMENT REF: A. 09JEDDAH414 ¶B. 09JEDDAH178 ¶C. 09JEDDAH146 JEDDAH 00000444 001.2 OF 002 Classified By: Consul General Martin R. Quinn for reasons 1.4 (b) and ( d) ¶1. (U) This is an action request. Please see paragraph 11. ¶2. (C) Summary: On November 16, Captain Mohammad Ali Jamjoom, Vice President Safety and Economic Regulation at the Saudi General Authority of Civil Aviation (GACA),presented EconCounselor and PolEconOff with further revisions to the Department's Model Open Skies Agreement text reflecting concerns from Saudi Arabian Airlines. The key change requested (again) is the deletion from the agreement of the right to operate from points behind. If the revisions proposed by Saudi Arabia are not acceptable to the United States, Jamjoom suggested we might be able to put the points in an annex and gradually phase in the provisions automatically. If the revised text meets US requirements, Jamjoom stated that an Open Skies agreement can be signed without delay. The proposed language has been received by ConGen Jeddah and forwarded via electronic mail. Jamjoom stressed that the Saudis -- particularly the civil aviation community -- are eager to conclude an Open Skies Agreement with the United States. He also requested immediate US approval of the codeshare agreement Saudia Airlines has negotiated with a US carrier. End summary. ¶3. (SBU) The remaining critical point in concluding an Open Skies agreement with Saudi Arabia concerns the language in section II which refers to "points behind." The Saudis continue to wish to delete from the agreement the right to operate from points behind. Saudia Airlines regards this right as tantamount to Sixth Freedom rights and is concerned about marketing competition. Jamjoom noted that while Saudi Arabia has Open Skies agreements with some regional countries, the Open Skies agreement with the United States would be Saudi Arabia's biggest agreement. Operators (i.e., Saudi Arabian Airlines) are very concerned about how the agreement will affect business. Although they see opportunity to expand service on their most profitable routes -- to the United States -- they also are worried about the potential competition from large US operators. ¶4. (C) Jamjoom concluded by noting that in the event the proposed changes are not acceptable to the United States, it might be possible to include some additional language in Annex II that might use the same staged approach, automatically removing restrictions over several years. U.S. routes a goldmine but eastern and domestic routes -------------- -------------- unprofitable -------------- ¶5. (C) Saudi Arabia's desire for an Open Skies agreement seems motivated by a desire to increase profitable flights to the United States, which are now limited in frequency under the 1993 agreement. Domestic routes are "breaking the back of operators," despite gradual attempts to "liberate prices" and decrease the number of PSOs so that operators can operate according to strategic plans. Because airplanes are the only transportation available to some parts of Saudi Arabia, the government mandates frequent flights and caps prices. ¶6. (C) Operators are barely recovering costs on routes east from Saudi Arabia, Jamjoom continued; because of high competition, prices are at rock bottom. Saudi operators are much more interested in the western option, with the route to the United States "the most tempting." Up to September 11 those routes "were a goldmine" -- so profitable that Saudi Arabian Airlines bought five 747s just to serve that route. Travel to the United States is increasing with the easing of visa restrictions and improvements in the immigration process. When the visa issue is "solved" -- including re-establishment of full visa operations at ConGen Jeddah -- Jamjoom expects large numbers of Saudis will travel to the United States because it is relatively inexpensive -- even compared to regional countries -- and has much more variety. The money route is to the United States, Jamjoom concluded. The future: more services, bigger airports, simpler -------------- -------------- regulations -------------- JEDDAH 00000444 002.2 OF 002 ¶7. (C) Asked how Saudi carriers see the future, Jamjoom replied that the cargo sector hasn't been explored to the full potential of the market. Although Saudi Arabia has space to create huge cargo areas, there have been few attempts to establish bases. The new cargo service spun off from Saudi Arabian Airlines needs time to get established (i.e., GACA will look to shelter it from international competition). Over the long-term, Jamjoom believes that the aviation sector needs to grow, both for cargo and passengers, because the number of operators is below that needed for a country of the size and with the population of Saudi Arabia. Jamjoom commented that there is a sufficiently large customer base to support and expanded sector, although facilities need to be expanded. Most Saudi airports are undergoing renovations, he added, citing the Medina airport as an example of a Saudi airport that is too small for the existing passenger traffic. Saudi Arabia plans to open several regional airports (e.g., Abha and Tabouk) for international service as part of the SAG's effort to develop tourism, including religious tourism. ¶8. (C) GACA is about to sign a contract with a US-based company to simplify and streamline its regulations, most of which are based on FAA rules and regulations. Although the US now has the best system in aviation, the multiple layers of regulations were built incrementally to incorporate the viewpoints of all stakeholders in the huge American aviation network. Jamjoom said that Saudi Arabia's aviation sector is much simpler, and the contractor will look to distill the most relevant parts of the existing regulations to make it more applicable to the Saudi case, and easier for carriers to comply. GACA is automating operations specifications so that carriers can do this online. GACA is also working with other Arab civil aviation bodies attempting to unify processes, for example moving toward single certification of flight schools and maintenance organizations. Arab civil aviation authorities need more authority so that decisions are removed from political pressure, said Jamjoom, noting it is politically sensitive to certify or deny certification. Immediate codeshare approval requested by Saudis -------------- --- ¶9. (SBU) Jamjoom emphasized that Saudi Arabia wants to proceed immediately with the codeshare agreement between Saudi Arabian Airlines and a US carrier. (He believed it was American Airlines; the Director General of Saudia said he was negotiating with Delta Airlines.) The airline has filed for codesharing, and Saudi Arabia is hoping for favorable results. ¶10. (SBU) Comment: Jamjoom repeatedly stressed the SAG's interest in concluding this agreement as quickly as possible. We believe GACA and Saudi Arabian Airlines are genuinely interested in capitalizing on the opportunity of greater Saudi traffic to the United States. He was also very aware of the positive political signal that concluding an Open Skies agreement would send about the strength of our bilateral relations. While we believe Saudia is seriously concerned about competition from US carriers, we also believe, based on Jamjoom,s presentation of the language, that GACA wants to find a way to agree on the text. ¶11. (SBU) ACTION REQUEST: Post requests EEB/TRA/AN respond indicating whether Saudi Arabia's proposed changes are acceptable, negotiable, or non-negotiable. QUINN