CONTROVERSY SWIRLS AS NEPAL AIRLINES INKS MOU

UNCLAS SECTION 01 OF 02 KATHMANDU 001046 SIPDIS E.O. 12958: N/A TAGS: EAIR ETRD PREL PTER NP SUBJECT: CONTROVERSY SWIRLS AS NEPAL AIRLINES INKS MOU REF: A. KATHMANDU 979 ¶B. KATHMANDU 529 ¶C. KATHMANDU 431 ¶D. KATHMANDU 202 Summary -------------- ¶1. (U) The Nepal Airlines Corporation (NAC) and Airbus announced they have signed a memorandum of understanding under which the national flag carrier will purchase two aircraft from the European aircraft manufacturer. The announcement was made two days after a local newspaper reported that, due to concerns about NAC mismanagement, the Ministry of Finance is unlikely to approve the financially ailing airline's request for a USD 134-million loan guarantee needed for the purchase to move forward. It also came at a time when Post has been urging Prime Minister Madav Nepal to support Boeing's request for an opportunity to present its proposal at an open hearing before the government decides whether to provide the loan guarantee. NAC Airbus Announce MOU -------------- ¶2. (U) On November 17, the NAC and Airbus announced the signing of a memorandum of understanding under which the state-run airline will purchase one narrow-body and one wide-body aircraft, a sale for which Boeing was also competing. The announcement, made at the Dubai Air Show, did not include a purchase price. However, the state-run airline reported earlier that it was paying USD 92.8 million for the wide-body aircraft and USD 41.3 million for the smaller aircraft. Needed Loan Guarantee in Question -------------- ¶3. (U) The Employees' Provident Fund, the country's largest non-financial lender, has agreed to extend a loan to the NAC for the purchase, but only if repayment was guaranteed by the Government of Nepal. Two days before the MOU was announced, a local newspaper reported that the Ministry of Finance was unlikely to recommend that the Cabinet approve the request due to serious questions about NAC's current management, which has borne much of the blame for the airline's growing operating losses. The report quoted an anonymous high-ranking Ministry official who said the guarantee would be useless unless the NAC's core management problems are addressed. Many Cast Doubt on Wide-Body Purchase -------------- ¶4. (U) Boeing declined to bid on the sale of the wide-body aircraft, saying the sale would be a "recipe for (financial) suicide" for the NAC. Similar concerns about the financial viability of the purchase of a wide-body aircraft were also raised by the Center for Asia Pacific Aviation (CAPA),an aviation market analysis firm hired by the NAC to assist it in reviewing the bid proposals. The report by CAPA, whose clients include Airbus, spurred the parliament's Public Accounts Committee (PAC) in mid-September to order the NAC not to move ahead with the purchase of the wide-body aircraft until it developed a detailed business plan for its operation. The PAC, however, lacked the authority to enforce its order. Post Kindles Boeing's Hopes -------------- ¶5. (SBU) After the NAC's October 26 decision to approve the purchase of Airbus aircraft, Boeing sent a letter to the airline's Executive Chairman requesting that it be given a chance to present its proposal at an open hearing before the Cabinet took action on the loan guarantee request. The company argued that, while the purchase price of its narrow-body aircraft was higher, the NAC would still save more than USD 10 million due to lower operational and maintenance costs. It also reiterated its concerns about the economic viability of the wide-body aircraft. On October 29, the Charge sent a copy of Boeing's letter to the Prime Minister, and, in separate cover letter, urged him to support the company's request for a hearing to validate its performance and economic data. ¶6. (U) The day after the NAC and Airbus announced their MOU, the largest Nepali-language newspaper and its English-language sister publication ran front-page articles KATHMANDU 00001046 002 OF 002 detailing the controversy surrounding the purchase. The articles quoted from the letter the Charge sent to the Prime Minister, which the reporter had obtained from sources outside the Embassy. Comment -------------- ¶7. (U) The controversy surrounding the Airbus purchase is likely to continue to grow, especially now that the PAC has scheduled another hearing for November 23 at which NAC executives are expected to be grilled again about the proposed purchase and their failure to address the Committee's earlier concern. Boeing's best hope is for the purchase to become so controversial that the Cabinet refuses to provide the loan guarantee needed for the deal to be completed, which would require the NAC to restart the bidding process. BERRY