NEPAL: BOEING'S BID GETS A BOOST

UNCLAS SECTION 01 OF 02 KATHMANDU 000880

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EAIR ETRD PREL PTER NP
SUBJECT: NEPAL: BOEING'S BID GETS A BOOST

REF: A. KATHMANDU 840

B. KATHMANDU 529

C. KATHMANDU 421

D. KATHMANDU 202

Summary
--------------

1. (U) Boeing's bid to supply a narrow-body aircraft to the
Nepal Airlines Corporation (NAC) has been given a boost by
the parliament's Public Accounts Committee, which at a
September 18 hearing issued a directive to the state-run
airline that should bring some balance to a decision-making
process tilted in favor of Airbus. Spurred by an independent
analysis that raised serious concerns about NAC's lack of a
coherent business plan, the Committee ordered the airline to
develop a detailed plan that addresses its long-term needs.
Boeing has been urging NAC to do the same thing in the belief
that from a long-range perspective its offer makes more
financial sense.

Two Aircraft Sought, Only One Approved
--------------

2. (U) As part of an effort to boost its international
business, NAC earlier this year issued a request for
proposals to supply one narrow-body and one wide-body
aircraft. Five companies submitted proposals, but NAC
decided to eliminate third-party suppliers, leaving Boeing
and Airbus to compete for the sales. However, unlike Airbus,
Boeing declined to bid on the wide-body aircraft because it
believed such a purchase by NAC would be financially
imprudent. Boeing's failure to bid on both aircraft caused it
to fall out of favor with NAC. (Comment. Currently, the only
long-range aircraft in NAC's fleet are two Boeing B-757s. End
comment)


3. (SBU) During a September 18 hearing, the Public Accounts
Committee (PAC) ordered NAC not to move forward with the
purchase of a wide-body aircraft until it submits a detailed
the rationale for the purchase. In making their demand,
Committee members pointed to a study conducted for the
state-run airline by the Center for Asia Pacific Aviation
(CAPA),an aviation market analysis firm, which, like Boeing,
questioned NAC's claim that it needed the wide-body aircraft
for long-haul routes to Europe. CAPA said NAC's plans are
"not sufficiently clear in outlining the need to launch these
routes and their viability." No deadline was set for the NAC
to submit its business plan.


3. (SBU) PAC member Prakash Chandra Lohani told Emboff that
the hearing, attended by Minister of Tourism and Civil
Aviation Sarat Singh Bhandari, NAC Executive Chairman Sagat
Ratna Kansakar and Managing Director Kul Bahadur Limbu, was
held in response to numerous recent media reports that the
purchase of the wide-body aircraft was imminent. He said the
findings of the CAPA report added to the Committee's sense of
urgency. The lawmaker and former Finance Minister predicted
that purchasing a wide-body aircraft without first developing
a proper business plan would prove to be a financial
"disaster" for NAC.


4. (U) Although the PAC halted the wide-body aircraft
purchase, it gave the NAC the go-ahead to buy a narrow-body
aircraft for operation on what the Committee deemed more
financially feasible regional routes in South and Southeast
Asia. Airbus has offered to provide the aircraft at a lower
price, but Boeing officials maintain their narrow-body
aircraft would be a better buy when operational costs over
its life span are taken into account.

Timing of Purchase Also Questioned
--------------

5. (U) PAC members also questioned why NAC was moving ahead
with the purchase of the aircraft before the long-standing
power struggle between Executive Chairman Kansakar and
Managing Director Limbu is resolved. Limbu, a veteran NAC
pilot, was appointed managing director in January 2008. He
was sacked 11 months later by the new Maoist-led government,
which replaced him with Kansakar, a move Limbu appealed to
the Supreme Court. In early June, the top court reinstated
Limbu as managing director, but, about six weeks later, the
Cabinet of the newly formed, UML-led government appointed
Kansakar as NAC executive chairman, transferring all of

KATHMANDU 00000880 002 OF 002


Limbu's responsibilities to him. Limbu asked the Supreme
Court to stay the Cabinet's decision until it heard his
appeal. After initially issuing a stay order, the Supreme
Court lifted the order on August 12, allowing Kansakar to
reclaim ultimate authority at NAC, at least until the top
court makes a final ruling on Limbu's appeal.


6. (U) Until the question of jurisdiction is resolved, Lohani
stressed, the NAC Board of Directors will not be able to
strictly follow its by-laws regarding the procurement of
aircraft, as it has been ordered to do by the PAC.

NAC Management Criticized
--------------

7. (U) In its report on NAC's aircraft purchase plan, CAPA
sharply criticized the state-run airline's management,
particularly the apparent "naivete" that led it to believe
that "the acquisition of new aircraft alone will solve all of
NAC's problems." The report stressed, "New aircraft are not
a panacea."


8. (U) During the PAC hearing, lawmakers called for reform
in NAC management. Given the current "very poor management,"
Lohani questioned whether the NAC could guarantee proper
utilization of the Rs. 10 billion (USD 130 million) that the
Employees' Provident Fund is providing the airline to
purchase the aircraft.

NAC Urged to Go with Single Company
--------------

9. (U) PAC members urged NAC to purchase new aircraft from a
single company, either Boeing or Airbus. They cited the
possible technical and financial burdens the airline would
have to bear operating aircraft from different companies,
which include maintaining distinct training programs and
separate inventories of spare parts. NAC maintains a Rs.
1-billion parts inventory to service its two B-757s,
according to Lohani. He requested that the NAC specify in
its business plan what it intends to do with these aircraft
and spare parts once new aircraft are purchased.

Comment
--------------

10. (SBU) While Post continues to hear that powerful forces
in the Government of Nepal are promoting the Airbus
bid, PAC's action boosts Boeing's efforts to sell a
narrow-body aircraft to NAC by drawing much-needed
attention to the airline's long-term needs, which Boeing
believes are better met by its offer. The company's
prospects would be further enhanced if the Supreme Court were
to rule in favor of Limbu, who is seen by Boeing official as
one of their few allies within NAC.
MOON