MACAU AIRPORT INTEGRATING SERVICES WITH MAINLAND

UNCLAS SECTION 01 OF 02 HONG KONG 000199

SENSITIVE
SIPDIS

STATE FOR EAP/CM
STATE ALSO FOR EAP/EEB
BEIJING FOR TSA EICKHOFF AND FAA POWER

E.O. 12958: N/A
TAGS: EAIR ECON ECIN TW MC HK
SUBJECT: MACAU AIRPORT INTEGRATING SERVICES WITH MAINLAND
MARKETS; MACAU GOVERNMENT BAILS OUT AIRLINES

REF: 09 HONG KONG 823

HONG KONG 00000199 001.19 OF 002



1. (SBU) SUMMARY: Faced with declining passenger and cargo
traffic, the Macau International Airport Company Ltd. (CAM)
has ventured into the Mainland's Pearl River Delta (PRD) in
hopes of better integrating its cargo and passenger services
with the region. An increase in air cargo volume from the
PRD in late 2009 spurred CAM to pursue additional integration
plans on the Mainland. Meanwhile, Macau government funds
have kept the city's two airlines operational, though CAM
executives expressed dissatisfaction with the airlines poor
business model. With Macau's growing popularity as a tourist
destination, they hoped U.S. airlines would soon make use of
the existing U.S.-Macau air services agreement and launch
services to "the Vegas of the East." END SUMMARY


2. (SBU) CAM Executive Director Suning Liu informed EconOff
January 21 that a recent study revealed substantial cost
savings for shippers who used the Macau International Airport
(MIA) as a cargo hub, bypassing the longer and costlier river
or truck routes to the eastern PRD airports of Shenzhen or
Hong Kong. The Macau Government (CAM's majority shareholder
at 55.24%) then engaged Guangdong Province officials with
this data to promote trucking services from Jiangmen and
nearby cities to Macau. The joint effort led to a 26%
year-on-year increase in MIA's cargo volume for December
2009, said Liu. CAM is also pursuing a so-called "Virtual
Airport Strategy" whereby it attracts PRD customers through
its website portal and partnerships on the Mainland. For
example, MIA has started sharing with regional freight
forwarders and manufacturers its shipping schedules for
supply chain planning purposes. It also started offering
on-line check-in and bonded transportation services to
Mainland passengers on flights from Macau to Australia,
Vietnam, Indonesia, and Japan.


3. (SBU) Liu stressed that Macau's two airlines, Air Macau
and Viva Macau, needed to join CAM's efforts to support
Macau's aviation sector and economic development. She
expressed dissatisfaction with the airlines' poor business
planning as both airlines' business models lacked the
flexibility needed to cope with the industry's challenges.
Air Macau was the exclusive holder of Macau's airline
concession, and other Macau carriers could only operate under
Air Macau-granted sub-concessions. Its business model relied
too heavily on serving the once-lucrative Taiwan to mainland
China transit market, Liu explained. The establishment of
direct cross-Strait flights led to a remarkable decrease in
transit passengers, adding to Air Macau's financial woes in
an already challenging period. In 2009, shareholders and the
Macau Government provided US$63.4 million to recapitalize the
airline. But instead of seeking alternative markets, Air
Macau opted in 2009 to lease its aircraft to Air China, its
majority shareholder (52.25%) and China's flag-carrier. Liu
lamented this option may have improved Air Macau's bottom
line but brought little economic benefit to Macau or its
aviation sector.


4. (SBU) Unable to participate in the Air Macau-monopolized
short-haul routes and the Taiwan transit business, Macau's
low-cost-carrier Viva Macau was pushed to venture into the
long-haul market from its inception in 2006. Liu credited
Viva Macau with "putting the city" on the map, with routes
throughout Japan, Korea, South East Asia and Australia.
However, the economic downturn of 2009 and Viva Macau's
unsuccessful cost-cutting measures plunged it into financial
distress. On January 19, the Macau Government came to its
rescue with a US$25 million loan, a measure reflecting the
government's strong support for the city's airline industry,
said Macau's Secretary for Economy and Finance Francis Tam.


5. (SBU) CAM handled 4.25 million passengers in 2009, down
17% from the 5.1 million passengers handled in 2008. Air
cargo dropped by 48% to 52,260 tons from 100,760 in 2008.
For 2010, CAM forecasts handling 4.6 million passengers and
55,000 tons of air cargo, both conservative estimates still
below 2008 levels. CAM will continue working with the Macau
Government to identify new air routes, promote Macau's
tourism industry, and integrate its services with cities on
the Mainland. Incentives to airlines opening new routes will
continue in 2010.


6. (SBU) The United States and Macau signed an Aviation
Transport Agreement (TIAS 12777) in 1996. The agreement
gives carriers on both sides broad flexibility to implement

HONG KONG 00000199 002.16 OF 002


air services, but no airline has yet made use of it. Macau
received more than 250,000 visitors from North America in

2009. As Macau's popularity as a tourist destination
continued to grow, coupled with the lowest airport fees in
the region, Liu said that air services to Macau by U.S.
airlines would prove profitable and should be encouraged.
MARUT