US embassy cable - 03HANOI2678

UNCLAS SECTION 01 OF 04 HANOI 002678 
 
SIPDIS 
 
SENSITIVE 
 
STATE ALSO FOR EAP/BCLTV, AND EB/TRA 
TRANSPORTATION FOR EOPPLER, DMODESITT AND CTOURTELLOT 
COMMERCE FOR ITA:EALFORD 
 
E.O. 12958: N/A 
TAGS: EAIR, EINV, PREL, VM 
SUBJECT: U.S. and Vietnam initial air services agreement 
 
 
1. (U) Sensitive but unclassified protect accordingly. 
 
2. (U) Summary:  On October 9, the U.S. and Vietnam entered 
into a five-year air services agreement that, while 
maintaining some restrictions, contains many Open Skies 
provisions.  The agreement will eventually allow three 
passenger carriers from each side to serve the other 
country, will allow all U.S. cargo carriers to provide 
virtually unlimited service through their hubs, and will 
grant to U.S. carriers unlimited rights to codeshare with 
third country carriers.  The agreement restricts the right 
of carriers to pick up local traffic in Japan, a restriction 
that may make direct passenger service by the major U.S. 
Pacific carriers less likely.  End Summary. 
 
3. (U) At the end of the third round of negotiations, 
delegation heads from the United States and Vietnam 
initialed a five-year air services agreement October 9 in 
Hanoi, the first such formal agreement between the two 
countries.  The agreement, while falling short of Open 
Skies, includes many key elements of an Open Skies 
agreement, and liberalizes the U.S.-Vietnam relation far 
beyond the service provided for in the previous Memorandum 
of Discussion, which included only bilateral codesharing and 
very limited third-country codesharing.  The new agreement 
will be applied immediately on the basis of comity and 
reciprocity. 
 
Restrictions 
------------ 
 
4.  (U) The elements where the new agreement differs from a 
standard Open Skies agreement are as follow: 
 
-- Designations:  Each side is limited to two passenger 
designations during the first two years of the agreement, 
and a third during the final three years; 
 
-- Frequencies:  Passenger carriers are limited to seven 
round-trip frequencies per week; 
 
-- Restricted routes:  Each country may select intermediate 
and beyond points in three countries each, and beyond points 
may not be the same as intermediate points. 
 
Passenger routes for U.S. carriers may not include points in 
Korea or France.  U.S. carriers have no fifth freedom rights 
(the right to pick-up local traffic) from points in Japan, 
Taiwan, and, until October 15, 2005, Hong Kong.  U.S. cargo 
carriers have no fifth freedom rights from points in Japan, 
France, Taiwan, and, until October 15, 2005, Hong Kong. 
However, a "hub" exception was included, so that U.S. cargo 
carriers may carry traffic to and from the above mentioned 
countries, as long as the traffic transits a point where 
fifth freedom rights are granted. 
 
Vietnamese carriers are prohibited from exercising fifth 
freedom rights from points in Japan. 
 
-- Destinations:  Direct service may be provided to five 
points in the other country; 
 
-- Codesharing: Vietnam is restricted to serving 25 points 
in the U.S. via codeshare partners; 
 
-- Charters: Each side may operate 52 charters per year; 
 
-- User Charges:  Vietnam is exempt from providing national 
treatment for user charges until October 15, 2007; 
 
-- Other:  The definition of Territory (Art 1.10) was 
altered to include airspace, and the text of the agreement 
was slightly modified in several places to conform to this 
additional meaning.  The Vietnamese said that their 
Constitution required this definition.  The use of foreign 
currency (Art. 8.4) was permitted, but "in accordance with 
national laws" on "a non-discriminatory basis" to take into 
account Vietnamese regulations regarding foreign currency. 
The right to employ intermodal surface transportation was 
not granted to and from third countries (Art. 8.8), so the 
phrase "or in third countries" was removed from the sentence 
describing that right. 
 
The Main Issue - Japan 
---------------------- 
 
5. (U) There was really only a single major point upon which 
the two sides had significant disagreement:  fifth freedom 
rights over Japan.   The Vietnamese head of delegation, 
Civil Aviation Administration (CAAV) Deputy General Director 
Pham Vu Hien, maintained throughout the three rounds of the 
negotiations that Vietnam's airlines cannot compete against 
U.S. airlines on Japan routes, and that they therefore need 
protection.  The U.S. for its part maintained that, since 
two of its major trans-Pacific carriers  have hubs at 
Tokyo's Narita airport, it is commercially infeasible for 
those airlines to provide service to Vietnam without fifth- 
freedom rights.  In the third round, the U.S. attempted to 
break the impasse by offering to accept transitional 
frequency and/or seat restrictions on fifth-freedom traffic, 
but Vietnam refused to yield on the issue.   Mr. Hien 
emphasized several times that even without Japan fifths, the 
concessions Vietnam was offering were the most liberal that 
Vietnam has ever given to any country. 
 
6.  (U) In the end, the U.S. side decided that the benefits 
of the agreement - very liberal cargo rights and unlimited 
third country codesharing for U.S. passenger airlines - 
outweighed the considerable disadvantage imposed by the 
Japan restrictions.   In an effort to mitigate the 
concession, the U.S. side obtained from the Vietnamese side 
the right to run blind-sector operations from Japan, a point 
that the Vietnamese had adamantly rejected up to that point. 
To underscore the importance of Japan, the U.S. side also 
insisted on denying Vietnamese carriers fifth-freedom rights 
over Japan.  Note: Terms of the Japan-Vietnam bilateral air 
services agreement preclude Vietnamese carriers from 
exercising blind sector or fifth freedom rights to the U.S. 
over Japan.  End Note. 
 
7. (U) As an indication of the sensitivity of Japan, the 
Vietnamese requested that in exchange for U.S. blind sector 
rights, language be put in the Memorandum of Consultations 
accompanying the agreement to the effect that fifth-freedom 
rights over Japan should not come up for discussion between 
the two sides until the agreement's successor is negotiated. 
 
Other issues 
------------ 
 
8.  (U) Other issues were not contentious, and the 
negotiations concerning them primarily involved working out 
details.  The Vietnamese side accepted without significant 
comment the "hub" exemption for fifth-freedom cargo rights, 
a concession that considerably lessens the effect of the 
fifth-freedom restrictions placed on U.S. cargo carriers. 
Significantly, it also accepted the inclusion of Korea for 
cargo fifth freedoms, immediate application of the agreement 
on the basis of comity and reciprocity, and specified 
effectuation dates - rather than periods based on entry into 
force -  for phased provisions. 
 
9.  (U)  On the issue of termination, the U.S. had proposed 
that only Annex IV, which contains all of the provisions 
limiting the application of full Open Skies, expire at the 
end of five years.  The basic Open Skies agreement would 
then remain in place, and only the nature of subsequent 
transitions to Open Skies would need to be re-negotiated. 
The Vietnamese side was unwilling to accept this, however, 
because it was not prepared to negotiate in the face of a 
default to Open Skies.  The entire agreement, therefore, 
expires five years from entry into force, with a commitment 
to renegotiate in year four. 
 
10. (SBU) Comment:  The Vietnamese reluctance to default to 
Open Skies in 2008 should not be taken as an indication that 
they have fundamental reservations about eventually moving 
to Open Skies.  During the course of the three rounds of 
negotiations, and again in a press statement at the final 
initialing ceremony, Mr. Hien indicated that Vietnam intends 
to move to Open Skies "well before the 2020 APEC Bogor 
target date (for developing economies to remove trade 
barriers)."  In negotiations, he mentioned specifically 2011 
or 2012 as the year when Vietnam would be ready for Open 
Skies.  In the next round of negotiations, therefore, it is 
reasonable to press the Vietnamese to negotiate a transition 
agreement to full Open Skies. End Comment. 
 
Impact on Service 
----------------- 
 
11. (SBU)  Based on the reaction of the carriers to the 
agreement, it is likely that passenger service between the 
U.S. and Vietnam will increase primarily through codesharing 
arrangements, rather than through direct service.  Western 
press at the initialing ceremony already noted the 
difficulty with direct service, questioning how a "nearly- 
empty" U.S. plane could operate profitably between Vietnam 
and Japan.  Northwest and United confirm that blind sector 
service from Tokyo is infeasible, and that neither is likely 
therefore to offer service over Tokyo or any other hubs 
during the life of the agreement.   The agreement, however, 
affords Continental the option to operate direct service 
from Houston via Guam.  Vietnam Airlines for its part 
publicly stated its desire to make San Francisco its first 
U.S. destination, although its plans to make this service 
viable (i.e. over which route) have not been publicized.  On 
the other hand, codesharing will expand beyond the frequency 
limitations permitted in the existing MOD.  The Delta Air 
Lines representative was already preparing to submit the 
necessary documentation for a codeshare with Korean Air 
before departing Hanoi.  American intends to implement its 
already approved codeshare with Vietnam Air as soon as the 
latter has completed its required FAA licensing and 
certification procedures.  All U.S. airlines are expected to 
seek codeshare partners during the life of the agreement. 
 
12. (SBU) Despite restrictions, U.S. cargo operators plan 
some direct service shortly.  Fedex and UPS already serve 
Vietnam as freight forwarders, and are likely to commence 
air service in early 2004 when the necessary regulatory and 
logistical arrangements can be completed.  Polar is looking 
at the possibility of starting service this Winter Season 
(Oct 26, 2003 - Mar 28, 2004). 
 
Entry into Force 
---------------- 
 
13. (SBU)  Both sides have indicated a desire to sign the 
agreement as soon as possible.  The GVN must translate the 
agreement (which was negotiated entirely in English) into 
Vietnamese, before it can submit it to the Prime Minister 
for approval to sign.  A potential visit of Deputy Prime 
Minister Vu Khoan to the U.S. in December presents one 
opportunity for signing the agreement in the U.S.  After 
signing, the GVN estimates it would complete the necessary 
bureaucratic procedures within a month before an exchange of 
dipnotes would bring the agreement into force. 
 
14. (SBU) Comment.  This agreement clearly represents not 
only a significant step forward in the strengthening of 
bilateral economic ties, but also another indication of the 
GVN's recognition of the benefits of broadening the 
relationship as a whole.  In stark contrast to the first 
rounds of ASA negotiations held in 1998 and 2000, the GVN 
exhibited a markedly higher degree of willingness during the 
three rounds in 2003 to compromise on a number of issues in 
order to secure an agreement.  End comment. 
 
Delegation Lists 
---------------- 
 
15. (U) The following were the participants in the 
negotiations: 
 
VIETNAM 
 
Mr. Pham Vu Hien 
Delegation Head 
First Deputy Director General 
Civil Aviation Administration of Vietnam (CAAV) 
Mr. Lai Xuan Thanh 
Director, Air Transport Department 
CAAV 
 
Mr. Luu Van Doan 
Deputy Director, International Affairs 
CAAV 
 
Mr. Vo Huy Cuong 
Senior Official, Air Transport Department 
CAAV 
 
Mr. Tran Van 
Advisor 
 
Mr. Nguyen Van Truong 
Advisor 
 
Mr. Do Tat Chat 
Advisor 
 
Mr. Bui Thien Thu 
Advisor 
 
Representatives of Vietnam Airlines and Pacific Airlines 
 
UNITED STATES 
 
Ms. Laura Faux-Gable 
Delegation Head 
Deputy Director, Office of Aviation Negotiations 
Department of State 
 
Mr. Edward Oppler 
Deputy Director, Office of International Aviation 
Department of Transportation 
 
Mr. Richard Gaffin 
Office of Aviation Negotiations 
Department of State 
 
Mr. David Modesitt 
Chief, Europe Division and Senior Negotiator, S.E. Asia 
Office of International Aviation 
Department of Transportation 
 
Mr. Christopher T. Tourtellot 
Office of the General Counsel 
Department of Transportation 
 
Mr. Samuel R. Watson, III 
Counselor for Economic Affairs 
U.S. Embassy in Hanoi 
 
Ms. Jessica L. Adkins 
U.S. Embassy Hanoi 
 
Ms. Nguyen Bich Ha 
U.S. Embassy Hanoi 
 
Representatives of the Air Transport Association (ATA), the 
Airports Council International-North America (ACI), the San 
Francisco Airport Authority, and nine U.S. carriers. 
 
16. This cable was cleared with the delegation. 
BURGHARDT