US embassy cable - 04BOGOTA3676

UNCLAS SECTION 01 OF 03 BOGOTA 003676 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EAIR, CO 
SUBJECT: COLOMBIAN AVIATION:  THE ONLY WAY IS UP 
 
Sensitive But Unclassified-- Please Protect Accordingly 
 
1.  (U)  Summary:  2003 was a tough year for Colombian 
airlines due to a drop in passenger traffic and high 
operational and fuel costs. Avianca, the nation's largest 
carrier, entered Chapter 11 reorganization in New York, and 
is up for sale.  A Brazilian consortium has offered to take 
over Avianca, but Continental Airlines, working in 
partnership with Panama's COPA airlines, also expressed 
interest at the last minute.  Local competitor Aerorepublica 
seeks to challenge the majority position of Avianca and has 
requested new routes.  A new airline, Fenix, owned by 500 
Colombian commercial pilots, hopes to begin operation in the 
second quarter of 2004, further complicating the picture. The 
only bright spot is in air cargo, fueled by an increase of 
exports.  Meanwhile, GOC officials are slowly examining the 
possibility of an Open Skies agreement with the U.S. under a 
12-month extension of the previous aviation agreement. End 
Summary. 
 
Performance of the Passenger Aviation Sector in 2003 
--------------------------------------------- ------- 
 
2.  (U) Colombian airlines continued to battle high fuel 
prices and bankruptcy during 2003. Two of three companies in 
the Avianca-led Alianza Summa alliance foundered in 2003. 
The board of directors of ACES, a troubled junior partner 
which served Miami, Santo Domingo, Lima and Quito, liquidated 
the airline on August 20, 2003.  ACES was unable to continue 
operations due to financial difficulty.  ACES routes were 
redistributed among other companies such as Avianca, SAM, 
Aerorepublica, Aires and Intercontinental. 
 
3.  (U) Avianca filed for Chapter 11 in the U.S., narrowly 
avoiding harsher Colombian bankruptcy rules which might have 
led to its closing.  SAM, an Avianca subsidiary that saw a 
boost in passengers and gross receipts in 2003, nonetheless 
posted a US$16 million loss due to one-time pension costs. 
Aerorepublica, Colombia's second largest airline, is hoping 
to gain market share in passenger service.  It has acquired 
two new aircraft and is improving its customer service in 
order to challenge Avianca's dominance of the market. 
 
4.  (U)  Relative shares in the international passenger 
market (all destinations) remained steady in 2003, with 
Avianca decreasing slightly to 39 percent, American Airlines 
up two percent to 11 percent, Panama's COPA at nine percent, 
Delta at 7 percent and Continental at five percent of the 
market. International travel decreased slightly during 2003 
by two percent from 2002 levels, but year-end travel 
increased 4.5 percent December 2003 over the previous year. 
 
5.  (U)  Avianca dominated the 2003 domestic market with a 36 
percent market share, followed by Aerorepublica with 21 
percent. Domestic travel decreased from January to December 
2003 by four percent from 2002 levels.  In December 2003 
alone, domestic passenger traffic decreased by seven percent 
over December 2002.  One of the key factors in the decrease 
was the success of the Uribe Administration's effort to 
secure key highways from the threat of armed groups, whose 
roadblocks and kidnapping activities diminished road travel 
considerably in previous years.  The Viva Colombia Travel 
program, administered jointly by transportation and military 
authorities, organizes private vehicles into caravans and 
provides military escorts in key travel periods.  For the 
first time in many years, travelers felt intercity road 
travel was safe from illegal armed groups in 2003.  The 
success of the plan will likely continue to depress demand 
for airline seats. 
 
6.  (U)  Some 500 Colombian pilots formed Fenix Airlines and 
applied to the civil aeronautics authority for 287 weekly 
flights, 175 domestic and 122 international.  Media reports 
say the GOC intends to approve operations the in April for 
domestic flights and international frequencies to the Andean 
countries and Santo Domingo.  Civiar authorities have denied 
this, however.  After approval, Fenix will have 180 days to 
begin operating. Fenix pilots proposed an initial investment 
of US$9 million, of which US$5.5 million would come from 
shareholders and US$3.5 million would be borrowed. 
 
Cargo Companies Benefit from Export Increase 
-------------------------------------------- 
7.  (U)  International cargo rose in 2003 by 16 percent over 
2002.  Outgoing cargo increased 16 percent, while incoming 
cargo increased 14 percent for the same period.  The 
increases reflect the country's nine percent jump in exports 
during the year as well as the 18 percent increase in exports 
to the U.S.  Domestic cargo also rose nearly eight percent in 
2003.  Key providers include Aerosucre with 26.5 percent of 
the market and LAS with 26 percent, down by five percent 
during the year. Avianca is also an important player in cargo 
services. Civil Aviation authorities assigned 20 new routes 
to seven air cargo companies on March 24, 2004, including six 
routes to one U.S. based carrier, Florida West International 
Airways Inc. 
 
Avianca's Bankruptcy 
-------------------- 
 
8.  (U)  After years of troubled finances, Avianca's U.S. 
subsidiary filed for Chapter 11 in New York in March of 2003. 
 The company filed in the U.S. to avoid stricter Colombian 
laws which do not allow for reorganization.  To date, Avianca 
has restructured US$263 million in debt, and renegotiated 
leasing agreements, insurance rates and cut marginal routes, 
reducing operating costs by two percent and increasing 
operating revenue by 11 percent to US$585.7 million. 
Nevertheless, it reported a net loss of US$116.2 million for 
2003.  The U.S. bankruptcy court also granted Avianca a 
series of extensions to identify a buyer that could supply 
additional capital.  The new owner will also take on 
responsibility for Avianca's remaining US$300 million debt 
(US$43 million in domestic debt, US$143 million in foreign 
debt, and US$114 million in pension-related debt). 
 
A Buyer for Avianca? 
-------------------- 
 
9.  (U) Following months of speculation and talks with a 
series of unwilling suitors, Grupo Sinergy, a Brazilian oil 
conglomerate that operates Brazil's largest regional airline, 
reportedly agreed to  purchase Avianca on March 18.  Sinergy 
offered to inject US$64 million in capital in addition to an 
undisclosed sum in exchange for the 50 percent stake owned by 
Colombian conglomerate Valores Bavaria.  It would also 
purchase half of the remaining stake owned by the Colombian 
National Federation of Coffee Growers, which will retain a 25 
percent share in the airline.  Under the terms of the 
reported agreement the Coffee Federation can exercise the 
option to sell their stake to Grupo Sinergy after three 
years. The Avianca subsidiary, SAM, would be included in the 
sale. Reports of the deal failed to mention how much Sinergy 
would pay for the airline, nor how it would handle Avianca's 
existing financial obligations. 
 
10.  (U) Sinergy is owned by German Efromovich, a self-made 
Brazilian oil magnate who reportedly is known for negotiating 
last-minute, rock-bottom purchases of troubled companies and 
then rebuilding them.  Sinergy's worldwide holdings include 
Maritima Petroleo, which generates some US$300 million a year 
in oil revenues, including 6,000 barrels a day in Colombia. 
It also owns a passenger airline in Brazil, OceanAir, which 
is reportedly the fastest growing airline in Brazil.  Sinergy 
also owns interests in telecoms, power production and marine 
construction. 
 
11.  (SBU) Continental Airways/COPA remains a potential 
suitor, however. According to press reports in Colombia and 
the U.S., a possible Continental/COPA deal was mentioned at 
the March 2004 Chapter 11 hearing.  In response, a press 
release from the Brazilian group argued that it had a signed 
contract with Avianca.  Others knowledgeable about the 
Sinergy deal, however, say that Sinergy signed a non-binding 
letter of intent and that the deal was far from final.  Under 
Chapter 11, any deal, whether offered by Sinergy or 
Continental/COPA, needs to be approved by the airline's 
creditors and the presiding bankruptcy judge.  The judge 
extended to April 30 the current deadline for Avianca to 
reorganize and present a new partner.  The parties will meet 
again April 20 to determine if the deadline needs to be 
extended. 
 
12.  (SBU) Civil aviation authorities privately told EconOff 
they strongly prefer that Continental and COPA purchase 
Avianca. They believe Continental, the seventh largest 
carrier in the world, offers strong experience in aviation 
management as well as far greater access to international 
connections and capital. The civil aviation officials also 
said they hoped the number of hours flown by Avianca pilots 
would increase under Continental, whose pilots log 20 percent 
more flight hours per month than Avianca pilots.  Avianca's 
President, Juan Emilio Posada, credited Avianca's improved 
performance for Continental/COPA's renewed interest. 
 
Labor issues 
------------ 
 
13.  (U) Aviation labor disputes have continued to mark the 
Colombian industry.  In 2002, 84 Avianca pilots accepted a 
company offer to take early retirement, increasing Avianca's 
immediate pension obligations by 29 percent.  The Colombian 
Association of Civil Pilots (ADCAC) maintains, however, that 
Avianca has not complied with the agreement and failed to 
fund the pension obligations.  A planned Easter week work 
slowdown by pilots to protest the issue was canceled by the 
union March 31 to await the outcome of the bankruptcy 
hearings. 
 
Open Skies Up In the Air 
------------------------ 
 
14.  (U) Post broached the offer of an Open Skies agreement 
with GOC Civil Aviation authorities in late 2003 as the 
existing bilateral air agreement was due to expire December 
31.  At that time, the authorities told EconOff that the 
fragile financial state of Colombian aviation would not 
permit national firms such as Avianca to face more 
competition.  The GOC then agreed to a year's extension of 
the existing agreement.  Civil Aviation contacts now indicate 
they plan to initiate internal discussions on Open Skies 
during 2004, but do not believe that they would be ready to 
conclude an agreement this year. 
WOOD