US embassy cable - 04BOGOTA8906

UNCLAS SECTION 01 OF 02 BOGOTA 008906 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EAIR, CO 
SUBJECT: CONCERNS FROM THE U.S. FLAG CARRIERS 
 
REF: A. REF A: BOGOTA 8026 
     B. REF B: BOGOTA 8515 
 
Sensitive but unclassified -- please protect accordingly. 
 
1.  (SBU) Summary.  At the midyear point, the three U.S. flag 
airlines, American, Continental, and Delta, all report higher 
earnings in 2004 than in 2003.  All three managers voiced 
concerns over the civil aviation authority, Aeronautica Civil 
(CAA), the association of Colombian travel agencies (ANATO), 
and the Avianca-Synergy deal.  End Summary. 
 
---------------------------------- 
Sales Increase But Problems Remain 
---------------------------------- 
 
2.  (U) 2004 is shaping up to be a good year for U.S. flag 
carriers, with sales revenues up from five to ten percent 
over 2003 levels.  Local station managers attributed this 
increase to sustained economic growth, an increase in foreign 
investment, a rise in corporate, leisure and student travel, 
and the free trade negotiations.   The ramp up to the free 
trade negotiations, as well as the negotiations themselves, 
have significantly increased business travel not only from 
Colombia to the U.S., but also from the U.S. to Colombia. 
American Airlines' Manager informed Econoff that the increase 
in business travel has allowed American to fly five times per 
week to Medellin and directly compete against Avianca. 
However, the airlines still face restrictions and expensive 
tax legislation, high travel agency commissions, a new 
administrative fee - (Ref B), and high fuel prices. 
 
-------------------- 
CAA and the Airlines 
-------------------- 
 
3.  (SBU) All three U.S. carriers expressed discontent with 
CAA's regulatory behavior.  American Airlines is the most 
vocal, stating Colombia is the most regulated airline market 
in Latin America.  CAA's regulatory behavior affects airline 
fares for internet programs, gate access, routes, and 
negotiations between private entities, such as travel 
agencies and airlines (Ref B).  Continental privately voiced 
concerns with CAA's response time to Continental's official 
complaints, pointing to one example where CAA responded to a 
complaint only after the event was a non-issue.  Continental 
and Delta publicly state, however, they have good relations 
with CAA.  The airlines did note that CAA was helpful with 
security and airport operations. 
 
----------------- 
ANATO's Influence 
----------------- 
 
4.  (SBU) ANATO, the Colombian travel agency association, has 
far greater influence with CAA than Colombia's airlines 
associations, ALAICO and ATAC, because of strong relations 
(and some business ties) with the Colombian Congress and the 
travel agency industry's support for political campaigns. 
ANATO's influence in CAA policy is readily seen in the rules 
regulating internet tickets for airlines (long delays in 
processing the requests) and in the newly created four 
percent administrative fee for travel agents (Ref B). 
ANATO's fight to survive in an era of internet tickets and 
reduced commissions for travel agencies is clearly 
demonstrated in an email, recently made public by American 
Airlines.  American's Station Manager in Colombia said the 
email, authored by the VP of ANATO, stated ANATO members 
should divert their sales principally towards Avianca and 
Delta because of Avianca's support for ANATO and American's 
lobbying efforts to lower travel agent commissions.  American 
Airlines has filed a lawsuit against ANATO as a result of the 
communication. 
 
--------------------------- 
Concern Over Avianca's Sale 
--------------------------- 
 
5.  (SBU) Avianca has been in Chapter 11 proceedings since 
March 21, 2003 (Ref A).  Avianca chose to pursue bankruptcy 
protection in the U.S. because U.S. laws are more lenient and 
less political than existing Colombian laws.  Avianca's goal 
was to search for a buyer that would absorb its debt, 
currently over USD 300 million, inject capital to the 
cash-strapped company, and install a better management team. 
By April 2004, Avianca had two bidders, the Brazilian company 
Synergy and Continental-Copa.  According to American 
Airlines' Station Manager in Colombia, Avianca chose Synergy 
mainly because Avianca felt that Continental-Copa would 
eventually absorb all of Avianca's operations and eliminate 
Avianca altogether.  Continental's Station Manager in 
Colombia stated that the Avianca-Synergy deal is worrisome to 
the Colombian aviation industry because Synergy has no real 
experience in operating a major international airline and 
fears that future Avianca-Synergy troubles may cause a 
price-war, where all airlines will lose out (however, CAA 
sets minimum and maximum price limits for the airline 
industry).  On 24 August, a New York Bankruptcy Court Judge 
said Avianca's restructuring plan, featuring a purchase by 
Synergy (which runs a successful regional airline in Brazil), 
complied with the U.S. Bankruptcy Code.  This crucial passage 
allows Avianca to release the plan to its creditors on 3 
September.  The confirmation hearing will occur on 14 October 
and Synergy hopes Avianca will exit Chapter 11 by the end of 
the year.  The judge granted 60 days for Avianca to obtain 
the necessary votes from the creditors to approve the 
restructuring plan. 
 
6.  (SBU) Comment.  The CAA's efforts to protect Avianca and 
ANATO are due to the political influence of both entities. 
The CAA has repeatedly refused Open Skies negotiations for 
fear that entering U.S. carriers would undermine Avianca's 
chances of survival.  In addition, it has not challenged even 
the most self-serving requests from ANATO.  Rumors in the 
aviation community suggest that CAA's director Velez has 
political aspirations (hoping possibly to follow in the 
footsteps of another former CAA director, President Uribe) 
and therefore does not want to burn any bridges with Congress 
nor ANATO.  End Comment. 
DRUCKER