US embassy cable - 04ACCRA1978

C O N F I D E N T I A L SECTION 01 OF 02 ACCRA 001978 
 
SIPDIS 
 
E.O. 12958: DECL: 10/03/2009 
TAGS: EAIR, EINV, GH, aviation 
SUBJECT: UPDATE ON U.S. INVESTOR'S PLANS TO TAKE OVER FOR 
GHANA AIR 
 
REF: A. ACCRA 1786 
 
     B. ACCRA 1703 
     C. ACCRA 1683 
     D. ACCRA 1644 
     E. ACCRA 1583 
     F. ACCRA 1550 
 
Classified By: Economic Chief Chris Landberg for Reasons 1.5 (B and D) 
 
Summary 
------- 
1. (C) Charge and EconChief met with Amcit representatives of 
Ghana International Air (GIA) to discuss its agreement with 
the Government of Ghana (GoG) to create a new airline to take 
over Ghana Air's routes.  GIA reps confirmed that the GoG and 
GIA have agreed to form a partnership, with the GoG taking a 
70 percent stake in the new company and GIA taking 30 percent 
with full operational control.  The GoG will be responsible 
for Ghana Air's debt and employees.  GIA will seek equity 
investments to fund equipment purchases and aircraft leases. 
It intends to take over Ghana Air's U.S., Europe and regional 
routes early in 2005.  The deal has generated much local 
skepticism and opposition, including from the IMF and Ghana 
Air's management.  Post raised its own concerns during the 
meeting. End Summary 
 
GIA Reps Outline Deal with Government 
------------------------------------- 
2. (C) Charge and EconChief met September 24 with Kirk 
Heaton, Executive Vice President of Sentry Financial 
Corporation, which handles financial arrangements for GIA. 
Heaton was in Ghana representing the U.S. investors behind 
GIA, led by SkyWest Airline founder Ralph Atkin.  GIA signed 
a Letter of Intent with the GoG on September 1 to create an 
airline company to take over the routes currently flown by 
national air carrier Ghana Air (Note:  see reftels for 
background on Ghana Air.  End Note).  This new airline, to be 
named later, will not take over Ghana Air, so will not have 
responsibility for Ghana Air's employees or financial 
liabilities. 
 
3. (C) Under the Letter of Intent, the GoG agrees to wind 
down Ghana Air in preparation for a hand off to a new airline 
in early 2005.  This will entail valuing Ghana Air's assets, 
dealing with Ghana Air's employees, and assuming Ghana Air's 
estimated USD 160 million debt. 
 
4. (C) The GoG will initially own 70 percent of the new 
airline.  GIA will take a 30 percent stake, but will retain 
full operational control.  Heaton stated the GoG will have 
seats on the board of directors, but will participate as a 
"silent partner."  Both sides agreed to put up an initial 
investment of USD 7 million, split 70/30, as operating 
capital. 
 
5. (C) GIA is working to raise an additional USD 30 to 50 
million from equity partners, targeting three types of 
investors:  1) strategic partners, mainly other airlines; 2) 
aircraft leasing companies; and 3) pure equity investors. 
The outside equity will dilute the GoG and GIA's holdings, 
lowering the GoG's stake below 50 percent.  GoG Transport 
Minister Richard Anane has discussed diluting GoG ownership 
further by floating shares on the Ghana Stock Exchange. 
 
6. (C) The GoG has "ring fenced" the USD 160 million debt, 
and will handle all negotiations with creditors (Note:  Post 
has heard that up to two thirds of the debt is owed to GoG or 
quasi-GoG institutions, and only about USD 70 million is owed 
to outside creditors.  End Note).  The GoG has agreed to lay 
off Ghana Air's estimated 1200 to 1600 employees.  GIA will 
poach Ghana Air's best employees, including most of its 
pilots, and its goal is to operate Ghana Air's routes with 
fewer than 250 employees. 
 
7. (C) GIA has also agreed to "consider" purchasing some of 
Ghana Air's assets from the GoG.  Given that Ghana Air is 
flying all its routes with leased aircraft, its assets are 
likely to have minimal value.  The GoG has stated it will 
liquidate the assets that GIA does not want. 
 
Timeline 
-------- 
8. (C) GIA is coordinating with Ghana Civil Aviation 
Authority (GCAA) to register and certify the new airline. 
Heaton said GIA would submit the appropriate application to 
GCAA within 60-90 days and estimated the GCAA would take two 
months to approve it.  GIA will use this period to raise the 
equity, hire employees, train pilots, and lease six Boeing 
aircraft (two each for the U.S., Europe, and regional 
routes).  After a few years of operations, GIA will approach 
OPIC and ExImBank for assistance with a second round of 
financing to expand the fleet.  GIA will immediately seek to 
establish linkages and join alliances with other airlines, 
with the goal of making the new airline the company of choice 
to partner with for flights to Africa. 
 
Local Reaction 
-------------- 
9. (C) Post has found few supporters of this deal outside 
government.  There are allegations of lack of transparency in 
the bidding process.  KLM, which bid on the deal but dropped 
out, argues that the Transport Ministry did not specify that 
the GoG would assume Ghana Air's USD 160 million debt.  Ex 
Ghana Air CEO, Philip Owusu, alleges that GIA has "secret" 
Ghanaian partners, who are the true force behind this deal. 
He claims that only GIA knew the GoG would assume the debt, 
so the deal was fixed from the start. 
 
10. (C) Other local observers, especially in the media, argue 
that GIA does not have the capacity or financial wherewithal 
to build a strong Ghanaian airline.  A frequently heard 
criticism is that the GoG should have chosen an established 
airline to save Ghana Air.  Ghana Air's current management 
argues this, and lobbied President Kufuor to oppose the GIA 
deal and instead support a Ghana Air partnership with 
Ethiopia Air. 
 
11. (C) IMF Resident Representative Alpha Muttardi also 
opposes the arrangement, and has lobbied the GoG to drop the 
deal.  She told EconChief that GoG assumption of the debt 
could undermine the IMF program.  Heaton claims President 
Kufuor personally intervened to conclude the deal with GIA, 
so the IMF's lobbying may have little effect. 
 
Comment 
------- 
12. (C) Charge and EconChief urged Heaton and GIA investors 
to research the problems other investors have experienced in 
Ghana.  Most recent disputes with the GoG resulted at least 
in part because the investors did not adequately document the 
division of rights and obligations with the GoG.  This may 
become a problem with the current deal.  GIA decided to sign 
a letter of intent with the GoG, rather than signing an 
agreement that would require Parliamentary approval. 
Although GIA did this on purpose to avoid Parliamentary 
delays, an approved agreement would provide more security to 
the investors.  GIA's tentative agreement to consider buying 
Ghana Air assets may also ultimately be problematic.  GoG 
officials consider verbal assurances tantamount to 
obligations, and have created obstacles to investors who 
failed to follow through on the purchase of local equipment. 
 
13. (C) GIA is following the old model of working directly 
with the President, and is keeping its intentions (and 
identity of its investors) close-hold.  However, Ghana Air is 
one of the more controversial subjects in Ghana, and as 
Kaiser Aluminum has discovered a deal with the President does 
not protect you from the other powerful forces in this 
increasingly decentralized democracy.  Cabinet Ministers, 
Parliamentarians, bureaucrats and private parties are 
increasingly influential, and GIA's many opponents may be 
waiting for their opportunity to undercut the new airline. 
 
14. (C) EconChief alerted Heaton of the impending FAA 
reassessment of civil aviation safety oversight, which could 
result in a downgrade to Category Two.  Heaton said he was 
well aware of the upcoming FAA visit and has offered 
technical assistance to the GoG and GCAA to help them retain 
Category One.  End Comment 
 
LANIER