US embassy cable - 05PRETORIA1134

UNCLAS SECTION 01 OF 02 PRETORIA 001134 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR AF/EPS AND AF/S/TCRAIG AND KGAITHER 
DEPT FOR EB/TRA/AN/CDEMARS, LFAUX-GABLE, ESMITH 
TRANSPORTATION FOR SMCERMOTT, KBHATIA, GRETCH 
 
E.O. 12958: N/A 
TAGS: EAIR, ETRD, ECON, SF 
SUBJECT: LAN CHILE - OPEN SKIES POSTERCHILD 
 
(U) Sensitive but Unclassified. Not for Internet 
Distribution. Please protect accordingly. 
 
1.  (SBU) SUMMARY.  U.S. Department of Transportation 
officials facilitated a conference call between senior 
executives from the Chilean airline, Lan Chile; U.S. State 
Department and DoT officials; and South Africa,s Director of 
Air Transport Regulation and chief aviation negotiator 
Godfrey Selepe.  The Lan Chile officials compared Chile to 
South Africa and attributed much of their success and 
Chile,s economic growth to the Open Skies agreement signed 
with the United States in 1997.  The officials felt that a 
step-by-step liberalization of the aviation regime would not 
have brought Chile the same economic benefits as an Open 
Skies agreement.  In addition, they said that Open Skies 
provides a more flexible business environment which 
especially benefits smaller firms.  Selepe said that 
President Mbeki,s policy has been one of managed 
liberalization.  In this context, he said that South 
Africa,s aviation policy is not necessarily pro-Open Skies, 
but doesn,t prohibit it either.  He added that South 
Africa,s aviation policy must consider the administration,s 
main priorities of alleviating poverty and creating jobs. 
Selepe said that he had hoped to remove some restrictions 
during the last round of negotiations in 2000 and looks 
forward to following up on this angle during the current 
negotiations.  END SUMMARY. 
 
2.  (U) U.S. Department of Transportation (DoT) Deputy 
Assistant Secretary for Aviation and International Affairs 
Susan McDermott facilitated a January conference call between 
senior executives from the Chilean airline, Lan Chile; U.S. 
State Department and DoT officials; and South Africa,s 
Director of Air Transport Regulation and chief aviation 
negotiator Godfrey Selepe.  Lan Chile executives included 
President and CEO Luis Ernesto Videla, General Counsel Juan 
Carlos Mencio, Director of Commercial Planning Jorge 
Grainger, and Director of Commercial Analysis and Development 
Raquel Galarza.  South Africa,s Minister of Transport 
Jeffrey Radebe and South African Airways officials were 
unable to participate in the call. 
 
--------------------------------- 
SIMILARITIES BETWEEN CHILE AND SA 
--------------------------------- 
 
3.  (U) Videla began by comparing Chile to South Africa.  He 
described Chile as a small, liberal economy distantly removed 
from the world,s most important economic regions.  He said 
that in the 1990s Chile was looking to grow its economy and 
viewed its relationship with the United States as a means to 
accomplish that.  Videla admitted some fear at the thought of 
competing head-to-head with the larger U.S. airlines. 
However, the opportunity to gain greater access to the larger 
U.S. market outweighed Lan,s reservations and they supported 
the move to an Open Skies (OS) agreement with the United 
States in 1997.  Raquel Galarza said that Open Skies is 
important to countries like Chile and South Africa because it 
provides the flexibility that is necessary for smaller 
companies to rapidly change their operational plan according 
to market conditions. 
 
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PROOF IS IN THE PUDDING 
----------------------- 
 
4.  (U) Jorge Grainger commented that Latin American 
countries with OS agreements produce stronger airlines.  He 
pointed out that Chile has over 100 frequencies with 
Argentina, 59 with Brazil, and 24 with Peru.  On the other 
hand, there are just 14 frequencies between Brazil and Peru 
and 24 between Argentina and Peru.  Grainger,s point was 
that despite restrictive agreements with its neighbors, Chile 
enjoyed a net advantage in frequencies because Chile is 
liberalizing its economy more rapidly. 
 
5.  (U) Grainger continued that in the seven years since 
Chile and the United States signed an OS agreement, Lan Chile 
has enjoyed the following successes: 
 
- Passenger load has increased 1.6 times 
- Cargo load has increased 1.7 times 
- Direct flights to U.S. cities increased from 3 to 6 
- Increased codeshare services have added 29 U.S. cities and 
7 Chilean routes to Lan Chile,s service. 
- Lan Chile,s frequencies have increased 60 percent 
- Lan Chile has 70 percent more seats 
- U.S./Chilean carriers have increased in direct flight 
market share from 86 to 98 percent 
 
6.  (U) Videla added that removing restrictions on air 
transport has been directly related to the successful 
development of Chile,s broader economy.  In 1990, exports by 
air were almost zero.  Today, Chile exports more than 120 
tons of goods per year on 300 freighters and Lan Chile has 
become the most important cargo company between the U.S. and 
South America with the liberalization of 7th freedom rights 
under Open Skies.  Grainger added that agreeing to a full 
Open Skies agreement has helped Chile develop its 
telecommunications and IT industries with an influx of 
reservation and call centers. 
 
7.  (U) Juan Carlos Mencio said that OS has strengthened 
relations between the two countries and ushered in an era of 
greater cooperation on transportation and aviation matters. 
The agreement allowed the United States to offer training to 
Chilean officials that was not available under the old 
aviation regime. 
 
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CAN OPEN SKIES BE PHASED IN? 
---------------------------- 
 
8.  (U) Videla was doubtful when asked whether Chile would 
have benefited as much from a step-by-step liberalization of 
its aviation industry.  He said Lan Chile feared that an 
incremental approach may have resulted in something less than 
Open Skies.  Galarza said that Open Skies creates a climate 
where companies can determine how they will respond to 
rapidly changing market conditions as opposed to an industry 
controlled by government-imposed conditions.  Non-OS regimes 
inhibit the ability of companies to exploit changing 
circumstances and the bureaucratic process moves too slowly 
to meet the demands of industry. 
 
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SELEPE,S RESPONSE 
----------------- 
 
9.  (SBU) Selepe described the conference call as more 
operational than regulatory in nature.  He regretted that 
South African Airways representatives were unable to 
participate in the call and said that they &missed a lot.8 
Selepe said that South Africa is still a young and 
inexperienced democracy.  Unlike Chile, he explained that 
South Africa is not yet a completely liberal regime and 
President Mbeki,s policy has been one of managed 
liberalization.  In this context, he said that South 
Africa,s aviation policy is not necessarily pro-Open Skies, 
but doesn,t prohibit it either.  He added that South 
Africa,s aviation policy must consider the administration,s 
main priorities of alleviating poverty and creating jobs. 
 
10.  (SBU) Selepe pointed out that all stakeholders in South 
Africa (i.e., tourism, SAA, international airlines operating 
in South Africa, etc.) would participate in the Open Skies 
discussion, but that no one specific party exercised decisive 
influence on the outcome.  At the end of the day, South 
Africa,s Department of Transport would decide whether or not 
to adopt an Open Skies agreement with the United States. 
Selepe said that he feels South Africa enjoys good relations 
with the United States via the International Civil Aviation 
Organization (ICAO).  He said that while the current 
bilateral agreement with the United States has some 
restrictions, it is certainly not the most protectionist. 
Selepe said that he had hoped to remove some restrictions 
during the last round of negotiations in 2000 and looks 
forward to following up on this angle during the current 
negotiations. 
FRAZER