US embassy cable - 05MAPUTO653

UNCLAS SECTION 01 OF 02 MAPUTO 000653 
 
SIPDIS 
SENSITIVE 
STATE FOR AF/S - TREGER 
DAKAR FOR FAA REP ED JONES 
E.O. 12958: N/A 
TAGS: EAIR, ETRD, MZ 
SUBJECT: MOZAMBIQUE - RIVAL AIRLINES VIE FOR DOMESTIC MARKET 
 
REF: 04 MAPUTO 1658 
 
1. (SBU) Summary. The ongoing fare war between 
government-owned Linhas Aereas de Mocambique (LAM) and 
upstart private airline Air Corridor has quickly turned 
Mozambique from one of the most expensive places in Africa 
for domestic flights to one of the cheapest. While consumers 
benefit, the highly contentious public rivalry raises 
questions about the safety of each airline, the ability of 
the Mozambican government to regulate competition in the 
airline industry, and future prospects for air transport 
privatization. Post has requested an FAA staff visit to 
Mozambique for June 2005 to assess airline safety and GRM 
regulatory capacity. End Summary. 
 
------------ 
Air Corridor 
------------ 
2. (SBU) Air Corridor, owned by Mozambican citizens of South 
Asian origin, opened for business in August 2004 and became 
the first airline to compete directly with the state-owned 
airline LAM on its principal domestic routes. Air Corridor 
early on experienced several in-flight incidents widely 
reported in the local press (reftel). These consisted of a 
dangerous approach when Air Corridor and another plane 
attempted to land simultaneously on the same strip and 
another in which the company's one Boeing 737-200 sucked a 
bird into one of its engines, causing a two-day service 
shutdown. Based on the potential seriousness of the 
incidents, and with guidance from the Department, the Embassy 
issued a warden system advisory in December 2004 notifying 
the American community of our decision not to use Air 
Corridor for official travel. 
 
3. (U) There have been no more safety incidents reported 
since then. In fact, subsequent discussions with GRM 
authorities suggest that other airlines and airport 
maintenance staff may have caused the 2004 incidents (see 
reftel). In any case, consumers have been happy to take 
advantage of Air Corridor's low prices, which are 65 to 70 
percent below those charged by LAM in 2003-2004. (LAM has 
responded by cutting its own fares to levels slightly above 
Air Corridor prices.) For example, a one-way Air Corridor 
ticket from Maputo to Air Corridor's home city of Nampula now 
costs only $60, which is only $20 more expensive than the 
bone-crunching 40-hour bus ride. Air Corridor is starting to 
see the benefits of its pricing policy; company officials 
indicated to Emboff that occupancy rates were steadily 
rising, and averaged nearly 60% in March/April 2005 - up from 
an estimated 45% in October 2004. The approximately 100 
Amcits in and near Nampula have also noticed. Several 
Nampula-area Amcits recently contacted by the Embassy have 
told us they have used the airline, found it generally 
superior to LAM, and have recommended further travel with Air 
Corridor. 
 
------------------------- 
Is This Fair Competition? 
------------------------- 
4. (SBU) It is unclear how Air Corridor and LAM are able to 
charge such low prices and survive. To a certain extent, 
each company could justify slashing fares due to the 
strengthened Mozambican metical, which rose against the 
dollar from 24,000 mt/$ to 19,000 mt/$ during the latter half 
of 2004, permitting the companies to purchase fuel much more 
cheaply. This year, however, the metical has lost nearly 
all it had gained, causing gas prices to climb again and 
squeeze profit margins. LAM believes that current airfares 
are unreasonable and, in various public statements, has 
charged Air Corridor with "dumping." LAM Managing Director 
Jose Viegas told Emboff that Air Corridor is pricing tickets 
well below cost, considering together the costs of general 
insurance, fuel, fuel insurance, salaries, airport fees, and 
the $300,000 per month cost of wet leasing a Boeing 737-200 
from Phoenix Aviation. He believes Air Corridor provided the 
GRM with false insurance papers, and really does not carry 
insurance that properly reflects post-911 premiums and 
coverage. Another critic, Segundo Alves Gomes, president of 
the Association of Mozambican Airline Operators, believes the 
GRM,s agreement to license Air Corridor was illegal because 
the proper paperwork was not filed. 
 
5. (U) (Note: LAM, for its part, dry leases its fleet of 
three Boeing 737-200s. Two of these are from a US company, 
International Aviation Partners, Inc. Viegas said that he is 
negotiating to lease an additional Boeing 737-200 from this 
company when the lease on his third airplane ends in October 
2005. Dry leases, unlike wet leases, do not include payments 
for crew and maintenance, and generally run $50-65K per 
month, according to Viegas. End Note.) 
 
6. (U) The broadside fired by LAM has started a discussion 
within the GRM and the industry about what constitutes fair 
competition. Both LAM and Air Corridor agree the industry 
needs better regulations, and each has written to the Civil 
Aviation Institute of Mozambique (IACM) with their requests 
for an improved legal and institutional structure. In recent 
conversations with Emboff, Antonio Pinto, director of IACM, 
lamented the GRM,s lack of relevant laws defining rules of 
competition in the marketplace and the lack of economic 
expertise necessary to determine whether "dumping" has taken 
place. He asked for USG technical assistance in developing 
an improved regulatory structure, whether from FAA, USAID, or 
other sources. 
 
-------------------- 
Privatization Issues 
-------------------- 
7. (U) The sudden, fierce competition between LAM and Air 
Corridor has pre-empted the decade-old debate of whether, 
when, and how LAM should be privatized. LAM, owned 80% by 
the GRM and 20% by its employees, has long been considered by 
the GRM to be a strategic company that should not be 
privatized. International financial institutions, however, 
have been urging its sale. But with long-standing 
multi-million dollar debts to Boeing and a 750-employee 
workforce considered by the World Bank to be more than twice 
as large as necessary, attractive suitors for LAM have been 
few and far between. Air Mauritius made the last serious 
offer for LAM, offering $3.6 million in 1997, which the GRM 
turned down. Given today's high fuel prices and insurance 
premiums, compounded by the loss of LAM,s monopoly, 
well-placed observers in both the World Bank and the airline 
doubt the GRM could even give LAM away for free today. 
 
8. (SBU) While LAM privatization is on hold indefinitely, 
privatization of airport services apparently is only on hold 
temporarily. On January 13, 2005, a few weeks before the 
Chissano government left office, the Council of Ministers 
approved a 25-year concession of the Maputo airport to 
Airports Company South Africa (ACSA). ACSA won a competitive 
bidding process on airport services carried out in 2003. The 
agreement would have given ACSA 70% stake in airport 
services, leaving the government with the rest. ACSA, in 
turn, would have secured a $30 million loan to upgrade Maputo 
airport. In late March 2005, incoming Minister of 
Transportation Antonio Munguambe de-authorized the Council of 
Ministers, concession. (Comment: Post understands that this 
is a legal maneuver under Mozambican law.) According to LAM 
and the Ministry, Munguambe decided the concession needed to 
be re-negotiated, considering that Maputo is the only one of 
the country's 18 airports that turns an annual profit. 
Moreover, its revenues have historically been used to finance 
minimal upgrades at the other airports, something the 
concession appeared to overlook. Both of the major domestic 
airlines and several new cabinet ministers, many of whom have 
just returned to Maputo after stints as governors or 
high-ranking officials in faraway central and northern 
provinces, have backed Munguambe's decision. These same 
sources indicate that the Ministry of Transportation is 
actively negotiating with ACSA, and they expect a new deal to 
be struck sometime soon. 
 
--------- 
FAA Visit 
--------- 
9. (SBU) Post will continue the monitor economic and security 
issues in the Mozambican airline industry, but we do not have 
the technical expertise to assess a particular airline's 
safety record. Therefore we have asked the FAA regional 
representative in Dakar to come to Mozambique to evaluate Air 
Corridor and LAM, preferably in late June. In the meantime, 
post has requested from IACM the latest reports from the ICAO 
and IATA. IATA staff visited Mozambique in April 2005 and 
made a cursory review of LAM and Air Corridor; Air Corridor 
hopes for a full inspection by IATA sometime soon as a 
precursor for gaining membership. ICAO visited Mozambique in 
late 2004. When post receives the documents requested, we 
will forward them to FAA-Dakar and the Department. 
Dudley