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Viewing cable 04YEREVAN812, ARMENIA'S MAIN AIR CARRIER SCOTCHES PLANS

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Reference ID Created Released Classification Origin
04YEREVAN812 2004-04-05 10:01 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Yerevan
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 YEREVAN 000812 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EUR/CACEN, EB/TRA/OTP 
 
E.O. 12958: N/A 
TAGS: EAIR ECON RS AM
SUBJECT:  ARMENIA'S MAIN AIR CARRIER SCOTCHES PLANS 
FOR EUROPEAN ORIENTATION 
 
 
1. (U) This cable is sensitive but unclassified.  Please 
protect accordingly. 
 
------- 
SUMMARY 
------- 
 
2. (SBU) Completely reversing its previous investment 
policy, Armenia's main flag carrier, Armavia Airlines, is 
halting its plans to expand towards Europe and move to 
European standards and is replacing its modern aircraft with 
older Soviet models in an effort to reduce costs.  The move 
is a breach of Armavia's agreement with the Government of 
Armenia and is a vote of no confidence in the commercial 
viability of a modern airline servicing European routes from 
Yerevan.  END SUMMARY. 
 
--------------------------------------------- 
ARMAVIA AIRLINES REVERSES INVESTMENT STRATEGY 
--------------------------------------------- 
 
3. (SBU) Bob Chaplin, a British consultant who has been 
managing Armavia, told us that Armavia's directors have 
decided that the investments necessary to expand Armavia's 
service to European cities were not justified. 
Specifically, he said that they were unwilling to accept 
losses in the initial years of investment and preferred to 
pocket the earnings from cheap but profitable point-to-point 
flights in the CIS.  According to Chaplin, for the moment 
Armavia will continue to operate its current European 
flights to Frankfurt and Amsterdam in order to avoid 
forfeiting its exclusive licenses to the routes, for which 
the company paid USD 14.5 million.  Chaplin noted that these 
routes will remain profitable through summer, but after that 
he expects that Armavia will probably try to sell the 
licenses or liquidate during next winter. 
 
--------------------- 
GETTING OUT OF EUROPE 
--------------------- 
 
4. (SBU) The sudden reorganization of Armavia's assets 
signals a clear exit strategy from the European routes. 
Armavia will transfer three of its five Airbus 320s to 
Siberian Airlines in Russia and replace them with old Soviet 
planes that are not allowed to land in European Airports. 
(Note:  Siberian Air owns a controlling share of Armavia 
Airlines.  End Note.)  The airline has also halted 
negotiations with Lufthansa on interline connections through 
Frankfurt and have withdrawn their bid for International Air 
Transport Association (IATA) certification. 
 
------------- 
"TOO RUSSIAN" 
------------- 
 
5. (SBU) "The directors are too Russian," Chaplin told us 
when asked why Armavia had failed in its plan to become a 
western airline.  The expense of meeting European standards 
had proven to be far more than the directors anticipated or 
were willing to bear.  He higlighted as examples the fact 
that the directors refused to fly scheduled flights when 
they were not full, refused to contract an attorney to 
negotiate interline agreements, and refused to open their 
aircraft and their books to inspection by third parties. 
 
---------------------------- 
CHANGES A BREACH OF CONTRACT 
---------------------------- 
 
6. (SBU) Armavia's withdrawal from its strategy puts it in 
breach of several investment conditions of its contract with 
the GOAM:  it is not yet clear how the government will 
react, however.  In case of a material breach the government 
has the right to cancel Armavia's licenses and resell them 
to another airline.  According to Viktor Mnatsakanian,  the 
legal advisor to Minister of Justice David Harutunyan, the 
Minister is aware of Armavia's move but the government has 
not yet taken any decision on how to respond. 
 
------- 
COMMENT 
------- 
 
7. (SBU) If the GOAM were to revoke Armavia's licenses it 
could exacerbate the situation considerably:  Armavia's USD 
14 million loss would likely send danger signs to potential 
investors.  The reversal of Armavia's strategy is a serious 
blow to Armenia's civil aviation industry, suggesting that 
Armenia cannot support an airline that meets modern Western 
standards and depriving a land-locked country of vital 
transportation links. 
ORDWAY