INTRA-CARIBBEAN
AIR TRANSPORTATION
THE CSME BRIDGE

1. Caribbean four times more dependent on tourism than any other region of the world.
2005 Statistics
•
22,281,000 stay-over visitors
•
18,883,400 Cruise passengers
•
US $ 21.5 billion in Gross Visitor Expenditure
•
Over 90 per cent of all the foreign exchange spent by visitors derives from those arriving by air.

2.
The Requirements for a Sustainable
Caribbean Tourism Development
•
Maintaining product quality with special emphasis on environmental resources which are the core of the product
•
A focus on profitability
•
Effective marketing and promotion of the product
•
Providing a safe environment for the industry
•
Securing the buy-in of local populations

•
Strengthening the linkages between tourism and other economic sectors
•
Combining regional resources for critical mass and the creation of a competitive force
•
Providing efficient, adequate and affordable international and intra-Caribbean air transportation

3. The Importance of Air Transportation to Island states
• Quote “ Air transportation is an important instrument of trade, tourism, employment, defense and economic development. It is the very breath of life in the Caribbean region. Its role in making possible intra-Caribbean travel for social and business purposes is also critical, and its absence would reduce the populations of several small states to being virtual prisoners on their islands”.

•
The Caribbean is the largest tourism market for a number of Eastern Caribbean countries.
•
An Intra-regional Carrier in a Single Market and Economic Community is a bridge between the states it connects, a part of the infrastructure

4. How do you measure the Return On
Investment of a Bridge?

Carry out a counter-factual study

Knock Down an existing Bridge

The cost of restoring a critical bridge is not the first priority

Return on Investment (ROI) is however always important

5. What kind of ROI are Caribbean
Governments getting for their
Investment in Regional carriers?
•
An MIT study reckons Air Jamaica contributed US $ 5 billion to Jamaican economy during private ownership
•
Cayman Islands Government reckons Cayman
Airways contributes 15 % of Gross Domestic
Product

6. Conclusions arrived at:
A successful Tourism Industry depends on the successful combination of:
 a quality product
 effective marketing
 efficient, adequate and affordable air access.

The net national profit must be calculated in terms of foreign exchanged earned, revenue generated and employment created for the country by the combined investment in the three elements of product, marketing and air transportation.

7. Several of the bilateral and multilateral agencies, especially the World Bank, insist on evaluating public sector investment in airlines in isolation from other elements of the tourism mix, and see them as colossal failures because:
 The carriers have sustained continuous losses over many years

They have received repeated injections of government cash to survive

8.These agencies recommend therefore as follows:
 
Government owned carriers should be privatized
 
Alternatively, the Caribbean should depend totally on foreign owned carriers.
•
Complete Liberalization- the best solution for mitigation of risks related to the region’s transportation problems

9. These recommendations fail to take into consideration the following:

The government owned carriers have lost more money under privatization than government ownership

Under private ownership (local and foreign), governments were forced to continue the subsidies.

•
Given the critical importance of air transportation, relying totally on foreign carriers involves tremendous vulnerability in respect of both tourism and other commerce

The liberalization theory accords neither with the region’s best interests nor experience.

 
Our focus on the exportation of sugar, bananas and manufactured goods in the production of which we have no comparative advantage, has been on earning foreign exchange, generating government revenue and creating jobs

 
We have therefore been producers of goods at costs greater than revenue, and forced to rely on quotas at the same special high prices as European protected producers and on preferential access, in order to survive.
•
Our foreign policy for years has been based on negotiating the above protectionist arrangements. We continue to argue for
“special and differential treatment”

•
Meanwhile, until recently, several international agencies, arguing that tourism was “fickle”, discouraged the Region from developing tourism in which it has a comparative advantage, and refused to supply aid for this purpose. Notable exceptions, the EU and the OAS.

11.The
New World Economic Order represents that the Perfect trading
Environment consists in:
•
Deregulation
•
Liberalization, as the best insurance of mitigation against loss of service, creation of monopolies and high prices/fares
•
Privatization
•
An end to government subsidies
•
Government support should be minimal and a last resort

• No business should seek to perform a social service
• Applied to the air transportation, this means every one should be permitted to fly where he wishes, at whatever price he wishes, on whatever route he wishes and at whatever time he wishes.
• “ Let the Market Decide”.

12. If examined in the context of Global air transportation performance since 1978, but especially since 2000, the above theories are at best, naïve, at worse fallacious:
•
The present chaotic financial situation of Global, and especially US air transportation, is a direct result of
US deregulation of air Transportation in 1978, not largely the events of 9/11, as commonly claimed. It unleashed suicidal fare wars and created unsustainable competition, especially from Low Cost
Carriers (LCCs), offering low fares that have benefited the consumer, so far, but destroyed several major airlines. (Pan American, Eastern, Swissair,
Sabena, for example, plus a number of LCCs).


If this conclusion is false, we would otherwise have to conclude that the Boards and
Management of nearly all the major legacy carriers of the world are bad and inefficient businessmen.
 
In the five years, 2000 to the end of 2005, the major US carriers accumulated a combined net loss of US $ 43 billion. In 2005 alone, they added a combined net deficit of US $ 10 billion to the US $ 33 billion, they had accumulated at the end of 2004.

 
In 2005, 4 of the 7 largest US airlines were operating under the Chapter 11 Bankruptcy
Act. Delta and Northwest will remain there until at least 2007. Industry insiders remain skeptical about the future of US Airways, in spite of its merger with America West and
United Airlines having based its future profitability on US $ 55 for a barrel of oil, will have to think again, with oil at over US $
70 a barrel.

•
The US major carriers have collectively reduced their annual operating costs by US $
15 billion but need to cut a further US $ 10 billion to survive.
•
Yields and unit revenues are strengthening and getting closer to those of LCC South West airlines, but oil and fuel prices remain high.
•
Operating within Chapter 11, many of the carriers are demanding billions of dollars in concessions from their workforce and creditors and are shedding staff.

•
The European airline industry, mostly because of the
LCCs, have done better than US carriers.
• Asian airlines (high volume, low wages, expanding economies) have also made profits.
• Most Latin American carriers are in a state of bankruptcy or near bankruptcy. Varig, the National carrier of Brazil, is on the point of collapse.
•
Low fares in an environment of high fixed costs, small margins and fierce competition, is a recipe for airline death, eventual loss of service, resulting in monopolies and an eventual return to high fares.

Adoption of the LCC model is no guarantee of success. So far,so good.
•
It is important for LCCs to stick to their operational model
•
The LCC stars, jetBlue, Easy Jet, Spirit have recently lost money. Song was closed down
•
New kinds of problems, like pilot burn-out, are emerging.
•
The LCC model is parasitic on the existence of other carriers serving other routes and other customers.
• The GDS (Amadeus, Sabre, Galileo) are fighting back o

•
Neither Liberalization nor need, has ever been a guarantee of attracting air transport service to a country or a region.
• Caribbean Tourism Authorities spend a great of time on the road negotiating airline services, often without much success.
•
Caribbean countries with “Open Skies” conditions, if not actual Open Skies Agreements, often have to pay subsidies to Foreign carriers to provide services they need from certain tourist markets.

•
Foreign air carriers, like foreign cruise lines, have at various and sundry times left the insular
Caribbean or shifted a great deal of their equipment to other places, based on sound commercial logic, as seen from the perspective of their Board Rooms.
•
Many of them returned to the Caribbean because of war, terror, SARS, Bird Flu, Mad
Cow Disease and Tsunamis in our competing destinations and not because of any
Liberalization policies followed by our governments.

•
While Caribbean governments are being advised not to subsidize government owned carriers, many of the major private airlines, in the UK, Europe and North
America, have survived by receiving various forms of subsidies (government cash injections, tax rebates, restructuring under Chapter Eleven Bankruptcy type arrangements, etc)
• The “Open Skies” policy is practiced very selectively by countries like the USA.
• The USA has strongly resisted any such approach with
European carriers, in terms of flying into the US or any foreigner owning or even managing US carriers

13. More and More, Tourism Practitioners and Hoteliers are defining the recipe for Tourism success as:
•
Good Product, Effective marketing and Low fares. The pig and chicken policy.
•
In a situation of ever escalating high input costs for airlines, this is only possible if the airline industry is subsidized

14. The Case for Air Jamaica, BWIA and
LIAT:

Air Jamaica, BWIA and LIAT, like Bahamasair and
Cayman Airways, have a history of accumulated debt and losses, but this situation is paralleled by the performance of the global airline industry.

The first three have provided a guarantee of international and intra-regional air services to the region for 37, 66 and 50 years respectively. Other competing airlines came and went.

The Return on Investment (ROI) of the regional carriers must be evaluated in terms of the combination of commercial and social services to members of the
CARICOM Community over that period of time.


Their existence as national carriers have given the
Caribbean countries bargaining power, in an industry that is currently controlled largely by bilateral
Agreements.

Privatization, whether foreign or local, has not so far guaranteed them profits, or an escape from government subsidies.

Both private and public sector owners/ managers of these carriers now accept that they have received far too little capital, rather than too much, as is commonly believed.
• They operate in a fiercely competitive environment

15. The LIAT Story

LIAT transports some 750,000 passengers a year.
30 % are visitors from outside the region. 70 % are Caribbean people or Caribbean residents going about their business of trade, commerce, vacation, sports, health services, festivals, education and government business.

LIAT serves 20 Caribbean destinations everyday.

In many cases LIAT is the carrier that carries the largest or the second largest number of passengers to those countries. It is, for example, the second largest carrier to Barbados.

•
The picture of a heavily subsidized carrier seeking no competition is false.
•
Over the past 50 years it has had many competitors on its routes, including BWEE
Express, E.C Express, Carib Express,(now all gone) while also competing with American
Eagle, BWIA, Caribbean Star, Caribbean Sun,
Air Caraibes and others.

It took six years for the Capital investment of US
31 $ million needed in 2000 to be received by the airline-a period that included 9/11, with all its financial and other consequences, as well as exponential growth in the price of oil.

•
Unlike Air Jamaica, Bahamasair, BWIA,
Cayman Airways, LIAT does not belong to one country responsible for providing a financial
Safety Net to support its operations.
•
Capital investment comes only in response to a cash flow crisis, depending on the resources available to any one of its 3 shareholders at a given time.
•
It serves many countries every day which see no obligation to support it financially

16. New LIAT
• At the end of 2004, LIAT embarked on a programme of radical and far reaching changes as follows:
• Negotiated settlements/compromises/ rescheduling of payments with all major third party creditors.
•
Developed and implemented a new business model involving a state of the art reservation, booking, revenue management and flight information system, called Navitaire.
• This has had positives and negatives and must be seen as a work in progress.

•
Addressed its punctuality problem ( now 65 % to 75 %, with a target of 85 %)
• Undertook major maintenance on the entire fleet, engines and rotables.

Expanded its fleet from 11 to 13 Dash 8s.

Adopted a new livery

Is in the process of carrying out a comprehensive analysis of all its routes, with a view to eliminating and /or reducing loss making services and routes and creating routes and schedules that better correspond to the public’s needs.


Created a new Commercial Department and appointed a Chief Commercial Officer, responsible for broad based promotion, advertising and marketing. This is a work in progress.

Introduced cost cutting measures such as staff reduction, productivity incentives, longer sectors, more direct flights, eliminated multistop flights.

Introduced a comprehensive training and implementation programme.

Appointed a new and highly experienced Chief
Executive Officer (CEO).

17. Final Conclusions and The Future
Intra-regional air transportation is part of the infrastructure of the Caribbean Single Market and Economy and the bridge connecting its member States.

Its real contribution has to be determined in terms of its total contribution to the socioeconomic life of the CSME.

Tourism dependent states should calculate the
ROI of air transportation in terms of the net return from tourism of which air transportation is one of three elements (product, marketing, air access).

If a successful tourism industry requires
Remember,
There can be no low fares without subsidies

• All Caribbean carriers, whether government or privately owned, should aggressively pursue cooperation, while working towards an end to suicidal competition and to creation of a profitable industry.

Governments should be open to private investment and even control, of regional carriers, provided the investor is committed to a strategic direction and to the socio-economic goals of the region.
•
There is a need for Caribbean Governments to address the air transportation needs of the Single Market in a comprehensive manner and to create a CARICOM
Community Air Transportation and Aviation policy.This includes addressing the capital investment needs of the carriers.

Thank you for your attention!
Any questions?