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 regions
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 regions best interests nor experience.

10. The advice we are receiving about

our air services needs to be evaluated
in the context of other historical
experiences:
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, nave, 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

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 publics 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

Low fares
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?