STATEMENT BY LIAT CHAIRMAN JEAN S. HOLDER PRESENTED TO LIAT MAJOR SHAREHOLDER PRIME MINISTERS – BRIDGETOWN, BARBADOS, 28th Dec 2012
Casual observers make facile comparisons between air transportation services in the Caribbean and elsewhere, without understanding the challenges that attach to Caribbean air transportation as a direct result of its history, geography and economy.
If the Caribbean Tourism Organization’s membership is taken as the widest area, we are dealing with 31 island states; Anguilla, Antigua and Barbuda, Aruba, The Bahamas, Barbados, Belize, Bermuda, Bonaire, British Virgin Islands, Cayman Islands, Cuba, Curacao, Dominica, The Dominican Republic, Grenada, Guadeloupe, Haiti, Jamaica, Martinique, Montserrat, Puerto Rico, St. Barts, St. Eustatius, St. Kitts and Nevis, St. Lucia, St. Maarten, St. Martin, St. Vincent and the Grenadines, Trinidad and Tobago, Turks and Caicos Islands, U.S Virgin Islands and the mainland territories of Belize, Guyana, Suriname and Venezuela. This has implications for the complexity of any regional or sub-regional routing and scheduling system.
The size and populations of these territories differ widely. There are small islands like Montserrat with 5,140 persons, Anguilla with a population of 10,300, Antigua and Barbuda with 87,884, Barbados, 286,705, Dominica,72,969, St. Vincent and the Grenadines, 103,869. 14 of the islands have populations under 110,000 persons. This has implications for the level of demand, the through put at airports, the seat capacity that can be accommodated and for costs generally, whether it relates to airport development and maintenance, or airline operating expenditure.
There are middle size states like Trinidad and Tobago with a population of 1,222,505, Jamaica, 2,868,380, Puerto Rico, 3,898,133, and there are the largest states like the Dominican Republic, with a population of 9,956,648, Haiti- 9,719,932, and Cuba-11,087,330. These states however have varying levels of disposable income and propensities to travel.
Historically, the states mentioned above were owned by five different metropolitan powers with which they traded and developed separate and distinct services operating under different systems of law. There is a saying that transportation follows the flag. Therefore there has, generally speaking, not been a great deal of traffic between the different language groups, except with Puerto Rico. This island, for historic reasons is “Spanglish” rather than Spanish, and is a major hub for international carriers serving most of the region’s destinations.
Within the large archipelago which is the Caribbean, there are smaller archipelago national states, for the governance of which transport connections are critical. These are the Cayman Islands, formerly linked with Jamaica, The Bahamas, comprising some 700 islands, St. Vincent and the Grenadines, Trinidad and Tobago, the British Virgin Islands , the U.S Virgin Islands and other forms of associated states, for example the OECS, and CARICOM itself.
This combination of circumstances creates a nightmare for regional and sub-regional transportation of any kind, but especially for air transportation which becomes costly and often inefficient.
Costs and subsidies
Caribbean States depend for their social and economic survival on air transport services. Some have had to face two realities. One is; owning a national carrier, because there are few private entrepreneurs willing or able to undertake transportation as a social service; the other is; subsidizing the costs of providing national air transport services in order to keep fares at a reasonable rate. In the case of the Cayman Islands, their support to their carrier extends to marketing and advertising it within the Tourism budget. Other Caribbean countries, depend heavily on these services, but make either no or little financial contribution to assist the carriers or the states that own them.
The need for subsidies apply not only to air travel. Across the world the same need for subsidies to bus and rail services obtain to support the social and economic demands of the population. In the USA, many of the air services serving rural communities, with many features similar to those in the Caribbean, are subsidized by Federal funding, which atypically is supported by both Democrats and Republicans. A 2008 IATA study has also demonstrated that many journeys of similar distance in Europe and North America cost far more than LIAT’s base fares in the Caribbean.
The much touted view that privatization is the answer to the problems of intra- Caribbean air transportation is demonstrably false. The Caribbean reality is that privatization of air transport services of Air Jamaica, BWIA and LIAT in the mid-1990s was a miserable failure, with the private sector operators demanding as much subsidies as were paid by government under public sector ownership. Several private sector airline ventures in the region have started and then disappeared. Moreover international private sector companies operating to and in the region, have had to seek government subsidies in various forms, such as route guarantees or/and marketing support.
The trend continues; American Eagle, having declared bankruptcy in 2012, will cease to fly in the region after March 2013. British Airways will cease operating to San Juan, Puerto Rico, after March 2013, Virgin Airlines will cease operating its summer programme to Tobago in 2013 unless the government there pays them £ 1,000,000. On 7th December 2012, Iberia announced that it will cease to fly into Santo Domingo, the Dominican Republic and Havana, Cuba, starting 1st April 2013. Surely other carriers will/ may take their place. But it will be at their price and they will decide on their own time of leaving, whatever they are paid. This is the kind of business that air transportation is.
Public/Private Sector Ownership
In 1971 BWIA sold LIAT to a British Company Court Line and in 1974, CARICOM states saved it from oblivion by investing as shareholders in LIAT 1974 Ltd. After 10 years of privatization, the government of Jamaica was forced to take back Air Jamaica from private owners to save it, the government of Trinidad and Tobago took back BWIA for the same reason, and the governments of Antigua and Barbuda, Barbados and St. Vincent and the Grenadines, became major shareholders in LIAT, again for the same reason.
It should have been clear then that, if air services are to be guaranteed in the Caribbean archipelago, that the core intra-Caribbean air transportation services need to be owned and supported by government in some form, if they are to survive. Bahamasair and Cayman Airways have stuck faithfully to the concept of a government owned carrier, subsidized annually to maintain an airline service at reasonable prices. While acknowledging the need for the greatest possible efficiencies, they recognize that the airlines are unlikely to make a profit in the existing circumstances.
There is no reason to shut out any competitor, private or public sector, which has demonstrated the financial strength, technical knowledge and will to compete on a level playing field. However, competition for its own sake simply makes no sense. Many of these arguments are fostered by the ideologies of liberalization, de-regulation and privatization, often based on a lack of local knowledge about the market and the absence of any personal skin in the game.
Such advocates close their eyes and ears to the realities of the region outlined at the beginning; there is such a thing as over-capacity and under-demand on certain Caribbean routes, and, in the absence of a subsidy, attempts to entertain competition, especially on price on such routes, will lead to a blood bath of price wars and to haemorrhaging of cash. This can result in the bankruptcy of one or more services and, in a worst case scenario, of all operators. It has happened many times before, but more recently with Caribbean Star, Caribbean Sun, Carib Express, REDjet and others now forgotten. The more often this happens, the less likely private sector investors are likely to come forward. No lessons, however, are learnt by the arm chair analysts.
Air transportation services within the Caribbean Community
The concept of a Single Market and Economy takes for granted the existence of an efficiently run and reasonably priced transportation service that meets the passenger and cargo needs of all Community partners. Until this is achieved, CARICOM should prioritize the discussion of this item at the highest level. The discussion should not, however, be restricted to how inefficient and expensive are the existing services paid for by a few countries, although this is a legitimate concern.
It should also be about what are the reasons for the inefficiencies and what each member state of CARICOM, other destinations currently served, and all the various tourism partners, such as hoteliers for whom air lift is critical, intend to contribute, financially and otherwise, according to their abilities, to achieve the objectives desired. This is a discussion that many of those who now benefit, and will benefit even more from an improved service, have, to date, refused to entertain.
The Need for Rationalization of Air Transport Services
Within the last decade, global air transportation services have experienced major financial difficulties and these have been addressed and efficiencies effected, largely by means of alliances and mergers between carriers that had often competed aggressively with each other. In Europe, North and South America, and even in the Caribbean, there have been no less than a total of 91 instances of such activities.
In this region, there has been a clarion call for better communication, cooperation and alliances between Caribbean carriers that stretches over a long period. There are many forms to consider; code sharing, alliances, functional cooperation, a Holding Company, under which each carrier retains its separate persona and an outright merger where all entities become one.
But there is nothing new about this call. The need for some form of cooperation between the government owned CARICOM carriers was addressed by the 1972 CARIFTA Secretariat Report.
It was addressed by the CTO Functional Cooperation study commissioned by CTO when I was Secretary General and executed by Ian Bertrand and the Miami Aviation Services in 1993. It demonstrated how efficiencies could be achieved, money saved and services improved. Its findings were not implemented. Rather the governments chose to privatize the carriers and the idea inevitably died.
Bilateral discussions between BWIA and LIAT morphed into an agreement in 2003 to form the Caribbean International Airways Holding Company (CIAH) out of BWIA and LIAT. Agreement was reached between the governments of Antigua and Barbuda, Barbados, Trinidad and Tobago and St. Vincent and the Grenadines to establish the CIAH company which was registered in Port of Spain. Suddenly, without explanation, Trinidad and Tobago, pulled out of the arrangement and the idea collapsed.
Much has happened with air transportation, most of it negative, in the Eastern Caribbean between 2003 and 2012; Caribbean Star, Caribbean Sun, Air Jamaica, REDjet and EZjet have ceased to operate. LIAT and CAL ex BWIA, continue to struggle to survive. Many millions of dollars have been lost and Caribbean people continue to complain about the costs and the inefficiencies of airline services. LIAT promises a profit in 2013, if a number of difficult conditions are met. CAL too has outlined a plan for improvements, but warned not to expect a profit in the short term.
Meanwhile, the Caribbean has announced the creation of yet another aviation committee, comprising people who are capable of once again articulating the problems. We wish it well, but hope that its advocacy role will focus on some of the real causes and effects covered in this paper and will not simply comprise a wish list of “Goodies”, as cheap fares that do not cover costs, competition, as a “good” on every route, whatever the consequences, and the removal of government and airport taxes, while suggesting no clear alternative on how the airports will be maintained and improved. Airlines need good airport infrastructure, which is very expensive to maintain. It is important to recognize that these issues are not being addressed for the first time and there is the need to take into consideration or/and be influenced by the evidence of history and by the factors affecting regional air transportation that have been delineated in this paper and elsewhere.
Of course, Caribbean carriers must take the hard decisions needed to put their own houses in order, but then so must all their partners. The basic objective must be to provide an acceptable service to the travelling public at reasonable costs, while cutting costs and increasing revenues.
Speaking for LIAT, there are internal inefficiencies which the carrier and its several constituencies, including its industrial partners, recognize. These are currently being addressed in the LIAT Business Plan which is being presented to shareholders and other partners by the Chairman of the Board and the CEO.
LIAT has made the case for capital investment to replace its aging fleet to both its present shareholders and to those who currently receive its services and are seen as potential shareholders. In some cases it awaits their responses.
LIAT understands the reason for the high level of regional taxation on aviation and that they will not be removed by the stroke of a pen. Steps need however to be taken to analyse the matter scientifically and Heads of Government should turn to CARICOM and CDB for help in examining the situation to see what relief can be got and what options exist.
Even in difficult global economic circumstances, improved services and better marketing of the airlines will lead to increased demand. But what role do hotels and Tourist Boards see for themselves in helping to market airline services wholly or partially owned by their own governments? For example, the Cayman Islands Tourist Authority is aggressive in marketing the services of Cayman Airways.
With respect to financial support, LIAT expects to be treated no better and no worse than other airlines when asked to provide specific flights to a destination where its costs of operation cannot be covered by the air fares.
What then can be done in pursuit of a sustainable air transportation service in the Caribbean? The major government owned carriers in the CARICOM Community are Cayman Airways, Bahamasair, CAL, LIAT and Surinam Airways. The persons who are well placed to effect the changes needed are the Heads of CARICOM and the airlines owned by CARICOM leaders are the carriers about which they can do something. But a service which is so critical to the survival of the Single market and Economy must be the concern of the entire Community.
What is being recommended here is as follows:
· That a special Meeting of CARICOM Heads of Government be convened early in 2013 to discuss regional air transportation and its critical role in supporting the Caribbean Single Market and Economy. The focus of the meeting must not be about blaming the airlines which have given a total of 200 years of service to the region and the countries which have subsidized the rest of the region. It must be about what is needed to get regional transportation right and what and how much each country which is a beneficiary of the services will contribute to the cause in its own best interests. The agenda must be wide enough to include a number of aviation issues which are related to the proper functioning of regional air transportation.
· That the idea of CARICOM airline alliances must be once more put on the table and a committee, including representatives of the management of the carriers be established, without delay, to examine the feasibility of this concept.
· That these deliberations take place with regard to the articles of the CARICOM Multilateral Agreement concerning the operation of Air Services within the Caribbean Community.