Jamaica cannot afford to make any company an exclusive national carrier

BY KEITH COLLISTER

Friday, February 19, 2010

LAST Friday, Anne Shirley did all Jamaicans at home and abroad a favour when she broke the story that the Government has agreed to ensure that Caribbean Airlines is designated the exclusive national carrier of Jamaica in a non-binding letter of intent signed on January 22 between the Government of Jamaica, Air Jamaica Limited, Air Jamaica Holdings Limited and Caribbean Airlines, a company owned by the Government of Trinidad and Tobago.

She advised that under the agreement, Caribbean Airlines will commence its Jamaican operations on or before July 1 upon the cessation of operations of Air Jamaica. On closing, the Government has agreed that "Caribbean Airlines shall be the exclusive national carrier of Jamaica and, in this regard, will not request designation of national carrier status for any other air carrier for as long as the Jamaican operations maintain a minimum level of service and meet certain other criteria, which in each case will be set forth in the definitive agreements".

The parties to the agreement are committed to making best efforts to sign legally binding agreements by March 31, and the Government of Jamaica and Air Jamaica will take all necessary steps to effect the cessation of operations of Air Jamaica on or before July 1, and as soon thereafter close Air Jamaica.

The route rights are the key issue

Whilst the time line of July 1st is obviously set by the IMF, their letter of intent does not preclude the Government of Jamaica from designating more than one carrier to utilise the route rights.

In Wednesday's Observer, Jamaican Michael Clarke, who I understand to be a leading airline consultant, formerly with Sabre, in a letter "Flying against the jetstream" cuts to the chase.

"In an era of global airline deregulation, and the promotion of free-market economies, it's startling to see the Jamaican Government signing an official non-binding agreement that would preclude any qualified group of Jamaicans from starting and/or running an international flag carrier to serve overseas destinations. In its relentless pursuit to divest our national treasure -- Air Jamaica -- the Government has gone too far by accepting unnecessary restrictions that may potentially hurt the country's economy in the long run."

He adds: "Any agreement that restricts competition is usually foolhardy, and can only be justified in the case where there are other overwhelming considerations. While most airline privatisation programmes will have limitations on what future carriers can do, there is typically a time limit to these restrictions to ensure that the acquiring entity has an opportunity to recoup their investments."

Clarke observes that since the government will be assuming the debt burden of Air Jamaica, there is no reason to accept any restriction on competition.

He observes that Jamaica has been a "welcoming destination" for JetBlue Airways, Spirit Airlines, United Airlines and Virgin Atlantic, who, despite being new to the Jamaican market place, have been welcomed with open arms. Clarke asks "Why is it then that we, as an independent sovereign country, would sign an agreement to prevent our people from establishing viable scheduled airline carriers to serve the local demand, and help promote the Jamaican brand worldwide?"

Clarke believes that the number of scheduled and charter carriers serving the island and Caribbean region means that "there is ample demand to support multiple indigenous airlines on the island. As a country that relies heavily on tourism, it is essential that we have the ability to promote our brand -- Jamaica -- and provide the necessary service to support the Jamaican diaspora worldwide."

Despite its need to divest Air Jamaica as soon as possible, Clarke argues the government "should not make unwise decisions that may come back to hurt us as a country and region in the future."

It is unfortunate that the negotiations over Air Jamaica have been shrouded in such secrecy when it has been clear for years (well before the new Government came into power for that matter) what the outcome of the negotiation should be. In an e-mail to the board of a leading private sector organisation approximately one year ago, I noted that the chance of getting an un restructured Air Jamaica off the books by March was "almost infinitesimal" with the only real possibility being a strategic deal e.g. China or some other country.

I noted that if this was going to occur, it would happen anyway, and that even a state owned foreign airline would probably ask for the government to restructure Air Jamaica, as Caribbean airlines has in fact done.

In the current international environment for airlines, it should have been clear that no potential investor was going to take over the debt, and Air Jamaica's inefficiency meant that they would all want to be able to choose which staff to keep, which means under our laws effectively making the staff redundant (what Caribbean airlines in fact did to the staff of the former BWIA). The price of planes, either to buy or rent, has been dropping sharply due to the severe global recession, so no investor requires Air Jamaica's planes either. What you are left with is the brand Air Jamaica, which Caribbean airlines doesn't want anyway, and the routes.

However, American and other internationally based airlines, under the "Open skies" agreement can come here if they want, so the only group affected by the exclusivity apparently demanded by Caribbean airlines would ironically be either Jamaicans or a company looking to headquarter its operations in Jamaica, which cannot be the intent of the government. Caribbean Airlines will be headquartered in Trinidad, so as would be the case with a purchase by any American carriers, the jobs of Air Jamaica's pilots, travel attendants and ground staff will for the most part not be required.

It should therefore be clear that what is being offered by Caribbean Airlines is not much different from a liquidation with a small equity kicker of undetermined value (10 per cent of Caribbean airlines is difficult to value without making the balance sheet public) with possibly large future negative effects on tourism and potential tax revenues. We should support Caribbean airlines coming here (as they should want to as Jamaica effectively doubles the size of their potential market) but not at the price of an exclusive agreement that blocks the entrance of either future Jamaican investors (the pilots or whoever else can come up with the money) or another airline prepared to headquarter themselves here and provide local jobs and tax revenues. The best thing for Jamaica's tourism industry (not to mention our diaspora) is the lower fares from unrestricted competition.

Which one of the following assets do you most favour to buy now and hold until the end of the year in Jamaica?
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