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Caricom chairman should act to end airlines stand-off

Published: 
Thursday, March 17, 2011

Travellers in the Caribbean appear set for a turbulent time because of the apparent stand-off between the T&T- owned, Caribbean Airlines Ltd (CAL) and the smaller carrier, LIAT, whose shareholders are the governments of Antigua and Barbuda, Barbados and St Vincent and the Grenadines.

There is no question that, for many of the countries of the smaller Caribbean countries, LIAT is an essential service. It has also become important for traffic to Guyana of North American and European tourists and nationals visiting from abroad who can get as far as Barbados via bigger airlines.

There is also no question that—however brave a face is put on it—LIAT’s ability to continue to fly without subsidies from its shareholder governments is in grave doubt. And, the possibility of its shareholder governments putting money into LIAT is pretty remote since all three of them are strapped for cash.  

Borrowing on commercial terms is also not a viable option in today’s market, particularly if such borrowing is based on a need to compete against CAL on certain Caribbean routes. CAL has made it clear that it intends to fly some of the routes now operated by LIAT. In the past, LIAT relied heavily on loans and subsidies from shareholder governments, but over the last four years it has paid its own way with no government having to give it a hand-out.

Indeed, LIAT’s landing fees to Caribbean governments have been a source of revenues to the airports in all countries that its serves. In Barbados, for instance, LIAT operates approximately 30 landings a day, making it the largest single source of landing fees. The same is true for Antigua and Barbuda, and for most of its eastern Caribbean destinations.

But the situation is now changing. LIAT has had to increase its fares because of increased costs, not least among them the cost of aviation fuel. The airline has an aging fleet in need of renewal.  Experts put the capital cost of renewal of the fleet at approximately US$300 million. LIAT’s home market, the Eastern Caribbean, is itself undergoing a period of economic recession with only limited possibilities for short term economic growth.

Any new competition from CAL will worsen LIATs financial problems and probably push it over the edge, particularly as CAL gets a fuel subsidy from the T&T Government, while LIAT pays market price. CAL’s fuel subsidy; erroneously described as a “fuel hedge” is quite significant. 

According to Finance Minister Winston Dookeran, CAL’s fuel subsidy claims to the Government for the years 2008, 2009 and 2010 amounted to $43.69 million 

In this regard, Prime Minister Ralph Gonsalves of St Vincent and the Grenadines is perfectly correct when he asserts the absence of a level playing field in any competition between LIAT and CAL. Gonsalves has also spoken of LIAT introducing a mix of aircraft and flying routes to Miami and New York. This is more a consummation devoutly to be wished than a prospect grounded in any reality. 

LIAT would not only have to compete on these routes with CAL which benefits from a fuel subsidy, it would also compete with American Airlines which several governments in the region are known to give subsidies in order to guarantee their flights. Since no Caribbean government has shown itself willing to provide a subsidy to LIAT to guarantee its intra-Caribbean flights, they are most unlikely to make any contribution toward LIAT’s wider explorations to New York and Miami.

Regional airlines experts point out that CAL has nothing to gain from a LIAT acquisition, similar to the acquisition of the Jamaica airline, Air Jamaica. CAL has route rights under the Caricom Multi-lateral Air Services Agreement, it has the necessary airplanes (with the acquisition of French ATRs), and it has a fuel subsidy. What is more, it has the support of countries like Grenada, St Lucia and St Kitts who are getting a service without paying for it, and who are not attracted to helping pay for LIAT. 

Further, CAL already flies to Barbados and Antigua and Barbuda. This probably reflects the thinking of CAL’s board of directors: why pay for something that might turn out to be an albatross, if they could put it out of business and secure a place of dominance in the Caribbean skies? Given the assets of CAL, particularly its fuel subsidy, it could put LIAT out of business unless LIAT secures financing from somewhere to allow it to meet its current financial obligations, upgrade its fleet and offer passengers a competitive price for its service.

Should that happen, CAL would enjoy a virtual monopoly. At that point, it is doubtful that the T&T Government would continue the fuel subsidy at its present level, if at all. Passengers would be expected to pay the commercial costs of the airline’s service. 

The end result for the passengers—tourists and Caribbean nationals alike—will be high costs for intra-regional travel. But, it could also mean a decision by the dominant airline to abandon non-profitable services and routes. Should the latter decision be taken, some governments would be forced to give the airline money to guarantee continued service. This is a practice many of them now apply to foreign carriers such as American Airlines but they refuse to do for regional carriers.

Clearly what is needed in this troubling situation is a high level consultative process involving the principals of both CAL and LIAT with the aim of developing an action plan, including an integrated business plan, for the two carriers.  

The issue is how to get the two carriers to talk at the level of their boards to work out such a plan that could be put to their shareholder governments. One approach would be for the present chairman of Caricom, Grenada’s Prime Minister Tillman Thomas, to appoint a team of say three people, headed by a seasoned diplomat and including persons with the issues of Caribbean airlines, to bring representatives of the airlines to the table and facilitate the development of the plan.

What is certain is that the current stand-off benefits no one, least Caribbean travellers.

 

The writer is a consultant and former Caribbean diplomat. Email him at www.sirronaldsanders.com

 

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