Air Jamaica divestment team pats itself on the back

The divestment of Air Jamaica cost some US$164 million (J$14 billion), according to Dennis Chung, who said the figure was about US$40 million less than budgeted.

Chung, the project manager on the Air J divestment committee and a chartered accountant, said the lower bill allowed for a near J$2 billion of savings in the supplementary budget.

"We did some excellent negotiations," he told the Financial Gleaner.

"Because of those negotiations, the US$204 million budgeted for the divestment, the actual costs were US$164 million," he said Tuesday in a telephone interview.

The divestment committee was led by Dennis Lalor, who has since been named as Jamaica's representative on the merged Caribbean Airlines/Air Jamaica operation.

Challenges in merger talks

Chung said that one of the challenges in the merger talks included negotiating the early termination of a 2014 lease arrangement on Airbus aircraft.

"It is not an easy thing to return an aircraft," he said.

The divestment team - otherwise referred to as the Legacy Operations Air Jamaica Limited — did come under scrutiny last year when the contractor general raised concerns about the fairness and transparency of the procurement procedures in relation to the sale of two A320 aircrafts.

The upshot was that the divestment team had been cavalier with some of the rules.

The aircraft were marketed by a broker, Focus Aviation Limited, resulting in 23 offers, some of them revised, from 14 entities. Legacy Operations ended up negotiating the sale with GA Telesis, a Miami-based aviation company in the business of aircraft leasing, overhaul and repair, and replacement parts.

Contractor General Greg Christie found that the team had contravened Ministry Paper No 34 on Privatisation Policy and Procedures that requires "arms length" transactions and equal opportunity to all bidders.

The CG's annual report quotes from an email dated August 5, 2010 from Air J president Bruce Nobles to Chung of Legacy Operations and copied to the broker, saying: "I think it is extremely important that we do not say that we told Pacific to rebid after they were outbid by GA Telesis. As I understand the procurement rules, that would not be appropriate."

His subsequent request in October that the sale process be aborted was overruled by Cabinet in favour of continued negotiation with GA Telesis for the sale of the A320s.

Air Jamaica has been an albatross for Jamaica for decades. Its majority sale in the mid-1990s to a group of private investors led by Gordon 'Butch' Stewart was unwound in the next decade after that team failed to turn around the national carrier, notwithstanding experiments with the fleet, routes and upmarket product redesign. The Government reacquired the airline and its debts.

In the last three fiscal years up to its sale — 2007-08 to 2009-10 — the airline cost the Government J$12.9 billion, J$11.9 billion, and J$15.5 billion, respectively. Those numbers were the equivalent to 1.2 to 1.4 per cent of GDP.

In August 2009, during negotiations with Trinidad, Prime Minister Bruce Golding said then that the sale of Air Jamaica would cost the Government close to US$200 million — about J$17-18 billion. Golding said that the divestment process involved redundancy payments amounting to US$30 million, operational costs and maintenance owed by the airline.

The airline made more than US$150 million in annual losses which impacted on the national Budget. Over the past decade, Air Jamaica lost more than US$1 billion.

Caribbean Airlines officially acquired majority stake in Air Jamaica in May 2011 after a year of operating as a consolidated airline. The Jamaican Government holds 16 per cent of the merged airline, which continues to operate both the CAL and Air J brands.

Air Jamaica operated 11 routes in 2010, but scaled back to five, according to the Economic and Social Survey Jamaica published in April by the Planning Institute of Jamaica. The routes terminated included Orlando, Baltimore, Havana, Curaçao, Chicago, and Grenada, while operations continued on the New York, Philadelphia, Fort Lauderdale, Nassau, and Toronto routes. However, in September 2011 the airline returned to Orlando.

The reduction of its routes resulted in a 40 per cent drop in revenues, from US$257 million in 2009 to US$154 million (J$13.2 billion) in 2010, while operating with less passenger seats filled than year-earlier levels.

Additionally, it resulted in Jamaica's air-travel ranking nosediving five spots below the soaring Trinidad and Tobago to 107 of 192 countries, amid the acquisition of its majority stake in local carrier Air Jamaica, according to an index published last month by Global Traveller. The top five nations were Germany, France, the United Kingdom, United States and Turkey. It was the first time that Jamaica dropped behind Trinidad — coinciding with the shedding of six routes by Air Jamaica last year in preparation for acquisition by Caribbean Airlines, which is based in Trinidad.

steven.jackson@gleanerjm.com