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Trinidadians lukewarm to Air Jamaica deal

Published:Friday | February 26, 2010 | 12:00 AM
Caribbean Airlines

R. Anne Shirley, Business Writer

uch has
been written in recent weeks about the current negotiations between the Government of Jamaica, Air Jamaica and Caribbean Airlines for the provision of airlift from Jamaica to five destinations in the United States and Canada by Caribbean Airlines Limited (CAL).

The Government of Jamaica intends to liquidate all assets of Air Jamaica, and the prime minister has told us that Air Jamaica will cease operations on or around June 30. The brand Air Jamaica is not for sale, and will be parked in a vault somewhere in the government system.

All of this is known to us, but it is interesting that there has been very little attention paid to the reaction of the Trinidadian public to the pending deal with Caribbean Airlines.

Perhaps the thing that seems to be irritating the Trinidadians the most is the relative silence on the part of the Government of Trinidad and Tobago (T&T) on speaking to the nation on the deal. In particular, a number of commentators and editorials in the major newspapers have focused on the potential cost of 'Jamaican Operations' being proposed by Caribbean Airlines.

Taxpayer burden

Anthony Wilson, writing in the February 18, 2010 edition of the
Trinidad Guardian
, noted that the T&T Ministry of Finance provided information last September in the tabling of the Estimates of Expen-diture for 2010 which "makes it clear that there is a cost to taxpayers of the State's ownership of Caribbean Airlines. According to the document, under the rubric 'Transfer and Subsidies', the Government provided an actual subvention of TT$225.37 million to Caribbean Airlines during the 2008 financial year (October 2007 to September 2008). The revised estimate for the 2009 financial year(October 2008 to September 2009) was TT$270 million and the 2010 estimate for the airline is TT$250 million."

He further points out that "according to Caribbean Airlines' financial statement for the 12-month period ending December 31, 2008, the amount that was "due from" the Government during the 2008 calendar year was TT$269.2 million, and for the 2007 calendar year, the amount was TT$236.36 million. Explaining this TT$500 million payment over the two-year period, which the finance ministry considers to be either a transfer or a subsidy, the Caribbean Airlines accounts state: "CAL has a fuel hedge rebate arrangement with the Government, which effectively hedges CAL against the downside risk of rising jet fuel prices. This arrangement allows CAL to recover the difference between the actual cost per gallon and the hedged price per gallon of US$1.50 as calculated from the base price of US$50 per West Texas Intermediate barrel of oil."

Wilson concludes: "This four-year arrangement between the Government and CAL, which the airline describes as a hedge and not a subsidy, will be shared with Air Jamaica, if the deal goes through. But at what cost to local taxpayers?"

The editorial in the
Trinidad Guardian
on February 22, titled 'Creating a Caribbean airline', also weighs in on the issue of the cost of Caribbean Airlines to the taxpayers of Trinidad and Tobago, particularly the so-called 'fuel hedge'. The editorial notes that "in the Caribbean Airlines annual report for 2008, it is clear that there remains a cost to taxpayers inherent in the State's ownership of the airline. What was once more bluntly described as a subsidy has now been manoeuvred deeper into the balance sheet as a financial hedge provided by the government against increases in the price of jet fuel. Since the volatility of that line item in an airline's balance sheets is the single most critical factor in driving dozens of carriers from the skies over the last decade, it remains a matter of fiscal hair-splitting exactly how the TT$225.37 million provided by the Government to CAL during its 2008 financial year is described. This hedge, however, does not protect CAL from other challenges in the increasingly marginal business of airline travel."

Questioning the T&T gov't

Conrad Aleong, former chief executive officer of BWIA, gave an extensive interview in the
Sunday Guardian
on February 21, in which he suggested that there must be some 'non-airline' reasons for the Government of Trinidad and Tobago to want to buy Air Jamaica. Aleong basically does not think that the deal makes sense: "Buying AJ, even without debt, would not be a right move," Aleong said. "Jamaica wants tourism from AJ. For the last 10 years, AJ has been pushing a tourism strategy for the Jamaican Government. That's why the airline is bankrupt. Tourism makes the airline lose money. It's always trying to sell volumes of seats and they have to discount to sell.

"AJ lost US$600 million in the last five years. If T&T gets a tourism deal with Jamaica, we're setting ourselves up for a major financial burden," Aleong said. "Even if Jamaica writes off all its debts, we would still end up with serious risk.

"We would be stuck with their reservations systems and be committed to a hotel chain or big travel consortium for the next five years. Further, there will be a need for start-up capital if CAL acquires AJ," Aleong said. "Who will fund the start-up? The Government spent $735 million for CAL to start-up. Maybe they will have to borrow money to do it. Theycertainly shouldn't borrow money to buy an airline."

He was also critical about the possibility of Caribbean Airlines taking up any of the existing Air Jamaica leases: "AJ has six leased Airbus airplanes - four of them A320s, one A319 and one A321.

We had discounted A320s because they can't go non-stop to Toronto. They will have to land, unlike the 737, which can fly non-stop. The Airbuses are okay for Kingston to Fort Lauderdale or New York.

"It's not the kind of airline CAL would like to get into. If the T&T government wants another airline, they will need a commercial fleet type of airplane. The Airbus would not fit CAL's network. You don't want two sets of pilots flying two sets of planes. It involves two different kinds of technologies," Aleong noted.

He suggested that CAL, if it wants to expand, should go into the area of a common agreement. "For years, Air Canada flew Toronto to Kingston. CAL would be better doing a commercial deal rather than a financial deal." Aleong advised: "The Government owes it to citizens to tell us a lot more about this deal. After all, it's our money and our Treasury which they are managing."

The fat lady is not yet singing on this deal.