MARY KIRBY / WASHINGTON DC
Can the struggling Caribbean air transport industry set aside internal squabbles and find a recipe for success in the face of increasing US competition?
Boasting crystal clear waters, white sandy beaches, lush vegetation and breathtaking sunsets, the Caribbean has long been a sunspot of choice for European and US leisure travellers. Even in the aftermath of 11 September 2001, the Caribbean's closeness to the US mainland and its accessibility by air from most major US gateways saw American tourists continue to flock there, albeit in fewer numbers. In contrast, the Caribbean saw a steeper drop-off in European traffic during the same period. By early February 2003, however, the Caribbean Tourism Organization was predicting that tourism would this year recover to 2000 levels and resume real growth in 2004 - barring a war in Iraq.
With the war now a reality, it is unclear when a full recovery in passenger traffic to the Caribbean will occur. US airlines, however, are optimistic that the Caribbean will continue to be one of the fastest growing segments in the industry. Even as they bleed red ink, carriers such as American Eagle Airlines, Delta Air Lines and US Airways are expanding services to the Caribbean. US-owned regional start-up Caribbean Sun Airlines, a sister to Antigua-based Caribbean Star Airlines, is injecting competition into the market by initiating services from San Juan, Puerto Rico to several Caribbean islands.
While US carriers turn to the Caribbean for growth, the region's own airlines - which for years have gone from one financial crisis to another - are downsizing, citing increased security, insurance and fuel costs, as well as the softening in the market. Caribbean international carriers, including Air Jamaica, Bahamasair and BWIA West Indies Airways, as well as regional Liat, all seek government assistance. In addition, says Trinidad & Tobago-based BWIA, US majors are "dumping capacity into the Caribbean", and discounting fares to a level that makes it difficult to compete.
No North American carrier has grown its Caribbean service more quickly in 2002 than US Airways. In the past few months, the carrier, which has just emerged from Chapter 11 bankruptcy, has introduced services to the Bahamas, the Dominican Republic and Puerto Rico and boosted frequencies on several USA-Caribbean routes.
The airline is also gradually building an intra-Caribbean operation, the GoCaribbean network, which includes marketing agreements with Dutch Antilles carrier Winair and Caribbean Star. US Airways declines to say if a codeshare with Caribbean Sun is in prospect. Such a partnership, however, would boost the US major's chances to compete against American Airlines and its American Eagle subsidiary, the dominant regional carrier in the Caribbean. St Kitts and Nevis-based Nevis Express was also involved in GoCaribbean until financial difficulties forced it to slash its operations and pull out of the grouping in December 2002.
Doug Leonard, US Airways vice-president, international, says: "A lot of people who live on the East Coast take their leisure trips to the Caribbean, so it is natural for us to grow our eastern-focused network down to the Caribbean. We break our business into three pieces, domestic, Caribbean and the Atlantic, and of those, the Caribbean was the best performer for the last year. We did carry reasonably high loads, probably mid-70 percentile, and we did pretty well on the yields compared to what we were seeing throughout the rest of the network." US Airways does not intend to shelve its planned new services to the Caribbean, including flights to Bermuda next month.
Delta, meanwhile, has initiated an assault on US Airways by increasing services to the Caribbean and Florida. To boost its winter schedule, the carrier expanded services from its Atlanta hub to Liberia, Costa Rica and St Maarten, and resumed services from Atlanta to Providenciales in the Turks and Caicos, and from New York Kennedy to Aruba. It also added capacity on its Aruba-Atlanta and Nassau, Bahamas-Cincinnati, Ohio routes. Continental Airlines and Northwest Airlines also are increasing flights to the Caribbean.
Dominant regional
Keen to keep its edge in the Caribbean, American Eagle - whose Executive Airlines unit has hubs in Miami and San Juan - continues to expand. It will add services between San Juan and Nevis from 15 May, to fill the void left by Nevis Express. The regional is also negotiating with Puerto Rico to open year-round services to Vieques by mid-year. Plans are in place to expand services to Nassau and add charters to Cuba. American Eagle hopes to initiate flights between San Juan and Georgetown, Guyana, via Port of Spain, Trinidad, as well as on a San Juan-Port of Spain-Surinam-Guyana routing.
"Because of the war, this summer people are coming to the Caribbean. People believe the Caribbean is safe because it is close to the mainland USA," says Pedro Fabregas, director of sales, marketing and planning for American Eagle's operations in Florida and the Caribbean.
By the end of this year, American Eagle will retire its 16 ATR 42s and increase utilisation of its 48 ATR 72s. Eventually, says Fabregas, American Eagle plans to acquire regional jets "that can seat 70 passengers, but which have capacity for 100", noting that Caribbean nationals haul large amounts of luggage back and forth.
For some Caribbean carriers, the continued expansion by US airlines to the Caribbean has proved to be a double-edged sword at a time when international traffic is down as much as 20%. Increased US flights mean more feed to Caribbean regionals, but it spells more competition to the area's international carriers. "The US carriers can afford to deeply discount fares to the Caribbean to get new revenues. So while they can go after the cash revenue of low fares, what they are doing is eroding a bedrock of a fares base that BWIA operates on. As a national carrier, our hands are tied," says BWIA.
Safety handicaps
Exacerbating BWIA's position is the fact that Trinidad & Tobago is designated Category 2 under the US Federal Aviation Administration's International Airlines Safety Assessment Program, meaning the country's civil aviation authority does not meet ICAO safety standards. As a result, BWIA is restricted from expanding its services to the mainland USA, changing equipment on Caribbean-USA routes or developing its codeshare with United Airlines, making competition against US carriers "a one-handed fight", says BWIA. The carrier this year received a $13 million government loan guarantee from Trinidad and is seeking extra capital. Weary of continued handouts, however, the Trinidad government is waiting to see a new restructuring plan from BWIA before committing to any assistance.
Also hurting from a Category 2 rating is the Organization of Eastern Caribbean States (OECS), which comprises Anguilla, Antigua and Barbuda, the British Virgin Islands, Dominica, Grenada, St Kitts and Nevis, St Lucia, and St Vincent and the Grenadines. To regain Category 1 status, the grouping must upgrade its Directorate of Civil Aviation (DCA) office to an official authority vested with much greater power to regulate and manage the OECS civil aviation system. The island members must also harmonise their aviation legislation, most agreeing to switch over from a UK regulatory model to one that mimics Transport Canada. Without a Category 1 rating, the OECS is also prevented from entering into fruitful discussion with the USA about an open skies agreement.
"The OECS is using Great Britain's CAA rules and regulations, which are not bad rules if you're flying a Boeing 747 in bad weather between Iceland and England. But that same set of rules don't work for flying a Britten-Norman Islander between two islands with nine passengers or less," says Nevis Express president Allen Hadaddi.
But the OECS's transition to a civil aviation authority has proven time consuming, much to the dismay of even the smallest Caribbean operators. SVG Air, a charter and scheduled operator at Saint Vincent and the Grenadines, wants to expand to the USA, but its plans are stifled. "We have three [Rockwell] Commanders, two Cessna 402s, three [Britten-Norman] Islanders and one [DHC] Twin Otter. We wanted to add a [Cessna] CitationJet last year, but we couldn't take it into the USA, so we didn't do it," says managing director Paul Gravel.
SVG and other Caribbean regionals hope that a transition to a civil aviation authority will bring a change to DCA regulations governing pilot duty limitations. The pilot duty limitation differences between the USA and the OECS are inequitable, says Gravel, noting that a flightcrew working for American Eagle from San Juan may operate for 14h a day, whereas a flightcrew working for Liat or Caribbean Star is permitted only to operate nine and a half hours a day. "This effectively means that a US carrier can employ 47% fewer pilots to achieve the same amount of work," says Gravel. "For an OECS airline that employs 90 pilots, the savings incurred by reducing the number of pilots by one-third would equate to $32 million over 10 years."
The millionaire owner of Liat's biggest rival, Caribbean Star, has managed to strategically bypass Category 2 restrictions. Allen Stanford founded Caribbean Sun and based it in Category 1-rated Puerto Rico. Heenvisages Caribbean Sun connecting with Caribbean Star to provide one-stops throughout the region, posing competition to American Eagle. Meanwhile, Stanford is moving Caribbean Star's Antigua headquarters to St Kitts, where there are more relaxed "route rights and a host of economic benefits", says Caribbean Star chief executive Paul Moreira. Stanford's organisation also plans to redevelop St Kitts Robert L Bradshaw Airport and create a fixed-base operation to handle private jets.
Lack of co-operation
At least part of the long-running crisis in the Caribbean air transport industry is due to a lack of co-operation, experts say. Caribbean carriers are generally owned in part or wholly by the indigenous island states and each country is proud and protective of its own airline.
In Miami, some small Caribbean airlines operate limited daily services to the islands, but refuse to even share the same booths at the airport. "Instead of sharing costs, they try to kill each other," says Carlos Dávila, the director of transport for the Association of Caribbean States (ACS), a political body that helps guide policy about trade, tourism and transport throughout the region.
Caribbean nations have never signed a multilateral aviation accord that would give the airlines broad blanket rights to fly between each island, fly across territories without landing, make stops for non-traffic purposes and operate with third, fourth and fifth freedom rights. Dávila hopes the fall-off in bookings will force ACS members to agree in principle to a multilateral aviation accord this summer.
"We need to do it. With the crisis in Iraq, the tourism sector is going to suffer, especially with a decrease in the number of bookings," he says. Even with unanimous ACS member agreement, however, such an accord cannot be put into effect until one-third of individual island governments ratify it.
Although airline officials have long paid lip service to plans for airline co-operation, the most significant teaming to date has been that of Liat and its minority stakeholder BWIA, a partnership that has been limited at best. With both companies in need of fresh financial assistance from the government, Caribbean Community leaders have begun a dedicated push for a more formal tie-up between the two airlines.
John Gilmore, the founding member of the Air Jamaica Acquisition Group that negotiated the purchase of Air Jamaica from the Jamaican government, says Air Jamaica, BWIA and Liat "need to be merged into a single organisation for scheduling and planning. I would assume that Cayman Airways and Bahamasair would probably participate as well, since they are relatively small and they both lose money. Every bailout [the Caribbean governments give], they always say 'it's the last one'. They have to come up with a solution."
But Caribbean airline executives are sceptical about a merger. "Regional integration will never work because West Indians can never work together. Each one will want to be the boss," says Gravel. "How can they help each other if they are both bankrupt? Liat and BWIA have been cutting each other's throats for years."
Air Jamaica chief executive Chris Zacca adds: "We are not interested in a merger. We would be much more interested in functional co-operation, including schedules and codesharing as well as accounting and some technical co-operation and purchasing." A Trinidad & Tobago-funded study into the feasibility of a merger is due to be released in May.
Whether Liat will be able to stay afloat to see such a merger come to fruition remains to be seen. For 46 years, the regional has been the backbone of the transport system between the islands of the eastern Caribbean, operating Bombardier Dash 8 turboprops. But the economic downturn, coupled with competition from rival Caribbean Star, has left Liat in need of $37 million in investment over the next year. Even though Liat has initiated cost cuts across the board, without new funds, says chief executive Garry Cullen, the carrier faces aircraft repossession and will have difficulty in paying its debts to Bombardier, GE Capital Aviation Services and Pratt & Whitney.
Privatisation plea
The former prime minister of Saint Vincent and the Grenadines, Sir James Mitchell, says governments must stop bailing out cash-strapped Caribbean carriers and seek to privatise them. "The Caribbean governments are just pouring money into the [region's] airlines without demanding serious restructuring," he says.
Like BWIA and Liat, Air Jamaica is also turning to the government for assistance. The carrier needs up to a $30 million government loan guarantee, but the government is likely to demand a debt for equity swap in the deal. Air Jamaica will remain majority owned by private shareholders, says Zacca. He says the carrier, which has pulled down a chunk of its US-Caribbean schedule and initiated layoffs, is confident that after the war, the carrier will recover.
"I feel strongly that when our yields come back, without fleet rationalisation, and with other cost-cutting measures that we have been working towards over the last few years, we would be in excellent position to be profitable," says Zacca. The company hopes to eventually expand its codeshare with Delta, and launch services to new US destinations, once a newly signed USA-Jamaica open skies agreement goes into effect in the next few months.
Source: Flight International
