Privatisation seems to have finally taken hold among airlines in the Caribbean. The resulting US-style management and new competition could spell permanent change for the region. By Mead Jennings.During last February's inaugural celebration for Barbados-based Carib Express, a 90 per cent privately owned regional airline, those in attendance heard the usual praise of the people who had made the project possible. But the crowd also heard what may well have been the first official proclamation that a new day has dawned for the Caribbean airline industry.

'Only efficiency will save jobs,' announced Sir James Mitchell, speaking more in his role as a board member of the fledgling airline than as the prime minister of St Vincent and the Grenadines. 'Let me say this: no one employed by Carib Express will be working for a government and relying on political patronage to retain a job. [And] no government will be giving Carib Express a blank cheque from the taxpayers.'

Such language could be considered revolutionary in the Caribbean airline industry. Robert Booth of Miami-based consultants Avman describes carriers in the region as traditionally 'inbred, in the sense of being government operated.' But Mitchell's sentiments are beginning to be echoed throughout the region, where a long-awaited wave of privatisations has finally hit the shores of a consistently unprofitable industry, inefficient and bloated by bureaucratic interference.

Near bankruptcy

In November Air Jamaica was teetering near bankruptcy before the regional hotel chain Sandals bought a 70 per cent share for $25 million. Then came Port of Spain-based BWIA, which in February was turned over to a group headed by ex-Pan Am officials for close to $20 million. In June Liat, the Antigua-based regional owned by 11 of the region's governments, will be up for sale. That is, if it can survive against Carib Express, 10 per cent of which is controlled by five of Liat's government owners. The upstart is challenging the turboprop operator with a fleet of three British Aerospace 146 regional jets in a head-to-head competition in the eastern Caribbean.

'For the first time there is real competition,' says Roy Barnes, the chief executive officer of Carib Express who previously managed British Airways' operations in the region. 'Since Carib Express began flying, there has been an upgrading of operations standards, an element of price competition and a move to a higher standard of punctuality and service. From a Caribbean point of view, it is a time of change.'

Golden shares

This begs the question of what this 'time of change' will produce. Though the region's governments still maintain 'golden shares' in all the carriers, the most important change may be that there is less government involvement and more responsibility for employees. This, believes Ian Bertrand, a former BWIA president whose consultancy El Perial works with the airlines, could mean a more efficient industry, service comparable to the US and European carriers that serve the region and, perhaps, profitability. 'The most important thing is that employees now recognise they have to pull things through,' he says. 'The safety net has been removed.'

Cutting the strings has been a long, drawn-out affair. BWIA, for example, first proposed privatisation in late 1986. Air Jamaica, too, has been flirting with privatisation for several years. Both considered privatisation a precursor to a merger and consequent creation of a 'regional airline' that would also have included Liat.

The 'new' Caribbean airline industry has been fostered because governments can no longer support their carriers' continuing losses and growing debts. BWIA has lost $120 million since 1990, and its total debt was close to $150 million before the Trinidad & Tobago government wiped its balance sheet clean as part of the privatisation. Liat's 11 governments have wrangled for years to be rid of more than $30 million in debt built up by the small airline. And Air Jamaica, which had been profitable into the late 1980s, had turned perennially unprofitable, last year accumulating estimated losses of $20 million on $150 million in revenue.

But there is more to the story than governments wanting to be free of money-losing companies. The Caribbean as a tourist region is expected to grow significantly from its 12 million visitor base of 1994. The success of American Airlines, since it entered the market in a major way in 1989 with the takeover of Eastern Air Lines' routes, has sparked the interest of many non-Caribbean investors. American now serves 36 cities in the region, primarily from its Miami hub, and controls more than half of the US-Caribbean traffic.

Among those interested have been Edward Acker, the former CEO of Pan Am and head of the Acker Group, who led the privatisation effort that put 51 per cent of BWIA in private hands. The government has retained 49 per cent, with up to 15.5 per cent earmarked for the employees. Of the $20 million invested, $7 million came from Trinidad & Tobago investors with $13 million from the US. The latter was comprised of a mix of investors, including AIG, the parent of aircraft lessor ILFC, which put up $5.5 million, the single largest component of the US total.

Foreign influence is also well in place at Carib Express, which is 20 per cent owned by British Airways. According to CEO Barnes, the rationale for this investment became clear after a series of studies proved that a regional airline with a hub in Barbados, which BA serves direct from London with a Boeing 747, could be highly profitable. Also, BA has been concerned an airline product that was 'compatible with BA's service levels for transferring passengers' simply did not exist in the region. 'There just wasn't a reliable distribution network.'

Meanwhile Air Jamaica has been 70 per cent privatised by a group led by hotel chain Sandals and controlled by US citizen Butch Stewart. The rest of the company is controlled by the Jamaican government, exemplifying Caribbean concern over maintaining some semblance of control of a lifeline entity. David Taylor, the airline's CEO, emphasises that the carrier's mission is two-fold: to make money, and to remain the national airline of Jamaica. 'From a tourist and cargo point of view, Air Jamaica is vital to the country,' he says.

This attitude is acknowledged by Ed Wegel, BWIA's new president and chief operating officer, who believes that in comparison with the US airline industry 'there is a lot more emotionalism attached to the carriers by the citizens.' However he adds that the airline-government relationship is a very cooperative one. The 33.5 per cent golden share gives public officials a power of veto over moving the company out of the country, or liquidating assets.

Debt-free airline

Indeed, BWIA's relations with the Trinidad government have given Acker and Wegel an almost debt-free airline and some valuable perks as well: of the four Lockheed L.1011 widebody aircraft in use by the carrier, three are owned outright and one is leased, with the government picking up the monthly charges through 1997.

The new BWIA may soon bear little resemblance to its old self. An extensive fleet replacement plan will see the selling or dropping of the L.1011s, while reducing the number of MD-83 narrowbodies from seven to two by the end of 1997. Though leasing giant ILFC has an ownership stake in the new BWIA, Wegel says it will be only one of many companies competing to provide BWIA with three Boeing 767s and up to 11 B757s in the next two years. Wegel begs to differ with the argument that it is cheaper simply to keep flying owned, albeit older, aircraft. 'Despite the capital costs, without the maintenance and fuel burn of the L.1011s there will be significant savings.'

The new aircraft will be needed for BWIA's new route and service plans. The B767s will be used for European operations and the B757s will be flexible enough to fly to Miami, New York and Toronto, while also serving a new hub in Piarco, in northern Brazil. Wegel hopes not only to stimulate the growing tourist flow from South America into the Caribbean, but also to develop Port of Spain as a connecting point for traffic between North America/

Europe and Brazil and Venezuela. BWIA is also reportedly looking at wet-leasing aircraft for cargo operations, a market that Wegel sees as 'having tremendous potential.'

At the same time, intra-Caribbean services have been cut, though BWIA is 'rewarding' local travellers by maintaining some regional services that would otherwise be closed. 'We could gain better utilisation and efficiencies for our aircraft, but we don't want to do that,' Wegel says, referring to the sensitivity surrounding service cuts in the Caribbean.

The network is being completed through a codesharing alliance with American at Miami and a similar marketing alliance with British Midland, as well as alliances with Carib Express - for connections on St. Vincent - Liat and Brazilian carrier Taba. Though American is also a competitor out of Miami and San Jose, there are cost reduction benefits, including BWIA's move into American's New York/JFK terminal, which saved the carrier some $2 million. BWIA is also co-hosting AMR's Sabre computer reservation system and may contract with the company to bring BWIA's automation levels up to date.

Though unit costs of 8.5 cents per available seat mile seem under control, the airline is still treating cost-cutting as an imperative: layoffs have resulted in a 25 per cent downsizing of the employee ranks to 1,700 people. Wegel says that a normally fractious union-management relationship has improved, and that costs are nearing the 7 cents per ASM mark.

Pricing leader

BWIA has predicted a doubling of revenues in the next five years, but no profit forecasts have yet been made. However, profits will be needed to realise Acker Group plans to take the airline public in the next 18 months.

If BWIA is able to achieve profitability, it may also be able to introduce the region to a new concept: a Caribbean airline as pricing leader. 'I see BWIA and American being the two largest carriers in the Caribbean, with a healthy level of competition between us,' Wegel says. 'I want to be in the position of having American wondering what we are going to do next, [and] be more proactive in pricing and marketing.'

In contrast, Air Jamaica has not established strong codesharing ties with any US carrier, though Taylor says it has begun to study the option. But the airline has initiated a unique, Frank Lorenzo-style cost cutting programme that has so far cut unit costs by 18 per cent, to 10 cents per ASM.

Last November the company cut the employee roster by 300 to 1,200 people, by abrogating its union contracts, making all the employees redundant and then hiring them back first through a temporary company, and then directly. Though pay levels were maintained, Air Jamaica still managed to gain a 20 per cent improvement in productivity without adhering to union rules. 'We want to see costs at 8 cents per ASM or [less]. We expect to break even this year.'

While its rivals cut costs, Carib Express is establishing its strategic plan, developed with the assistance of Price Waterhouse and BA's consulting subsidiary, Speedwing. The plan calls for inter-island travel to be served by older BAe146 jets, a new development in a region that has been dependent on turboprops.

By April Carib Express will be flying three 146s from its Barbados hub to St Lucia, St Vincent, Dominica, Grenada, Port of Spain, Tobago, San Juan, Georgetown, Antigua and Caracas. Though the 146s are on cheap leases - around $70,000 a month - the next phase of expansion will call for turboprop aircraft to serve short distance markets, such as the 17 miles between St Lucia and St Vincent.

Though longer term plans call for alliances with BA and American Airlines, for international traffic feed at Barbados, Antigua and St Lucia airports, Taylor says the carrier's real market is local traffic: 'The backbone is intra-Caribbean travel, which upon maturity will be 60-70 per cent of our passenger base.'

In other words, Carib Express will be in direct competition with Liat. Taylor says that Carib Express has an operating plan that includes the existence of the Antigua-based point-to-point operator. But sources at other carriers including BWIA say they are waiting for the new competition to bring forth a clear winner before they look for alliances, or even equity stakes, in Liat.

Though Liat may be the first casualty of the more liberal competitive environment in the Caribbean, a continuation of the privatisation trend is much more likely. Provided the carriers that have already been privatised can actually make money, it will be hard to stop the momentum from spreading to other carriers, like Bahamasair and Cayman Airways, says Booth. 'The politicians are fortunately getting out of the business of owning airlines,' he says. 'It's a microcosm of the US: now there are entrepreneurial types who are bottom-line oriented. It's good for everybody.'

Though Liat may be the first casualty of the more liberal competitive environment in the Caribbean, a continuation of the privatisation trend is much more likely. Provided the carriers that have already been privatised can actually make money, it will be hard to stop the momentum from spreading to other carriers, like Bahamasair and Cayman Airways, says Booth. 'The politicians are fortunately getting out of the business of owning airlines,' he says. 'It's a microcosm of the US: now there are entrepreneurial types who are bottom-line oriented. It's good for everybody.'

Source: Airline Business