Airline Shakedown
To an outsider, the Caribbean may seem to be a poor market for airlines, but despite record closures and billions in annual losses, there are many carriers on the fringe waiting to have a swing at the market

by Keisha Phillips, St Vincent- Eastern Caribbean

One month after he expressed "grave disappointment" at the failure of regional air-carrier, Carib Express, Vincentian Prime Minister, James Mitchell, announced that he had found the solution to the island's air transport problems.

However, this answer came as a surprise to many Vincentians, as well as the rest of the Caribbean. Instead of announcing a new deal to get the regional airline off the ground, Mitchell provided details of his plan for American Eagle- a US based carrier- to service the US/St Vincent route and the southern Caribbean. Mitchell, who, one year ago, was among the group of Caribbean Government leaders responsible for the controversial formation of the regional airline, Carib Express, said his Government has struck a new deal with the US carrier.

The controversy involving Carib Express arose out of his Government's reluctance to follow through with its agreement to support Leeward Islands Air Transport (LIAT)- another regional airline. Though resources were found to fund the formation of Carib Express. Now, similar to the situation with LIAT, Mitchell seems to have changed his mind and has now turned his back on Carib Express. Instead, he said that if all goes well, American Eagle's operations out of St Vincent will begin before the end of this year.

This move by Mitchell symbolised the development of the regional airline industry in the Caribbean. In the absence of a clear policy agreement by regional Governments on how the industry should develop, individual administrations approach the carriers separately. Over the past decade, the need for strong airlinks from the Caribbean to the United States and Europe has become more important as regional economies become more dependent on tourism. This makes the Caribbean a prime location for an airline to operate, but it also has unique problems.

In many of the Caribbean islands, particularly the Windwards, which are heavily dependent on tourism, the performance of its airline links can significantly affect economic performance, employment, exchange rates and the standard of living. Therefore, indirectly, the performance of the air carrier impacts on the current Government administration at election time. Because of this precarious situation, Governments, hotel owners and related downstream industries immediately look for alternative air links if access to tourist markets are cut off when an airline is grounded.

With the grounding of Carib Express, such alternatives were quickly identified in order to maintain the flow of tourists. Two weeks after the grounding of Carib Express, a seven- member delegation led by the airline's Vice President for the Caribbean, Tom Delvalle, met with Mitchell, top Ministers, airport officials and representatives of the tourism sector to ensure that visitors keep coming. Although Mitchell was reluctant to say how much cash his Government was contributing to the venture, he said that since Carib Express was not functioning, the door was open for the American airline to service the route to the US and probably even the southern Caribbean.

American Eagle is expected to begin its operations in St Vincent by November in order to meet its deadline to begin serving the route before the Christmas season. The new agreement will also give St Vincent a direct link to Puerto Rico and North America, thus providing an avenue for expanding tourism and economic development. Mitchell had expressed optimism about Carib Express' ability to be onstream by July to assist with the heavy passenger flow coming into St Vincent for "Vincy Carnival 96" which runs from June 28 to July 9.

But Carib Express remains grounded and the longer it remains in this condition, the less likely it will fly again. Launched in February 1995, as a joint venture among the Caribbean private sector, British Airways and the governments of Barbados, Grenada, St Lucia and St Vincent and the Grenadines, the airline operated for about fifteen months. It was forced to cease operations after it was unable to secure interim financing of BD$6 million from its shareholders to continue operations until a business plan was formulated.

Barbados' Prime Minister, Owen Arthur, had promised to provide BD$2 million in financing if the trustees were able to produce a viable business plan. A plan has since been submitted to the Barbados government but has not yet been approved. Carib Express' Chief Executive, Brian Pocock says that after completing the research and examining the type of aircraft being used by the airline, it would be difficult to continue under the current business structure. It is uneconomical to use jet aircraft over such short runs, he adds, and the proposed business plan sought to address these problems.

"The problem is that with the existing market, and regulatory environment, we're not able to capture the 50 percent market share needed for any new carrier based in Barbados. If we don't have that assurance, it is going to be extremely difficult achieve viability. On that basis, it would be irresponsible to go ahead and take money from people to support the airline," Pocock said. Carib Express was down but not out, and, despite its financial woes, the employees were still determined to turn around the airline's fortunes.

Apart from the promised line of credit from Barbados, twelve management employees, fighting to save their jobs, have agreed to give up two months' pay and pump ten per cent of their earnings each month for the next ten years into the airline. Arthur, who described the workers' decision as an "extraordinary commitment to their own livelihood," said that under the plan, Government would provide technical and negotiating support. Minister of International Transport, Ronald Toppin said the BD$2 million would be loaned to the group to invest as equity and the workers would be given a five year grace period before repayment begins. To receive the money, however, the workers must prepare and submit a business plan for the airline, including what Toppin said would be a "mutually attractive and beneficial" arrangement between Carib Express and BWIA International.

The new arrangement, Toppin said, must allow Carib Express to explore alternatives to its own viability instead of being tied down to strictly leasing its aircraft to BWIA.The Barbados government had earlier found a similar plan, which was outlined in a memorandum of understanding to save the fledgling airline by the previous owners, was "offensive." But what went wrong?

Chief Executive Officer, Brian Pocock explained Carib Express' problems as a lack of finance. "The difficulty, of course, has been that we required interim funding of about BD$6 million to carry the company through until we effected a new business plan.But unfortunately, we have been unable to secure that necessary funding," Pocock said. He adds that a plan worked out with the Trinidad and Tobago based airline BWIA, to save Carib Express was not acceptable to the Barbados government.

In January, the end of the first financial year, when it was disclosed that the airline had lost $13 million, Pocock proclaimed they were looking to make a profit of $35 million for the financial year ending January 1997, but this depended on the ratification of the business plan.

However, Sir Neville Nicholls, a prominent businessman and President of the Caribbean Development Bank (CDB), said the airline's fate was sealed on the day it was launched. "It was launched prematurely, without proper pre- launch marketing and without clearly defined route rights," he said it was regrettable that Carib Express decided to use jet aircraft, normally reserved for medium- haul routes, instead of turbo props, which are recognized as more suited for short, intra- regional stops as exist in the region. In addition, he said Carib Express erred when it assumed that LIAT would have collapsed under its own financial pressure when it was privatized in late 1995.

Grenada's Prime Minister, Dr Keith Mitchell said the problems which eventually affected Carib Express' performance should have been dealt with during its formation and not after operations had already begun. Grenada along with Barbados, St Vincent, St Lucia and Barbados had formed a company, Caribbean Investments Limited, which owned 10 percent of the airline. Mitchell said that Grenada was unable to help since the country was already involved in the rescue of LIAT.

"We have to pay the debt of LIAT. Right now the country does not have money to put into another airline," Mitchell said. Meanwhile, the final privatization of LIAT is being held up by the failure of three other regional governments, St Lucia, St Vincent, and Barbados, to sign loan agreements of a EC$38 million debt to the Caribbean Development Bank (CDB). LIAT's corporate secretary, Justin Simon, said that part of the privatization process was the apportionment of the debt among all shareholders, except Jamaica.

"What the CDB requested was a loan agreement which each Government would sign accepting the responsibility for that part of the debt apportioned to them." He said one consequence of the failure of the three Governments to execute the loan agreement is that the EC$19 million the airline received from private investors last year remains in an escrow account. Sources at the CDB said the bank could pressure governments which have not signed the loan agreement.by holding up additional loans applications to the bank. But LIAT officials confirmed that apart from the pressure from the CDB, there is nothing that the airline can do to force those governments to execute the documents.

Simon said, apart from the new capital from the private sector which is being used by the company, the failure of the governments to sign the loan agreement is not having a serious impact on the airline's bottomline. Simon and other members of the LIAT board spoke at a news conference at the Royal Antiguan Hotel just outside St John's in May. The conference was called by LIAT to officially announce the commercial agreement between itself and BWIA.

LIAT's Chief Executive, Gilles Filiatreault, said under the agreement BWIA will take over LIAT's operations in Grenada, St Lucia and Antigua. Questioned about possible layoffs as a result of the commercial agreement, Filiatreault said the analysis has not yet been done. LIAT also announced that it will be purchasing three new aircraft and building a new headquarters at the Antigua airport costing between EC$8- 10 million.

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