Dennis Chung, Contributor
THE PROBLEMS at Air Jamaica once again brings to mind the question of what we as a country can and cannot afford. In November 2004, it was revealed that Air Jamaica was in serious financial constraints and a snapshot of the balance sheet was presented that would cause any executive to suffer from stress-related illnesses. I can just imagine the pressure the Air Jamaica management was under and am one who genuinely believes that the 'Butch' Stewart-led team was only too happy to relieve themselves of the burden.
As at November 2004, it was reported that Air Jamaica had statutory obligations of US$133.5 million, government loans of US$102.4 million, trade liabilities of US$171 million and losses of US$682 million. It is no surprise after hearing these numbers that the government once again took control of the airline. The financial state was obvious, even without the availability of the accounts. If we were to impute some numbers from what has been presented we could infer a debt to equity ratio and also project the viability of the airline.
DEBT AND LOSSES
A report in the Jamaica Observer on November 24, 2004, stated that there would be a debt for equity swap where the government would convert $7 billion of the debt owed to it for an additional 20 per cent stake (from 25 per cent to 45 per cent). If we assume that this $7 billion accurately represents 20 per cent of the equity consideration, then we could impute equity of $35 billion ($7 billion x 5). We also know that at that time statutory obligations, government loans and trade liabilities amounted to J$25 billion. We also know that losses amounted to J$42 billion and if we were to conservatively reduce the losses by J$28 billion (J$35 billion minus the government's $7 billion injection) we could assume that J$14 billion of the losses were financed by debt as opposed to equity. This gives a total debt of J$39 billion (J$25 billion plus J$14 billion) and does not include any long-term debts for leases, etc. This means that Air Jamaica's debt/equity conservatively could be 111 per cent (J$39b/J$35b).
In addition, it was also revealed (Gleaner of November 24, 2004) that Air Jamaica has made losses of J$34 billion since its privatisation in 1994, which is an average of $3.4 billion per annum. The Observer also reported in the same article that Chris Zacca stated that Air Jamaica would slash up to US$50 million (J$3.1 billion) per annum in costs. The problem here is that these savings would not be enough to place the airline in the black as there would still be an average shortfall of J$300 million per annum.
SUGAR COMPARISON
These two points are, of course, simplistic, but based on the limited information that was presented, it gives an indication of the future financial prospects for any investor. This naturally leads to the next question: Can we afford to keep Air Jamaica? This was partially answered by 'Butch' Stewart when he spoke to the economic benefit of having Air Jamaica, which most tourism players agreed with, naturally so. It would serve us well, however, to do a proper feasibility on the benefits versus the cost, as the last thing we want to do is end up with another sugar industry.
When Air Jamaica (and the sugar industry) privatised I thought that this was the best thing for the country as in both cases the expectation was that they would both be taken off the national purse string. In both cases the reverse was true. The private sector tried and failed and our government has once again taken over the expense. We have already seen in the case of sugar the disaster that has resulted. We have spent (and continue to do so) hundreds of millions in sugar and have cultivated nothing but a vast amount of resources (human and capital) in an industry that in its present form will never be internationally competitive and always be a strain on our national resources.
In last Sunday's Observer there was a report that the Trelawny cane farmers were bracing themselves for further losses as government was pulling back on its subsidies. The problem here is that we have (for political reasons) misguided our entrepreneurs into believing that sugar is a profitable venture. When it all falls apart we will have a bigger problem as there will be a larger pool of workers with skills that will not be needed. The result is greater long-term poverty.
We have to bear the sugar mistake in mind when we are looking at the Air Jamaica situation. Air Jamaica, however, is different in many respects to sugar: (1) it does not employ anywhere near the 40,000 that sugar does; (2) it requires greater cash resources; and (3) it is subject to international standards. These differences means that it must be assessed in a different light than the sugar industry when determining its value. What both share in common is that they have an indirect benefit that is greater than the direct one. In the case of sugar it employs 40,000 persons and thousands more benefit. In Air Jamaica's case a solid argument can be made that the spin-off to tourism and the benefit of having a national carrier have a very high value.
VALUING ECONOMIC BENEFIT
What is required in both cases is that we assess the value not only in terms of financial profits or losses but also the opportunity cost of them not existing. In Air Jamaica's case, for example, we should add another line to the profit and loss, which states the direct benefit of having Air Jamaica. The profit and loss statement would therefore show an operating loss of J$3.4 billion and then we would add back what we consider to be the economic contribution.
If Air Jamaica causes an economic contribution in excess of J$3.4 billion then we could argue that it should be kept. If the contribution is less than J$3.4 billion then it may not be worth keeping. What the technocrats must do is find a way of valuing that contribution that Air Jamaica makes. One way of doing this is to look at the marginal increases in tourist arrivals (by airline) as Air Jamaica increases the number of routes. This would, of course, include other factors such as increases attributable to 9/11 and increased advertising but a good estimate could be worked out.
After the marginal increase attri-butable to Air Jamaica is worked out then one could work out what the total income is by applying the average spend per tourist. This would provide a good indication of what we would be giving up if we were to do away with Air Jamaica. A value, of course, would have to be placed on the risk of not having a national carrier, but then again maybe if we were to solve our crime problem we would not have to try so hard to attract tourists.
PROUD OF THE SERVICE
The point is that this sort of analysis is essential in determining what the true economic benefit of Air Jamaica is. 'Butch' Stewart has done an excellent job in bringing Air Jamaica to higher heights but if it is going to be the responsibility of the people of Jamaica, through the government, then we must consider the strain on the national resources lest we end up with another sugar industry. I, for one, am always proud of the service that Air Jamaica provides and the reputation of the airline. I have also grown up knowing Air Jamaica and would want to see it continue to soar, but decisions like these cannot be made from either an emotional or political standpoint as eventually they can become an economic nightmare.
The current budget is projected to end up with a J$20.3 billion fiscal deficit and Air Jamaica already owes the government some J$14 billion, almost 75 per cent of the projected deficit. This projection also is without the burden of Air Jamaica considered. If we do not properly analyse the Air Jamaica situation then we can only guess what effect it will have on our fiscal targets in the coming years and ultimately the economic strain on the population.
I believe that there is a lot of merit in 'Butch' Stewart's argument of Air Jamaica's economic benefit but we must properly document it so that we are sure of what we are getting into. If we were even to impute an economic benefit then the question of who would contribute to Air Jamaica also arises as some taxpayers would benefit more than others.
E-mail: dra_chung@hotmail.com
