- RICARDO MAKYN/STAFF PHOTOGRAPHER
Persons waiting to check in at the departure area of Air Jamaica at the Norman Manley International Airport because of the cancellation of some flights caused a pile-up at the airport on Tuesday, April 5.
Keith Collister, Contributor
OVER THE last decade, the competitive environment for the international airline industry has changed significantly. It has become increasingly cut-throat due to deregulation, the reduction in barriers to entry, subsidised manufacturers (Airbus and Boeing) producing too many aircraft and lessors prepared to lease at uneconomic rates ensuring substantial overcapacity. In this type of environment, only the really cost-efficient carriers will make money.
According to international expert Larry Stanley of London-based consultancy Aviation Economics, the contradiction about the airline industry is that while it purports to be a global industry, there are no global carriers, as they all, with very few exceptions, operate only in and out of their home country.
Deregulation has spawned a lot of new carriers but not many survive beyond two to three years, although they can have a huge impact on the markets they serve in that time. Unlike other industries, cross-border consolidation is almost unknown because of bilateral agreements and ownership protection laws practised by most countries.
In this extremely tough operating environment, it is likely that Air Jamaica will continue to have a tough time especially as it faces the U.S. legacy carriers, all of whom are effectively being subsidised by the U.S. government.
BASIC PROBLEM
The basic problem for Air Jamaica is that, having effectively abandoned its Montego Bay hub, it is now a point-to-point airline operating in the territory of the U.S. majors. While it has done a good job of branding and product differentiation since inception, and I would argue particularly under former Chairman Butch Stuart, it nevertheless lacks the marketing muscle and distribution of the U.S. carriers. As a consequence, its passenger load factors, typically in the low 60 per cent area, are not enough to break even, and this problem appears to have been compounded by diseconomies of scale in its route structure, inhibiting full aircraft and crew utilisation, partially due to its location offshore, which also adds significant costs in some areas.
This strategic problem for Air Jamaica as an island-based point-to-point carrier competing with the so called U.S. legacy carriers, such as American Airlines, is currently being compounded by the fact that the point-to-point market is currently being ripped apart by the low-cost carriers in the United States. Moreover, according to Aviation consultant, John Gilmore, even the best low-cost airlines, such as South West, only break even at an 80 per cent passenger load factor.
Air Jamaica is about to face increased competition from low-cost airlines, such as Spirit, in its own backyard, and therefore, it is critical in my opinion that they understand the issues they face with this increased competition.
IRELAND'S AER LINGUS
For this reason, the experience of Ireland's national state-owned carrier, Aer Lingus, may be a useful example for Air Jamaica.
Like Jamaica, Southern Ireland is an island of approximately three million people with a relatively large tourist industry for its size and a huge number of its nationals having emigrated abroad for work during bad times for hundreds of years, ensuring lots of visiting friends and family traffic. Aer Lingus was badly hurt by home-grown Ryanair, arguably an even more brutally low-cost competitor than Southwest in the U.S.
Unlike Air Jamaica, under European anti-state assistance laws, the Irish Government as the 95 per cent shareholder, was effectively prevented from financially helping the airline.
According to Mr. Stanley, in the case of Aer Lingus, this facilitated a 'burning deck' scenario and the acceptance of radical change, an environment apparently very different from Air Jamaica's which was obviously able to rely on Government funding for losses of up to US$700 million.
The biggest saving area for Aer Lingus was on marketing and distribution with some 80 per cent of ticket sales in Ireland now on-line, and 50 per cent and growing overseas. This resulted in huge savings on commissions, sales and marketing staff and sales office costs. While Aer Lingus is not a true low cost carrier, it has gone a long way to eliminate complexity in its operation and fare structure to make it more competitive particularly on short-haul routes where all routes are now economy class only. It has however retained business class on its long-haul transatlantic routes.
PROFIT-MAKING ABILITY
One key difference with Air Jamaica, however, is that Aer Lingus had a history of profitability. Although it had to reinvent itself as a low cost carrier to compete with Ryanair, unlike Air Jamaica, it was returning to its position of historical profitability. Aer Lingus had successfully grown its profits year on year in the seven years prior to 2001 and therefore had a culture where profitability was accepted as vital and the norm even, for the most militant shop stewards. This helped facilitate the drawing up of a radical restructuring plan and its successful implementation.
Mr. Stanley comments: "In my consultancy role, I have seen a number of airline restructuring plans. The biggest fault with most is that they are not radical enough because of fear of the unions. They buy time but often need further action at latter dates (for example Swiss International)."
While one cannot assess from outside whether its unions played a critical role in Air Jamaica's problems, it is likely that labour costs are the only area of potential long-term competitive advantage over U.S. carriers if Air Jamaica were to take Aer Lingus's decision to go the low cost route. While factors such as cultural differences, industrial relations practices, government policies, and company history to name a few, make it unlikely that one can say that just because this low-cost strategy worked for Aer Lingus it will work for Air Jamaica, nevertheless this has to be one of the options to be carefully considered by management in the preparation of its business plan, which should be released within the next few months.
Another option would be for the airline to become part of a properly-capitalised integrated regional system (including the other regional carriers) that international competition cannot access.
GOOD FOR JAMAICA
A further option would be to say that we do not need an Air Jamaica. I would argue that there are clear benefits to having one's own airline, although that cannot be a justification for the level of losses that Air Jamaica has experienced. In this regard, a very interesting study was released by The Massachusetts Institute of Technology (MIT) International Centre for Air Transportation on the economic benefits of Air Jamaica to the Jamaican economy. The report notes that the benefit of Air Jamaica to Jamaica between 1995 and 2004 was US$5.49 billion. Thirty three per cent (US$1.83 billion) of the total was a direct incremental contribution to the economy while the rest (67 per cent or US$3.66 billion) came in via indirect incremental contributions.
The methodology used was to first estimate the economic contribution of air transportation for the case where Air Jamaica does not exist, and then subtract this value from the economic contribution of air transportation for the case where Air Jamaica does exist.
In summary, I believe the future of Air Jamaica is of critical importance to Jamaica, and should be of interest to every Jamaican, both locally and overseas. One option we don't have however is to do nothing, as the status quo is untenable.
