Keith Collister, Contributor
Gordon' Butch ' Stewart, (right) former chairman of Air Jamaica, chats with Vin Lawrence and Burchell Whiteman before the press conference to announce changes to the ownership and management structure of Air Jamaica on December 23, 2004 at the Ministry of Finance. - RUDOLPH BROWN/CHIEF PHOTOGRAPHER
THE MASSACHUSETTS Institute of Technology (MIT) International Centre for Air transportation study on the economic impact of Air Jamaica to the Jamaican economy did not look at the costs, the principal author of the study, Jamaican born Dr. John Paul Clarke told the Financial Gleaner.
The study quantified the benefit of Air Jamaica to Jamaica between 1995 and 2004 at US$5.49 billion, of which 33 per cent (US$1.83 billion) was a direct contribution to the economy, with the remainder being indirect.
Economic commentator Ralston Hyman argued that the Air Jamaica study is so flawed that it could tarnish MIT's reputation, principally because it failed to consider the opportunity cost of the Air Jamaica investment.
Air Jamaica this week borrowed a further US$125 million, bringing the total loans received by the airline over the past 30 days to US$325 million. The loan is a floating rate loan with an initial annual interest rate of 9.14 per cent with the principal due to be paid in lump sum in ten years (2015).
REFINANCE
Executive Chairman and CEO Dr. Vin Lawrence has advised that the capital injection would be used to refinance, over 10 years, existing short-term loans which are becoming due. It was also to pay legacy debts as well as to finance inventories of aircraft spares in order to improve the company's reliability, improve operating systems and to provide working capital for the airline.
"Over the last six months the board of directors and the management team have looked at the financial health, assessed the risks facing Air Jamaica and the industry, analysed routes, customers, competitors, suppliers and regulators," Dr. Lawrence said. "The team has completed a comprehensive business plan which we are confident has the potential to move the company on the path to financial viability and improved reliability in the medium to long term".
In an interview with the Financial Gleaner from his hotel in Northern Ireland, the principal author of the study, Jamaican born Dr. John Paul Clarke, clarified some of the assumptions underlying the conclusion of the study.
"Our study was an attempt to quantify on the inflow side what benefits Air Jamaica is bringing to the Jamaican economy as opposed to just the overall revenues and costs of Air Jamaica itself. We didn't look specifically at the cost side nor as to whether the Airline was well managed. Instead we looked at the issue of what revenue was uniquely attributable to the existence of Air Jamaica directly from ticket sales etc, and indirectly e.g. pilots wages."
According to Dr. Clarke, the key to understanding the study is MIT's unique "passenger choice model". This model allowed the MIT team to model how many people will travel to Jamaica without Air Jamaica, which when subtracted from the number of people travelling when Air Jamaica exists allows one to calculate the number of incremental tourists that would not otherwise come to Jamaica.
DRIVERS
The model is driven by the fundamental assumptions that the two drivers of airline travel demand are a convenient schedule and price. According to Dr. Clarke, he assumes in the model that price is constant without an Air Jamaica. He believes this is
conservative as if American Airlines became a virtual monopolist as a result of Air Jamaica being shut down, prices are likely to rise reducing tourist travel to Jamaica.
According to Dr. Clarke, the model predicts between an 8 to 16 per cent drop in tourists coming to Jamaica due to reduced convenience of passenger schedules in the absence of an Air Jamaica (Air Jamaica carrying approximately half the passengers to Jamaica). The underlying assumption behind this model is that every individual intending to travel has a time of day that he would like to leave and arrive.
The MIT model uses data from surveys for leisure and business travel to create the model, allowing them to model how people respond to convenience. The model also assumed that 30 per cent of revenues are retained here (e.g. as wages and the purchase of supplies) if tourists used Air Jamaica to travel to Jamaica, as opposed to just 10 per cent for an American Airline.
A further input was that each stopover visitor was estimated to spend U.S. $1,000, an estimate attributed to Jamaica's PIOJ. The model also assumed that for passengers using Air Jamaica's former hub in Montego Bay to fly to other Caribbean Islands such as St. Lucia, the local revenue retention was 20 per cent or double that from a connection through a U.S. based carrier.
Dr. Clarke noted that this "economic impact study" had made no attempt to model the cost side, particularly the opportunity cost of Jamaica's past losses, and agreed that there was a need for a full cost/benefit analysis in considering the future of the airline.
Nevertheless, he believes the potential benefits of Air Jamaica's former hub have been understated, citing for example the success of Dubai's hub, "a shopping mall surrounded by two runways". He also agreed that the strategy of becoming the gateway to the Caribbean, similar to the success of Panama's Copa in Central America and Chile's Lan in Latin America, is the correct one, the key being the correct U.S. partner airlines, although this may be more difficult now potential partners are more aware of the revenue potential of the region thanks to Air Jamaica.
He also agreed that Aer Lingus's success story has lessons for Air Jamaica, and that in moving to a low cost model in August 2001 they "did the right thing at the right time". In fact he added that, in his opinion, "a low cost Caribbean airline that did the same type of route expansion should be profitable."
Dr. Clarke was unable to say whether he thought the U.S. $30 million subsidy programmed in the budget for Air Jamaica would be better spent in expanding the budget of the tourist board as that would require one to measure the effectiveness of the Jamaica Tourist Board's tourism promotion spending. Nevertheless, he agreed that in view of the fact that tourism promotion had been an implied objective of Air Jamaica for decades, justifying substantial losses over time, this should be an area for further study.
Former Minister of Tourism and leading Breakfast Club talk show host Tony Abrahams had a more succinct view on this issue " A profitable national airline can contribute to the overall growth of tourism, but to operate it at a loss in the belief that it will facilitate tourism is economic madness".
