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Economist: Caribbean Airlines is a liability to Jamaica’s government

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The Government’s minority stake in Caribbean Airlines (CAL), the new parent airline of Air Jamaica, may come with the risk of having to assume more debt, which would contradict the intent of the dives

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The Government’s minority stake in Caribbean Airlines (CAL), the new parent airline of Air Jamaica, may come with the risk of having to assume more debt, which would contradict the intent of the divestment of the locally named carrier, claims economist, Dr Damien King.

He contends that partial government divestments tend to result in continued debt accumulation for the Government.

“I like to remind people that the Government owns 16 per cent of CAL and so the contingent risk of owning an airline still exists within the Government,” King said at a joint Centre for Leadership and Governance/Gleaner Editors’ Forum held last Thursday at the newspaper’s North Street, Kingston, head office.

King compared the 2011 Air Jamaica divestment with its privatisation in the ’90s which resulted in the Government holding a minority stake in the airline but assuming the bulk of its debts. The Government reacquired the airline and billions in debt in 2004 from a group of private investors, led by Gordon ‘Butch’ Stewart.

According to King, the Air Jamaica privatisation was one where the Government owned 49 per cent equity but in practice, that turned out to be Government holding 100 per cent of the losses. He said the lessons learnt in the 2000s indicate that partial privatisation can prove costly.

“It is well established now from experience that privatisations that go badly are the partial ones. Government either has to maintain ownership, in which case they are responsible for losses and profits, or divest completely, in which case they are neither responsible for profit nor losses.”

However, in a May 4, 2010 Gleaner report, then prime minister, Bruce Golding, was quoted as saying: “The Government of Jamaica will have minority ownership in all of Caribbean Airlines, not just the Jamaican operations, but will not be required to absorb any losses or provide any capital,” Golding said.

CAL officially acquired majority stake in Air Jamaica in May 2011 after a year of operating as a consolidated airline. Last month, credit-rating agency, Moody’s Investors Service, scrapped the rating of Air Jamaica but maintained the B3 rating of its debt as part of activities to reflect the airline’s change in majority ownership. Concurrently, Moody’s revealed that the value of the Jamaican Government’s acquisition of its 16 per cent stake in Caribbean Airlines, was worth nearly US$30 million (J$2.56 billion). Moody’s withdraws its rating when it no longer rates an entity or debt. It meant that the rating agency would cease classifying Air Jamaica, now part of the CAL group, but it will keep the rating on the airline’s US$325 million worth of bonds.

The divestment of Air Jamaica cost some US$164 million (J$14 billion) or about US$40 million less than budgeted, according to Dennis Chung, the project manager on the Air Jamaica divestment committee, in previous discussions with The Sunday Gleaner. In the last three fiscal years up to its sale – 2007-08 to 2009-10 – the airline cost the Government $12.9 billion, $11.9 billion, and $15.5 billion, respectively. Those numbers were equivalent to 1.2 to 1.4 per cent of GDP.

redundancy payments

In August 2009, during negotiations with Trinidad, then Prime Minister Bruce Golding said that the sale of Air Jamaica would cost the Government close to US$200 million – about J$17 to 18 billion. Golding said that the divestment process involved redundancy payments amounting to US$30 million, operational costs and maintenance owed by the airline.

The airline made more than US$150 million in annual losses which impacted on the national Budget. Over the past decade, Air Jamaica lost more than US$1 billion.

In preparation for its divestment, Air Jamaica scaled back its routes from 11 to five, according to the Economic and Social Survey Jamaica, published in April by the Planning Institute of Jamaica. The routes terminated included Orlando, Baltimore, Havana, Curaçao, Chicago, and Grenada, while operations continued on the New York, Philadelphia, Fort Lauderdale, Nassau, and Toronto routes. However, in September 2011, the airline returned to Orlando.

The reduction of its routes resulted in a 40 per cent drop in revenues, from US$257 million in 2009 to US$154 million (J$13.2 billion) in 2010, while operating with less passenger seats filled than year-earlier levels.

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