Consolidation in the Caribbean

First Air Jamaica; Will Liat be Next?

Caribbean Airlines' takeover of Air Jamaica was finalised this week and Trinidad and Tobago's prime minister has signalled the government's intentions to create one regional carrier for the Caribbean. Routes News breaks down the key issues in the Caribbean.

Senior representatives from Air Jamaica and Caribbean Airlines (CAL) gathered earlier this week to announce transition arrangements that will see the Jamaican government transfer Air Jamaica's (profitable) routes to Caribbean Airlines, while retaining some control, which translates into a 16% shareholding in the company. The government of Trinidad and Tobago will own the remaining 84%.

It is against a backdrop of mounting competition from the low-cost carriers for air service to the Caribbean that consolidation for Air Jamaica makes logical sense in the context of its loss-making operations. Some prime examples - Air Jamaica was forced to pull its Montego Bay to Orlando service earlier this year, and budget carriers JetBlue and AirTran reacted quickly by launching the same service on February 8 and 11 respectively.

Another key factor that the governments would have factored into the consolidation is that there is no overlap between Caribbean Airlines' and Air Jamaica's networks.

Air Jamaica is based in Kingston and Montego Bay and serves five points in the North America: Fort Lauderdale, Toronto, JFK, Baltimore and Philadelphia. All of these are served from both Kingston and Montego Bay, with the exceptions of Toronto and Philadelphia, which are served only from Kingston and Montego Bay respectively.

Out of Caribbean Airlines' 13 markets, only Toronto, New York JFK and Fort Lauderdale are served by Air Jamaica. There will be the potential for savings in marketing and distribution on these routes.

Transition Period - What's Involved?

According to CAL's official press statement, Caribbean Airlines, which currently flies to 13 markets in the Caribbean, South America and North America, will use Air Jamaica's existing aircraft, regulatory authorisations and its "JM" code during the transitional period.

Below are two tables showing the weekly frequencies for Air Jamaica and Caribbean Airlines. (Source: Flightbase, May 3-9^, 2010).

Caribbean Airlines Weekly Frequencies:

What else does Caribbean Airlines gain from moving into the northern Caribbean? Firstly, the revenue benefits are likely to outweigh the cost savings from the new group. Caribbean Airlines will now get the opportunity to develop two of the largest O&D markets in the Caribbean in Montego Bay and Kingston. Plus, there are frequent flyer benefits and joint sales and marketing resources in shared markets.

The operational synergies and potential cost savings are more difficult to understand. There are no aircraft similarities - Caribbean Airlines has nine 737-800s and five Dash 8-Q300s, while Air Jamaica has six A320s and one A321 and one A319. The merged carrier can be more flexible on aircraft gauge and the Dash 8s may provide some opportunities for new markets to be served from Jamaica.

Joint purchasing of ground services, maintenance and fuel may be possible, but the joint buying power will not be that strong.

There will be management savings, with consolidation of systems, but Caribbean Airlines is also retaining 900 Jamaican workers to run the Jamaican sector of the network.

Caribbean Airlines will operate eight routes from Jamaica: Kingston-Fort Lauderdale, Kingston-New York, Kingston-Toronto, Montego-Fort Lauderdale, Montego Bay-New York, Montego Bay-Philadelphia; Kingston-Grand Cayman and Kingston-Nassau. The Grand Cayman and Nassau routes are new, post the merger.

What is clear is that the carrier will focus on VFR traffic. Its chairman Lok Jack said: "Migrants from Caribbean countries like Jamaica and Trinidad make up a substantial population - the "Caribbean Diaspora" - who continue to visit their homelands. The VFR market is also made up of many business travellers which make it distinct from the typical tourism market."

Return on Investment

Overall, while the takeover is largely seen as a positive reaction given that Air Jamaica has been unable to stem heavy losses over many years, the $49.2 million investment from the Government of Trinidad and Tobago to fund the transition, which is reported to take up to a year to sign off, has also prompted discussions about how much investment is justified, given that none of the capital will be used towards Air Jamaica's debt.

Caribbean Airlines' Jack was quoted in the local press this week, as announcing that an anticipated return on the $49.2 million would be "somewhere in the region of $12 to $15 million per year based on current levels of operation.

Further Consolidation

Will there be further consolidation in the Caribbean and does this mean that Caribbean Airlines will start discussions with other carriers? The government of Trinidad and Tobago has confirmed it is in discussions with Liat for a further, potential takeover by Caribbean Airlines. However, the difficulty for the development of one carrier for the Caribbean is that each island has its own objectives as far as airlift is concerned.

The fate of BWIA, Liat, Cayman Airways and Bahamas Air will be one to watch.