A discussion paper on regional airline integration

By Capt. Peter Schmid

Capt. Peter Schmid

Where are we today?
Under the heading "Air Carriers of the Caribbean, Bahamas and Bermuda," Airline Data lists 25 island states with no fewer than 128 registered organizations that provide air services to and within this region. Of these, only a few are air-carriers with a published schedule operating transport category aircraft. None of these airlines is currently making a profit; all require some sort of government support or concessions!

In addition to these locally controlled airlines, the region is served by many airlines originating from the home countries of the tourists that visit our islands. Further, seasonally operating charter-carriers cream off profits without obligation to provide air service during lean times.

Almost every Caribbean nation considers tourism to be an important pillar of the economy. Yet, beyond the Caribbean tourism association and the Caribbean hotel association there is little regional cooperation to nurture and control this increasingly important industry.

While most Caribbean states depend to a significant degree on revenue created by tourism, it does not necessarily follow that each individual state is best served by having its own and exclusive air transport entity, and it is a fallacy to assume that each individual state is able to maximize the benefits of the tourism industry without regional cooperation. This fact has been recognized in other industries such as finance and agriculture.

In many Caribbean countries, agriculture and other traditional industries such as fishing are falling victim to globalization. Individual governments are hard pressed to replace the declining revenue or meet the rising expectations of its population for social services and infrastructure. They are, therefore, ever less kindly disposed toward subsidizing a national carrier, especially since it would appear that foreign carriers could supply the required airlift capacity.

Today, most tourists arrive on our shores via foreign air carriers. If the traveler intends to visit one of the smaller islands, often he or she faces poor connections with lengthy layovers sometimes transferring to small carriers with a different operating culture, which do not provide the level of service one usually associates with an international carrier. Lack of air service to some islands hampers development and suppresses the standard of living. There is little hope that individual carriers have either the will or the wherewithal to supply the needed airlift to these neglected areas or to take advantage of other opportunities that perhaps require some venture capital.

Considering the current state of Caribbean airline finances and operating costs, it is not farfetched to say that the demise of the national airlines of the Caribbean as we know them today is perhaps only one or two recessions or serious downturns in tourism away. National pride or large egos notwithstanding!

The organization Skytrack rates airlines of the world on a system of one to five stars with five representing excellence. Of all the Caribbean airlines, only three are being rated, each of them with three stars representing "fair" value. We must be better than that!

To summarize the current situation, the uncoordinated system of a few relatively small national carriers competing with each other instead of working together, is not serving the region well and is definitely in the competing foreign carriers' favor. The piecemeal effort to negotiate bilateral agreements puts the small nation state at a distinct disadvantage vis-à-vis the large nation. The prolonged inability to achieve profitability affects everything from strategic thinking and investment to fleet planning and utilization as well as market expansion and the quality and morale of the workforce.

Bahamian Premier Perry Christie said recently at a tourism conference: "There can be no rejuvenation of Caribbean tourism without the simultaneous reinvention of Caribbean air transportation."

Where do we want to be?

The proposition is to create one regional airline to serve the interests and needs of the entire Caribbean region, with a view to becoming the dominant world-class carrier of the region for passengers and goods, offering a high standard of service and to all corners of the globe. This regional integration of the current carriers is in the interest of economic survival, competitiveness and control and protection of the tourism product.

Caribbean airline integration is the logical solution to the dilemma that the region's airlines currently face; namely, that of being too small to afford the infrastructure that is required by law or to serve all the air-transport needs of the home state efficiently and to negotiate bilateral agreements from a position of strength.

The size of the revenue base of the current national carriers restricts expansion to achieve the critical mass necessary to take advantage of economies of scale in purchasing fuel, equipment, catering and so forth-all of which result in a high operating cost per seat mile, which in turn limits yield and thereby eliminates profit or expansion capital. Further, the absence of profitability continues to subject airlines to political influence, which often runs counter to commercial imperatives.

There are now sufficient examples of airline integration for us to study and analyze. Air Canada successfully absorbed Canadian Airlines, and American Airlines integrated TWA into its own network with minimum difficulty. In China, 12 local airlines were integrated into three for the reason that I mentioned above and because it has become much simpler for the regulatory authority to exercise oversight and assure operating and safety standards. This is especially important now that China is wooing Western tourists.

It has been demonstrated that airline alliances have resulted in 15%­20% increases in revenue and that customer service has been improved and made more consistent.

Leo Mullen of Delta airlines, speaking of the current United States situation, which can be applied to our region, told Reuters, "as weaker carriers buckle under huge losses and light passenger loads in the wake of the Sept. 11 terrorist attacks, mergers might be an option to maintain a strong aviation system. Now the government and the industry have got to rethink that whole proposition, because some of these organizations are not going to make it."

European Transport Commissioner Loyola de Palacio said, "there would probably be a reduction in the EU's 12 flag carriers plying transatlantic routes as market forces took hold. Perhaps we won't be able to keep all 12. The logical trend in the market will be that there will have to be a reduction in the number of airlines with a global vocation."

She also said that she would push for an EU-wide aviation pact with the United States, which would help companies overcome fears that if they merged they would lose rights to fly to the United States given only to airlines from a particular country under the bilateral deals. This is an interesting point, considering Caricom's efforts to achieve same!

We have seen the EU adopt the JAR system of regulations. If the Caribbean region could adopt a similar regional standard, either by defining its own or joining JAR or FAR, individual island states would be less vulnerable to the whims of the FAA's safety oversight examiners.

Airline integration has also received its share of negative press. In the United States, it is generally believed that the reduction of the number of airlines in a given market is bad for competition. In our case this is a good thing, since our competition is the foreign carriers. It has been said that in some markets the dominant carrier, created through integration or merger, is now controlling 80% of the traffic. Again this is a goal that is worthwhile pursuing in our region.
We may be unable to create the United States of the Caribbean, but by now it must be clear to everyone that in the airline and tourism business of today the well known maxim of "united we stand, divided we fall" is truer and its adoption more urgent than ever.

All of us already know that when there is a hurricane anywhere in the Caribbean, friends and relatives from afar call to find out if we are well and safe, never mind that the storm is more than a thousand miles from our particular locale. This demonstrates that while the rest of the world regards the Caribbean region as one unit, bound together by geography, similar history, economy, mix of peoples, and weather conditions, we as citizens and residents of this region differentiate between us as if some island-states' citizens were significantly superior or inferior to others.

Most of us recognize that the majority of the region's people have arrived here from somewhere else, albeit spread over a few centuries, which then makes our populations similar to each other and to nations such as the United States and Canada. These countries have formed a single nation despite the diversity of their populations.

For the most part, this has proved to be economically and socially beneficial, as is evidenced by the standard of living, GDP and that so many of our region's citizens have moved, or desire to move, there.

In any other industry, with local politics removed, it would have become irresistibly obvious long ago that we could gain significant advantages by having one large air-transport entity operating a comprehensive network serving the entire region (including some of the markets in islands not currently served). This entity would be operating equipment from an approximately 20-seat capacity upward, with a uniform livery and standard of service. It would have a worldwide marketing and advertising strategy with a schedule conducive to minimizing inconvenience to the customer.

This entity would achieve economies of scale in many areas such as equipment purchasing and utilization, fuel, training, maintenance and spare holdings as well as reservation systems and so forth. It would have growth potential that can scarcely be imagined now. There is no question that size matters!

A large entity has a much larger profile in the eyes of the world and projects an image of success and stability. The name would become a "household" word, comparable with Cathay Pacific, British Airways, American Airlines and the like. These factors are necessary to expand and counteract the home-market advantage of the carriers of the USA, Canada and EU.

Such a regionally controlled entity would be able to be more responsive in times of changing market conditions because its sole aim would be to serve the needs of the region. It has the potential to become a major international carrier and a safe and neutral travel option by not being bound to a particular political or religious persuasion. Naturally, the customer would start to enjoy the relaxing Caribbean flavor upon boarding, not just after arrival.

While some may be concerned about job losses as a result of consolidation, the opposite is quite possible; such a carrier could become a major provider of employment of heretofore unimagined dimensions.

There is perhaps at this time a unique opportunity to pursue this proposition. The large carriers of the USA are in dire straits and at present more occupied with bringing their internal house in order. This presents an opportunity to capture market share and expand service into currently underserved markets.

Surely it will only be a matter of a short time before Cuba will be open completely to the US tourist. If a Caribbean carrier has a prominent presence in that market, it can only profit from it.
It must be recognized that today's tourist has limited options. Instability in the Middle East and bombing attacks in Indonesia make the Caribbean area a prime destination for the safety-conscious person or family. Fear of being potential targets for terrorism has created a desire among some travelers to avoid US carriers. The heavy-handedness of the US security personnel has many travelers avoiding the USA if possible. It is reasonable to attempt to bring any tourist to any destination in the region with no more than one or two stops.

What are the challenges?

The topic of regional airline integration has evoked a barrage of emotional letters to editors and calls to radio talk shows; it is understood that the proposition has its naysayers. There are concerns about workforce reduction and loss of national image and privilege. These concerns are valid, but they pale into insignificance when compared to the basic need for the process, which is intended to ensure the survival of the region's airline industry and the ability to control its air service.

First and foremost, regional airline integration requires political will and long-range thinking at the ministerial level. There will be a need to publicly declare unity of purpose and determination to succeed. Next will be the creation of a structure that can pursue the stated objective, immune to interference from special interest groups. Individual states must subordinate their peculiar short-term interests to the requirements of achieving the overall long-term objective.

An implementation team of unquestionable integrity, impervious to slander and political pressure that can translate the plans into reality must be assembled to carry out the process. A very important part would be the choice of a name and livery. It must be not only regionally acceptable and something that our people can adopt and support but also representative of our geographical area. It must be sufficiently different from any currently existing carrier to avoid the handicap of appearing to favor any one of them and should be designed to promote the attractiveness of the region wherever it is seen the world over.

The simplicity of these statements belies the complexity of the task!

In conclusion, most likely integration would be a gradual process but with a definite and ambitious timetable. Obviously the process must be inclusive. It might appear that the process would be evolutionary, when in fact the end result would be nothing short of revolutionary and may well be but the first chapter of real regional integration.

Footnote:
At the time of writing the paper on airline integration late 2002, the aviation industry looked considerably different from the picture we see today. American Airlines, United Airlines and Air Canada are now either under bankruptcy protection or close to it, the Government of Jamaica is considering a larger equity in that country's airline by assuming some US$300 million of its debt and BWIA and Liat are in fact actively pursuing a merger or integration.

About the author:
Capt. Peter Schmid originally hails from Switzerland and arrived in Cayman in 1969. His aviation career started in 1971. Prior to joining Cayman Airways in October 1979 he worked as Charter Pilot and Flight Instructor. Joining CAL as a First Officer on the BAC1-11 he rose to become Chief Pilot of Cayman Airways from 1993 to 1997. He still actively flies as a line Captain today. He is a founding member and signatory of the Cayman Airline Pilots association (CAPA) and its current President. He was selected to represent Caribbean Pilots at an "Open Skies" seminar between the USA and Caricom in September 2000.
His many community involvements include: current President of the Rotary Club of Grand Cayman Central, member of the steering committee of Habitat for Humanity, member of the Board and past President of Junior achievement.
Capt. Schmid lives in West Bay with his wife of 32 years, Sherlene, they have one Son, Patrick.

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