Editorial
CAL Has No Reason To FearLower Airfares
Leader of Government Business, the Hon.McKeeva Bush, the minister in Government responsible for CaymanAirways (CAL) made a most profound and instructive statement whenhe said that he encouraged the Airline to cut its prices to attractbusiness without affecting profitability.
Mr. Bush is obviously acutely sensitiveto what is happening in the airline industry.
One of the questions which Cayman Airwaysand indeed Government will have to address, is to what extentcan the national carrier continue to be protected by having "control"of the airfare structure in the Cayman Islands.
We have seen from reports from those inthe travel industry what the lowering or prices can do to stimulatethe airline industry.
Deregulation of the airline industry hasbeen a very successful exercise in the United States and elsewhere.It has produced sharply reduced prices, increased service, greatersafety and more competition. Indeed, one of the major benefitsof deregulation has been increased competition.
Therefore, to restrict major competing airlinesfrom reducing air fares and expanding the availability of discountseats, would be to reverse this highly successful policy, notto mention prevent this country from competing with others inthe region who have more liberal policies.
To use the examples of those who supportedthe now defunct Caribbean Airways in Barbados and the soon-to-be-privatisedBahamasAir, the rationale for this protectionist policy is toprevent supposed "predatory pricing".
This term is used for a supposed businessstrategy of reducing prices below costs until financially weakercompetitors, in this case primarily small airlines or new entrants,are driven out of business by the losses from attempting to matchthese below cost prices. With this competition removed, the predatorycompany or companies can then raise their prices above marketlevels and earn profits.
But as a practical matter, it is our viewthat this business strategy is unworkable. Or if it works, itwill not succeed for very long.
First, at below cost prices, the supposedlymuch larger airlines would be losing far more on its much largervolume than the smaller companies would on their much smallervolume. For this strategy to even begin to succeed, the largerairline would have to be able to weather far larger losses inreal dollars than the smaller airlines.
And even if the larger airline did succeedin outlasting the competitors, it would then be stuck with enormouslosses to make up.
That is all the more reason why the impressionmust not go forth that CAL is seeking to use the government toprevent other airlines from reducing prices to meet the competition.An airline, like any other business, must pursue policies to enhanceits bottom line as well as its competition in the industry.
Once airlines are allowed to compete onprice, new carriers are allowed to enter the industry, airlineswill be forced to cut costs and reduce expenses, allowing evenlower prices.
In any event, the country would benefitbecause planes will be coming to Cayman loaded with a wide crosssection of tourists, hotel rooms will be filled and merchantswill join them in celebrating increased sales.
Cayman Airways therefore has nothing to fear.
So instead of returning to tried and failedpolicies of protectionism, it may be useful for government toconsider adopting policies such as those hinted at by Mr, Bush,and practiced by governments of Barbados and The Bahamas to improveairline competition by removing government barriers to such competition.
In the final analysis, the Cayman Islandswill be the chief beneficiary.