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Tuesday 16 July 2019
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Commentary

A tale of two airlines

Ramesh Lutchmedial
Ramesh Lutchmedial

RAMESH LUTCHMEDIAL

NUMEROUS commentators have spoken and written of a merger between Caribbean Airlines (CAL) and Air Jamaica (AJ) or a takeover of AJ by CAL.

The fact is that there was never a merger of CAL and AJ or a takeover of AJ by CAL.

AJ commenced operations in April 1969 after the government of Jamaica decided not to invest in British West Indian Airways (BWIA), the predecessor to CAL.

In 2008, the International Monetary Fund required the government of Jamaica to divest its ownership of loss-making AJ as a condition to secure a US$1.2 billion loan.

During a visit to TT in December 2009, Jamaican prime minister Bruce Golding, in commenting on CAL’s vision for one airline serving the entire Caribbean, stated that while Jamaica supported the concept of a regional carrier, there are particular interests that must be satisfied, and he was hoping to arrive at an agreement in short order that would preserve and protect AJ’s routes that are vital and essential to Jamaicans.

In February 2010, Golding informed the Jamaica Parliament that after the failure to reach an agreement with Indigo Partners, owners of US-based Spirit Airlines, on the privatisation of Air Jamaica, a decision was taken to engage second rank bidder CAL.

In May 2010, Minister of Finance and Public Service Audley Shaw informed the Jamaican Parliament that AJ was an unbearable cash drain for the government, recording losses in 40 out of its 42 years of existence with an accumulated debt of US$1.5 billion. He added that the proposed transaction with CAL operating the former AJ routes resulted in the Government of Jamaica acquiring a 16 per cent ownership in CAL valued at US$28.5 million.

The designation of CAL by the government of Jamaica to operate routes into the US with CAL not being an airline that was majority owned and controlled by citizens of Jamaica was initially problematic.

The US indicated that it would favourably consider such a designation provided both countries signed “open skies” agreements with the US.

Jamaica had previously signed an “open skies” with the US on October 30, 2008. At the behest of the US, TT and the US signed a previously negotiated “open skies” agreement on May 22, 2010, two days before the general election.

On May 27, 2011, Jamaica’s Minister of Finance Shaw and his TT counterpart Winston Dookeran signed a shareholder’s agreement in Port of Spain. Under the terms of the agreement, CAL would operate certain routes to North America, particularly the US, on behalf of Jamaica.

The government of Jamaica would be given a 16 per cent shareholding in CAL and have one director on the CAL board. CAL also agreed to rehire approximately 1,000 former AJ employees comprising pilots, flight attendants, maintenance engineers and ground handling staff.

Shortly thereafter, the Jamaican Civil Aviation Authority revoked AJ’s air operators certificate (AOC), making it unlawful for AJ to engage in commercial air transportation for reward or hire.

In order to fly CAL aircraft, the ex-AJ pilots, mostly citizens of Jamaica, were granted TT’s commercial pilots licences under the TT civil aviation regulations.

These are the only aviation regulations in Caricom that fully comply with the revised Treaty of Chaguaramas as it relates to air transportation. Under the TT regulations, any Caricom citizen can obtain a TT air operators certificate and establish a TT-based airline and put and an aircraft on the TT civil register.

At a gala function held at the Pegasus Hotel in Kingston in 2011, a senior government official announced that CAL was going to operate one airline with two brands. Subsequently, CAL aircraft were banded in the AJ logo and livery. Announcements informed passengers that they were travelling on Air Jamaica.

In July 2012, the TT Civil Aviation Authority (TTCAA) directed CAL to refrain from using the AJ brand in accordance with CAL’s then slogan, “One Airline, Two Brands.” The TTCAA informed CAL that it was wrong to hold out to the public that an entity is an airline when it does not have a valid AOC.

In December 2010, through a consent order, CAL mitigated a penalty imposed by the US Department of Transportation for posting internet fare advertisements on its website that quoted prices for numerous airfares that did not include applicable fuel surcharges.

By failing to include fuel surcharges in its base fares, CAL violated 14 CFR 399.84 and engaged in an unfair and deceptive practice and unfair method of competition in violation of 49 USC § 41712.

In the airline industry which is highly regulated, “one airline, two brands” is a misnomer. On the other hand, you can have several airlines operating a single brand.

An example is American Eagle. Several airlines with individual AOCs such as Piedmont Airlines, Envoy Air, PSA Airlines, Republic Airlines, and SkyWest Airlines fly under the American Eagle brand.

The feasibility of operating the Jamaican routes by CAL projected that it would make a profit more than US$100 million during the first two years. On the contrary, CAL lost over US$100 million and had to drop the routes specified in the shareholder agreement that proved to be unprofitable.

CAL has faithfully served Jamaica and provided employment to hundreds of Jamaican citizens including during the loss-making periods at TT taxpayers’ expense.

The shareholder agreement of May 27, 2011, between the Governments of TT and Jamaica did not provide enough safeguards for CAL. Shortly after the takeover of the AJ routes by CAL, Jamaica granted an AOC to Fly Jamaica which competed directly with CAL on several routes until March 30 this year, when Fly Jamaica announced it was suspending operations after an accident in Guyana involving one of its Boeing 767 aircraft.

There is nothing that prevents the Jamaican government from approving another Jamaican airline which can compete directly with CAL. Therefore, it is time for Corporation Sole to revisit the shareholder agreement.

Ramesh Lutchmedial is a retired director general of Civil Aviation

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Ramesh Lutchmedial

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