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A noble masterplan for Air Jamaica - Part III
By Al Edwards
Friday, July 03, 2009
The privatisation committee of Air Jamaica chaired by Dennis Lalor has now made its recommendation to the government as to who would be best suited to acquire the national carrier Air Jamaica.
Bruce Nobles
President and CEO of Air Jamaica, Bruce Nobles has outlined a masterplan for Air Jamaica - greater utilisation of aircraft, reduction of routes, wait for the airline to become better capitalised and then grow it exponentially. His plan seems to be working as the airline seems to have stemmed its horrendous losses over the last few years and is looking to profitability in 2010.
Breaking even this December
Nobles is of the opinion that governments do not do a good job of running businesses of any kind much less airlines. People ask him what has changed from the las time he was at Air Jaica back in 1994 and the answer to that how much has changed and how much has not changed. " The difference between the governance of the airline when it was privately owned by Butch Stewart and its return to being publically owned is really dramatic. We havve done a number of things to improve its infrastructure.
The facilities in Montego Bay and Kingston are now far superior than a few years ago. But some things still remain the same, like the size of our overhead is essentially the same when we had 24 aeroplanes back in 2004."
He points to the fact that recently the government approved a further injection of US$100 million into the airline which caused many people to baulk at more tax dollars going to the beleaguered airline. However, Nobles says that in the airline business US$100 million is a drop in the ocean and the nature of the business is that it is a very expensive one. He further added that Air Jamaica now generates US$300 million in revenue a year.
"If we can get this airline adequately capitalised and with the right profit and loss operation there's nothing to say Air Jamaica cannot be profitable going forward, " declared Nobles, who further added that the airline is expected to break even this December.
In July and August, Air Jamaica tends to have good revenue flows. There is then a noticeable dip in September into the fall and then it proves problematic for the airline to pay its bills. This is when you need to have money on the balance sheet and typically what Nobles likes to assume is you need at least 45 days of revenue sitting on the balance sheet in cash that can be used.
A tough time to be selling an airline
Nobles, who is a former head of Hawaiian Airlines, is patently aware that this is a difficult time to sell an airline. The world economy is contracting, fuel prices are again escalating and less people are travelling. But at the same time Jamaica is one of the most indebted countries in the world and Air Jamaica continues to add to a debt stock which is now in excess of J$1.1 trillion.
The question remains if Nobles is able to turn Air Jamaica around, why sell it?
He counters, "Where is the capital going to come from. I can understand that people are nostalgic about Air Jamaica and want to see it flying the skies. But there is the practical matter of ensuring that there is adequate airlift to support the tourism industry.
"Sure you can shut it down and it would not be a fatal blow to the tourism industry. There are adequate examples to support this. About a year and half ago two large carriers pulled out of Hawaii taking a tremendous amount of lift out of Hawaii with a significant short-term impact on tourism and its economy. But since that time carriers have added service, built up capacity and frankly it is now business as usual. Can this also happen in Jamaica? I suspect so."
Last year Air Jamaica had 45 per cent of the seats from the United States to Jamaica and 40 per cent of the passengers. So if Air Jamaica were to shut down, passengers would have to figure a away to get to the island. Carriers like American Airlines, Delta and JetBlue would no doubt add enough capacity and take up the slack.
An effective regional carrier
For decades now there has been a call for an effetive regional carrier that would be the embodiment of what Caricom is all about. Many airlines have tried and failed to link the entire region and some say that Air Jamaica should take up the mantle and represent the entire region.
One of the things in Air Jamaica's business plan of 2007 was the addition of the Eastern Caribbean from New York. There are an increasing number of visitors coming to Jamaica from the Caribbean region and the hub in Montego Bay serves the region well.
"We decided to keep Barbados and Grenada in our plan but the problem was in order to maximise utilisation of the aeroplanes we had to make the flights go overnight. I got a lot of comments that tourists would not travel overnight which I totally disagree with. You just have to go to JFK one evening to see what I mean. What happened when we changed the schedule is that it allowed us to increase the flying because we were doing so overnight. But there are a limited number of places where that works because once again due to where Jamaica is - we are too close to the United States to really make that work well. But in the case of the Eastern Caribbean, that's not bad. We can leave New York in the late in the evening, get there in the morning turn around and come back and still use that aeroplane to fly to Jamaica during the day," said Nobles.
However Barbados was not enamoured of the idea, more particularly its hotels. Nobles went to the Barbadian government and made it clear that he was given a directive not to fly to destinations that do not make money and so it was incumbent upon them to support the flights.
"They came back to us and asked would we fly to Barbados during the summer. We said OK so we are back in Barbados for July and August with the government's support and a guarantee. We will be doing our best to fill up the aeroplane as much as we can.
"The Grenada situation is a little different. Grenada has been strong despite the fact that nobody likes the overnight flight. It must be said the majority of the traffic there is not tourists but ethnic. Business there has been quite good.Grenada also agreed to a revenue guarantee but I don't think they will have to pay anything because we will generate a profit there."
Nobles notes that the market from Jamaica to the Eastern Caribbean while popular was just thirty passengers a day which meant Air Jamaica was losing money on that route.
"We decided t o stop flying to many Eastern Caribbean routes and concentrate on our mission which is to support the people of Jamaica, support the country's tourism product and support Jamaican trade. If I can fly to other places and make money I will but I am not going to fly to routes that loses money and end up putting this airline further in debt.
Either a route works or it doesn't.
Nobles added that Air Jamaica has stopped flying to St Lucia because the market there was too small and furthermore the St Lucian government was not prepared to give a guarantee.
So why have regional carriers not prospered?
"Well Liat is facing its own challenges and I understand that tit recently fired its CEO. These small carriers operate relatively inexpensive planes but operate in a difficult environment were fares are low. I do think there are some opportunities there. As we at Air Jamaica grow we may add some small jets to service the region. However, with Cayman we put on a 150 seat aeroplane and still we couldn't fill it . There are opportunities which are best served by smaller and less expensive aeroplanes, like what American Airlines does over San Juan."
Trinidad's Caribbean Airlines has been doing a pretty good job of late and much of the credit has to go to its CEO Phillip Saunders. Both Saunders and Nobles share the view that the airlines of the Caribbean are too small. Nobles points out that each of the Caribbean airlines have different marketing missions.
"We have to find ways in which we can work more closely together. For example we don't compete against Caribbean Airlines , their market is 90 per cent business and ethnic and 10 per cent tourism whereas we are 50/50 therefore we have different strategies in that regard.
We have different aircraft so if we had the same planes there may be some economies of scale there. We are working on doing a joint fuel purchasing deal with Alta.
"Caribbean Airlines is a little smaller than we are but it is doing well. The Trinidadian government has a lot of money and took the decision to restructure the airline by shutting down BWIA, paid off everbody and the debt, recreated the airline and put lots of cash on the balance sheet and gave it a low cost structure."
Now is that something the government should be doing with A ir Jamaica? Nobles' curt response was " They don't have the money. If they did have that kind of money (some US$400 million), that would be the right strategy. Let's not forget that Caribbean Airlines also has a fuel hedge which means they are buying fuel at around US$40 a barrel. We have had conversations with Caribbean Airlines about ways we can work together mostly to share costs. But the same goes with Bahamasair, Liat and Cayman Airways - it's about working together from a costs standpoint.
Floating Air Jamaica on the stock exchange
One way to raise capital for Air Jamaica would be to float in on the regional exchanges and drum up national fervour that saw Jamaican's taking a vested interest in their national carrier. Air Jamaica's former boss, Butch Stewart, has always been of the view that there would be very little takers. What says Noble?
"The question is how much would you raise doing that? Areasonable investor whould have to have reason to believe that the company was going to be more successful in the future. The problem is no one to this day has come up with the right srtategy that says this airline will be more profitable and valuable in the future than it is now. Let us not forget the amount of debt on the company is substantial. The company has lost US$1.4 billion since it was formed. There's something in the order of US$600 million sitting on the government's books with some US$300 million in debt obligations which are not on the books. That begs the question, how much will you have to raise to pull the airline out of its financial predicament? Yes you could raise some money from the stock exchange, but I'm not sure you could raise enough to make it a success."
Is there room for Airone in Jamaica?
For some time now the low-cost carrier Airone, headed by Ian Burns, has been seeking a licence to operate from Jamaica but has been continuously denied by the Jamaican government on the grounds that Airone would in effect be competing with Air Jamaica and would be an impediment to the divestment of the national carrier.
This begs the question, what about free enterprise and competition and wouldn't Air Jamaica benefit by having to compete with another airline in its backyard?
"There is room for that low-cost model, after all Spirit has gone that route. It has not been a home run for them. We compete directly against them in Fort Lauderdale and carry more passengers than they do every day. They operate with low fares at very low costs and that is where Airone wants to go.
"I think the government's position is, as long as it owns Air Jamaica and is trying to privatise it, to then support someone else coming in to compete directly against Air Jamaica would be nuts. Why compete against yourself? The Government has taken the stand, not right now. Not no! But not right now.
"The airline business is one of high fixed costs and there is just too much competition at the moment. Look at the automobile business, how many manufacturers are there in the United States? Just a handful. There are three times that many airlines in the United States alone. How manay markets do you know of that has so much competition?
"It's not just about low costs, you have to have the right business model. The problem is the Caribbean is a very small market with a population of just five million people. The question for Airone then becomes, how much capacity is there and what kind of revenues can we generate?
Ian Burns is a pretty smart guy and I am not opposed to people putting their money to work and see what happens. I just think that right now for the Government of Jamaica to own Air Jamaica and to support somebody competing against Air Jamaica would not be a very smart thing to do.
Providing subsidies for American Airlines to compete against us raised a lot of concerns last year. The way I saw it, it didn't make a lot of sense. I get the rationale that tourism gets to see an increase in capacity but at the end of the day you have one branch of the government competing against another branch of the government. Every dollar they paid American Airlines to take passengers away from Air Jamaica just helped to increase the debt of Air Jamaica."
So what does the future hold for Bruce Nobles?
"Depends on what happens. I have said that I am here as long as I need to be. I have no deadlines. My family is back in Dallas and come here a couple of weekends a month. I go back a couple of weekends a month.When you get to my age commuting becomes a little harder. I came here to do what I could to help and I'll be here as long as I need to be."
By Al Edwards
Friday, July 03, 2009
The privatisation committee of Air Jamaica chaired by Dennis Lalor has now made its recommendation to the government as to who would be best suited to acquire the national carrier Air Jamaica.
Bruce Nobles
President and CEO of Air Jamaica, Bruce Nobles has outlined a masterplan for Air Jamaica - greater utilisation of aircraft, reduction of routes, wait for the airline to become better capitalised and then grow it exponentially. His plan seems to be working as the airline seems to have stemmed its horrendous losses over the last few years and is looking to profitability in 2010.
Breaking even this December
Nobles is of the opinion that governments do not do a good job of running businesses of any kind much less airlines. People ask him what has changed from the las time he was at Air Jaica back in 1994 and the answer to that how much has changed and how much has not changed. " The difference between the governance of the airline when it was privately owned by Butch Stewart and its return to being publically owned is really dramatic. We havve done a number of things to improve its infrastructure.
The facilities in Montego Bay and Kingston are now far superior than a few years ago. But some things still remain the same, like the size of our overhead is essentially the same when we had 24 aeroplanes back in 2004."
He points to the fact that recently the government approved a further injection of US$100 million into the airline which caused many people to baulk at more tax dollars going to the beleaguered airline. However, Nobles says that in the airline business US$100 million is a drop in the ocean and the nature of the business is that it is a very expensive one. He further added that Air Jamaica now generates US$300 million in revenue a year.
"If we can get this airline adequately capitalised and with the right profit and loss operation there's nothing to say Air Jamaica cannot be profitable going forward, " declared Nobles, who further added that the airline is expected to break even this December.
In July and August, Air Jamaica tends to have good revenue flows. There is then a noticeable dip in September into the fall and then it proves problematic for the airline to pay its bills. This is when you need to have money on the balance sheet and typically what Nobles likes to assume is you need at least 45 days of revenue sitting on the balance sheet in cash that can be used.
A tough time to be selling an airline
Nobles, who is a former head of Hawaiian Airlines, is patently aware that this is a difficult time to sell an airline. The world economy is contracting, fuel prices are again escalating and less people are travelling. But at the same time Jamaica is one of the most indebted countries in the world and Air Jamaica continues to add to a debt stock which is now in excess of J$1.1 trillion.
The question remains if Nobles is able to turn Air Jamaica around, why sell it?
He counters, "Where is the capital going to come from. I can understand that people are nostalgic about Air Jamaica and want to see it flying the skies. But there is the practical matter of ensuring that there is adequate airlift to support the tourism industry.
"Sure you can shut it down and it would not be a fatal blow to the tourism industry. There are adequate examples to support this. About a year and half ago two large carriers pulled out of Hawaii taking a tremendous amount of lift out of Hawaii with a significant short-term impact on tourism and its economy. But since that time carriers have added service, built up capacity and frankly it is now business as usual. Can this also happen in Jamaica? I suspect so."
Last year Air Jamaica had 45 per cent of the seats from the United States to Jamaica and 40 per cent of the passengers. So if Air Jamaica were to shut down, passengers would have to figure a away to get to the island. Carriers like American Airlines, Delta and JetBlue would no doubt add enough capacity and take up the slack.
An effective regional carrier
For decades now there has been a call for an effetive regional carrier that would be the embodiment of what Caricom is all about. Many airlines have tried and failed to link the entire region and some say that Air Jamaica should take up the mantle and represent the entire region.
One of the things in Air Jamaica's business plan of 2007 was the addition of the Eastern Caribbean from New York. There are an increasing number of visitors coming to Jamaica from the Caribbean region and the hub in Montego Bay serves the region well.
"We decided to keep Barbados and Grenada in our plan but the problem was in order to maximise utilisation of the aeroplanes we had to make the flights go overnight. I got a lot of comments that tourists would not travel overnight which I totally disagree with. You just have to go to JFK one evening to see what I mean. What happened when we changed the schedule is that it allowed us to increase the flying because we were doing so overnight. But there are a limited number of places where that works because once again due to where Jamaica is - we are too close to the United States to really make that work well. But in the case of the Eastern Caribbean, that's not bad. We can leave New York in the late in the evening, get there in the morning turn around and come back and still use that aeroplane to fly to Jamaica during the day," said Nobles.
However Barbados was not enamoured of the idea, more particularly its hotels. Nobles went to the Barbadian government and made it clear that he was given a directive not to fly to destinations that do not make money and so it was incumbent upon them to support the flights.
"They came back to us and asked would we fly to Barbados during the summer. We said OK so we are back in Barbados for July and August with the government's support and a guarantee. We will be doing our best to fill up the aeroplane as much as we can.
"The Grenada situation is a little different. Grenada has been strong despite the fact that nobody likes the overnight flight. It must be said the majority of the traffic there is not tourists but ethnic. Business there has been quite good.Grenada also agreed to a revenue guarantee but I don't think they will have to pay anything because we will generate a profit there."
Nobles notes that the market from Jamaica to the Eastern Caribbean while popular was just thirty passengers a day which meant Air Jamaica was losing money on that route.
"We decided t o stop flying to many Eastern Caribbean routes and concentrate on our mission which is to support the people of Jamaica, support the country's tourism product and support Jamaican trade. If I can fly to other places and make money I will but I am not going to fly to routes that loses money and end up putting this airline further in debt.
Either a route works or it doesn't.
Nobles added that Air Jamaica has stopped flying to St Lucia because the market there was too small and furthermore the St Lucian government was not prepared to give a guarantee.
So why have regional carriers not prospered?
"Well Liat is facing its own challenges and I understand that tit recently fired its CEO. These small carriers operate relatively inexpensive planes but operate in a difficult environment were fares are low. I do think there are some opportunities there. As we at Air Jamaica grow we may add some small jets to service the region. However, with Cayman we put on a 150 seat aeroplane and still we couldn't fill it . There are opportunities which are best served by smaller and less expensive aeroplanes, like what American Airlines does over San Juan."
Trinidad's Caribbean Airlines has been doing a pretty good job of late and much of the credit has to go to its CEO Phillip Saunders. Both Saunders and Nobles share the view that the airlines of the Caribbean are too small. Nobles points out that each of the Caribbean airlines have different marketing missions.
"We have to find ways in which we can work more closely together. For example we don't compete against Caribbean Airlines , their market is 90 per cent business and ethnic and 10 per cent tourism whereas we are 50/50 therefore we have different strategies in that regard.
We have different aircraft so if we had the same planes there may be some economies of scale there. We are working on doing a joint fuel purchasing deal with Alta.
"Caribbean Airlines is a little smaller than we are but it is doing well. The Trinidadian government has a lot of money and took the decision to restructure the airline by shutting down BWIA, paid off everbody and the debt, recreated the airline and put lots of cash on the balance sheet and gave it a low cost structure."
Now is that something the government should be doing with A ir Jamaica? Nobles' curt response was " They don't have the money. If they did have that kind of money (some US$400 million), that would be the right strategy. Let's not forget that Caribbean Airlines also has a fuel hedge which means they are buying fuel at around US$40 a barrel. We have had conversations with Caribbean Airlines about ways we can work together mostly to share costs. But the same goes with Bahamasair, Liat and Cayman Airways - it's about working together from a costs standpoint.
Floating Air Jamaica on the stock exchange
One way to raise capital for Air Jamaica would be to float in on the regional exchanges and drum up national fervour that saw Jamaican's taking a vested interest in their national carrier. Air Jamaica's former boss, Butch Stewart, has always been of the view that there would be very little takers. What says Noble?
"The question is how much would you raise doing that? Areasonable investor whould have to have reason to believe that the company was going to be more successful in the future. The problem is no one to this day has come up with the right srtategy that says this airline will be more profitable and valuable in the future than it is now. Let us not forget the amount of debt on the company is substantial. The company has lost US$1.4 billion since it was formed. There's something in the order of US$600 million sitting on the government's books with some US$300 million in debt obligations which are not on the books. That begs the question, how much will you have to raise to pull the airline out of its financial predicament? Yes you could raise some money from the stock exchange, but I'm not sure you could raise enough to make it a success."
Is there room for Airone in Jamaica?
For some time now the low-cost carrier Airone, headed by Ian Burns, has been seeking a licence to operate from Jamaica but has been continuously denied by the Jamaican government on the grounds that Airone would in effect be competing with Air Jamaica and would be an impediment to the divestment of the national carrier.
This begs the question, what about free enterprise and competition and wouldn't Air Jamaica benefit by having to compete with another airline in its backyard?
"There is room for that low-cost model, after all Spirit has gone that route. It has not been a home run for them. We compete directly against them in Fort Lauderdale and carry more passengers than they do every day. They operate with low fares at very low costs and that is where Airone wants to go.
"I think the government's position is, as long as it owns Air Jamaica and is trying to privatise it, to then support someone else coming in to compete directly against Air Jamaica would be nuts. Why compete against yourself? The Government has taken the stand, not right now. Not no! But not right now.
"The airline business is one of high fixed costs and there is just too much competition at the moment. Look at the automobile business, how many manufacturers are there in the United States? Just a handful. There are three times that many airlines in the United States alone. How manay markets do you know of that has so much competition?
"It's not just about low costs, you have to have the right business model. The problem is the Caribbean is a very small market with a population of just five million people. The question for Airone then becomes, how much capacity is there and what kind of revenues can we generate?
Ian Burns is a pretty smart guy and I am not opposed to people putting their money to work and see what happens. I just think that right now for the Government of Jamaica to own Air Jamaica and to support somebody competing against Air Jamaica would not be a very smart thing to do.
Providing subsidies for American Airlines to compete against us raised a lot of concerns last year. The way I saw it, it didn't make a lot of sense. I get the rationale that tourism gets to see an increase in capacity but at the end of the day you have one branch of the government competing against another branch of the government. Every dollar they paid American Airlines to take passengers away from Air Jamaica just helped to increase the debt of Air Jamaica."
So what does the future hold for Bruce Nobles?
"Depends on what happens. I have said that I am here as long as I need to be. I have no deadlines. My family is back in Dallas and come here a couple of weekends a month. I go back a couple of weekends a month.When you get to my age commuting becomes a little harder. I came here to do what I could to help and I'll be here as long as I need to be."
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