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Why is CAL unprofitable?
Story Updated: Apr 16, 2013 at 8:40 PM ECT
It was less than a week ago that I returned from a short vacation to Orlando with my family. We travelled with Caribbean Airlines Ltd (CAL) for several reasons:
1. It is the only airline that provided direct flights between Trinidad and Orlando.
2. It was the cheapest at the time of booking.
3. It was the only airline to allow passengers two 50-lb luggage allowance.
4. It was the only airline to provide a complimentary meal.
5. It was the only airline to provide free in-flight entertainment.
During the process of checking- in, boarding and flying, I recalled a recent newspaper article that suggested that CAL was $100 million in the red and at times I pondered what risks this might entail.
I looked at the employees and attempted to comprehend their state of minds as they performed their duties knowing that their jobs may be at stake, the potential for increased stress levels and the effect on the quality of their service deliverables in this critical, high-risked industry.
I recalled the events of 2005 when Delta airline filed for bankruptcy and immediately all its aircraft were grounded. But Delta has now risen as one of the most profitable airlines.
Why can’t CAL follow suit after its predecessor, BWIA, has gone bankrupt and governments have injected huge sums of cash into CAL?
More so, Air Canada has more recently cancelled its direct flights to T&T, creating more space for CAL in this lucrative market.
Recent reports that CAL has netted a US$43 million loss in 2011 and US$83 million loss in 2012 are alarming if not confusing.
Notably, my flights to and from Orlando were full to the max. This is true for most flights because online reservations for many flights indicate less than ten seats left.
The profit equation in its simplicity is profit=revenue=costs.
The cost structure for any airline is certainly complex but one can reasonably assume that major costs will be attributed to landing rights, aircraft maintenance, fuel and staffing. But these costs are not unique to CAL, which enjoys the advantage of fuel subsidy, the relief of a major financial burden. The critical question that must engage the authority is simply—how is CAL managing its costs? Revenue is a function of demand for services, and undoubtedly, the major revenue stream for CAL which is sales of tickets is in no way being stifled.
While opinions vary on the acquisition of Air Jamaica, when one examines the routes that CAL is able to capitalise on by this acquisition, it certainly gives CAL a competitive edge.
Considering US destinations, apart from its Miami flights, CAL is the only airline that offers regular, direct flights from T&T to Fort Lauderdale, Orlando and New York—major destinations for Caribbean travellers.
To get to these destinations with CALs closest rival, American Airlines (AA), requires transfers in Miami, a gross inconvenience in terms of time and hassle to most travellers.
CAL is also the only airline with regular non-stop flights to Canada. United Airlines and AA travellers must transfer in Houston and Miami respectively, spending as much as 13 hours travelling compared to six hours with CAL.
In the Caribbean CAL offers the most comprehensive routes of inter-island services. CAL is therefore well positioned to effectively differentiate its service offerings from other carriers.
Cal certainly enjoys business advantages in the routes that it serves. Therefore, why is CAL still reporting huge losses? How can CAL address this problem?
Only a very detailed investigation into the operation of CAL can reveal causes and possible solutions, but newspaper reports on possible initiatives from various sources must be of concern:
1. “Closing Air Jamaica routes because they are proving unprofitable”. This only makes sense if unprofitability is due to non-travellers. If flights are filled, then losses must be due to bad management.
2. “CAL will cut jobs in its Jamaican operations this week.” Has some form of study involving cost-benefit analysis been completed to determining whether this is an economically feasible move? Will CAL be getting rid of experienced staff with irreplaceable institutional knowledge, reducing valuable human capital and hence escalating the existing problem?
3. The finance minister indicates restructuring the airline. What does this really entail?
4. If CAL is privatised tomorrow will it still make a loss?
It is imperative that the government move swiftly to curb this budding economic nuisance which has all the supporting elements to be easily transformed into a cash cow.
Dr Ramchand Rampersad
Story Updated: Apr 16, 2013 at 8:40 PM ECT
It was less than a week ago that I returned from a short vacation to Orlando with my family. We travelled with Caribbean Airlines Ltd (CAL) for several reasons:
1. It is the only airline that provided direct flights between Trinidad and Orlando.
2. It was the cheapest at the time of booking.
3. It was the only airline to allow passengers two 50-lb luggage allowance.
4. It was the only airline to provide a complimentary meal.
5. It was the only airline to provide free in-flight entertainment.
During the process of checking- in, boarding and flying, I recalled a recent newspaper article that suggested that CAL was $100 million in the red and at times I pondered what risks this might entail.
I looked at the employees and attempted to comprehend their state of minds as they performed their duties knowing that their jobs may be at stake, the potential for increased stress levels and the effect on the quality of their service deliverables in this critical, high-risked industry.
I recalled the events of 2005 when Delta airline filed for bankruptcy and immediately all its aircraft were grounded. But Delta has now risen as one of the most profitable airlines.
Why can’t CAL follow suit after its predecessor, BWIA, has gone bankrupt and governments have injected huge sums of cash into CAL?
More so, Air Canada has more recently cancelled its direct flights to T&T, creating more space for CAL in this lucrative market.
Recent reports that CAL has netted a US$43 million loss in 2011 and US$83 million loss in 2012 are alarming if not confusing.
Notably, my flights to and from Orlando were full to the max. This is true for most flights because online reservations for many flights indicate less than ten seats left.
The profit equation in its simplicity is profit=revenue=costs.
The cost structure for any airline is certainly complex but one can reasonably assume that major costs will be attributed to landing rights, aircraft maintenance, fuel and staffing. But these costs are not unique to CAL, which enjoys the advantage of fuel subsidy, the relief of a major financial burden. The critical question that must engage the authority is simply—how is CAL managing its costs? Revenue is a function of demand for services, and undoubtedly, the major revenue stream for CAL which is sales of tickets is in no way being stifled.
While opinions vary on the acquisition of Air Jamaica, when one examines the routes that CAL is able to capitalise on by this acquisition, it certainly gives CAL a competitive edge.
Considering US destinations, apart from its Miami flights, CAL is the only airline that offers regular, direct flights from T&T to Fort Lauderdale, Orlando and New York—major destinations for Caribbean travellers.
To get to these destinations with CALs closest rival, American Airlines (AA), requires transfers in Miami, a gross inconvenience in terms of time and hassle to most travellers.
CAL is also the only airline with regular non-stop flights to Canada. United Airlines and AA travellers must transfer in Houston and Miami respectively, spending as much as 13 hours travelling compared to six hours with CAL.
In the Caribbean CAL offers the most comprehensive routes of inter-island services. CAL is therefore well positioned to effectively differentiate its service offerings from other carriers.
Cal certainly enjoys business advantages in the routes that it serves. Therefore, why is CAL still reporting huge losses? How can CAL address this problem?
Only a very detailed investigation into the operation of CAL can reveal causes and possible solutions, but newspaper reports on possible initiatives from various sources must be of concern:
1. “Closing Air Jamaica routes because they are proving unprofitable”. This only makes sense if unprofitability is due to non-travellers. If flights are filled, then losses must be due to bad management.
2. “CAL will cut jobs in its Jamaican operations this week.” Has some form of study involving cost-benefit analysis been completed to determining whether this is an economically feasible move? Will CAL be getting rid of experienced staff with irreplaceable institutional knowledge, reducing valuable human capital and hence escalating the existing problem?
3. The finance minister indicates restructuring the airline. What does this really entail?
4. If CAL is privatised tomorrow will it still make a loss?
It is imperative that the government move swiftly to curb this budding economic nuisance which has all the supporting elements to be easily transformed into a cash cow.
Dr Ramchand Rampersad
El Socorro