Traveling with Air Jamaica

The Bob Woolmer mess up by the Jamaican authorities has captured most of the news headlines recently. This is not surprising, as it is possibly the most internationally embarrassing moment that I can recall for Jamaica. And while Jamaica’s image suffers it seems as if the main preoccupation is to deflect blame and not seek to suppress the really bad publicity, and possible law suits, that could arise from this. But such is the culture of Jamaica, and even imported persons will soon fall into this Jamaican trait.

One other thing about the “Bob Woolmer Foul Up” is that it could possibly be as costly to us as Air Jamaica, in terms of lost revenue. With Air Jamaica we can actually see the money leaving the bank, as if the victim of some massive Nigerian scam. The airline has not been without its fair share of media attention with the sale of the London route to Virgin Atlantic. This has culminated in a battle royal between the political parties, with the opposition JLP, supported by the JHTA, charging that the 5.1 million pounds sterling deal was not the best we could have received, and the PNP defending the shots in true West Indian batsman style.

The real deal
But what is the real deal with Air Jamaica. Let’s examine the facts we know, even without the full knowledge of the business plan. We know the following:
- it is costing us J$10 billion per annum, which could build four “world cup opening ceremony stadiums”;
- It is suggested that the London route was one of our biggest routes;
Virgin will not be increasing the number of flights to Montego Bay, to compensate for the abandoned Air Jamaica flights;
- Air Jamaica will soon begin replacing the Air Bus aircraft with older Boeing planes;
- Accumulated loss is over US$1 billion, and an additional US$125 million was recently raised and US$72 million is loaned to the airline from the PetroCaribe fund; and
- Paul Pennicooke has recently stated that the losses are decreasing, and some benefits are being noticed.

So the airline continues to cost us immensely, and if it is not profitable could see write offs well in excess of US$1 billion (J$69 billion) that could be used to fund education, health, equip our security forces, fund small business development, and build a few stadiums of course. The first four mentioned would have significant positive development for Jamaica, by creating an environment where businesses can compete and tourists will come free of harassment.

But even while St. Lucia is opting out of LIAT, and relying on free market forces to service their hotel industry, we have decided that Air Jamaica will be profitable come 2009. This is of course in the face of mounting challenges being faced by much larger airlines internationally, and rising fuel costs, which are projected to go even higher. So if by 2009 we are not profitable then it would have cost Jamaica what we cannot afford, and once again the poor people of Jamaica will be set back by maybe about J$100 billion, which they will have no choice but to will to their children and grandchildren.

Based on this risk, it is therefore very important that the powers that be do everything to ensure that the 2009 plan is not only viable but highly probable. Because after all the losses have been racked up, those responsible for taking the decisions will leave the debt for Jamaicans to bear. And so Mr. Golding is right in indicating that Air Jamaica’s future must be given much consideration. One fundamental rule of investing is that the reward must be considerably greater than the cost of the risk. If for example the cost of the risk is $100 and you only stand to gain $50 from the transaction then it is not a good investment decision. If the reward-risk amounts are reversed however then it is a good gamble, after of course considering all the technical and fundamental information.

Decision time
So the decision that must be made re Air Jamaica is, is the projected profitability more likely to occur than further losses? If the probability of the airline being profitable is 70% and the probability of losses is 35%, then it may be worth the risk. Consideration of course will have to be given to projected fuel price increases, competition expectations, any competitive advantage, and the cost to our tourism sector of no Air Jamaica. The decision cannot be based on an emotional reason such as, we need a national airline, or mistakenly trying to recoup past losses because of pride.

So my stance on Air Jamaica is that I am going to trust those in authority that the sale of the London route was the best financial decision for Jamaica, and that this is a part of the process to take us to sustained profitability in 2009. I am going to trust those in authority that pumping billions into Air Jamaica is the best use of our funds for Jamaica’s long term development. I trust these decisions simply because I do not have access to the intricacies of the business and development plans of Air Jamaica, and as the Minister states this could create a disadvantage if leaked to the competition.

While I trust the authorities to do so, and understand that the business plan cannot be revealed in detail, I also would like to understand what decision will be taken if we get to 2009 and the airline is still not profitable. I also would like to know what the accountability is in that situation. At some point in time we have to put in place what traders call “stop loss”, which is put a stop on the losses so that you can walk away with something.

At some point in time we have to stop throwing borrowed billions at projects that serve no more purpose than to sink us deeper into debt and poverty. We are fast approaching J$1 trillion in official debt. For example, included in the PetroCaribe disbursements are flood repairs and toll road routes ($3.72B); Lift Up Jamaica ($0.43B); Air Jamaica ($4.82B); SCJ ($3.72B); and JUTC ($0.20B). There are other disbursements, which I am assuming have some benefit as they mostly address debt refinancing and may be to replace higher cost debt. But these amounts must certainly be questioned as to what benefits are expected that will make Jamaica a more prosperous country.

As Ronnie Thwaites has been saying publicly for years, given the situation we are in, we must ensure that we get added value for every dollar that we spend. And this can only happen through proper financial analysis and due diligence.