Airline industry picks up

Dennis Morrison, Contributor

After the intense speculation and subsequent anxiety that surrounded Air Jamaica's divest-ment process and negotiations for the takeover by Caribbean Airlines, the transition to the integrated entity appears to be proceeding smoothly, at least in the early phase. Having weighed so heavily on the public purse, especially over the past 15 years under both private and public-sector management, it is imperative that the integration be concluded successfully. Interestingly, by some twist of fate, the chances of this have got better, as conditions in the airline industry have been turning noticeably positive since the beginning of this year.

A few days ago, the Air Transport Association in America issued figures showing that airline revenues have been rebounding since January and surged by 25 per cent in June, which was the sixth consecutive month of revenue increases. This obviously reflected the recovery in passenger traffic begun late last year. But, more important, domestic ticket prices, excluding baggage and other fees, have climbed, as reversal of the decade-long slump in airfares is taking effect.

Notably, even Southwest and JetBlue, low-cost challengers to legacy carriers, pushed up their fares by double-digit figures in the first half of the year. American Airlines also registered a 14 per cent increase in passenger yield which, if sustained, should boost its financial performance after years of depressed earnings. Yet, the US Department of Transportation has noted that airfares in America in the first quarter this year were still down nearly six per cent compared with the corresponding quarter of 2001 [although this comparison does not take account of the baggage and other fees introduced in recent years].

Air Jamaica ran up huge losses since the mid-1990s and, like most other airlines, went through a turbulent period when the dot com bubble burst in 2000, leading to recession after the plunge in air travel following 9/11, and fuel costs began to gallop in 2004. Faced with a downturn in air travel, the large legacy carriers and national carriers like Air Jamaica stubbornly resisted adjustments to their fleets, resulting in massive excess seat capacity.

In Air Jamaica's case, cutbacks in routes that were demonstrably non-viable were met with public disapproval, despite burdensome losses that had to be met by the national budget. The closure of the London-Heathrow route, in particular, was loudly denounced as an act of abandonment by tourist industry leaders, even though aircraft were flying that route with plenty empty seats. That Air Jamaica's loss on this route was running at over US$40 million per year even before oil prices approached US$100 per barrel still did not cause rational thinking to prevail.

Clouded by sentiment, discussions and decision-making surrounding the Lovebird's survival failed to take into consideration the fact that as US domestic air travel declined, American carriers expanded their operations in the 'near abroad' [Caribbean, Central America] to boost their business. Ignored was the fact that the criticality of the national carrier to our air transportation needs was lessening, as we were becoming less exposed to the risk of a shortage of airlift and being forced into costly seat-support arrangements.

As seat capacity remained excessive internationally, there was an intense race to the bottom in terms of pricing of airfares and consequential huge losses. This intensified when oil prices skyrocketed, and labour costs rose up to mid-2008. Then came the Great Recession that began with the financial crash of September 2008, and a near seven per cent decline in global passenger movements in the first half of 2009. Airlines were no longer in a position to postpone cutbacks in seat capacity because, with passenger traffic falling steeply, cuts in fares rather than boosting bookings only served to exaggerate falling revenues and overall losses.

Under these pressures, airlines accelerated their restructuring process, with major American carriers like Delta, Northwest, United Air, Continental, US Airways, as well as large European carriers, forming mergers. Fleets have been consolidated, and route rationali-sation has taken place, leading to tighter control of seat capacity. Air Jamaica, too, stepped up fleet and route cutbacks, and last year further tightened up operations prior to the arrangement with Caribbean Airlines.

Apprehensions about dislocation consequent on the integration with Caribbean Airlines have lessened, and so far flights have been proceeding routinely. Concerns relating to the impact of the change of government in Trinidad and Tobago on the transaction have also been put to rest. Visually, passengers would not have noticed any changes [the Lovebird logo and colours are undisturbed], and so would have been reassured of continuity as well.

Importantly, visitor traffic from the US, in particular the north-east, the source of large diaspora travel, and from Canada which, together, form the bulk of Air Jamaica's business, has also remained strong. The major threat to the venture is, of course, a possible double-dip recession in the US and what that would do to our tourist industry and overall economic activity. It is also vulnerable to increased oil prices, although if the US economy weakens that would serve to moderate oil prices. On balance, these factors are encouraging for the outcome of the venture.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.