Trust the market

Dr Densil Williams, Guest Columnist

The entry of low-cost carrier REDjet into the airline industry of the Caribbean is a clear vindication of my position on a parallel issue I raised in a Sunday Gleaner article of March 11, 2011, titled 'Phoney concerns: no need for alarm on Digicel-Claro merger'.

In that piece, my central thesis was that, with the mobile market now fully liberalised, it presents an opportunity for any player to enter and rival incumbents, to the betterment of the consumers. I, therefore, warned that Digicel cannot expect to behave like monopolies of the past, although it may have market dominance. For, astute and adroit investors are eyeing the market and will enter once they see an opportunity where value can be extracted. I grounded my analysis in the five-forces model of industry competition espoused by Harvard economist and business strategist, Michael Porter.

It was not surprising to see the flurry of responses pointing out the 'flaws' in my analysis. The responses, in most cases, were pedestrian and lacking serious intellectual redoubt. I had expected this. Indeed, not many persons are nuanced enough to understand the micro foundations of strategy and business analyses. They take old conventional theoretical lenses and try to fit them into contemporary context where globalisation and market capitalism have rendered most traditional theoretical lenses useless. Our business people will have to learn not to be enslaved by traditions but to take a more serious look at business strategy. This is the only way they will see the opportunities in what appears to be adversity.

The market working for consumers

In early 2006, when it was clear that BWIA would wind up its operations as the main carrier to transport persons from Jamaica in the north of the Caribbean to Suriname in the south of the Caribbean, emotions were running high.

The concerns were further exacerbated when Air Jamaica, BWIA's main competitor on the route from Jamaica to the southern Caribbean, decided to withdraw its service. The decision by Air Jamaica left the market in the hands of one dominant carrier, Caribbean Airlines, the new regional airline which took over the operations of BWIA. Caribbean people were hopping mad. The grave ills of the behemoth monopoly syndrome surfaced. The price of a ticket from Jamaica to Suriname was almost twice the price to fly from Jamaica to New York in some cases.

If I had told them then that the airline market is open and very soon, Caribbean Airlines will not have the luxury of abusing them with their dominant position, because some smart investor will try to extract value from the market by one day entering the industry and forcing Caribbean Airlines to become more competitive in its offerings, which will redound to the benefits of the consumers, I would be laughed at. I would hear all sorts of stories about what Caribbean Airlines is doing to tie in customers and preventing others from entering the market. I would hear that the airline business is not like selling cars or widgets. And I could go on.

Thankfully, the smart entrepreneurs who now own the low-cost carrier REDjet are serious about business and are studying carefully market dynamics. It may have taken five years, but very soon (the adverts said May 8, 2011) consumers will be able to fly from the northern Caribbean to the southern Caribbean for at least 60 per cent less than what it had cost them over the last five years. REDjet is now selling fares starting as low as US$9.99, exclusive of government taxes. When taxes are added, the price for the ticket moves to US$105 round trip. By any yardstick, this is an amazing bargain for the consumers in the airline industry. Again, competition comes to the rescue of the consumer. It is the liberalised nature of the airline industry which made this possible.

The parallels

I have no doubt that with a properly regulated mobile market in Jamaica, a similar thing will happen in the near future. I do not want to hear the weak arguments about the mobile market is different from the airline market, and, as such, you will not have this situation occurring. When we strip away the frills, industry structures are basically the same: buyers, sellers, substitute products, barriers to entry and rivalry among players.

This basic understanding is critical to building strategies. The issues in the mobile market which person use as their redoubt (customers being ring-fenced on a network, network providers setting their own termination rates, lack of number portability) are all issues that can be regulated away. These are not systemic to the industry structure. It is for the regulators to identify where these bottlenecks are and find suitable ways of dealing with them. This is not for Digicel or any other dominant carrier in a market to do.

What is sure is that if Digicel sits comfortably on its laurels and thinks that its dominance will ensure continued success, it will be making a sad mistake. A REDjet might just come crashing into them. I am sure that with a properly regulated mobile market, the Claro-Digicel deal will not spell a death knell to competitive offerings in the marketplace. Investors are already watching this market, and when the time is right, a REDjet moment will come for our consumers.

Dr Densil Williams is a senior lecturer of international business and head of the Department of Management Studies at UWI, Mona. Email feedback to columns@gleanerjm.com.