REDjet: a defining moment for regional air policy

The Caribbean's limited intra-regional air-transport network has long been recognised as one of the obstacles to dynamic regional business activity and economic integration. The prospect of air service being expanded by the entry of REDjet, the Barbados-based new low-cost carrier, would, therefore, be regarded as a positive step by many, especially as it will be privately operated and not be a charge to taxpayers. Travellers would also welcome increased competition, as invariably this brings benefits to them - price, service and convenience.

Whatever were the issues holding back the application of REDjet to fly to Trinidad and Tobago and Jamaica, it appears that the transport ministers of Barbados, Jamaica, and Trinidad and Tobago have now agreed to cooperate in expediting the application. From what we read, safety issues may well be a consideration in the assessment of the aviation authorities involved. The Barbadian political directorate has made clear its conviction of the benefits of the new entrant in terms of expanded air service.

But these matters are never as simple as that, and in this case there may be doubts that the introduction of a low-cost carrier will stimulate demand, as has happened in metropolitan markets where population, size and income levels made it possible. Southwest Airlines, Ryanair and easyJet are examples of how this model works. But in small Caribbean markets, there might not be room enough for multiple carriers, and the result would be a race in which all the players lose.

Space for competitor

The view of some experts is, however, that it is quite possible that there could be space for a low-cost competitor to Caribbean Airlines, particularly if it can be a catalyst for generating increased traffic from outside the region to destinations within the region. Connections from Montego Bay for tourists interested in visiting other Caribbean destinations, say Barbados, or vice versa, are one example. As I have previously written, expansion of intra-regional air connection, a glimpse of which we saw with Air Jamaica's Montego Bay hub, is a necessary ingredient for the long-term growth of tourism in the region.

The downside of expanded air-seat capacity to which I adverted has dogged the airline industry, and especially in North America, in the decade since the 2000 recession and after 9/11. Airlines, particularly legacy carriers - American Airlines, Delta, United, etc., and their European counterparts - persisted with excess seat capacity, competing with each other with deeply discounted fares, in an effort to hold market share. With modest growth in air travel and rising fuel prices, the result was a period of massive losses in which Air Jamaica was a casualty.

The deep recession of 2008, when air traffic plummeted, eventually forced airlines to merge and undertake significant cuts in seat capacity right across the industry. Now, they are controlling capacity tightly, while introducing a multitude of fees which have combined to return them to profitability. Last year, the airline industry recorded profits of US$18 billion, having lost US$26 billion in the 2008-2009 period. North American carriers generated profits of US$4.1 billion, recovering from losses of about the same amount the year before.

Load factors

The turnaround in profitability bears a close resemblance to the discipline being shown in controlling seat capacity. While American carriers operated flights on domestic routes generally with load factors of 65-75 per cent a few years ago, they are now typically achieving levels of more than 85 per cent. Thus they have been able to raise ticket prices at regular intervals, increasing revenue per passenger, while still filling seats.

Fuel prices have remained a pressure point for airlines, although they have been efficient at recovering increases by way of surcharges. In the first quarter of this year, US domestic airlines experienced a 30 per cent increase in their fuel bill over the corresponding period for 2010. Volatile oil prices could, therefore, squeeze demand for travel in an environment of slowing economic growth.

Caribbean tourist destinations have benefited over the past five years or more, as US carriers went in search of traffic in this region when growth in their domestic market fell. It is because of this that Air Jamaica could have been downsized without fallout in airlift for the tourist industry, and to serve our ethnic traffic. It is still to be seen whether the tighter management of capacity will affect available air seats to the island.

For the time being, major traditional US routes are now well served by American Airlines, Delta, US Airways, Continental, and new entrants like Spirit, JetBlue and Air Tran. We cannot, however, ignore the continuing strategic importance of having a regional capacity to ensure air transport to major markets. The viability of the Caribbean Airlines/Air Jamaica entity must, therefore, be a serious factor in assessing the potential benefits of new entrants to the playing field.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.