Shortly after taking office, the Government announced the decision to divest Air Jamaica. This decision was consistent with a commitment stated in our Manifesto as part of necessary measures to relieve the taxpayers of the burden of loss-making state-owned enterprises that were not considered part of the core functions of government.
Since its inception in 1969, Air Jamaica has accumulated losses of over US$1.4 billion or J$126 billion. In the last 3 years alone, it has incurred losses of US$337 million or J$31 billion.
The economic programme that is required to put Jamaica in a position to achieve sustained growth including the containment and ultimate reduction of our huge public debt does not allow any continued absorption of these losses.
In pursuance of this decision, the Government established a Privatization Committee headed by the Hon. Dennis Lalor to oversee the divestment of Air Jamaica. The other members of the Committee are Mr. Richard Byles, Mr. Colin Steele and Mr. Christopher Berry. Mr. Dennis Chung was appointed Project Manager for the divestment. The Government engaged the services of the International Finance Corporation (IFC) which then engaged a group of premier aviation consultants to advise on the divestment process.
An Invitation for Expression of Interest was issued in April 2008 simultaneously with the launch of the Air Jamaica Privatization website (airjamaicatrasaction.org) which contained detailed information that potential interests would require. Seven companies responded. Of these, four were considered to have fulfilled the technical and financial criteria as stated in the published invitation.
In October 2008, an 87-page Information Memorandum was issued providing detailed information on: the divestment process and evaluation criteria; Air Jamaica’s organizational structure, operations and financial performance; information on Jamaica’s economy and demographics; the aviation market with particular reference to the Jamaican and Caribbean environment; applicable regulatory framework.
Two of the four companies, Caribbean Airlines and Indigo Partners, visited Jamaica to conduct due diligence exercises and these were fully facilitated by the Air Jamaica authorities.
At the extended deadline for submission of firm offers, June 30, 2009, two bids were received from Caribbean Airlines and Indigo Partners. These were evaluated against the stated criteria and scored under four headings: Probability of transaction completion Requirement for ongoing GoJ support Financial outcome to GoJ Proposed Business Model
On conclusion of the evaluation, Indigo Partners were evaluated as marginally superior to Caribbean Airlines.
Based on these findings, the Cabinet gave approval for negotiations to be entered into with Indigo Partners. These negotiations continued for more than four months but the parties were not able to reach a satisfactory agreement.
In November, the decision was taken with the approval of Cabinet to terminate the negotiations and to enter into negotiations with the second-ranked bidder, Caribbean Airlines. These negotiations are well advanced but have not yet been concluded. A non-binding Letter of Intent has been signed with a target date for completion by March 31st 2010.
In view of a confidentiality agreement between the two parties, a standard requirement in such negotiations similar to that which existed with Indigo Partners, it is not possible to disclose at this time the details of the negotiations, the terms that have already been agreed and those that remain outstanding. Any agreement that may be arrived at will be subject to the approval of the Cabinet.
Caribbean Airlines was established in 2007 following the closure of BWIA which, like Air Jamaica, had accumulated huge losses. It is capitalized by the Government of Trinidad and Tobago and operates a fleet of 7 Boeing and 5 DHC-8-300 Dash aircraft flying to 13 destinations from its Port-of-Spain hub.
In its first year of operation, it sustained a loss of US$117,000. It recorded a profit of US$34 million in 2008. It benefits from a preferential fuel price provided by the Trinidadian government, given its position as an oil producer. It operates with a much leaner structure than its predecessor, BWIA, employing less than 700 persons compared to the 1,700 previously employed by BWIA. Air Jamaica, on the other hand, currently operates 8 Airbus aircraft flying to 13 destinations from Kingston and Montego Bay. In 2007, Air Jamaica employed 2,585 persons. Despite staff reductions that have helped to reduce its losses, its current staff compliment is 1,607.
Caribbean Airlines is seeking to expand its regional operations and there is the possibility that it will eventually merge with other regional airlines to become a truly regional carrier for the Caribbean. It is the stated intention of the Government of Trinidad and Tobago that it will conduct a public share offer and if the current negotiations are successful, we would insist that Jamaicans be given the opportunity to subscribe.
The Jamaica Airline Pilots Association (JALPA) has submitted a proposal to the government to acquire Air Jamaica. I have met with the Association’s representatives to discuss its proposal. I queried why it had not submitted its proposal at the time when the International Call for Expression of Interest was issued. Its representatives advised that their understanding was that a prospective bidder would have to be prepared to assume Air Jamaica’s liabilities. No such condition was stated in the invitation. Indeed, in the Information Memorandum it was stated clearly that “The Government is not averse to forgive or assume in full the GoJ-guaranteed debt currently owed by Air Jamaica”.
I have explained to JALPA that under the divestment procedures, the negotiations with Indigo Partners having been terminated, the Government is obliged to enter into negotiations with the next-ranked bidder, Caribbean Airlines. Indeed, in a response to the Air Jamaica staff dated February 1st, the Contractor-General stated:
“1. The OCG has been monitoring the Air Jamaica divestment process from as early as 2008 April.
2. Based upon written representations which have been made to the OCG, by the Government of Jamaica (GOJ), during the course of the referenced monitoring process, the OCG is of the understanding that the GOJ has been negotiating with certain companies which submitted formal bids, within a specified deadline, in response to the requirements of what was a competitive tender process.
3. The Information Memorandum (Tender Document) which governs the referenced divestment process has expressed a stipulated tender submission deadline date of “June 24, 2009″.
4. The referenced Information Memorandum was authored by the GOJ. As such, the OCG has been monitoring the divestment process for conformance with the documented rules, pursuant to the provisions which are contained in Section 4 of the Contractor General Act. The rules are, therefore, not prescribed by the OCG.
5. Given the aforementioned, we must respectfully advise you that the concerns which you have raised in your letter to the OCG are best dealt with by the GOJ which has developed the Information Memorandum, conducted the evaluation of the eligible bidders and which is also responsible for the negotiation process leading up to the eventual divestment of Air Jamaica.”
In light of the foregoing, it would not be appropriate for me to make any comments on the credibility or viability of JALPA’s proposal. It is in order, however, for me to make the following general observations:
(1) The extensive analyses of Air Jamaica’s operations conducted by reputable and experienced consultants on behalf of the Privatization Committee as well as the evaluation conducted by both Indigo Partners and Caribbean Airlines points to the unlikelihood that Air Jamaica, given the size of its current and potential operations, can be profitable as a stand-alone airline. Its overheads, even after rationalization, are too great and its most optimistic projected revenues too small to assure a profit.
(2) Given Jamaica’s Open Skies obligations and the ferocity of ever-increasing competition from low-cost carriers, Air Jamaica’s dominance on its traditional routes will continue to be severely threatened and undermined.
(3) The interest of the Government is not only to terminate the drain on the public purse but to ensure adequate and sustained airlift on those routes that are required by Jamaican travellers, the Jamaican Diaspora and the tourist industry. The Government must, therefore, have reason to be confident that the successor to Air Jamaica will be in a position to adequately maintain these routes since under no condition can there be any recourse in the future to public funds to support its operations.
(4) Free of all its debts which the Government will have to absorb, Air Jamaica’s routes on which it carried 1.1 million passengers last year have a value which, in any privatization, must be treated as an asset and secured for the benefit of the people of Jamaica. We cannot be expected to assume all the debts and give away the rest for free.The Government understands the emotions that are aroused in determining the future of Air Jamaica. All of us share the pride that those colourful airplanes evoke whether we are seated in one of them or watching from the ground as they soar to their wuthering heights. But that pride has come at a huge cost – $126 billion over the last 40 years, $31 billion over the last 3 years – and it has helped to deprive us of the pride we should have been able to have in seeing our children go to good schools and the sick to good health facilities. We have to get our priorities right!
The Government does not intend (because it will not be able) to provide any financial support to Air Jamaica beyond this financial year which ends in March. Time is, therefore, of immense essence.
I will report to the House in due course on the outcome of the current negotiations with Caribbean Airlines.
