A noble master plan for Air Jamaica

By Al Edwards

Friday, June 19, 2009

For the better part of 50 years, the national carrier Air Jamaica has been a financial burden to the government and it has never turned a profit. The present administration is seeking to sell the airline and cut its losses and has brought in Bruce Nobles as President and CEO, with the distinct mission to get the airline in reasonable shape before divestment.

Nobles... has the distinct mission to get the airline in reasonable shape before divestment
Already the government has identified two potential buyers and is proclaiming that a decision will be made in a few weeks.

The question that remains is this: if a management team is able to turn the airline around and make it a profitable entity, why sell it? Furthermore, why sell it during the height of the tourism summer season at a time when it is imperative that the country garner every possible tourism dollar flowing into the national coffers. The displacement caused by a new enitity taking control of Air Jamaica will no doubt impact the number of visitor arrivals, albeit for a short period of time.

Speaking exclusively with Caribbean Business Report, Nobles outlined his stategy for stabalising the operations of Air Jmaica, getting it ready for divestment and even turning a profit next year.

"We have developed a plan which will focus on increasing the utilisation of our aircraft. Having planes sitting on the tarmac doesn't make you any money; in fact it costs you money, and we don't have any money. More than half of our costs are related to airplanes. In any business, what you want to do is maximise the utilisation of your assets. The strategy employed in 2007 saw the reduction of the utilisation of Air Jamaica's assets, in my view, was not a good one. We think that you have to fly the airplanes as much as you can to generate revenue, said the Air Jamaica boss.

Explaining the rationale behind cutting routes, Nobles said that his management team took a comprehensive look at all the routes that Air Jamaica flies to and posed the question: Where does Air Jamaica have either a natural or historic advantage? They looked at New York, where Air Jamaica is the largest carrier of Jamaicans to that United States city and always has been. The decision was therefore taken that it is a destination that Air Jamaica should clearly dominate. Nobles looked at Baltimore, where Air Jamaica has no competition and is a very good connecting point and decided to plant a flag there.

Air Jamaica has always historically done well in Toronto and so that route was a keeper. Chicago, Nobles deemed as marginal, but since threatening to pull out of there it has performed nicely. Philidelpia is a market where Air Jamaica has some competition. US Air has a big hub there but doesn't focus as much on the Caribbean as it used to and in fact Air Jamaica does fairly well there.

Why stop flying to Miami?

Air Jamaica has come in for some criticism for its decision to stop flying to Miami, where many Jamaicans reside and commute to. To Nobles that decision was simply a business one. "We took a look at South Florida and said, OK we operate from Orlando but in South Florida we operate from two airports that are 30 miles apart. In Miami we were up against an 800-pound gorilla in American Airlines, whose marginal costs to add an additional flight is tiny. Our marginal cost to add an additional flight is big. We looked at Fort Lauderdale, where five years ago we carried about 175,000 passengers a year to Jamaica and 170,000 a year from Miami. Last year, we carried 275,000 passengers a year from Fort Lauderdale and only 75,000 from Miami. The same 350,000 passengers but the shift was dramatic, and at the same time American Airlines increased the size of their hub and their operation to Jamaica. Not to mention that the cost of operating from Fort Lauderdale is a third of the cost of operating out of Miami. So the question then is, does it make sense to consolidate our two operations in Florida into one in Fort Lauderdale. Just the economies of scale make all kind of sense. It was an easy economic decision but it was not an easy emotional decision. The fact is, we now carry more passengers from Fort Lauderdale than we did from both airports last year at much lower costs."

Driving home the point that Air Jamaica must concentrate on routes where it has a natural advantage and cut those where it does not, Nobles cites Atlanta as an example. Here, Delta Airlines has 1,100 departures a day with 4 a day to Jamaica and 200 destinations you can connect from. Air Jamaica was very marginal there, with just one flight a day.

Nobles decided to cut the route, reasoning that he could use the aircraft on more productive routes, like New York. "I got petitions and received all manner of complaints but there just weren't enough Jamaicans in Atlanta to warrant the route. I have a very clear direction from the government to stop losing money and that is the core of my business plan - where are all the places we can be profitable and where are the places where we can't," said Nobles.

Using less aircraft

The next step was to put together a schedule that highlights the best pattern of service and minimises the number of aircraft Air Jamaica uses. So instead of using 13 airplanes a day it chose instead to use eight, but increased the utilisation of those planes by more than 25 per cent. Air Jamaica is now in the process of renegotiating its lease agreements and is looking to operate on a fleet of just ten aircraft.

"When Butch Stewart ran the airline, he talked about a fleet of between 28-30 aircraft. Where we are right now is that the world is in a severe recession. What we are trying to do is maximise the utilisation of the assets we have. There are lots of places we could fly to and in a different set of economic conditions we would attempt to do so. Our intention is not to stay at this size but to get it to the right size and grow it out organically. When the world starts to get better we will then increase frequency and fly to other destinations. Right now, we do not see any other markets that we can be profitable with. A few months ago, the minister of transport Mike Henry asked me whether we could fly to Singapore. He wanted us to consider flying to China over Africa and Singapore. He believes there are trade opportunities in Singapore and an opening for tourism with China. On a wider scale he sees a future where Jamaica increases its trading with Asia.

"I said yes we could do it but it would be an expensive operation. It's not the sort of thing we can do right now. Can we do it some day? I think so. Right now we are seeing some real softness in airline travel and the cost of fuel is beginning to increase again."

A different strategy for different times
Nobles worked for the Air Jamaica Acquisition Group (AJAG) when the airline was privately owned by Butch Stewart and recalls those heady days when the airline pursued a totally different model.

"Back then we had 24 aircraft and flew to 26 destinations. We flew to Belize and all over the Caribbean and we had a big hub in Montego Bay. The strategy then was to try to spread your fixed costs over a bigger base. There's nothing wrong with that strategy, except by now there is no demand for that to work.

"The other issue is reducing your overhead. What we have done is not only increase utilisation of our planes but look at all the things we do to ensure we can operate more efficiently. Take salaries, for instance. My salaries have to be spread across all the flights and I have to reduce those overheads, which means making certain cuts to create a leaner, more efficient airline which someone will want to buy.

Using Montego Bay as a hub

Nobles is not totally enamoured of the idea of using Montego Bay as Air Jamaica's hub. He believes it has the same problem the Caribbean has in using Port-of-Spain as a hub. He believes Jamaica is too close to the United States to be a good hub.

"When you think about it, passengers who want to come to the Caribbean want to leave home in the morning and they want to go back in the evening.

What do you do with the aircraft in the middle of the day? The strategy was we will bring them from New York in the morning and then take the plane on to the Eastern Caribbean. The problem is

you can't get from New York to Montego Bay to Barbados then back to Montego Bay and then back to New York without it being a very long day, which then creates operational issues. If Jamaica were 200 miles further south it would work better because you would get better yields.

(Part II next week)