Caribbean-based airlines have consistently incurred financial losses over the last five years.
Together, Bahamasair (BAH), LIAT, and Caribbean Airlines (CAL) have racked up over US$1 billion in deficits.
What's more, they cost their respective taxpayers around US$100 million every year to keep their planes in the air, according to a recent Caribbean Development Bank (CDB) study.
Within CARICOM, the airlines are not able to achieve the scale of operations necessary to overcome high fixed costs. Travel taxes imposed by member countries are high compared with basic fares. Unprofitable routes are maintained because of social reasons. And regional airlines are not free of political intervention.
The list of reasons for why they lose money is exhaustive.
That they continue to operate year-in and year-out can be explained with a single word: tourism. The industry is estimated to contribute over US$4 billion to the CARICOM economy and provides 280,000 jobs.
"The CDB understands the importance of the region's airlines to the wider economy and society and that the Caribbean cannot afford to lose the services that regional airlines provide," wrote CDB President Warren Smith in his foreword to the study.
But foreign carriers have become more significant in providing capacity to and from the region. For example, whereas Air Jamaica and Cayman Airways provided 32 per cent and 36 per cent of the available seats from the United States to the respective markets in 2009, they represented 14 per cent and 28 per cent of the capacity last year, according to the US Bureau of Transportation Statistics.
On the other hand, Caribbean Airlines has been consolidating around its base in Port-of-Spain, Trinidad & Tobago. Although it cut its flights and seats from Jamaica to the US by half over the past five years, it increased its capacity out of Piarco by seven per cent over the same period.
The Trinidad-based airline - in which the Jamaican government owns 16 per cent - also took over a substantial portion of the traffic to and from neighbouring Guyana. It was responsible for 68 per cent of the seats available between the US and Georgetown last year, whereas Delta Airlines was the sole carrier to the North American market in 2009.
Suriname Airways (SLM) also provided 16 per cent of the capacity in 2014.
Foreign Carrier Risk
But the case of Bahamasair hits home when looking at the vulnerability presented by an over-reliance on foreign carriers or, at least, the importance of domiciled airlines.
When American Airlines was rationalising its operations under its Eagle brand and US Airways was cutting its capacity to the Caribbean destination, the Nassau-based airline increased its available seats by 31 per cent relative to 2009. Yet overall capacity between The Bahamas and the US declined marginally over those years, even with Delta and relative newcomer JetBlue pushing for greater market share.
"The role of foreign carriers based principally in Central America, North America, South America, and Europe has to be carefully considered," said the CDB paper titled "Making Air Transport Work Better for the Caribbean".
"In countries like the Dominican Republic, and now increasingly in Jamaica, a greater presence of foreign carriers and a reduced domiciled carrier presence has coincided with traffic growth, especially in leisure-intensive markets," it added.
"There is no reason to think that the same would not be repeated in other parts of the Caribbean, if and when it becomes easier for foreign carriers to gain a foothold in these jurisdictions. The potential downside is that foreign carriers are purely commercially focused, and, in the absence of basing and cabotage (exclusivity) rights, they are not able to partake in much foreign direct investment or intra-regional transport in the Caribbean area."
Armed with requisite traffic rights, foreign carriers have been known to establish bases and grow in foreign countries such as Ryanair across Europe.
"They have also been known to be less tied down to individual regions and countries and would waste little time in making cuts if it made commercial sense to do so," warned the CDB discussion paper.
Foreign carriers also present difficulty for regional carriers to compete.
Data shows that CARICOM-based airlines are able to generate just over 60 per cent of the revenue per available seat kilometres that the airline industry achieves, and load factors - a measure of percentage seat occupancy - of the regional carriers are considerably lower than other airlines.
CAL, BAH, and Cayman Air all had the lowest load factor among carriers operating from their bases to and from the US last year. More specifically, they weren't able to fill as much as 70 per cent of their planes leaving Grand Cayman, Kingston, Montego Bay, and Nassau, while the foreign carriers were operating well above 70 per cent, and in some cases over 80 per cent.
The report pointed out that break-even load factors for US airlines rose from less than 60 per cent in the 1980s to around 80 per cent by 2013.
Regional carriers could perhaps take cost-cutting measures such as rationalising routes or changing fare structures, but the thinnest of the market makes it difficult to yield significant results.
"Other forms of cost control or measures to improve returns on expenditure rely on economies of scale and scope, which point to better cooperation by aviation organisations in order to rationalise schedules, improve load factors, increase revenues, drive down costs, and generally improve balance sheets," said the report.
"A CARICOM carrier-to-industry comparison of competitiveness in these areas is a reminder of the need for improvement, which additional coordination could enable."
Mergers Not Viable
Mergers do not present a viable option for airlines domiciled in the region. The report identified a merger of the operations of SLM, LIAT, and CAL in the Southern and Eastern Caribbean as the only realistic possibility.
"From a network perspective, post-merger retrenchment into one major hub and rationalisation of the others to become feeders is possible," the paper said. "It would also present substantial cost synergies."
A 2014 Centre for Aviation (CAPA) analysis of CAL suggested that it is not the right time for the Trinidad-based airline to start thinking about further consolidation with other carriers until such a time as it get its own house in order.
"To date, CAL has not been able use its merger with Air Jamaica (AJ) to good effect," said the report.
What's more, the Caribbean market has been shrinking in terms of seats and flights.
In fact, it was the only region to show reduction in capacity over the period 2004 to 2014, according to recent analysis conducted by Aircraft Commerce.
"In 2004, there were over 16.7 million seats (two-way) available on over 380,000 flights," said the report. "By 2014, this had reduced to 11.9 million seats on 304,000 flights, representing a reduction of 29 per cent and 20 per cent, respectively."
"The article explains that the primary cause of this reduction was a result of airline consolidation and network cuts," it went on to say.
At the core of the CDB's recommendations is the establishment of a 'Quick-wins' CARICOM airlines association to identify cost reduction and revenue enhancement opportunities that can be pursued jointly; and the establishment of a high-level Air Transport Reform Authority to address the longer-term structural, institutional, and industrial barriers.
The airline association of the CARICOM-domiciled airlines could move towards negotiating and purchasing inputs such as fuel and parts; sharing of aircraft maintenance facilities and passenger-handling activities; code sharing; and even sharing IT platforms such as reservation and check in.
The Transport Reform Authority could then formulate a long-term strategy for the industry, including the development of a "region-wide binding aviation policy that best serves the interest of the regional aviation industry as a whole; and a plan for implementing the regional policy".
"The overall aim of the policy must be to craft a safe, efficient, and reliable regional air transport sector operating at a reasonable cost level, which is compliant with international safety norms and practices and following global industry best practices as much as possible," said the CDB discussion paper.
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