|The Courier N° 156 - March - April 1996 - Dossier: Trade in Services - Country Report : Madagascar (EC Courier, 1996, 96 p.)|
|Trade in services|
by Wilberne H. Persaud
For anyone interested in state enterprises and privatisation, Air Jamaica presents an interesting case. A 'before and after' review will illustrate what is possible under the two different ownership/management types. It will also show why, if a state enterprise is to be viable, its Board and Management must be left strictly alone. once given broad and general guidelines, and perhaps even objectives by the Government.
From its inception in 1969, Jamaica's national carrier had its fortunes dictated by the twin tentacles of the tourism industry and government policy: Air Jamaica was a means to an end. Calculus of the 'end' never included the airline's economic, financial and organisational health. The box gives a brief summary of the fortunes of Air Jamaica since it was established.
One feature of its whole existence was under-capitalisation. Government, as stockholder, refused to capitalise the airline to a degree that would put it even close to comparable airlines, whether private or national. As late as the mid-1 980s, most of the world's airlines were not strictly commercial and the commercial ones were to be found mainly in the USA. Yet for several years running, Air Jamaica showed operating profits. Indeed, in one period, its ratios were better than the world industry average! Nevertheless, it chalked up huge losses overall while having to service externally-based debt in foreign exchange.
A second feature of state ownership was lack of freedom to determine internal policy. Certain routes were serviced simply to provide the tourism industry with fodder. Irrespective of the party in power, there always seemed to be some severe conflicts of interest in the relationships between the airline, the Jamaican Tourist Board, the Ministry of Tourism and hotel interests more generally. Indeed, whether taken consciously or not, the effective decision for Air Jamaica was that it would serve as the conduit for state subsidy to the tourism industry.
State ownership involved another negative aspect. Air Jamaica's Presidency became a matter of political correctness, its Board positions being seen as plums to give to party supporters. Board membership and potentially conflicting business interests were never acknowledged as a problem. In addition, being seen as a 'government' company meant that no-one was willing to take unpopular decisions regarding streamlining of staffing, and the introduction of integrated information processing systems which would perhaps exacerbate staff unrest. No shareholder was there to ask awkward questions about expenditure and income. The public, however, was not oblivious to this.
So for a considerable period of time, Jamaicans, while being unashamedly proud of their national airline, maintained a kind of ambivalent 'love hate' relationship with it. They loved the local food, the flight attendants and the 'Jamaican-ness'of the airline but simultaneously, it was widely believed that airline employees were abusing their low-cost travel privileges. There was also a feeling that certain politicians were being granted favours in travel and baggage allowances, especially at peak periods like Christmas. In other words, there were several significant and generally negative attitudes prevailing towards the airline. All one had to do to get a feed on this was to listen a while at one of the ticket counters or airports.
From a business and financial perspective, the airline was non-viable. Government, for some time, resorted to comfort letters to local commercial banks guaranteeing huge overdrafts with interest rates sometimes as high as 62%! In March 1994, Deloitte and Touche noted: 'The company has reported losses over the last 18 years... its current liabilities exceeded its current assets by J$1.29 billion and there was a capital deficiency of J$437 million. These factors raise doubts that the company will be able to continue as a going concern.'
Despite all this, Air Jamaica was potentially a very lucrative business - assuming it was allowed to operate purely for its internal 'bottom line', with the requisite capitalisation. It maintained an impeccable safety record and its maintenance department functioned very well (even if there was a certain volatility arising out of trade-union based responses to problems). It showed signs of having the potential to be efficient and profitable. Finally, Jamaicans, more of whom live abroad than at home, are a fiercely nationalistic people. They religiously come home to the 'rock' - and the rock begins with Air Jamaica ! So there was a lot to work with.
The fortunes of Air Jamaica
1969-1972 (Jamaican Labour Party administration)
Start-up, heavy debt, optimism, national istic sentiment
1972-1980 (People's National Party administration)
Heavy debt, ear/y operating profits - later disaster, socialism and the tourist slump
Heavy debt, deep decay, rallying, some operating profits, attemps at efficiency
Heavy debt, indecision, multilaterals dictate, suitors found, privatisation.
Selling an airline may seem a simple business. It is not. In the case of Air Jamaica, it was a convoluted procedure carried on in almost complete secrecy. Not many outside the political and economic inner circle had a clue about what was happening. In fact, the airline had very few tangible assets. It owned its headquarters building - an asset some thought to be of questionable value - hangers and spare parts, a logo and trade name of significance and some operating routes. It also had significant debts.
So was Air Jamaica a bride with no dowry? Would-be suitors came forward with this view and it seems that the government was of the same opinion. As it currently stands, the government has assumed all of the airline's debts and after several attempts at marriage, the ownership now breaks as shown in the table.
There were some initial rumblings about the privatisation. These, it seems, were based on the fact that the airline had always subsidised the tourism industry, yet it was now to be sacrificed in a 'fire sale' to those very interests. Criticisms along these lines failed to gain much momentum, however, and in November 1994, Air Jamaica began to function as a private company. The thrust of the new owners was to reverse the negative image of the airline. The slogan 'Soaring to New Heights' was adopted. The marketing vision was that of a first class carrier dedicated to serving its public. A second objective was to define a long-term vision for the airline. This would entail finding true partners and destinations, and determining the composition of the fleet. These are all integrally related issues which Air Jamaica confronted while it was still state-owned. Indeed, some tentative conclusions had been identified but there was a kind of paralysis that public ownership engendered. The difference today is that decisions have been taken and implemented. Whereas the government might suffer political fallout if some flight attendants were made redundant, or an accounting department was streamlined with resulting job losses, a private company could weather the storm. And it did. While a state owned entity may have objectives other than simply the financial health of the organisation, a private one cannot entertain such luxuries, certainly not in its initial effort to achieve viability.
Today, the fruits are beginning to show. The company has bought two Boeing 727s and four new Airbus A-320s for delivery in October 1996 at a cost of roughly US$50m each. They have also purchased a headquarters building in a prestige location in Montego Bay. All the terminal facilities have been completely overhauled. In effect, the image has been transformed in less than a year. Customer sentiment is improving although it is still not in accord with the wishes of the company's marketing and advertising gurus.
As for the business profile since privatisation, a profit was revealed for the first time in July and August - a dramatic improvement over previous years. However, the final 1995 figures are still expected to show a loss. There have been further problems. Competition from American Airlines has become fierce (something of a back-handed compliment, in fact) and the USA authorities denied landing rights for the new Airbus during the peak Christmas period on the grounds that Jamaica's rating (with respect to handling international traffic) was below requirement. Today, this problem has been ironed out and the company is moving ahead with plans to fly to new gateways in the USA and the UK. Profits are projected for 1996.
Air Jamaica may have had no dowry but its potential turned out not to be in question, at least among those 'in the know'. The trade name alone is a golden fleece. And if the present owners and operators have their way, it will soon rank beyond Bob Marley and Blue Mountain coffee. One of the Moo Young family stresses that Air Jamaica is not only about profits. Rather, it embodies central elements of Jamaica's development potential. Another partner, 'Butch' Stewart, a stickler for excellence, wishes to see Air Jamaica as a unique airline delivering consistent quality service. In an arena normally the stamping ground of the 'majors', who is to say that there is no room for a spirited 'minor'? W.H.P.