September 25, 2006

Document of the World Bank

Report N

o. 36863-LAC

C

aribbean Air Transport

Report No. 36863-LAC

Caribbean Air Transport

Strategic Options for Improved Services and Sector Performance

Finance, Private Sector and Infrastructure Department (LCSFP)Latin America and the Caribbean Region

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Table of Contents

Acknowledgements .......................................................................................................................... i Technical Terms .............................................................................................................................. 11

Executive Summary ....................................................................................................................... iii

I . Introduction and Objectives ......................................................................................................... 1 I1 . Civi l Aviation, International Trade and Tourism in Caribbean Economic Development ......... 2 I11 . What Can Air Services Do For Tourism Development? .......................................................... 5 IV . Policy and Regulation o f Air Services .................................................................................... 12 V . Regional Airline Services ........................................................................................................ 24 V I . Where Do We Go From Here - and How? ............................................................................. 36 Annexes ......................................................................................................................................... 41 Annex 1 - Caribbean Air Transport Services Symposium, Barbados: June 1-2, 2006 ................ 42 Annex 2 - Caribbean Regional Organizations and their Membership. ......................................... 45 Annex 3 - Caribbean Tourism and Transport Statistics ................................................................ 46 I . Trends and composition o f tourist arrivals ............................................................................ 46 I1 . Dominican Republic - Tourism trends and air transport services ........................................ 48

Annex 4 - Air Transport Services Case Studies ............................................................................ 50 A . Aruba .................................................................................................................................... 50 B . Barbados ............................................................................................................................... 56 C . Mauritius .............................................................................................................................. 64

Annex 5 - L i s t o f Reports and References .................................................................................... 75 Annex 6 - List o f Persons Met and/or Interviewed ....................................................................... 77 Map IBRD 34974 .......................................................................................................................... 82

.. ...

List of Tables . Main Text

Table 1 : Caribbean Arrivals by Air. 2004-2005 ............................................................................................................ 4 Table 2: Intra-Caribbean Movements by Air. 2000-2003 .............................................................................................. 4 Table 3: Aviation Safety Status in Selected Caribbean Countries ............................................................... Table 5: Caribbean Airlift Capacity - by Country ................... Table 6: OECS - Analysis of Intra-Eastem Caribbean Airlift . Table 7 : Regional Airlines Operational Performance

Table 4: Caribbean Airlift Capacity - by Airline .......

List of Boxes . Main Text

Box 1: Airport Security in OECS ...................

Box 3: Key Features o f the CARICOM MASA . Box 4: Recent International Experience in Box 5: Examples o f Subsidized Air Services .............................................................................................................. 20

Box 2: Air Services Policy in Aruba and B ............................................ 15

................................................................... 16

Box 6 : The Fiscal and Economic Impact o f LIAT Operati Box 7 : The Experience o f Mauritius ..................... Box 8: Jamaica - One Approach Towards Estimat

List o f Charts - Main Text

Chart 1: U.S. - Caribbean Traffic Compared to Other Regions .................................................................................... 3 Chart 2: Passenger Arrivals by Carrier in 2003 ........................................................................................................... 25

List of Tables - Annexes

Table A4- 1 : Weekly flights by Airline and Destination CountryRegion: February 13-1 9, 2006 .............................. 60 Table A4- 2: Weekly flights by Airline to USA Airports: February 13-19, 2006. ...................................................... 61 Table A4- 3: Weekly flights by Airline to European Airports: February 13-19, 2006 ................................................ 61 Table A4- 4: Tourist Arrivals in Mauritius from Country o f Origin ........................................................................... 65 Table A4- 5: Overview of key Bilateral Air Services Agreements ............................................................................. 66

List of Charts - Annexes

Chart A3- 1 : Tourists Arrivals to Selected Caribbean Chart A3- 2: Tourists Arrivals to Selected Caribbean Chart A3- 3: Tourists Arrivals per Capita in Selected Chart A3- 4: Tourists Arrivals per Capita in Selected Chart A3- 5: Tourists Arrivals by Main Market (in percentage o f total) ..................... Chart A3- 6: Dominican Republic: Tourist Arrivals by Main Market (in percent)

Chart A3- 8: Total Passenger Movement by Air (perc Chart A3- 7 : Total Passenger Movement by Air ........ Chart A3- 9: Total Scheduled Passenger (Arrivals and Departures) by Airport. Chart A3- 10: Total Charter Passenger (Arrivals and Departures) by Airport ............................................................ 49 Chart A4- 1 : Tourist (Stop-Over) Arrivals per Capita in Selected Countries, 2004 .................................................... 50

Chart A4- 3: Tourist Arrivals by Country in 2004 (in percent o f total) .................................................... Chart A4- 4: Tourist Arrivals by Country (Non-US) ................

...................................... .49

Chart A4- 2: Aruba Real GDP and Tourism Sector Performance (percent change) .................................................... 50

Chart A4- 5: Air Passenger Arrivals to Amba by Carrier ...................... Chart A4- 6: Real GDP and Long-Stay Tourist Arrival Growth Rates . Chart A4- I : Barbados: Tourist Arrivals by Country o f Residence ....... Chart A4- 8: Tourist Arrivals by Market, 2004 ...... Chart A4- 9: Passengers (EmbarkedDisembarked Chart A4- 10: Passengers (EmbarkedDisembarkedTransit) Carried by Charters in 2004 ......................................... 60 Chart A4- 1 1 : Load Factor on Selected Routes ............................................................... .68 Chart A4- 12: Destination and Share o f Cargo Chart A4- 13: Contribution to Passengers Tra Chart A4- 14: Contribution to Freight Traffic and Revenues .............................................................. Chart A4- 15: Shareholding o f Air Mauritius Ltd. (March 2005) ........................................................ Chart A4- 16: Number o f Hotel Rooms and Annual Growth Rate .......................................................... Chart A4- 17: Hotel Occupancy Rate ............................................................................. Chart A4- 18: Average Length o f Stay in Hotels ................................................................

AcknowledPements

This report was prepared by Douglas R. Andrew (Lead Infrastructure Specialist) and Stephen J. Brushett (Lead Transport Specialist).

The report takes into account the results o f a stakeholder symposium that was held in Barbados, June 1-2,2006, details o f which are provided in Annex I o f this report.

The report also takes into account the findings o f a “Caribbean Air Transport Services Study - Air Fares Yie ld Analysis and Best Practices Simulation Model” carried out by a team from Inter VISTAS Consulting Inc. led by Douglas Wilson, Director o f Transportation, Forecasting and Planning under funding provided by the Bank.

Specific contributions to the preparation o f the report were made by: Ingrida Rosa (Consultant Economist), who collected and analyzed data for this report and who prepared the Aruba and Barbados case studies and by Vickram Cuttaree (Infrastructure Economist), who prepared the Mauritius case study. Marc Forni (Consultant) provided information concerning air transport infrastructure, safety and security improvements in the OECS countries. Additional research was carried out by Julieta Abad and Nicolas Serrie. Annette Minott assisted in the organization o f the above-mentioned stakeholder symposium and o f the various country visits. Maria Constancia Mal lo provided assistance in the editing and formatting o f this report.

Peer reviewers were Charles Schlumberger (Senior Transport Specialist), Pierre Pozzo di Borgo (Senior Transport Specialist) and Jordan Schwartz (Senior Infrastructure Specialist).

Special thanks for their contributions and insights are due to McHale Andrew (Research and Development Adviser, Caribbean Tourism Organization - CTO) and Ian Bertrand (Civil Aviation Consultant, El Perial Management Services) responsible for carrying out the parallel EU funded study on air transport services under the Caribbean Regional Sustainable Tourism Development Program (CRSTDP).

Technical Terms

International air service among states i s governed by the International Air Services Transit Agreement (IASTA) and by complementary bilateral air services agreements (BASA) which cover the rights o f airlines o f one state to fly (and carry passengers and cargo) into and beyond another state. The rights permitted in terms o f airline entry, the frequency and capacity o f flights, pricing and regulation o f airline co-operation as well as other operational issues, are normally covered in these agreements which are categorized by defined "freedoms o f the air" in ascending order o f "liberalizationy', i.e.:

1" freedom - aircraft o f one state flying over another state 2"d freedom - landing for technical reasons in another state 3'd freedom - carriers from state A setting down passengers in state B 4'h freedom - carriers from state A picking up passengers from state B 5'h freedom - carriers from state A picking up passengers in state B destined for state C or setting down passengers in State B originating in State C

The 1" and 2nd freedoms are included in the IASTA. The other freedoms would normally be included in the BASA, though 5th freedom rights are rarely granted.

"Open Skies" (OS) bilateral air service agreements usually have the following characteristics:

unlimited airline designation provided the airlines have at least their principal place o f business in the designating state; an open route schedule; open traffic rights; open capacity; airline investment provisions which focus on effective control and principal place o f business, but protect against flag o f convenience carriers; third-country code-sharing; a minimal tariff filing regime; and application o f normal competition law

The Multilateral Agreement on the Liberalization of International Air Transportation (MALIAT) provides for:

an open route schedule open traffic rights open capacity designation based on effective control and principal place o f business but protection against flag o f convenience carriers multiple airline designation third country code sharing minimal tariff filing regime retention o f cabotage

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Executive Summarv

Introduction. Safe and secure air transport services, provided cost effectively in response to demand, are key contributors to the economic development o f the Caribbean region. The present study builds on the results o f earlier analyses o f the constraints to improved air transport sector performance and seeks to provide guidance to the Caribbean governments on available strategic options centered on two specific areas: (i) improving sector policy and regulation for air services at both the national and regional level, including approaches to securing service continuity on potentially unprofitable routes; and (ii) addressing the future role o f regionally-owned and operated airlines and the contribution o f governments thereto.

Background. The report has been prepared in response to the demand init ially expressed by the countries o f the Organization o f Eastern Caribbean States (OECS) further to which the required study was included in the FY06-09 Country Assistance Strategy. The audience for this report i s however the Caribbean Community as a whole, given the broad regional interest and topicality o f the subject matter, and Jamaica, Barbados and Trinidad and Tobago in particular given their ownership interests in airlines which play a critical role in inter-island interconnectivity in the Eastern Caribbean.

The report takes into account the results o f a stakeholder symposium held in Barbados June 1-2, 2006 which was attended by 37 participants - from 7 different Caribbean countries representing governments, airport authorities and regionally- based airlines and from various regional organizations involved in c iv i l aviation, tourism, economics and development finance. The symposium notably confirmed the strategic importance o f sustaining effective regional services; making foreign based airlines want to fly to the Caribbean; and making regionally based airlines viable. Participants also noted that effective air transport services would be a critical underpinning to the successful implementation o f the Caribbean Single Market and Economy and to exploiting opportunities for regional, multi-destination tourism.

Conclusions and Recommendations. Four main sets o f conclusions and recommendations emerge from the report:

1. Evidence from international experience supports the view that a policy o f liberalization i s effective in securing cost effective, reliable and quality air transport services in most cases. Competitive forces and technological change in the industry (smaller, efficient aircraft) increase the opportunity to provide services to various markets at a profit. This holds true inter al ia in the Caribbean sub-region where recent empirical evidence suggests: lower fares f iom the United States to destinations adopting an “open skies” regime compared to those that do not; some examples o f where private sector airlines are able to profitably service small island markets. Caribbean nations would thus be advised to adopt a fully unrestrictive policy towards air services provided that: (i) local airlines have a right to compete, with the “community of interest” principle applying; and (ii) adequate arrangements are put in place to ensure fair competition. In this regard negotiated “open skies” style bilateral agreements should be complemented by a revision to the CARICOM multilateral agreement to open new competitive opportunities for the provision o f regional air services.

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2. Evidence from international experience indicates that there are few cases where the public sector has been able to run an airline efficiently and profitably. For specific historical reasons, there are, however, a number o f airlines in the Caribbean sub-region which currently are part or wholly publicly owned. These airlines are undercapitalized and are generally facing serious operational and financial problems, with consequent negative impact on the quality and reliability o f regional services. Caribbean nations with ownership interests in regionally based airlines would be advised to adopt clear and appropriate policies and to take necessary actions to allow such airlines to compete, to become pro j tab le and earn appropriate returns or else go out of business. Open-ended, non-transparent and unpredictable government support for these airlines should not continue. A formal ownership agreement between each government and the airline board could be struck covering, inter alia: target rates o f return; l ines o f business; risk management policy; dividend policy; Board accountability to the government; and financial support from the government necessary to implement the policy.

3. Continuity o f inter-island air services - especially in the Eastern Caribbean - in a liberalized market i s a legitimate concern. International evidence suggests that there are many countries adopting liberal air services policies that have recognized the importance o f securing social services (public service obligation). There are a number o f working schemes in place for addressing this need, though relatively few so far in developing countries. Caribbean nations would be advised to adopt appropriate policies in regard to public service obligation which would underpin, for example, the award of subsidies to airlines for selected routes and services on the basis of a competitive process - that is to ensure “competition for the market ’’ where “competition in the market ” cannot be sustained. The policy should clearly establish inter alia: objectives; target beneficiary groups or communities; payment arrangements; and performance monitoring.

4. A liberal environment for the provision o f air transport services does not obviate the need for effective policy and regulatory capacity. Governments will need the capability and the know how to effectively manage the opportunities created by competition for services to ensure overarching policy objectives can be met and satisfactory services to the consumer can be secured. A good start, for example, has been made in this direction in the Eastern Caribbean in regard to the management o f air safety and security. Further to this, Caribbean nations would be advised to take the opportunity to now generally review and selectively strengthen public sector capacity, in order to assure effective monitoring of air transport services, to critically assess policy options and their impact on sector performance, and to develop and sustain knowledge of a i r transport best practices.

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I. Introduction and Obiectives

1.1 Safe and secure air transport services, provided cost effectively in response to demand, are key contributors to the economic development o f the Caribbean region. The present study builds on the results o f earlier analyses o f the constraints to improved air transport sector performance and seeks to provide guidance to the Caribbean governments on available strategic options centered on two specific areas: (i) improving sector policy and regulation for air services at both the national and regional level, including approaches to securing service continuity on potentially unprofitable routes; (ii) addressing the future role o f regionally owned and operated airlines and the contribution o f governments thereto.

1.2 T h i s report has been prepared in response to the demand init ially ex ressed by stakeholders in the countries o f the Organization o f Eastern Caribbean States (OECS) , further to which the Bank agreed to the inclusion o f an air transport rationalization study in the FY06-09 Country Assistance Strategy. The audience for the report i s however the English speaking Caribbean region as a whole, not the OECS alone. Air transport policy reform and the improvement o f Caribbean air services are matters o f broader regional concern and in fact a matter o f specific attention at this time in the Caribbean Community (CARICOM). Island interconnectivity, .especially in the Eastern Caribbean, i s impacted inter alia by the status and performance o f various regionally-based airlines, in a number o f which Caribbean governments have significant strategic and financial interests - particularly in Air Jamaica, BWIA (British West Indies Airways) and Leeward Islands Air Transport Services (LIAT). Thus, in addition to the OECS, particular attention i s paid in this report to the issues and options for Jamaica, Barbados and Trinidad and Tobago (TT).

P

' Comprising Anguilla; Antigua and Barbuda; British Virgin Islands; Dominica; Grenada; Montserrat; St. Kitts and Nevis; St. Lucia; and St. Vincent and The Grenadines.

11. Civil Aviation, International Trade and Tourism in Caribbean Economic Develonment

EfJicient demand responsive air transport services are crit ical for international trade and economic development. This applies with particular force in the Caribbean in view of its geography, its openness and its dependence on the tourism sector. While Caribbean tourism growth has lagged world average growth rates, the sector has responded well post 9/11 and is diversifLing to meet new market demands. The Eastern Caribbean may be more vulnerable however than other parts of the region to trends towards new destinations. Whereas the cruise market is an important one, air arrivals account for most of the time - and money - spent in the Caribbean market. The most signflcant sources of tourism are North America and - less so - Western Europe, but there is also a substantial amount of intra-Caribbean travel.

2.1 A well functioning air transport sector offers significant economic development benefits2. Integration o f developing nations into global and regional markets - and the concomitant benefits that come from increased trade and economic diversification - i s inconceivable without adequate air transport infrastructure (ATI) and the transport services to make use o f them. The attractiveness o f developing nation markets for new business opportunities wil l depend critically on how effectively rising demand for air travel, both passenger and freight, can be met.

2.2 The arguments for a strong, responsive air transport sector apply with particular force in the Caribbean region. This i s a region essentially comprised o f a large number o f diverse, small island economies which are highly dependent on international trade. Geographical realities thus also place serious limits on the traditional role o f land transport in meeting demands for mobility. Additionally, maritime transport has thus far had a limited economic impact and i s largely geared to meeting the demands o f niche markets for passenger travel (cruises, yachting) with a limited number o f ferry services available to the traveling public. As discussed below, the tourism sector, accounting for about 18% o f GDP and 34% o f employment, i s now, and i s likely to remain, a driving force for Caribbean economic growth and uniquely reliant on good air linkages to i t s main markets, in North America and Western Europe. Economic diversification in the region i s giving rise to additional demands for good connectivity, though both transport and telecommunications in such areas as financial and information services, and other “offshore” businesses such as in education and health3. Most nations also have important “diaspora” communities: cost-effective air services contribute to their continued linkages to home countries with the associated economic benefits.

2.3 The Caribbean region i s recognized as one o f the world’s leading tourism destinations, traditionally driven by “sand, sea and sun” opportunities packaged to suit a variety o f demands. Proximity to the USA - accounting for over one third o f a l l tourists and same day arrival to the primary destinations in the north o f the region - and recent diversification into new niche markets - adventure, nature and event based tourism - are among factors that should fuel future tourism sector growth. Tourism in the Caribbean is, however, subject to intense global competition and inevitably there i s significant price sensitivity. In this regard, it should be remembered that the USA i s simultaneously an important source o f tourist traffic as well as a

World Bank 2005e. This paragraph owes largely to World Bank 2005c.

2

tourism competitor to the Caribbean with a wide variety o f destinations which may be less expensive and easier to access. This may help to explain recent growth in the Caribbean which has been less than the world average - 2.9% per annum compared to 3.7% per annum over the period 1990-2002. T h i s i s a trend that i s expected by the Wor ld Tourism Organization (WTO) to continue into the future, that i s anticipated 4% per annum Caribbean growth as opposed to 4.5% per annum world growth up to 2020. Air traffic data support the view that there has been growth in the Caribbean market from the U S but that this has tended to lag behind the growth rates experienced in traffic to other regions, notably to Central America, see Chart 1.

Chart 1: U.S. - Caribbean Traffic Compared to Other Regions

+Moxko + C a n t r a l h r k a * Caribbean Group +South America +Atlantk +FarEast +South Pacmc

Source: Inter Vistas 2006

2.4 The available data (see also para. 2.5 below) suggest the strongest growth now and in the medium term i s more likely to take place in the Northern Caribbean rather than in the Eastern Caribbean. This wil l be o f some concern to the OECS countries - with a market share o f 6% on somewhat o f a declining trend in recent years. This trend could potentially be further impacted in the future by such developments as the opening up o f the Cuba market to US tourism should there be any change in the current policy settings. I t i s likely, however, that a proportion o f incremental traffic to this new destination would be at the expense o f traditional destinations, especially in the Eastern Caribbean. OECS countries wil l thus need to consider a two pronged approach to safeguarding their market position - continuing to improve their tourism product in relation to international and sub-regional competition; and assuring improved quality and competitively priced air access.

2.5 Air transport i s inevitably organized around catering to the demands o f tourists - both extra and intra regional - and other visitors, numbering just under 19 mi l l ion arrivals in 2005 (Table I). This number does include significant intra-Caribbean movements (Table 2) - about 1.5 mi l l ion arrivals in 2005 or 10% o f al l movements. This i s a particularly noteworthy factor in the Eastern Caribbean - about one quarter o f this accounted for by the OECS countries. “Diaspora” related traffic, particularly to Jamaica and Trinidad and Tobago (TT), i s also an

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important feature o f air travel in the sub-region. However, the largest single market i s the Dominican Republic, which together with Cuba, has also been the fastest growing market in recent times. Within the OECS, Antigua and St. Lucia are the most important destinations while the British Virgin Islands and Anguilla are the fastest growing. Per capita tourism arrivals average slightly over 2 times the local population, about the same as in Barbados, but much less than Aruba where arrivals are equivalent to seven and a half times the local population.

Table 1 : Caribbean Arrivals by Air, 2004-2005

Source: CTO

Table 2: Intra-Caribbean Movements by Air, 2000-2003

Source: CTO

2.6 Whi le tourism i s predominantly driven by air transport, i t i s important to draw attention to the cruise market, which i s also strong and growing and which has been adding new destinations recently. According to the CTO, arrivals in 2005 amounted to 16.8 million persons, with the top four destinations being: The Bahamas (3.3 million), U S Virgin Islands (1.9 million), Cayman Islands (1.8 million) and St. Maarten (1.5 million) accounting for half o f the total arrivals. The strongest markets are generally those in the Northern Caribbean though cruises are likely to remain a significant factor in the future development o f tourism in the OECS, which in 2005 accounted for 8% o f passenger arrivals (1.2 million). Barbados i s seeking to develop i t s potential as hub connecting air and cruise traffic. A number o f OECS countries, including Antigua and Grenada, have invested in upgrading facilities to accommodate cruise ships. The economic significance o f the cruise market is, however, less on average than for the air arrivals as much less time and money i s expended by visitors in the visited Caribbean nations.

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111. What Can Air Services D o For Tourism Development?

The air transport sector contributes to tourism and travel through: assuring safety and security, providing infrastructure, and providing adequate and appropriate a i r services through international and regional carriers. The Caribbean region has seen recent improvements in air safety and security, with a large number of the English-speaking countries obtaining a Category I status under the FAA IASA program, the most recent being the OECS in Apr i l 2006. Airport infrastructure is not a binding constraint to tourism development other than in a few exceptional cases. Efforts are under way - inter al ia through capacity expansion, improved management and private sector participation - to improve the arrival experience. A i r transport services are provided by a variety of carriers - with in the case of the US-Caribbean market, increasing competition f iom both legacy and low cost carriers to the dominant position of American Airlines. There are competing services on most routes, though with generally fewer alternatives on intra-Caribbean routes which are normally served by regional carriers. The proportion of airl i ft capacity allocated to intra-Caribbean traflc is much higher in the Eastern Caribbean than elsewhere. US-Caribbean fares are on average higher than comparable US domestic fares - although the difference is less marked in those markets which have adopted an “open skies” policy. The specific characteristics of the market for intra-regional services in the Eastern Caribbean has kept fares here relatively low, although this may be not be sustainable.

Air Safety and Security

3.1 One o f the most significant events affecting recent tourism development in the Caribbean has been 9/11 and i t s aftermath. Air safety and security are thus to be seen as paramount for consolidating the position o f the sector and are particularly important for securing the U S market. The Caribbean has recovered relatively well from the init ial shocks, and overall in fact better than other tourism regions, with tourism growth o f 7.1% recorded in 2003, 6.9% in 2004 and 3.6% in 2005., However there can be no cause for complacency. Growth could s t i l l fal l back again in the absence o f corrective measures being taken in regard to safety, security and ATI. Even wi th the implementation o f such measures, there i s the possibility that air travel and tourism wil l fal l o f f as the result of: renewed fears o f terrorist activity; and o f the consequent increase in security and delays and inconvenience encountered at airports in the USA and the sub-region.

3.2 In this regard, the ultimate objective for Caribbean nations i s obtaining Category 1 status under the International Air Safety Assessment (IASA) Program which i s managed by the Federal Aviation Administration (FAA). The program, first established in 1992, i s designed to determine the capacity o f foreign countries to adhere to international standards and recommended practices, including aircraft operation and maintenance, in conformity with the established norms o f the International C iv i l Aviation Organization (ICAO). This i s to ensure that any foreign carriers operating to and from the USA benefit from proper oversight in regard to safety by a competent c iv i l aviation authority. In addition, it i s a requirement that the airports from which direct flights leave for the USA comply with safety and security standards issued by the Transportation Safety Administration (TSA). Inspection programs have been carried out in conjunction with the FAA to assess which countries qualify. Category 1 status confers a range o f benefits to the countries concerned, in addition to the likely effect o f increasing marketability through a safety “seal o f

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approval”, this including the opportunity to “code share” with U S airlines. One such benefit i s to allow the airlines o f that particular country to be eligible to fly into the USA, which may be a quite important consideration when countries assess the benefit o f entering into an “open skies” agreement as wil l be discussed in Chapter IV below. Following Table 3 below, many Caribbean countries whose c iv i l aviation arrangements do not currently enjoy Category 1 status do not currently have national airlines serving the U S A (or often any other international) market.

Country Aruba Barbados Belize Bermuda Cayman Islands Dominican Republic Haiti

Table 3: Av ia t ion Safety Status in Selected Caribbean Countries

Status Remarks 1

na na 2 Currently not serving USA 1 1 2 Currently not serving USA 2

Jamaica Netherlands Antilles OECS Suriname Trinidad & Tobago

1 1 1 Certification granted in 2006 1 1

Box 1: Airport Security in OECS

The events o f September 11,2001 (9/11) had a significant impact on the Eastern Caribbean island states on several fronts as the number o f tourist arrivals fel l . The resulting loss of tourism earnings, a key source o f government tax revenue and employment, created a liquidity crisis among OECS countries. The countries clearly recognized the potential gravity o f the economic damage and took steps to respond to these events.

Within six months of 9/11, the World Bank approved a regional program comprised o f 5 projects tailored to the individual needs o f Dominica, Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines. In addition to meeting the short term liquidity needs o f OECS countries through an emergency lending instrument, the Bank addressed the need to enhance security associated with the tourism industry in the countries. Prior to 911 1, ports and airports in the sub-region lacked modern security equipment and operated in an environment o f relaxed security,

To assist governments in meeting more stringent international security requirements, the Bank provided technical expertise and financial resources to enhance security at ports and airports with the aim of preventing acts o f terrorism and safeguarding the sub-region’s image as a safe tourism destination. The development objectives o f the Emergency Recovery Project were to: i) help safeguard and maintain the productive capacity o f the tourism sector by securing the industry’s energy needs; ii) enhance security at key airport and seaport facilities in line with international standards; and, iii) strengthen the country’s institutional capacity to develop and implement security plans, procedures and measures as mandated by the international civil aviation and maritime transport regulatory agencies.

As a result o f the project, international airports in the five participating countries have greatly enhanced their security arrangements, and the underlying cultwe in regard to safety, through an improvement in the regulatory framework, provision of training, installation of screening equipment, and construction of airport perimeter roads and fences. After having met all security guidelines required, all airports have been able to obtain International Civil Aviation Organization (ICAO) certification.

Key to project success was the establishment o f a cohesive capacity building program at the sub-regional level. The OECS Directorate of Civil Aviation, later the Eastern Caribbean Civil Aviation Authority (ECCAA), was involved early on in the project and effectively coordinated the institutional strengthening and training components o f the program. By coordinating various aspects of implementation, the ECCAA directly supported participating countries’ ability to address regional security issues. The authority i s now well positioned to apply regional standards and to conduct security audits in the OECS countries on behalf o f ICAO.

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Air Transport Infrastructure

3.4 In addition to safety considerations, more efficient, customer-focused management of, and appropriate investment in, airport infrastructure are likely to improve the arrival and transit experience for passengers and increase tourism potential. Jamaica and the Dominican Republic are the only two countries which have introduced private operation and financing o f airports, using the instrument o f a long te rm concession o f airport operation to a private provider. These efforts seem to be registering some success in improving efficiency, service quality and covering costs - the concession o f Sangster Airport in Montego Bay, Jamaica for example should specifically help increase capacity for tourist arrivals, as witness the recent start up o f a new direct Virgin Atlantic service from London. In a number o f other countries, airport management i s being turned over to state owned statutory corporations (such as St. Lucia, TT, Grenada and Guyana), measures supplemented by the increased prevalence o f contracting out of airport services, Barbados, which i s the major hub for the Eastern Caribbean, i s currently undertaking - with public financing - a major renovation and capacity expansion at Grantley Adams Airport in advance o f the 2007 Wor ld Cup Cricket.

3.5 Airport infrastructure i s generally speaking not a binding physical constraint in regard to handling current and projected future demand. However, there are some countries whose principal airport runways are s t i l l unable to accommodate wide body jet aircraft (Guyana, St. Vincent and the Grenadines, and Dominica). There are other cases where further investment may shortly become necessary to improve service levels and aircraft turnaround time, where for example at peak periods there are significant numbers o f large aircraft seeking to arrive and depart (Antigua). In terms o f airfield security, most airports in the CARICOM area are compliant, though some deficiencies in relation to I C A O requirements have been noted in Jamaica, Grenada and Guyana4. The Caribbean region has an abnormally high density of international airports in close proximity, with the consequence that the volume o f services per station i s low by international standards. The Inter Vistas study indicated that most Caribbean airports have lower traffic volumes than the smallest US airports which are served by low cost carriers (LCC), and that none has a throughput o f more than 1 mi l l ion passengers per year5. There are some underexploited opportunities for the development o f sub regional “hubs” with higher capacity and service levels around which service “spokes” could be better deployed. Air traffic in the Eastern Caribbean employs Barbados and Antigua as principal hubs, with Port o f Spain, TT also providing a point through which intra-Caribbean travel can be facilitated. Future growth in traffic volumes i s thus likely to be much higher in these “hubs” than in other airports in the OECS.

3.6 Airport charges are typically much less important than passenger costs in the total cost o f services. These charges do seem to vary quite considerably between regional airports, as regional governments currently adopt different policies in regard to cost recovery and revenue generation.

World Bank 2005a. Inter Vistas Consulting 2006.

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Air Transport Services

3.7 The Caribbean market i s currently served by a variety o f air transport services provided by a number o f international as well as by privately and state-owned regional carriers. Some, if not all, o f these carriers have been able to increase the level o f services in response to demand. I t i s a moot point as to whether the current capacity could be considered adequate in relation to demand, although there i s competition on most routes, though generally speaking less on the intra-Caribbean routes. Regional carriers have low load factors and are running at a loss as discussed further in Chapter V. There also continue to be concerns about cost, quality and reliability. Providing basic concerns on air safety and security would be addressed, this report would argue that efficiency and cost effectiveness of air transport services wil l be the major consideration in increasing the contribution o f air services to economic development o f the Caribbean region as a tourism destination. The measures that need to be taken are thus the principal subject for consideration later in this report.

3.8 Scheduled airline capacity - measured in terms o f departing seats - to the Caribbean appears to have fallen back marginally in 2005 compared to 2004, although growth in 2006 i s expected to be o f the order o f 4.7%. T h i s compares to an average global growth rate o f 5.9% for the same period6. US based airlines are the dominant players in the market (Table 4). American Airlines i s the largest service provider at over one third o f al l seats, this including i t s regional American Eagle service based in San Juan, Puerto Rico. This rather substantial degree o f concentration in one supplier i s being eroded however through increased activity o f competitors in the USA - both other “legacy” carriers attracted by higher available yields on international as opposed to domestic services and “low cost carriers” which have been expanding services from a historically l ow base figure. Services to and from the USA - and to some extent Canada - have been growing whereas those to and from Europe have on average stagnated (in fact a 1% decline i s expected in 2006 over 2005). Services from Latin America account for a very small percentage - in the range 3 to 4% o f seats and mostly to and from Venezuela - though there i s a strategic interest in the Caribbean in developing more air transport and business linkages with the region. Caribbean region based carriers are significant players, accounting for 28% o f available seats. As discussed further in Chapter V, there are significant differences in the markets and the associated challenges between those airlines competing directly with international carriers on external routes (such as Air Jamaica and BWIA) and those providing intra-Caribbean services often in competition only with each other (LIAT, Caribbean Star).

Airclaims 2006.

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Table 4: Caribbean Airlift Capacity - by Airline (‘000, departing seats)

Air Jamaica 2,157 1,521 5 Charters 1,273 1,121 4 Source: Airclaims 2006

3.9 From the point o f view o f a country analysis, the strongest recent growth in capacity appears in regard to services to and from The Bahamas and Dominican Republic (Table 5) though in 2006, Antigua, St. Lucia and Jamaica are also expected to increase7. OECS countries account for about 10% o f airlift capacity. Puerto Rico remains the dominant market because o f the extensiveness o f air connections with the US and with San Juan as the largest hub in the Caribbean region. T h i s i s overall, however, a slower growth market, though intra-Caribbean movements have been growing at 2 to 4% per annum.

Table 5: Caribbean Airlift Capacity - by Country (‘000, departing seats)

Source: Airclaims 2006

’ Airclaims 2006.

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3.10 The specific cases o f Aruba and Barbados - studies o f which are provided in Annex 4 o f this report - illustrate recent trends and the extent o f the diversity in the provision o f air transport capacity to Caribbean destinations which are heavily dependent on the tourism sector. Aruba had substantially expanded i t s AT1 capacity in the late 1990s to cater for growing tourist arrivals, over 70% o f which are from the USA. Aircraft movements have generally mirrored passenger arrivals with modest growth re-established in 2004 after several years o f post 9/11 decline. In a randomly chosen week in March 2006, 160 weekly flights were logged; o f which, 84 direct to or from 13 different US destinations, by 19 different carriers, Barbados’ growth in tourist arrivals has kept pace and generally slightly exceeded GDP growth in recent years, the largest portion o f arrivals coming from Europe, especially UK. In a randomly chosen week in February 2006, 455 weekly flights were logged, o f which 91 to major hubs in North America and Europe. There are 54 direct flights to 7 different destinations in the USA. Services are provided by 22 different scheduled carriers and by a number o f charter services (1 6% o f total).

Air Transport in the OECS

3.1 1 In Chapter 11, it was established that a very high proportion o f air arrivals in the OECS were from intra-Caribbean movements - in fact, as high as 30%, comparable to the figure for TT but higher than the Caribbean average o f 7% and much higher than the Jamaica’s o f 3%. Not surprisingly, the availability o f seats to the OECS follows a similar pattern, as highlighted in Table 6 below. In two cases - St. Vincent and The Grenadines and Dominica - 100% o f air traffic i s intra-Caribbean.

Table 6: OECS - Analysis o f Intra-Eastern Caribbean Airlift

Sources: World Bank 200Sd (a,b), CTO (c), Inter Vistas 2006 (d), Airclaims 2006 (e) Note: (1) non-stop flights only (2) E. Caribbean is OECSplus Barbados (3) some rounding errors

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Air Fares

3.12 The Inter VISTAS consulting teams carried out a comparison o f fares in three markets - the U S domestic market; the US to Caribbean market (countries adopting an “open skies” (OS) policy); the U S to Caribbean markets (countries adopting a more restrictive set o f policies). On the basis on sample data drawn from 10 U S markets and 22 Caribbean destinations, the analysis concluded that on average: fares to OS Caribbean destinations were $71 higher than a US domestic comparator, whereas fares to “restricted” Caribbean destinations were $155 higher. Average fares on routes governed by a liberalized regime are 12% lower than on routes where more restricted agreements prevail. The presence o f a l ow cost carrier on a route tends to lower average fares by 16%, suggesting an effect o f liberalization that might be anything up to 28%. The averages do, however, tend to mask large variations between the data for city-pairs. The relationships have been found to be statistically significant.

3.13 The difference in actual fares between domestic routes and OS international routes could reflect higher operating costs on international services, the larger traffic volumes o f domestic routes (hence, lower costs) and the reluctance o f some U S domestic airlines to serve international destinations. Fares may tend to be higher under restrictive as opposed to liberal regimes as when fare controls are in force airlines may be unable to offer deals in response to any decline in traffic and thus make best use o f their yield management systems. Airlines may be forced to fly with empty seats, the revenue shortfall from which they must then compensate by seeking higher ticket prices.

3.14 There i s limited data available on trends in fares on intra-Caribbean services. The intra- regional air services market in the Eastern Caribbean has specific characteristics which make i t diff icult to compare to trends in international fares. Fares have tended to fal l over the recent past, perhaps by a factor o f 20-25% since 2000 and taking into account the introduction o f the services o f the privately owned Caribbean Star in direct competition to LIAT. W h i l e the traveling public has gained some benefit from this situation in the short run (subject to quality and reliability o f the service), the current fare levels may not be sustainable in view o f the financial situation o f the operators (they are losing money on a regular basis) and o f the need for LIAT to be properly capitalized in order to remain operational at all. The policy and industry specific issues are discussed in more detail in the succeeding chapters o f this report.

Inter Vistas 2006.

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IV. Policv and Repulation of Air Services

Ai r services in the Caribbean are regulated by inter-governmental bilateral air service agreements (BASA), many of which incorporate restrictions to a greater or lesser extent, in regard to fare approval, designation of carriers, routes and capacity. I n practice however greater flexibility may be practiced, especially in regard to fares. Multi lateral A i r Service Agreements (MSA) , such as the one adopted by the Caribbean Community (CARICOW, exist but these are often also restrictive and have had limited impact to date in terms of improved a i r services. The arguments in favor of a liberal “open skies ’’ (OS) policy are persuasive and are broadly agreed in principle in the Caribbean. International experience on the benefit of a liberal, OS approach is broadly positive and not just in the relatively advanced cases of the USA and E U but in a variety of developing country settings as well. For the OS countries in the Caribbean - Aruba, Dominican Republic - the results have been largely positive - Jamaica is expected to shortly follow. This means that OECS, Barbados and TT (Trinidad and Tobago) w i l l be competing against destinations with the most liberal a i r services regimes that small countries can achieve in place.

Caribbean nations would be advised to adopt a fully unrestricted policy towards a i r services provided that both local airlines have a right to compete and that adequate arrangements are in place to ensure fair competition. The adoption of OS by individual Caribbean governments would be enhanced with a revised CARICOM M S A fully supportive of these principles. Individual member states may however not always be prepared to adopt and implement “open skies ’ I at the same pace. Key issues for the Caribbean nations concern implementation and the management of risks, in particular regard to service continuity and local state-owned airlines. National strategies and policy framework would need to speciJically address the risk of service provision shortfalls through the use of subsidies and protection of the competitive process to ensure benefits of competition are passed to consumers. Countries which have a signiJicant ownership interest in regionally based airlines w i l l need to adopt clear and appropriate policies to allow these airlines to either compete or go out of business. I n order to design and implement good policies, some countries may require selective strengthening of policy and regulatory capacity.

The existing regulatory framework

4.1 In l ine wi th international practice, air services currently are regulated in Caribbean nations via a series o f bilateral air service agreements (BASAs) entered into by each government. BASAs cover the framework under which the airlines o f one state are granted economic rights to fly into and beyond another state. BASAs, as elaborated via the result o f on-going bilateral negotiations, regulate the rights o f each country to designate one or more airlines, what routes the airlines can service, the capacity they can offer and their pricing o f the services. The details are usually covered by memoranda o f understanding that accompany each BASA. The key point i s that both nations need to agree to any changes. BASAs in the Caribbean generally contain a number o f restrictions, often more so for intra-Caribbean agreements than for others, though in practice some flexibility has been demonstrated, especially in regard to pricing.

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4.2 Traditionally, governments can only designate airlines under BASAs that can be regarded as owned and controlled by nationals o f the designating nation. CARICOM nations have been in the forefront o f efforts to reduce the restrictiveness o f this requirement for smaller countries with small capital markets. This has resulted in I C A O adopting a “community o f interest” principle to assist developing nations in similar positions - under a 1983 non-mandatory Resolution A24-12. Under the CARICOM M A S A (CMASA) - discussed further below - there i s already enshrined the concept o f a CARICOM carrier (article l(f)) in an attempt to address this problem. However, for air services beyond the Caribbean, agreement o f the bilateral partner government remains necessary. There appears to be increasing openness on this issue e.g. the issue i s explicitly and generally favorably addressed in the Memorandum o f Consultations between the Jamaican and U S governments in the context o f the finalization o f the new OS BASA. Further practical expressions o f this intent are that BWIA i s designated by Antigua and St. Lucia in their BASAs with the UK and Air Jamaica by Barbados and St Lucia in their BASAs with the USA.

4.3 The ability o f designated foreign airlines to serve “in-between” and “beyond” markets (so-called fifth freedom rights) i s often highly restricted. This can be potentially important in thinner markets e.g. a European carrier flying to Antigua and Grenada would generally need explicit agreement to provide services between say Miami and Antigua en-route and between the two Caribbean nations. I t i s understood that there are significant “grand parented” rights for some international carriers such as British Airways in this respect. The use o f such rights - if included in a BASA - does in theory provide an option for providing additional competition on, and service options for, intra-regional traffic in the Eastern Caribbean. The practical interest o f international airlines appears, however, to be limited, as such services cannot usually be profitably provided on the wide body aircraft that they employ.

4.4 A number o f countries in the Caribbean have now either adopted, or are reviewing the advantages o f adopting, an OS policy with the USA. This represents the most liberal option with a substantial degree o f openness in regard to pricing, airline and route designation. The comparison o f the experiences o f one such country - Aruba - as opposed to a country that continues to adopt a more restrictive regime - Barbados - are illustrated in Box 2 below (with further detail in Annex 4).

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Box 2: Air Services Policy in Aruba and Barbados

Aruba i s part o f the Netherlands but has enjoyed an autonomous status since 1986. Influenced by the experience o f the Netherlands, Aruba was an early adherent to liberal air transport policies, signing an open skies agreement with the USA in September 1997 including the granting o f 5‘h freedom rights. There are 18 bilateral service agreements in effect in total, most o f the rest o f which incorporate some degree o f restriction, such as air carrier and destination designation. Four agreements have restrictions on capacity and six on frequencies o f service.

There has been growth in the number o f airlines and the frequency o f services with the USA since 1997, albeit not al l o f that can be attributed to air services policy, The number o f U S scheduled carriers has increased from one to five and the number o f charter flights have expanded by 3.6 times. There are presently no registered national airlines providing services. There were two national airlines prior to OS, both o f which subsequently have ceased operations.

Barbados i s a Commonwealth country, which has been increasingly dependent on tourism, predominantly from Western Europe. Its airport also serves as a hub for the Eastern Caribbean with substantial intra-CARICOM air traffic. Barbados has no national airline, Two designated CARICOM carriers, BWIA and LIAT, account for 35% of traffic. Air access i s defined by 18 BASAs, none o f which are “open skies”. Eleven agreements provide for multiple airline designation, six for single designation, All agreements provide for double approval o f tariffs, which i s restrictive in principle and practice. Passenger capacity and frequency o f flights are not formally restricted but are required to be approved by the authorities.

I

Regional air service agreements

4.5 In the Caribbean region, air transport policy and regulation at the national level has to take cognizance o f the existence o f multilateral air service agreements (MASA), which may impose specific additional obligations. There are two such agreements which are relevant for the countries o f this study - the CARICOM M A S A (CMASA) which i s reviewed in more detail below and the air transport agreement o f the Association o f Caribbean States (ACS)9. The ACS agreement i s intended to support the objectives o f the 25 member grouping, in particular regard to the establishment o f a “sustainable tourism zone” in the region. The agreement was formalized in February 2004 but has yet to come into effect. I t has been signed by 15 member countries but ratified only by six. I t i s thought unlikely in any event that this agreement could be implemented in i t s current form as it contains restrictions which would conflict with the provisions of the bilateral agreements signed by some Caribbean nations, for example: the agreement limits signatories to designate two airlines and restricts the issuance o f f i f th freedom rights.

4.6 By contrast, the CMASA i s legally in effect. T h i s agreement does at this time contain a number o f restrictions and clauses that have been agreed by member countries to be in need of revision, as per Box 3 below. With the implementation o f the Caribbean Single Market and Economy (CSME) for CARICOM members it i s recognized that some o f the provisions o f the C M A S A wil l need up-dating as they are inconsistent with the Revised Treaty o f Chaguaramas. A revised C M A S A might be expected to support trade and economic development in the region through: creating an open market for air services to encourage competition and expand opportunities for regional airlines, improve services and reduce prices; facilitating (or at least not constraining) the adoption by member countries o f liberal air service arrangements with external partners. However, there i s a risk that the reform o f the C M A S A wil l fal l short and that some

See Annex 2. Membership includes 17 Caribbean countries and a number o f Latin American countries having sea borders with the Caribbean.

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restrictions wi l l be retained. The known intention i s for member countries to review, inter alia, Articles 4 and 6 together with Article 18 that specifies that the C M A S A does not affect existing BASAs. On this latter point, the apparent intention i s that the revised CMASA would require modifications to BASAs e.g. signing “open skies” agreements to be approved by CARICOM. I t appears that there i s no current intention to liberalize the competition and tariff articles. The CARICOM Secretariat i s concerned about “destructive” competition and excessively low prices and considers that governments continue to need the ability to veto such tariffs. This would be inconsistent with liberalization if this view were to be translated into a revised C M A S A andor competition law.

Box 3: Key Features o f the CARICOM MASA

The CMASA entered into force on November 17, 1998. There are currently 8 signatories who have ratified the agreement - Antigua and Barbuda, Barbados, Dominica, Grenada, Guyana, St. K i t t s and Nevis, St. Lucia, and TT. St. Vincent and The Grenadines and Suriname have signed but not yet ratified. Jamaica, Bahamas and Montserrat have not signed, inter alia, because they wish to retain double as opposed to single disapproval o f fares.

Whi le the agreement allows signatory nations to designate more than one airline, account has to be taken o f the impact on existing carriers in doing so (Agreement, Article 4). Depending on how this requirement i s implemented this may or may not amount to an economically restrictive rule. The CMASA i s un-restrictive in respect o f services offered by any designated CARICOM airline (Article 6). Its provisions on “fair competition” (Article 14) and tariffs (Article 15), however, fa l l well short o f liberal benchmarks with, for example, any government being able to disapprove a proposed air fare filed with it.

The concept o f a CARICOM air carrier, being an airline owned and controlled in any member State, being able to be “designated” by any other member State i s helpful certainly within the regional markets. Beyond the region, the concept depends on the willingness o f the other countries to recognize the designation.

Liberalization of air service policy - evidence and experience

B ac knround

4.7 Theory and practice over the last twenty years support the view that air services markets are workably contestable and competitive. Once the markets were de-regulated, starting with the USA and Chile in the 1970s, i t was demonstrated that entry (and exit) to markets i s relatively l ow cost as physical (aircraft) and human capital (pilots, etc.) can move to other markets at low costs provided satisfactory AT1 exists and safety regimes are effective and efficient. Efficient competitive outcomes in air services markets are possible in terms o f services provided in relation to expected customer demands and requirements. The broad conclusion from aviation reforms over the last two decades or so suggests that air services markets would be best served by commercial airlines, predominantly if not overwhelmingly privately owned, operating within a regulatory regime set by governments which focuses on safety, security, environmental concerns and economic aspects being covered by standard competition law with no further economic regulation e.g. entry and pricing.

4.8 Technological innovation has resulted in a wide range o f aircraft that can serve small to large markets, albeit at differing unit costs. Better airline business practices have taken advantage o f this wider range o f commercial aircraft. A number o f airline business models exist, perhaps

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most simply characterized by the traditional “legacy” airlines often offering “hub and spoke” or network services increasingly linked via international alliances on the one hand e.g. American Airlines and so called l ow cost carriers (LCCs) on the other, e.g. Southwest or Spirit. Analysts consider that the latter s t i l l have a significant unit cost advantage over the former because of more efficient use o f physical and human capital, although legacy carriers are moving to reduce their costs in the face o f the competition. Southwest only uses Boeing 737s for example, reducing costs o f maintenance and operations. The general expectation i s that real air fares on average wil l continue to decline with falling unit costs being passed onto to customers as a result o f competition. With lower and reducing costs it would thus become profitable for existing and new airlines to serve progressively smaller markets. This i s a factor that i s relevant for some o f the smaller Caribbean air markets.

International

4.9 Empirically, there i s evidence that liberalization has been associated with increased services and lower fares. The evidence i s stronger perhaps in the US and EU markets where more extensive analysis has been carried out - but the positive impacts are also fel t in a number o f diverse, developing country settings, see Box 4 below. The effects o f comprehensive liberalization on the air markets for markets as diverse as Latvia” and India are dramatic.

4.10 In the USA, air fares are estimated to be 24 percent lower than what they would have been if the regulated market had continued”. Studies o f the effects o f OS air service agreements on the U.S. and EU markets and smaller markets such as the Netherlands-Kenya routes and Australian markets also show benefits. Studies also highlight that there are benefits resulting from earlier rather than later liberalization which could provide a strategic advantage - such for the Netherlands versus France.

Box 4: Recent International Experience in Air Transport Policy Reform

Following the initial experience of Chile, a number of countries in different parts of the world have implemented policy reforms broadly consonant with OS.

- Chile - The government considers that the OS policy adopted in 1989 has contributed to a 10 percent per annum growth in passengers up to the present, and a 9 percent per annum growth in cargo. The number of services offered internationally has increased from 104 to 329 per week. This has not however been at the expanse of Chilean carriers, who account for 1,487 services now, compared to 47 per week before.

Lebanon - A recent analysis carried out on behalf of the EU indicates that this country’s OS policy has helped to deliver a dynamic air market as the tourism sector rebounds’*. The local airline - MEA - appears to have coped well with the new competitive environment.

Latvia - Comparing the performance of Latvia to Armenia as regards services to the EU, there i s a dramatic difference in fares, with those in the more open Latvian market being up to 40% lower. I t does, however, appear that entry into the single EU air market has created more rapid traffic growth than that obtained since the earlier introduction o f OS.

lo World Bank 2006.

’’ European Commission (2004) 74 Final February 2004. Cliff Winston and Steve Morrison, Brookings Institution, Washington DC 2003.

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4.11 Countries interested in pursuing a liberal approach to air services have the option to participate in the Multilateral Agreement on the Liberalization o f International Air Transportation (MALIAT). The provisions are similar to those o f the U S style OS agreements, but would apply multilaterally as opposed to bilaterally. A country can request to participate provided that it has demonstrated that i t has acceded to a number o f stated international security agreements. Current signatories are Brunei, Chile, New Zealand, Singapore, Samoa, Tonga and the USA. The New Zealand government i s the depository state for the agreement.

Caribbean-Speci f ic

4.12 Aruba has signed an OS agreement with the U S A and generally appears to follow the liberal policies o f the Netherlands. I t i s noteworthy that following the signature o f the OS agreement with the USA a number o f airlines entered in direct competition with American Airlines that had previously dominated the USA-Aruba markets. The latter’s market share fe l l significantly. U S charter airlines increased output significantly also. Aruba i s less than hal f the size o f Barbados but i t s connectivity in terms o f the number o f flights into major airports such as Miami appears approximately the same. In the case o f the Dominican Republic, there has been continued growth in air traffic and passenger arrivals since the signing o f an OS agreement with the USA in December 1999. O n average, the rate o f growth is, however, not greater than in the period preceding OS though the growth o f traffic and increase in carriers i s marked to some destinations, such as Punta Cana.

4.13 The evident increases in airline services to Aruba and the Dominican Republic cannot, therefore, be attributed simply and only to the adoption o f OS policies. In both cases, the countries have benefited from the development and marketing o f an attractive tourism product and government policies that have been supportive o f private sector development in the sector. Barbados - a case study on which i s also included in Annex 4 - has tended to adopt more restrictive policies, have been relatively successful in developing air services - helped in this case by the role o f a “hub” that i t plays in the southern part o f the Eastern Caribbean. Barbados air fares have however been higher on average than some o f the neighboring islands.

4.14 Jamaica i s at an advanced stage in i ts discussions with the US on the implementation of an OS agreement. The agreement was negotiated in October 2002, providing for unrestricted capacity and frequency on al l routes, but has yet to come into effect. In addition to other benefits, the signing o f the agreement i s seen as advantageous to Air Jamaica’s prospects as i t would open up service opportunities beyond the 10 destinations in the USA included in the current more restrictive BASA. As and when this agreement i s finalized and put into effect, countries in the Caribbean operating more restrictive agreements - such as OECS and Barbados - would be faced by an increased number o f countries adopting OS policies and which are likely to be increasing the quantity o f international air services to their destinations. There is, thus, the potential for some diversion o f business to countries as a result o f increased competition from countries adopting more liberal regimes and away from the Eastern Caribbean.

4.15 Standard competition law i s generally considered to appropriately address concerns about predatory pricing, which often arise in debates over the liberalization o f air markets. This i s

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generally absent in the focus countries o f this study, with the exception o f Jamai~a '~ . CARICOM has initiated work in this area, which should result in the establishment o f a CARICOM Competition Policy Commission. While it i s explicitly seen as a mechanism to assist the implementation o f the CSME, it i s unclear at this stage whether air services markets wil l be covered by the law and the Commission or not. Each member country would have to agree to this in any event.

Specific policy issues of concern to the Caribbean

Service continuitv

4.16 When assessing air service liberalization reform propositions, policy makers are often concerned about potentially greater risks to the continuity o f services in liberalized and more commercial markets. This i s l ikely to be particularly so in the Caribbean region for a number o f reasons: principally the need to ensure some level o f access and connectivity between the various island countries given the existence o f few, if any, modal alternatives to air transport; additionally the concern that the current air transport services to the smaller islands such as in the Eastern Caribbean might not be continued under a more liberal, market-oriented environment. The Caribbean countries would thus be advised to consider whether or not to adopt explicit policies as to the situations in which they would intervene to secure either andor: a given level o f service that would not be provided as a result o f competition in the market; a level of (subsidized) fares either generally or to specific groups that would otherwise not be attainable through competitive service provision. I t i s not evident that any such policies have been adopted. The alternative approach - where (such as with LIAT in the Eastern Caribbean) a regional state- owned airline i s implicit ly expected to cover this service requirement without, however, having the resources to do so - i s neither preferable, nor likely sustainable over the medium term.

4.17 International experience suggests that air transport services will generally be available in the absence o f restrictive economic regulation including entry and air fare controls. Prices charged will depend on a range o f factors - with average prices often being higher in smaller markets where technically available scale economies are less likely to be utilized and competition i s limited. Fixed costs, while less important than in the infrastructure services markets, s t i l l do exist. Also costs, on a passenger-kilometer basis, reduce as route length increase. Evidence also suggests that the presence o f competition, particularly from LCCs, lowers average prices14. Al lowing airlines pricing freedom within the limits o f general competition law i s likely to result in the maximum achievable level o f services. I t would thus be generally expected that more services, rather than less, would be provided under a liberal policy environment than under a restricted regime and that this should apply also in the Caribbean.

4.18 Should the Caribbean region more generally and explicitly adopt liberalized air services policies, service provision decisions would be made by airline management, including decisions to cut or vary services and raise fares. Compared to a situation where governments own airlines

l3 In principle in Caribbean international air markets redress can be sought using the partner nation's law, for example BWIA could use U S law if it considered that a US carrier was engaging in anti-competitive predatory behavior in the TT-US market. l4 See also Inter Vistas Consulting June 2006

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can direct their operations, governments often fee l exposed to adverse polit ical consequences o f commercial decisions particularly when alternative services may not be directly comparable e.g. passenger sea ferries versus air services. Under the policy approach proposed here, loss-making airlines would reduce services. Air fares may init ially r ise because o f reduced competition but operating costs would fal l somewhat with higher load factors and more efficient competing airlines may be encouraged to enter the market, thus offsetting the ability to raise prices. In any event, remaining airline(s) would have stronger incentives to serve profitable markets and service levels would almost certainly rise. Very small markets l ike Montserrat would likely get services, however, at “high” prices reflecting the high costs, in the absence o f any explicit subsidies. I t i s likely that many customers - certainly those in the tourism and business sectors - will be willing and able to pay the prices to order to benefit from the available services.

4.19 The high price o f services - and their relatively infrequency - in relation to a government “benchmark” would, however, be o f legitimate policy concern insofar as this might adversely impact intra-Caribbean travel movements which do have broader economic and social benefits. There would be an argument for subsidizing such travel - in order to capture such benefits - if this would not otherwise take place at market service and fare levels. In the current situation, however, it i s difficult to identify and quantify the extent o f “social” air travel, given that the customer base for air services i s a heterogeneous one, e.g. even in regard to St. Vincent and The Grenadines and Dominica which are totally dependent on regional, intra-Caribbean services, a large proportion o f travelers are tourists or persons on private or government business. Nor i s information widely available on route profitability, with a likely substantial degree o f cross- subsidization o f loss-making routes practiced by both LIAT and Caribbean Star. Caribbean governments - and specifically those o f the OECS - would thus be advised to undertake further work in this area and to ensure that the capacity o f the responsible policy and regulatory authorities in their countries are strengthened to carry out andor supervise such work.

4.20 Explicit subsidies via contracts with airlines would in principle be an appropriate mechanism to address remaining air service adequacy concerns if the government considered this to be the best use o f tax revenue and value for money could be achieved e.g. through competitively awarded tenders or auctions. Sound public policy would, however, suggest that before any such policy i s adopted the proposal should pass a cost-benefit test in addition to government funds being available. In this regard, the policy - and the mode by which i t should be implemented - would also have to address the following points:

* * * *

* *

What are the objectives o f the policy? Who are the target beneficiary groups or communities? What i s subsidized and how i s the level o f subsidy determined? What are the arrangements for managing payment o f any subsidy and ensuring it i s correctly used (and targeted)? How i s the air service provided - on a competitive basis, or through allocation? How i s the performance o f the airline to be monitored and service contracts periodically renewed?

4.21 There i s some relevant international experience that could be tapped by Caribbean policy makers in designing a policy framework to underpin service continuity with some specific

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examples provided in Box 5. Many o f the largest countries or blocs which have been in the forefront o f air service liberalization - this including the USA, EU and Australia - do have essential services policies in place as the (limited) application o f “public service obligation” i s recognized. The extent to which essential services are provided under such policies, whether with or without financial subsidy, i s quite limited, though the services are undoubtedly important for the beneficiary communities. The issue o f service continuity i s recognized in a number o f different developing country settings - including Cape Verde and Madagascar - although there are relatively few examples o f a successful scheme being launched and sustained. The Madagascar experience i s quite illustrative o f the practical difficulties that might be encountered in implementing a service support scheme in a resource-challenged environment. In the case o f Cape Verde, a policy to secure inter-island maritime service on designated unprofitable routes through competitive bidding for least cost subsidy appears to have been successful. The policy has created additional supply options at a subsidy cost much lower than had been expected.

Box 5: Examples o f Subsidized Air Services

USA - A federal “Essential Air Service Program” was initiated in 1978 at the time o f the liberalization o f the sector. I t serves to ensure provision o f a fixed number o f services (normally 2 to 4 per day) by 19-seater aircraft from remote rural communities to a medium or large hub airport. The distance must be 70 miles or more and the subsidy per passenger would not exceed $200. 154 communities are currently benefiting from the program (including 39 alone in Alaska). The budget for 2006 i s US$106 million. Routes are allocated on a competitive basis taking intc account a variety o f cost and service factors. The amount o f subsidy may be fixed for a period not longer than two years.

EU - Regulation 2408192 permits member countries to turn air service to a peripheral or development region into a “public service obligation”. Subsidies can be provided for the provision o f such services following an open, competitive process. In addition, member countries could provide direct subsidy support to disadvantaged passengers. Since the issuance o f the accompanying guidelines, France, Spain, Portugal and UK have taken advantage. The programs initiated are largely to encourage connections between remote islanders and other citizens with the metropolitan country. Some examples thus include - France: one round trip per year for inhabitants o f the overseas departments and territories and rather more generous support for Corsica; Spain: 33% discounts for inhabitants o f the Canaries, Balearics, Ceuta and Mel i l la; and Portugal: 30% discounts for inhabitants o f the Azores.

Australia - The Remote Air Service Subsidy (RASS) program exists to ensure that isolated communities benefit from at least one weekly service for urgent travel on the part o f passengers and for basic cargo shipments. The government grants the rights to such routes through a bidding process - a fixed term agreement - and pays any subsidies required directly to the air carriers.

Madagascar - A policy has been adopted under which isolated communities with access to an aerodrome but without regular air service and without reliable alternative transport means could benefit from subsidized services. A legal instrument to this effect was passed in 1999. In principle, routes are allocated to an air carrier after a competitive process for a defined period o f time (usually limited to 2 years). The subsidy i s intended to cover the difference between revenue and operating costs. Twenty one communities are currently identified as beneficiaries of social service though this i s currently under review. In practice, there have been deficiencies in the way the scheme works as no guidelines have been issued for the implementation o f the decree, that is: there has not been competition for service provision, only Air Madagascar has provided service and mostly for periods exceeding 2 years. There i s no mechanism for verifying information provided by Air Madagascar for the purpose o f justifying subsidies; subsidies in any event have not been paid, the airline i s owed US$4.3 million.

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Local airlines

4.22 Governments may worry that a contractual approach s t i l l leaves important decisions in commercial hands. State ownership i s often justified as i t potentially gives to governments direct control over services provided. However, experience, including in the Caribbean, has shown that airline ownership doesn’t eliminate performance problems, and i s fiscally costly and risky. Governments generally struggle to earn anything like an economic rate o f return on their investments. BWIA, Air Jamaica and LIAT have al l caused, and are likely to continue to cause, significant fiscal problems for their respective governments. Governments have to continually and appropriately manage any ownership interest in an airline to protect their, and ultimately the taxpayers, financial interests. These issues and their potential solutions are discussed in more detail in the succeeding chapter.

4.23 The presence o f government-owned airlines in markets, or able to enter markets, can have adverse effects on competitive service provision in those markets. Commercial airlines will be less clear about the competitive response by government-owned airlines because the objectives and motivation o f the latter may not always be evident. As private capital and resources are highly mobile internationally, the easiest response to the uncertainty caused by government-owned airlines i s to operate elsewhere. The reforms suggested below go towards addressing this problem by clarifying the airline’s objectives and accountabilities.

4.24 A further concern i s that government ownership interests may constrain efforts to de- regulate air services markets. While continued economic regulation may be seen to reduce fiscal costs in the short term, the adverse effect on potential competition reduces the efficiency o f the critical air services markets. Experience has also shown that protecting state-owned enterprises (SOEs) from competition blunts their incentive to improve efficiency. Fully exposing SOEs to competition i s clearly desirable from the overall economic interest o f the economy and ensuring efficient SOE operation, but even then governments have generally found it challenging to operate SOEs on a strictly commercial basis. No t unsurprisingly, there i s over-whelming evidence that in competitive markets privately owned f i r m s out-perform state-owned f i rms” .

4.25 Further, i t i s evident that those Caribbean countries which have a current direct ownership stake in airlines would be unlikely to derive full benefit from the liberalization o f air transport services unless an explicit and appropriate policy i s being pursued with regard to state- owned airlines. The circumstances in which these countries find themselves - and the policy responses thereto - are, however, not necessarily uniform in each case, even if the underlying principles may be the same. I t i s possible to distinguish three different cases, which broadly apply to each o f three regional state-owned airlines that are analyzed in more detail below. For Jamaica, the proximate decision to adopt an “open skies” policy with the U S forces the need to restructure and recapitalize Air Jamaica (AJ) - so that i t can compete commercially or else go out o f business. For TT, a number o f steps were taken to restructure and recapitalize BWIA and set in place the framework under which it might operate commercially. However TT does not intend to seek an OS arrangement yet and some measure o f “protection”, at least in the short term, wil l be afforded to the airline, or i t s likely successor (see Chapter V). In both these cases,

Megginson and Netter, Journal o f Economic Literature, June 2001.

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however, alternative service providers are available on the routes operated by the state-owned airlines so there i s no justification for a policy other than to allow the airlines to operate on a commercial basis. For OECS (and Barbados), the policy to be adopted towards LIAT i s linked to decisions that have to be taken on the optimum approach to defining and implementing any required subsidies on services and fares for service continuity. One eventuality might be that LIAT would be operated with a commercial orientation, and might (or might not) decide to compete for subsidized route service in addition to a core profitable set o f services. The ability and willingness o f the shareholder countries to recapitalize LIAT i s likely to be a limiting factor to any future prospects for the airlineI6.

A possible strategic approach for the Caribbean

4.26 Caribbean nations would be advised to adopt a fully unrestricted OS style policy towards air services provided that both local airlines have a right to compete and that adequate arrangements are in place to ensure fair competition. Such a policy i s likely to be consistent with increasing the availability o f air services and with ensuring quality and demand responsiveness through the competitive process. This i s likely to be a robust and most appropriate risk mitigation strategy. I t i s recognized that individual member states may not however always be prepared to adopt and implement OS at the same pace. The timing and content o f bilateral negotiations towards liberalization may thus vary from country to country.

4.27 The adoption o f an unrestricted policy by individual Caribbean governments would be enhanced by the adoption o f a revised CARICOM MASA fully supportive o f these principles. The CMASA should be revised in the direction o f creating a regional “open skies” arrangement retaining only the designation o f CARICOM airlines. In addition, CARICOM members would expect to support the inclusion o f the “community o f interest” provision in any bilateral negotiations towards an OS style agreement. These two measures may be seen as enhancing the prospects for regional based airlines to effectively compete for business in liberalized air transport markets.

4.28 Key ongoing issues for the Caribbean nations concern implementation and the management o f specific risks, in particular in regard to service continuity and local state-owned airlines. National strategies and policy frameworks would need to specifically address the risk o f service provision shortfalls through the use o f subsidies and protection o f the competitive process to ensure benefits o f competition are passed to consumers. A related consideration wil l be the level o f fares in a liberalized air transport services market. Strategies would need to be put in place to identify communities or groups that might be adversely affected and to propose whether and how they should be supported. Countries which have a significant ownership interest in regionally based airlines wil l need to adopt clear and appropriate policies to allow these airlines to either compete or go out o f business.

4.29 In order to design and implement good policies, some countries may require selective strengthening o f policy and regulatory capacity. The areas concerned would include:

l6 Owner governments in the case o f LIAT appear motivated to explore external financing options to keep the airline afloat, such as the reported discussions o f the Antigua government with Venezuela for a US$20 mil l ion cash injection.

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management o f anti-competitive conduct such as predatory pricing; design and management o f service continuity and fare subsidy schemes. Key officials would benefit from exposure to best and recent practices in the air transport sector and f rom greater familiarity with analytical tools and techniques, such as the “best practices model”, which has been developed under the Inter Vistas consultancy. Countries would be encouraged to widely disclose their air transport sector policies to the public and also to provide regular reports in regard to policy implementation and to monitoring the performance o f the sector.

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V. Repional Airl ine Services

Regionally-based airlines, both privately and state-owned, are signijkant service providers in the Caribbean, especially in regard to intra-Caribbean traflc. A movement towards a liberalized a i r transport policy regime, while maintaining Category I status, would open up - in principle - some new opportunities for these airlines whilst at the same time increasing competitive pressures in traditional markets. The three state-owned airlines reviewed in this study - Ai r Jamaica, B WIA and L IAT - all face financial and operational difficulties to varying degrees. Undercapitalization seriously hampers the ability of the airlines to respond to opportunities and pressures, and quality and reliability of service is adversely impacted. There is history of largely unsuccessful attempts to turn the airlines around, under both public and previously private ownership. There is continuing interest in exploring regional collaboration and partnerships among one or more of these airlines, though this approach is likely to have a marginal effect on viability.

Open ended, non-transparent and unpredictable government support for these airlines should not continue - this wi l l not help assure competitively provided services, in fact just the opposite: it w i l l deter new competitors f rom entering the market. Government should adopt clear and appropriate policies under which state-owned regional airlines should be expected to be profitable and earn appropriate returns - if not, they should: either be divested if this is sti l l possible; or else wound up. A i r services generally do provide economic and social benefits in view of the importance of intra-Caribbean mobility for economic development. However, the argument that these justifL the current level of financial losses and the accumulation of substantial net liabilities by state-owned airlines incurred is highly questionable. A better approach would be to subsidize particular routes or services as and when the market cannot provide - such subsidies should, however, be awarded competitively and targeted at inducing additional services following the adoption of a clearpolicy in this regard.

Overview

5 .1 Regionally owned and operated airlines are a major factor in the provision o f air transport services in the Caribbean. As earlier stated, these airlines - which currently are seven in number - currently account for about 28 percent o f total regional airlift. However, their relative importance may be higher in specific markets, especially their home countries as indicated below in Chart I. In the cases o f Jamaica and TT, where the relevant regional carrier provides 43% and 42%, respectively, o f airl i ft capacity, the majority o f the services provided are extra-regional. In the case o f the OECS, regional airlines account for over one third o f services, though the level o f dependence i s much higher than this for intra-Caribbean services where the major alternative (indirect) option i s the use o f American Eagle through San Juan.

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zoo0 90 a so 0 70 0 60 0 50 0 40 0 30 0 20 0 I D D 0 0

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5.4 This section - focusing particularly on the government owned and supported airlines o f Air Jamaica, BWIA and LIAT, which together account for a total o f 15% o f al l airl i ft in the region - considers the strategic options commensurate with the efficient future operation of regional airlines in l ine with the conclusions drawn from the preceding chapter, that i s the adoption o f an OS style air transport policy subject to adequate provisions made, in the interest o f the consuming public, to ensure competition for service and subsidy on routes where no service provision would otherwise occur.

5.5 All three o f these carriers currently face diff icult financial and operating issues. All have at times in the past operated under majority private ownership on commercial terms, though not usually on a profitable basis. More recently, financial distress and increasing government involvement has changed both the shareholding o f the airlines and the strategies they have followed, orientated towards continuity o f services, and often just plain survival. Air Jamaica was re-nationalized in December 2004 after several years o f fully private ownership. LIAT’s private shareholding has progressively fallen since the 1995 restructuring and i s now under 20%, and that o f BWIA i s less than 2% having been over 50%. In the cases o f LIAT and BWIA, government ownership stakes have progressively increased.

5.6 The conclusion i s that for all three airlines, the prospects for establishing and sustaining viability are bleak. In al l three cases, their continued operations, as wel l as any further public fiscal and financial support, should be thus subjected to transparent and appropriate criteria, as set out at the concluding part o f this chapter.

Regional airlines issues

LIAT

5.7 LIAT i s majority owned by the governments o f Barbados (43%), Antigua and Barbuda (18%) and St. Vincent and The Grenadines. Both Barbados (US$lO million) and Antigua and Barbuda (US$6 million) have recently injected additional capital into LIAT. Eight other governments, including TT, own 3.3% o f equity but have shown no interest in providing additional capital. The recent injections have, however, been insufficient to fully address the financial problems o f the airline - which has a negative net worth o f EC$100 mi l l ion (US$37.2 million) and, more disturbingly, appears to be generating a negative cash f low from operations. A number o f restructuring plans have been designed and implemented at least in part over the past 10 years without an appreciable positive impact. In that time, a substantial number o f cost cutting measures have been enacted - reducing employment by one third, a wage freeze since 1997. Financial difficulties have forced LIAT into a “hand to mouth” mode o f operation - this may increase i t s operating costs. Losses are currently running at over EC$50 mi l l ion per year.

5.8 The B a M F C was invited to review strategic options for LIAT back in 2003, as the airline was slow to rebound from the impact o f 9/11. LIAT subsequently introduced a so-called L C C strategy in July 2005, but the implementation suffered from a number o f problems. An overriding concern for the strategic positioning o f LIAT i s the competition since 2000 from Caribbean Star. The competitor fully matches the LIAT network, with newer and larger aircraft. LIAT does not have ready access to the resources to match this. Current shareholders do appear

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to be concerned to address the issue o f proper recapitalization, but thus far the approach has been to periodically inject cash from the limited resources available to them. This will likely be insufficient to secure the future operations o f the airline.

5.9. The apparent underlying public interest rationale for continuing with LIAT i s that with the start o f the Caribbean Single Market and Economy (CSME), intra-regional linkages in the Eastern Caribbean cannot be dependent on the “foreign-owned” Caribbean Star. It should be noted that Caribbean Star i s yet to be profitable but the company had a forward looking strategy for commercial viability, in part based around LIAT’s putative commercial demise. I t i s understood that LIAT management are working on defining a core profitable network that they would be prepared to operate without subsidy - but this i s likely to be a much narrower than the range o f services they currently provide with the consequent reduction in employment. A new development in the search for a viable future for LIAT concerns the preliminary discussions that have been launched in September 2006 by the major shareholding governments with the owners o f Caribbean Star. 17

5.10 LIAT’s negative net worth and the on-going loss on operations do not appear to be fully reflected in the accounts or budget provisions, respectively, o f i t s main shareholders. Therefore, the owners may not be making decisions in full light o f the facts and o f the financial consequences o f the current operating strategy. The fiscal impact o f any future losses could be significant, and would l ikely to fal l most heavily on Barbados and Antigua and Barbuda, see Box 6 below.

Box 6 : The Fiscal and Economic Impact of LIAT Operations

The current and projected future levels o f fiscal support to LIAT are substantial. If these remained at current levels and were shared equally by two major shareholder countries, Barbados and Antigua and Barbuda, they would amount to, respectively, 1.6% and 6% o f public revenue. This i s before taking into account any additional investment in recapitalization that would be at least as much again. It can be noted that in the case o f Antigua and Barbuda, this combined amount i s roughly equivalent to health or education sector expenditure, respectively 12% and 10% o f public revenue.

The Government o f Antigua and Barbuda considers that the loss on LIAT (or their share o f it) would be more than offset by the benefits from the employment by LIAT o f people in Antigua. This perceived benefit does not stand closer scrutiny. This report estimates that the subsidy i s now o f the order o f US$40,000 per job per year, four times the current GDP per capita. Given the re-employment options available, such as with Caribbean Star, subsidizing employment in this manner would seem to be a poor use o f scarce public resources.

A further argument in favor o f subsidization o f the losses o f LIAT i s that such losses could be regarded as the “insurance” premium in case the private airline alternative ceased their operations. The foregoing analysis suggests, however, that the complete loss o f commercial services i s unlikely, although as discussed in the preceding section, the government could use alternative, better suited policy instruments to secure competitive service on thinly trafficked routes.

I I

” T h i s suggests an attempt at a coordinated rationalization o f the services offered by the two airlines. It i s not yet certain what impact this would have on the preservation o f competition among service providers in the Eastern Caribbean.

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Air Jamaica

5.1 1 Having lost nearly US$0.7 bi l l ion over the last ten years, Air Jamaica i s now back in government ownership. There i s some interest in exploring new routes to and from Central America, but otherwise service levels and frequencies are likely to be downgraded. The services operated from Jamaica's Montego Bay airport hub have already been significantly reduced. The airline's market share for Jamaica i s only 43% and falling, inter alia, with the impact o f increased competition form US based LCCs which have entered the markets e.g. Spirit and Jet Blue. Passenger traffic fe l l by 21% in 2005 alone, although this may be partly explained by dislocations caused during the re-nationalization, The imminent signature o f a US-Jamaica OS agreement will increase competitive pressure on AJ.

5.12 While detailed financial information has not been disclosed recently, the indications are that the airline has continued to make losses - US$113 mi l l ion in 2004, estimated at U S 1 3 6 mi l l ion in 2005 and officially projected at US$74 mi l l ion for 2006'8. The reported assets o f A J are US$295 mi l l ion per the 2005 accounts. I t i s not clear whether the finance leases for aircraft leases are on or o f f balance sheet. The balance sheet shows a substantial negative net worth position. The current expectation i s that airline could, at best, reduce annual losses to about US$30 million, assuming favorable fuel prices. I t i s not clear when or how such losses are to be eliminated with reported load factors below those o f competitors and higher costs imposed by adherence to tighter maintenance schedules mandated by the c iv i l aviation authority.

5.13 I t i s not clear whether the government o f Jamaica i s willing or able to properly capitalize the airline given i t s fiscal position, high levels o f debt to GDP and competing priorities for government expenditure. The new Board o f Directors appointed on the re-nationalization appears to be representative, rather than commercial in i ts composition. No new strategy has been adopted by the Board for the re-establishment o f viable operations, although a new chief executive officer has recently been appointed - who i s a former chief executive o f an airline company, America West.

BWIA

5.14 The airline i s back under government ownership with a residual private ownership below 2%. A commission under the chairmanship o f Arthur L o k Jack was appointed in 2004 to investigate options for revitalization o f BWIA and a return to profitability. A new Board has since been appointed on which commission members s i t with a mandate to prepare a medium term business plan, based on the recommendations o f the commission. Actions to be taken included measures to cut un-profitable routes, increase productivity and reduce personnel costs, inter alia through contract renegotiation with the unions. A new chief executive officer has been appointed, one who has had experience in turning around a struggling European carrier (SN Brussels). The airline also requested regulatory assistance to constrain U S charters from selling seats in the local TT market. Concern over US retaliation has constrained government action on the latter request. Operating losses have however not yet been reduced, and are believed to be s t i l l running at around US$1 mi l l ion per week. The reported 2005 loss was US$27 million.

'* Public Bodies FY2006/2007, Jamaica Ministry o f Finance and Planning. Some market analysts project a loss o f US$160 million.

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5.15 BWIA’s latest available annual report showed that as at 31 December 2004 it had negative working capital o f US$l 10 million, non-current assets o f the same amount and negative net worth o f US$104 million. The net cash flow from operations in 2004 was US$2.5 million. The audit statement noted that the financial statements have been prepared on a “going concern” basis which assumed that adequate financing wi l l be obtained to allow the company to meet i t s obligations. Thus additional commitments o f support from the government were always likely to be critical to BWIA’s future viability.

5.16 On i ts appointment, the Board was to operate under an “Appointment Letter” issued by the government specifying expectations, rights and obligations o f both sides. For example the Board was requested to advise the government on the best future ownership and governance options for BWIA, e.g. re-privatization (full or partial) or management contract. The government had offered an indemnity to BWIA in respect o f o i l prices above $50 per barrel. Subject to a satisfactory business plan being submitted by the board, it had been envisaged that the government would invest US$250 million in BWIA sometime in 2006. In the event, the government decided in early September 2006 to wind up BWIA by or before December 3 1,2006 with a new company, Caribbean Airlines, to be created in i t s place.

5.17 The fact that the government was prepared to take this step when no other option appeared more attractive i s noteworthy. I t does not necessarily signal however that further government involvement in a regional airline, either now or in future, i s out o f the question. The winding up o f BWIA gives the new airline an opportunity to try to operate competitively without the encumbrance o f heavily indebtedness and an unmanageable cost structure that wore down BWIA. However, the government’s financial position does mean it could continue to provide financial support to allow the airline to operate at a loss, at least while oi l prices are high. Earlier discussions with government officials suggested that the concept o f a required rate of return on government investments i s not yet central to government thinking. The new situation calls for government to clarify i t s policies in regard to future investment in the airline sector in l ine with this report’s recommendations that regional airlines ought to be allowed to operate on a fully commercial basis.

Strategies for Mitigation

5.18 future continuing losses o f the regionally operated airlines.

There are a number o f specific strategies that could be adopted to mitigate the likely

(1) Reducing costs through collaboration. There are a range o f options that could be considered that would include route sharing and development o f common services on a contract basis, a l l the way to the suggestion that all airlines should merge into a single entity mooted at the Caribbean Hotel Association meeting in June 2005. In principle, there i s a possibility that collaborative arrangements could reduce costs for the equivalent level o f service that i s currently provided. Specific opportunities may arise that wi l l tend to encourage collaboration, such as the joint planning activities, which are ongoing to assure adequate airlift in the region during the 2007 World Cup Cricket. I t was the thrust o f an earlier Caribbean air transport initiative in 1993 that saw the approach o f regional collaboration as the most likely to improve the fortunes o f regional carriers. The main drawbacks are twofold: firstly - it i s improbable that any cost savings

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obtained are going to be deep enough to have a major impact on improved viability - which would almost certainly require fleet renewal and large scale re-capitalization; and secondly - historical evidence suggests that there are practical difficulties in getting collaborative arrangements to work on a sustainable basis (witness for example the failure in the recent past to implement the agreements for BWIA to help LIAT on marketing and sales). Within the Caribbean - a position specifically championed by the CTO - there i s the suggestion that these measures could be supported by streamlining the “hub and spoke” arrangements in the Caribbean to generate economies o f scale in airline operation.

(2) Expanding markets. An expansion o f intra-Caribbean or international market opportunities for regional airlines would go someway towards opening up the possibility o f providing more remunerative services. Such an approach would need to be underpinned, however, by efforts to sustain, and selectively improve, the quality o f the tourism product in the Caribbean, including the development o f multi-destination tourism. The adoption o f OS policies in general and the liberalization o f air transport within the CARICOM region specifically (which could eventually be expanded to encompass the whole o f the Caribbean region) would, at least, increase the range o f options available to regional airlines. Functional cooperation in the region to some extent - and pursuing strategic alliances with international airlines to a greater extent - could support the airlines’ effective response to any scale up opportunities created by new demand.

( 3 ) Privatization and/or downsizing. This does not necessarily represent a new strategy - all three featured airlines have gone through cycles o f public and private ownership and have undertaken various strategies, mostly unsuccessful, to return the airline to profit under different shareholding arrangements. All the shareholder governments appear open to consider the possibility o f further private sector investment, though it seems highly unlikely that they would attract new investors, either internationally or regionally at this stage. The recent and current restructurings do not appear to have introduced any new, or more viable, business model for operating services. That position i s unlikely to change until such time as air services policy reform would help expand market opportunities for these airlines as discussed in the preceding section.

(4) Winding up. This may eventuate as a sound strategic option where eithedor: the continued operation o f the airline cannot be guaranteed due to financial stress or outright insolvency: an assessment confirms that there are viable alternatives that either are or would likely become available in a competitive market as and when the existing regional carriers folded. Experience suggests that alternatives can be developed and countries generally have survived the winding up o f a national carrier - Zambia i s an example o f a country, comparable to the Caribbean in terms o f the thinness o f markets, i f not in terms o f geography, where more than one viable carrier has emerged to serve a market vacated by the demise o f a single state-owned service provider. Critically, however, as this report argues below, the shareholder governments will need to set out clear objectives and performance criteria for state-owned airlines to meet prior to taking the decision that the airline concerned ought to be wound up.

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Are losses inevitable?

5.19 There are common fallacies stated below that continue to circulate to the effect that Caribbean governments would be justified to continue to subsidize losses and would be rational in allocating resources to this effect. These arguments do not necessarily turn out to be strong. Even if a case could be made for public service provision, i t would also be necessary to demonstrate that finds could be allocated and expended well.

(a) Airlines generally don 't make a profit, even in the developed world. An increasing number o f airlines do, particularly those adopting the LCC approach. Also, some developing country airlines do make a profit, such as in Mauritius per Box 7 below. Some o f the circumstances o f the Mauritius case are highly specific and possibly not applicable in the Caribbean. However, some o f the lessons from this experience could be replicated such as: partnerships with the private sector; sound professional management; no day to day involvement o f government in airline operations. Recent data provided by IATA forecast a global industry profit o f US$7.2 bi l l ion in 2007, compared to losses o f US$2.2 bi l l ion in 2006 and US$6 b i l l ion in 2005. Clearly there are a number o f large international, legacy carriers in USA (responsible for the highest proportion o f global losses) and Europe which have experienced financial problems. In some cases, these issues have been addressed, often in the case o f U S airlines after the benefit o f filing for Chapter 1 I bankruptcy. l 9 In other cases airlines have failed and gone out o f business, more so in the USA than in Europe. In the Caribbean context, which i s the one in which the issue o f regional airline losses must be resolved, governments have to critically assess the trade offs between supporting loss making airlines and other economic and social development expenditures.

'' Note that both United Airlines and American Airlines were expected to report operating profits in 2006 after suffering many years o f losses.

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Box 7: The Experience o f Mauritius

Air Mauritius i s a modem and profitable airline, with an excellent safety record. I t i s still controlled by Government, but operates with the benefit o f a number o f partnerships with the private sector. Between 2002 and 2005, the company posted profits between €14 million and €21.5 million. Although it i s true that Air Mauritius benefited from a restrictive air policy, i t s ownership structure and good quality management contributed mostly to its financial performance. Moreover, the current air access policy was the result o f very specific conditions not necessarily applicable to the Caribbean and the airline i s now facing more competitive pressure following the Government decision to open more its air access.

Mauritius’ natural characteristics enabled the country to market itself as an exclusive, isolated, high-end resort destination like the Seychelles and the Maldives. The fact that its population was fluent in French allowed the island to position itself very well in the French market (about 55% of tourists come from France and Reunion). This made possible the establishment o f a restrictive air access policy with bilateral agreements containing single destination clauses, restrictions regarding capacity and frequencies, and no-charter policy. In addition, the establishment of share code agreements with competing airlines contributed to maintaining high prices and resulted in a monopolistic situation on some routes (such as Paris-Mauritius). This, in turn, allowed the airline to cross-subsidize other less profitable routes.

Air Mauritius benefited from private sector participation and has been managed professionally. The company ownership i s shared with several airlines (British Airways, Air France, and Air India), investment management companies and one o f the biggest domestic conglomerates heavily involved in the travel and tourism industries. Moreover, a significant number o f shares are floated on the domestic stock market and non-government representatives have six o f the fifteen seats on the Board. By being listed on the stock exchange, the company has to publish audited accounts and be managed in a commercial way. In addition, the Government has limited input into the daily management o f the company and several key executives have been recruited internationally. The fleet i s modem and older planes are being replaced in order to improve the services provided to the passengers and to reduce maintenance costs.

The company i s now facing more competitive pressure and will have to overcome its relatively high operating costs. The most profitable routes are those in which the company enjoys a quasi-monopolistic situation. In addition, the company i s not very active in price discrimination to minimize empty seats and maximize revenues. A more liberalized air access policy, expected to be beneficial to the tourism industry, i s being gradually implemented by the Government. Such a new strategy would require Air Mauritius to review its pricing strategy, destinations and engage into measures to reduce its costs and increase its competitiveness.

(b) Many (inter-island) services are unviable and would not be served in an open, competitive market situation. This i s surely a legitimate concern in a region where air transport services may be called upon to provide basic inter-island access in addition to the more prominent demands arising from the Caribbean tourism market. As has been argued in the previous section, there are plausible alternative designs for a scheme to assure service continuity focusing on routes and services, rather than on underwriting overall airline losses. This might be a more cost effective way to achieve government objectives for minimum service levels than i s currently the case. I t i s however important to test any hypothesis about the need for subsidies in the market - by providing opportunities for service providers to bid competitively, this being particularly so in the Eastern Caribbean. There are a number o f recent examples in the Caribbean region i tse l f - Air Caraibes services from Martinique to Dominica and WinAir services from St. Mart in to Montserrat - which demonstrate that some level o f basic service can be provided by commercial operators, often without the need for subsidy even in very thin markets.

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(c) Social and economic benefits outweigh financial losses. A worked example supporting this contention has been prepared for the case o f Air Jamaica (AJ), see Box 8 below. The study supports the view that there are gross benefits to the economy from the operations o f a local airline. The methodology used however does not convincingly demonstrate a net national benefit. Specific benefits to retaining a loss making airline appear to be overstated. Many o f these benefits would be available if another (non-national) airline provided the same service. The “without local airline” case might generate a net benefit when avoidance o f losses and inclusion o f new competitive service opportunities are factored in. As discussed above, the arguments in favor o f economic benefits to Antigua have also been used to justify continued support to the losses o f LIAT. The implicit cost per LIAT job safeguarded seems too high to justify where alternative forms o f employment may be available. This suggests that governments in the Caribbean ought to: carefully review these arguments; and carry out a properly structured cost- benefit analysis before taking at face value claims that airline losses should be supported by the taxpayer.

Box 8: Jamaica - One Approach Towards Estimating Economic Benefits

The study (Estimation o f Economic Benefits o f Air Jamaica to Jamaica between 1995 and 2004) estimates economic benefits as US$5.5 billion. Two mechanisms for the delivery o f benefits are - Jamaican input purchases attributable to AJ; expenditures o f foreign visitors that would not occur in the absence o f AJ. These estimates are doubled to reflect multiplier effects - for which a more robust estimate i s expected to be provided by another yet to be published study. The study assumes that AJ purchases 30% o f inputs in Jamaica whereas a foreign airline i s assumed to only purchase 10%. The study assumes that foreign airlines would not fully replace passengers carried by AJ in the event o f its demise. Average spending per tourist to Jamaica i s put at US$lOOO.

The purchase benefits o f “with AJ”, including employment o f nationals may be overstated. If AJ ceased operations, staff in many areas would be expected to taken on by other employers, including alternative air service providers so the cost to the economy may be low. The assumption on replacement services may be true to the extent that some or more AJ services are loss making. If the policy assumption were to be relaxed (see below) however, replacement services may be provided more readily than assumed in the study. There i s evidence elsewhere that the absence o f local carriers may actually lead to a larger air services market as protection will be reduced.

The approach used provides only a partial answer to the “without AJ” scenario. A full national cost benefit analysis would allow for a more comprehensive take on al l the relevant costs and benefits, i.e. a net benefit rather than a gross benefit calculation. The estimation o f benefits should not be static in terms o f the policy stance - this might well change in a “without” AJ” scenario creating additional consumer benefits through lower prices and more frequent services. This might in turn engender higher per capita tourism expenditures. Avoidance o f AJ operating losses would also be a benefit in the policy change scenario. The additional cost under this analysis which i s not considered in the study would be the transitional costs associated with the restructuring o f AJ and the temporary loss o f service on some routes in this transition.

5.20 I t i s becoming increasingly diff icult for governments to run airlines profitably, by at least covering their cost o f capital. There are certainly examples o f this happening in specific circumstances, such as in the United Arab Emirates and Singapore, but the conditions concerned may be restrictive and diff icult to replicate in the Caribbean. There are in addition substantial downside r isks in the industry, the adaptation to which increasingly make private sector provision o f air transport services the best option. I t i s o f primary importance to establish the minimum requirements to be met for the continued involvement o f public ownership and to establish criteria for the allocation o f scarce public resources to this end.

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A possible strategic approach for the Caribbean

5.21 The focus o f state ownership o f airlines should be on ensuring that they are run as successful business enterprises. International experience would suggest that both the government and the board o f directors o f the airline need to agree that the airline should be run on an “arms length” basis as if it was fully privately owned. Ideally, this should be specified in legislation to constrain the understandable, but ultimately counter-productive incentive, for interference in airline management to address short term political and economic problems: e.g. route or employment changes planned by the airline to better meet i t s commercial goals.

5.22 From this starting point, the objective o f the board o f the airline should be to maximize shareholder value, generating a return at least covering the cost o f capital in the country. Operationally, the board would need to set target rates o f return over the medium term consistent with shareholder value maximization and be accountable for the airline’s actual performance against those targets. The board would need to be given commercial levels o f autonomy in appointing - and in i t s ability to remunerate and to fire - the management team best able to deliver this performance. The management team would need commercial levels o f autonomy and incentives to design and implement the necessary decisions to operate the airline successfully.

5.23 The important corollary i s that the Board and management be given the space in which to operate and that they should be held accountable to the shareholder(s) - in the case o f state- owned airlines, thus to the government - for their performance. The shareholder(s) would need to hold the Board effectively accountable for performance against the agreed objectives and targets and act on a strictly commercial rather than political basis in this function. The quality o f the Board membership and the adequacy o f the incentives under which they will perform wil l be critical to the success o f this approach. The foregoing would strongly suggest that at least the core membership o f the board would have high quality business people committed to running the airline as a successful business. I t would be preferable that government officials would not be on the Board. Rather, they should be given the mandate, and provided the necessary experience and training, to advise the government as shareholder.

5.24 A Board would want the airline to be properly capitalized with an appropriate level o f net working capital and a debt-equity ratio consistent with the risks the airline would be expected to face. If governments cannot properly capitalize the airline then it would be preferable to wind-up operations as opposed to the current position o f under-capitalized airlines continuing to operate on with implicit, non-transparent and government guarantees. I t i s recognized that in some, if not al l cases, winding up i s likely to require respective governments to take over a number o f the airline’s financial obligations which wil l have short term financial implications. However, it i s likely that this approach wil l be more economically and fiscally efficient over the medium term than the status quo.

5.25 In theory, “arms-length” operation o f a state-owned airline as a separate l imited l iabil i ty legal entity protects the government from major errors o f the board and management. In practice governments have often been unwilling to see government enterprises become bankrupt or be liquidated. This suggests that the government as part o f i t s ownership agreement with the airline board may want adequate assurance in respect o f key operational and financial risks. Treasury

34

operations are one obvious area but also aircraft financing and fuel hedging policy have often been a cause o f subsequent problems. More generally the airline’s ability to enter into financial arrangements, if permitted, needs to be undertaken within a clear ownership agreement with appropriate disclosure and risk mitigation strategies. Safety i s another area o f strategic risk. This suggests that getting the right and sustainable balance o f board autonomy and government accountability in respect o f airline ownership i s particularly challenging for governments as owners and requires appropriate resources from the government side in addition to the appropriate board appointments.

5.26 One element in any ownership agreement would be the situations in, and the conditions under which, the government would be prepared to make public resources available to the airline management and board. For example, state-owned airlines might be able to contract with governments for subsidized services. If governments either wanted to maintain existing levels o f service or introduce new services which the airline considered were likely to be un-profitable then the government should contract with the airline for the provision o f those services. However, as discussed earlier, it would be advisable to tender for the required services rather than to allocate direct to the state-owned airline. This i s likely to reduce the net cost to the government.

5.27 The conclusion in respect o f government owned airlines i s that governments should either adopt a strictly commercial approach to the operation o f the government owned airlines or wind them up. The former involves the appointment o f a board for the airline that i s predominantly made up o f suitably qualified private sector business people, clear agreement that the Board has commercial level o f autonomy to run the airline, including hiring - and firing - the airline’s management team, and decision making on routes, employment etc. This understanding should ideally be formalized via an ownership agreement between each government and the board covering, inter alia: . . . . dividend policy . .

target rates o f return on the airline’s assets and equity, l ines o f business for the airline, risk management policy including the airline’s financial structure policy

the Board’s accountability to the government; and the financial support from the government necessary to implement this policy including up-front re-capitalization and any subsidies for non- commercial routes that the government wished to see served.

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VI. Where D o We Go From H e r e - and How?

This report builds on conclusions reached by earlier studies of the Bank concerning the constraints imposed on regional economic development by inadequate air transport infrastructure and associated services. The recommendations included: (i) progress should be made on air safety and security, towards achieving Category 1 status; (ii) OSpolicies should be adopted as likely to obtain the best results on service quality and fares; (i i i) loss making regionally based airlines should not be subsidized; and (iv) continuity of service is a desirable outcome which should however be secured by competitively bid route service subsidy if the market provision of services is considered inadequate. Follow up on these recommendations has been uneven. Some important advances have been made on a i r safety and security in the region. There is broad and increasing recognition in the region both of the potential benefits of adopting a liberal policy regime for air transport services and of the need to adopt appropriate policies in regard to management of public ownership interest in airlines. Caribbean countries have however, with a few exceptions, been reluctant to carry out all the necessary reforms and implement the required measures.

Strategic approaches to secure improved services and sector performance in the Caribbean have to be designed - and implemented - to address regional concerns and to mitigate perceived risks. This report supports the view that unrestrictive air transport policies should be adopted and that Caribbean countries should seek to sign and implement OS agreements, provided that: (i) local airlines are given an opportunity to compete and the “community of interest” principle is accepted; and (i i) adequate arrangements are secured to ensure fair competition. These policies w i l l generally support service competition and lower prices and better quality through competition. This report proposes that these policies be supported by reforms of the CARICOM MASA to increase market opportunities for regional airlines. The timing and content of implementation strategies may vary across the region because of the perception and consequent mitigation of risks in regard to: (a) loss making state owned airlines; and (b) addressing service continuity concerns. I n this regard, the OECS countries and the Eastern Caribbean face perhaps the most challenging transition.

6.1 This study builds on, and adds value to, previous analyses o f the underlying factors explaining the current disposition of, and future prospects for, regional c iv i l aviation. The specific, additional contributions o f the study have included: collection and analysis o f additional data in regard to the degree o f restrictiveness in Caribbean air transport markets and the impact on fares; identification o f international experience, including case studies o f Caribbean nations and o f comparator countries, in regard to the impact o f the introduction o f OS policies; review o f the status and performance o f state owned regional airlines and the conditions under which future public support could be contemplated for them; and review o f the options for addressing service continuity in the region taking into account some o f the lessons from international experience in this regard.

6.2 This report endorses a number o f the relevant conclusions o f the Wor ld Bank study on infrastructure services in the Caribbean’’. The study identified four specific conclusions, as set out below together with the principal respective recent developments:

2o World Bank 2005a.

36

(a) Progress had to be made on air safety and security, inter alia, to open up increased air services opportunities with the U S and other external markets for tourism. I n this regard it is noted that substantial progress has been made in recent years - whereas before only Jamaica of the report’s focus countries enjoyed Category 1 status, now the majority are, following OECS ratification early in 2006.

(b) “Open skies” air service agreements would be in the best interests o f Caribbean countries and would assure the best value for consumers in terms o f service quality and fares. This conclusion is broadly confirmed by the additional analysis carried out: including the increase in the range of services enjoyed by OS adopting countries and the differences in average fares between those Caribbean countries which have adopted OS policies (such as Aruba and Dominican Republic) and those that have not.

(c) No public subsidies should be paid in order to keep regional, loss making airlines afloat, which should rather respond to competitive forces. This report elaborates on the specific strategies that could be adopted to better manage - and eventually phase out - public support to regional airlines and on the objectives that the regional airline should be required to attain.

(d) Continuity o f service i s a justifiable cause for concern in the Caribbean region; though this should largely be met through targeted, competitively bid route service subsidies in return for a guaranteed level o f service. This report endorses this general approach and develops principles that should underpin the design of a scheme to support service continuity, taking into account some of the lessons of international experience in this regard.

6.3 Follow up in the Caribbean on the recommendations made in regard to the liberalization o f air transport services has been uneven. There i s broad and increasing recognition in the region both o f the potential benefits o f adopting a liberal policy regime for air transport services and o f the need to adopt appropriate policies in regard to management o f public ownership interest in airlines. The summary o f the outcome o f the stakeholder symposium (see Annex I) provides confirmation o f this from both public sector officials responsible for air transport policy as well as private sector clients and beneficiaries o f air transport services. Caribbean governments have however, with a few exceptions, been reluctant to carry out al l the necessary reforms and implement the required measures. Generally speaking, they would l i ke to have a higher degree of confidence that unrestricted air transport policies would be beneficial to the traveling public in terms o f service availability, quality and price. Without such assurances, those particular countries which have an ownership stake in an airline - a declining but s t i l l significant number - may continue to view control o f their own airlines as a better risk mitigation option and may be reluctant to let them operate on an “arm’s length” basis and s i n k or swim in a more competitive environment for air services. So whereas Jamaica appears willing and interested in adopting an OS policy with the US, a number o f other countries which have an ownership stake in airlines are not at this stage.

6.4 Strategic approaches to secure improved services and sector performance in the Caribbean thus have to be designed - and implemented - not only to benefit from international best practices and experiences but also to address regional concerns and to mitigate perceived

37

risks. There wil l be a recognition that a l l countries will not be willing or able to move at the same speed towards reform. However the direction that the reforms ought to take i s reasonably clear and the benefits from the adoption o f unrestricted policies are evident from international as well as regional experience to date. It i s l ikely that, other things being equal, Caribbean countries which delay adopting unrestricted air transport policies wi l l lose out to those that liberalize as far as future tourism business i s concerned.

6.5 applicable to a l l Caribbean decision makers:

In this light, the report concludes with the following specific recommendations which are

Air Services Sector Policy and Regulation

0 Governments should adopt - and disseminate - appropriate c iv i l aviation policies that inter alia provide for the elimination o f economic entry barriers, including ex-ante fare control.

0 Governments should enter into discussions with the US government (and the European Union if possible) with the objective o f signing and implementing “open skies” agreements for international air services. CARICOM wide agreement to this objective and i t s implementation should be sought, possibly through accession to the Multilateral Agreement on the Liberalization o f Air Transportation (MALIAT). In such discussions, governments should ensure that: regional airlines would have the opportunity to compete; the “community o f interest” principle would apply; and adequate arrangements would be made to assure fair competition.

0 Governments should consider adoption o f appropriate policies in regard to any future public financial support to air transport sector, including, if relevant, support to service continuity. Any policy on service continuity ought to cover inter alia: policy objectives; target beneficiary groups or services; level o f subsidy and payment mechanism; provision o f air services; performance monitoring.

State-Owned Airlines

0 Following the foregoing on policy and economic regulation, concerned governments should either adopt a strictly commercial approach to the operation of state-owned airlines, or, if feasible, develop a strategy for the divestment of the government shares in the airline, or wind-up the airline. A commercial approach might include the following measures:

e Appoint a Board predominantly comprising suitably qualified

Provide the Board wi th the autonomy necessary to run the airline,

Put together an ownership agreement between the Government and

business people

including decisions relating to hiring and firing o f management and staff

Board for each airline to cover:

e

e

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A clear commercial objective for the airline business Multi-year target rates o f return on equity and assets Lines o f business to be pursued Risk management policy, in particular regard to financial structure Dividend policy Board accountability to Government Financial support from Government, including up-front r e capitalization and payment o f compensation for any services that the government wants the airline to continue the provision o f any route based operating subsidies

Supporting Measures

0 Governments should give consideration to the introduction o f competition law on the basis o f international best practice.

0 ' Governments should pay more attention to the development o f public sector capacity - at the level o f officials - to effectively monitor air service markets and to critically assess the impact o f specific policy options on sector performance as well as to develop and sustain knowledge o f air transport best practices.

0 Governments should ensure that reports on sector performance, issues and how these are being addressed are published on a regular basis.

6.6 particular countries and groupings in the Caribbean:

In addition to the foregoing, the report has the following specific recommendations for

I n regard to CARICOM

The M A S A should be renegotiated in l ine with the broad objectives o f the CSME and should provide for unrestricted fares and market access for air transport services, at least for designated regional carriers.

In regard to Jamaica

Specific policies should be adopted in l ine with the report's general recommendations on state- owned airlines as a matter o f priority in regard to support to Air Jamaica.

I n regard to OECS

OECS countries need to review their policy options for sustainable service provision on inter- island routes and to strengthen public sector capacity to review air transport policies and monitor their impact. Particular and immediate attention should be given to an economic analysis of the costs and profitability o f providing various inter-island services. This analysis would inform a

39

review o f OECS specific policies on service continuity through competitive provision and a review o f the policies to adopt in regard to the future o f LIAT.

40

Annexes

41

Annex 1 - Caribbean Air Transport Services Symposium, Barbados: June 1-2,2006

The symposium was co-sponsored by the World Bank and the Caribbean Tourism Organization. Conveners were Stephen Brushett (Lead Transport Specialist - World Bank, Latin America and Caribbean Region) and McHale Andrew (Research and Development Adviser, Caribbean Regional Sustainable Tourism Development Program). Welcoming remarks were provided by Senator Rudy Grant, Parliamentary Secretary, Ministry o f Tourism and International Transport on behalf o f the Government o f Barbados and by Vincent Vanderpool-Wallace, Secretary General o f the Caribbean Tourism Organization. Closing remarks were by Ambassador Amos Tincani, Head o f the Delegation o f the European Union.

Principal resource persons were Douglas Andrew (Lead Infrastructure Specialist - World Bank), Ian Bertrand (Civil Aviation Consultant, El Perial Management Services), and Douglas Wilson (Director o f Transportation Research, Forecasting and Planning, Inter Vistas Consulting). Additional presenters were Pauline Yeanvood (Senior Research Officer, Ministry o f Tourism and International Transport, Barbados); John Lewis (Senior Transport Officer, CARICOM Secretariat) and Luther Miller (Director o f Finance and Resource Management, Caribbean Tourism Organization).

The total number o f participants in the symposium was 37. The following 7 Caribbean countries were represented: Antigua and Barbuda, Barbados, Dominican Republic, Grenada, Guyana, Jamaica and Trinidad and Tobago. The following 4 regional airlines were represented: Air Caraibes, BWIA, Caribbean Star and LIAT. The following 7 regional organizations were represented: ACS, CARICOM, CDB, CHA, CTO, ECCAA and ECCB.

The primary objectives o f the symposium were:

present progress achieved and tentative conclusions reached in regard to regional air transport services emanating from the complementary work streams o f the World Bank and CTOKRSTDP; share new information and the results o f new analysis carried out on the issues; interact with, and l isten to the views of, key Caribbean stakeholders in regard to the issues and how they might be resolved. discuss the possible solutions that could apply in the changing global and regional environment; build support for some o f the key changes in policy that need to be undertaken; and devise appropriate implementation strategies for change.

Through productive deliberations over the course o f one day and a half, participants identified the key challenges as follows: getting and sustaining effective regional services; making foreign based airlines want to fly to the Caribbean; and making regionally based airlines viable. Participants noted that effective air transport services would be a critical underpinning to the successful implementation o f the CSME and to exploiting opportunities for regional, multi- destination tourism. Participants noted the continued poor performance o f regional, state owned airlines which provided in effect limited insurance cover (in regard to service continuity) at a

42

high price. They also noted - from regional experience - that regional ownership o f an airline service provider might not be necessary for a successful tourism sector.

The main conclusions o f the symposium were thus as follows:

Liberalization is generally accepted in principle and is to some extent already applied in practice

Specific advantages were expected to be:

increasing opportunities for the provision o f new service options providing a sign o f welcome to new providers, inter alia through an “open skies” arrangement using diversification as an effective instrument for risk mitigation at regional level, encouraging trade and tourism within the Caribbean region

Liberalization is a necessary, but not su ffiient, condition for improved air transport services

Particular concerns raised were as follows:

assuring the provision o f cost effective air transport infrastructure providing for effective regulation o f safety, security and environment integrating “community o f interest” as a Caribbean specific issue in future negotiations for air service liberalization allowing for continued but minimized financial support - targeted on service and route subsidies where desired service levels may not be provided in the market

Participants noted also that countries may want to move at a different pace in the process o f deepening or completing the liberalization process.

Regionally based service providers - both new and existing - should enjoy increased opportunities to compete, an objective whose realization will be helped by securing an open intra-Caribbean market in line with the CSME.

Government supported regional airlines should be operated on a commercial basis under clear objectives managed through agreements with Boards and management.

Participants noted that government ownership should be considered as a last resort and that governments have a disadvantage vis-a-vis the private sector in assuring air transport services. Government owned airlines in the Caribbean are endemic loss makers and none are properly capitalized.

Symposium conveners presented the following as the next follow up steps to the symposium:

0 editing and distribution o f symposium presentations and related materials to all participants

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0

0

0

World Bank and CTOKRSTDP to complete their respective reports and report back to their respective core clients to obtain “buy in” to main findings and recommendations dissemination o f major findings and recommendations on a broader scale to regional stakeholders Wor ld Bank and CTOKRSTDP to devise and undertake a strategy for outreach o f presentation o f recommendations to decision makers, at both national and regional levels.

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Annex 3 - Caribbean Tourism and Transport Statistics

30.0 - 25 0 - 200 - 150 - l o o -

n o - -5.0 -

5.0 -

-10.0 -

I. Trends and composition of tourist arrivals

Chart A3- 1 : Tourists Arrivals to Selected Caribbean Countries

b

1

1600 1

0 4 I I I I I I I I I I I I I I I

1990 I991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

-- OECS +Jamaica +Trinidad and Tobago - h b a Batbados

Source: Caribbean Tourism Organization

Chart A3- 2: Tourists Arrivals to Selected Caribbean Countries (percentage change)

I I I I I I I

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

--*- OECS -Jamaica -Trinidad and Tobago +Aruba Barbados

Source: Caribbean Tourism Organization

46

7 4 3 0 G O 4 0 2 a 0 0

13.7

Tobago

11. Dominican Republic - Tourism trends and air transport services

Chart A3- 6: Dominican Republic: Tourist Arrivals by Main Market (in percent)

50.0 40.0 30.0 20.0 10.0 0.0

USA Canada Europe Other

2004 m2001 Source: Caribbean Tourism Organization

Chart A3- 7 : Total Passenger Movement by Air

4500000 1

--&-

500000 0

1880 1991 1882 1993 1884 1985 1886 1997 1988 1889 2300 2001 21302 2003 21304 2005

Source: Central Bank of Dominican Republic

Chart A3- 8: Total Passenger Movement by Air (percentage change)

20.0 30.0 1

-20.0

-30.0 Source: Central Bank of Dominican Republic

48

Chart A3- 9: Total Scheduled Passenger (Arrivals and Departures) by Airport (in percentage o f total)

70.00 1 60.00

50.00

40.00

30.00

20.00

10.00

0.00

29.8

14.3

LAS PUERTO PUNTACAN4 LAROMAN4 SAMl4GO HERRERA AMERICAS PLATA

2000 m2005 Source:DR Civil Aviation Authority

Chart A3- 10: Total Charter Passenger (Arrivals and Departures) by Airport (in percentage o f total)

60.0 1

50.0

40.0

30.0

20.0

10.0

LAS PUERTO P U M A C A N 4 LAROMAN4 S A M R G O HERRERA AMERICAS P LATA

2000 m2005

Source: DR Civil Aviation Authority

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Annex 4 - Air Transport Services Case Studies

A. Aruba

Aruba, which i s part o f the Kingdom o f the Netherlands, i s a small Caribbean island (1 80 square km) with a population o f about 96,000 inhabitants. I t i s located about twenty miles o f f the northern coast o f Venezuela. Since it gained autonomy (status aparte) in 1986, the country experienced rapid development and i ts per capita GDP i s the second highest in the region ($21,200 in 2004) after Bermuda. The economy i s highly dependent on tourism, which generates about 38% o f GDP and 35% o f employment.

Chart A4- 1: Tourist (Stop-Over) Arrivals per Capita in Selected Countries, 2004

Aruba Barbados Dominican Guyana Jamaica Trinidad

Tobago Republic and

Source: Caribbean Tourism Organization, World Bank G D F and W D I central database

The country attracts one o f the highest numbers o f tourists per capita in the region but i t s market share in the Caribbean in terms o f stay-over visitors i s only 3.8%. Despite the expansion of the tourism sector, o i l processing remains the dominant industry in Aruba. Agriculture and manufacturing industries are o f minimal importance.

Chart A4- 2 : Aruba Real GDP and Tourism Sector Performance (percent change)

+ Real GDP -Tourist nights Number of stay-over visitors

Source: Central Bank of Aruba

50

Throughout the 199Os, Aruba posted growth rates around 5%. However, in 2001, a decrease in demand led to the f i rst economic contraction in 15 years, reflecting lower investment activity and weak tourism performance caused by the global economic downturn and the effects of the September 1 1,2001 terrorist attacks on the USA.

30.0

20.0

10.0

0.0

Chart A4- 3: Tourist Arrivals by Country in 2004 (in percent o f total)

8.1 F - 3 .L 2.8 2.3 1.5 1 .I 0.7

-I-

USA Venezuela Netherlands Canada Curacao Colm bia United Brazil Kingdom

Source: CBS Aruba

Over 1.5 million tourists per year visit Aruba, with 73.5% o f those from the USA. European arrivals accounts for around 8%, Canada 2.8% and the remaining 16% include other Latin American and Caribbean markets.

Chart A4- 4: Tourist Arrivals by Country (Non-US)

\\ \,

\\+.-----

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 -+-Venezuela Net herlands j Canada -Curacao + Col m bia +United Kingdom -Brazil

Source: CBS Aruba

51

USA tourist arrivals recovered after the decline in 2001 while Venezuela which i s the second tourist arrival country for Aruba, recorded a substantial decline (-25.3% in 2002 and -33.2% in 2003). Colombia recorded a decline in tourist arrivals in 2003 mainly due to increased restrictions in visa requirements.

Boeing 747/MD-11 Airbus A3 10 Airbus A320

Overall Aruba's tourism industry performance i s competitive compared with other Caribbean nations. I t s overall hotel occupancy rate increased from 71.7% in 2002 to 80.7% in 2004, higher than Caribbean average (63.6% and 67.9% respectively). At the same time, the average daily hotel rate in 2003 was US$134 compared to US$156 in the Caribbean".

3 4 4

Aviation Infrastructure

Boeing 757 Fokker F50 Long-term (MD-11) Total

A large number o f airlines connect Aruba's Reina Beatrix Airport (Aeropuerto Internacional Reina Beatrix) to the rest o f the world with scheduled and chartered flights. The airport underwent a renovation project called "Beatrix 2000". The US$50 mi l l ion project began in July 1996 and entire time span o f this expansion was approximately 3 years.

2 4 2 19

Two completely new terminal buildings for departures and hold rooms and the renovation o f the existing terminal building for arrivals were expected to raise passenger capacity by a third to 2.6 million, 1,470 departing passengers (800 USA Pre-clearance and 670 non-USA) and 1,260 arriving passengers were to be accommodated at peak hours. 10 aircraft positions (with a new automated aircraft parking system) and eight airbridges were added. This was to give the airport a comparable capacity to Barbados's Grantley Adams International, which i s one of the Caribbean's major airports.

The expansion entailed the construction o f 2 completely new terminal buildings for departure and hold room areas. The first terminal i s for international, non-US bound passengers. I t contains 24 ticket counters, airline offices, an outbound baggage area and a make up area behind the airline offices. The second terminal i s for U S bound passengers. I t includes 42 ticket counters, airline offices and US ImmigratiodUS custom facilities for U S pre-clearance, meaning that passengers flying to the U S wil l be taking domestic flights into the US.

The existing terminal building has been remodeled to form a new arrivals-only hal l with Aruba Immigration and Customs, airport administrative offices and external ticket sales offices.

Source: Central Bank o f Aruba. Annual Report, 2004.

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Aruba International Aviation Policy

The Department o f C iv i l Aviation i s working on a draft for the policy regarding air access in Aruba. Aruba’s current air access policy i s very liberal, in particular, in relation to the Netherlands and related territories, European countries, Canada. Similarly to the Netherlands which was the first European country to sign an Open Skies Agreement with the USA. in 1992, Aruba was the f i rs t country in Americas to sign such an agreement, which came in force in September 18, 1997. The air access policy with other countries i s defined by more restrictive bilateral air transport agreements. With Latin American and Caribbean countries in the surrounding area that are not so liberal Aruba, tend to be similarly more restrictive. (see Attachment on “Aruba’s Air Transport Agreements”)

Most o f the air transport agreements are multiple or open (USA and Chile) air carrier designation clauses, 5 countries (Belgium, Brazil, Cuba, Surinam and Trinidad & Tobago) have single designation and Costa Rica has 2 designated airlines.

Only 4 out o f 18 agreements provide for restrictions regarding capacity (Brazil, Cuba, Dominican Republic and Surinam) and 6 agreements have restrictions on frequencies (Bolivia, Brazil, Cuba, Dominican Republic, Netherlands Antilles, Surinam).

The 5th freedom rights are granted only in the agreements with U S A and Netherlands. Agreements with Chile and Colombia do not grant such rights. Other countries either allow it in the case o f code-sharing, or allow it to be requested and agreed between the parties. The 5th freedom allows the carriage o f passengers and cargo between the two countries by an airline of a third country en route with origin and/or destination in i t s home country.

Capacity

Aruba’s air services supply reflects the demand for tourist services and U S A destinations are dominant in terms o f air passenger arrivals.

Before the Open Skies Agreement with the USA, American Airlines was the only scheduled U S A carrier with around 33% share in total air passenger arrivals, After the agreement, other airlines as Delta, United Airlines, Continental and US Airways, started to operate on a regular (scheduled) basis, together with American Airlines accounting for 64.4% o f total passenger arrivals in 2004.

In additional to scheduled carriers, at least 5 chartered companies and 3 all cargo carriers are serving the market. Most o f the charter flights are flying to USA, in particular to Boston. The number o f passenger arrivals to Aruba by charters increased 3.6 times in 1998 followed the signature o f the Open Skies agreement.

Air Aruba used to be Aruba’s national carrier. The government owned Air Aruba until 1997, when it sold a 70% stake to Venezuelan investors led by Simeon Garcia, owner o f Aserca Airlines. However, the expected benefits from Aserca’s investment never materialized and competition from other airlines, particularly American Airlines, proved too strong for Air Aruba,

53

which ceased operations in October 2000. A new privately owned Aruba based carrier - TIARA AIR N.V. - started serving the Aruba-Curacao route from April 2006. There are plans to extend services to Bonaire and to Las Piedras and Valencia in Venezuela.

Chart A4- 5: Air Passenger Arrivals to Aruba by Carrier

290003 -

200003 -

laom -

103003 -

90003 -

-American kriines +Charters ALM Aeropostal -KLM +Avianca -AirAruba -Private Planes - Delta

Source: CBS Aruba

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B. Barbados

Barbados, the most easterly o f the Caribbean chain o f islands (430 square km, 166 sq. mi) and population o f 271,600 inhabitants, was settled by the British in 1627 and remained a British colony until internal autonomy was granted in 196 1. The island gained full independence in 1966 but maintains ties to the British monarchy as a member o f the Commonwealth.

Colonial ties to Britain made Barbados a popular destination for wealthy British nationals long before the World War 11. However, since the 1950s the economy became increasingly dependent on tourism. Long stay visitors to the island have increased from 17,829 in 1956 to 551,502 in 2004. The island has also benefited from the development o f the international cruise industry with an increase in cruise passengers from 12,391 in 1956 to 721,270 in 2004.

Chart A4- 6: Real GDP and Long-Stay Tourist Arrival Growth Rates

-4- Real GDP Growth Tourist M v a l Growth Rates

Source: Central Bank of Barbados

Historically, the Barbadian economy had been dependent on sugarcane cultivation and related activities. Foreign exchange earnings from sugar, agricultural and manufactured goods witnessed a marked downward trend and their contribution to GDP gradually declined. With an 11.8% share in GDP (in 2003) the tourism sector gradually became the major source of growth and a major foreign exchange earner in Barbados. Visitor expenditure was estimated at $1.4 billion in 2004. As the above graph shows, tourism and GDP are highly correlated.

In 2003 value added in the tourism sector increased by 7.3% (6.7 % in long-stay arrivals) against the global decline o f 1%. In 2004 long stay arrivals rose by 3.8%. Like other island nations in the region, Barbados suffered a drop in tourist arrivals as a result o f September 1 1,2001.

Since 1994 UK arrivals exceeded tourist arrivals from the USA and since then continued to be the major market, accounting for 38.8% o f total market share in 2004. UK i s followed by USA with 23.5%. The long-stay segment o f the market benefited from the increased airlift capacity out o f the United Kingdom, which facilitated increased arrivals from that country.

56

Chart A4- 7: Barbados: Tourist Arrivals by Country o f Residence

250000 7

0 4 4 , 1990 1991 1992 1993 1894 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

-+-YM-+-BA - - e LK+OMWBROA-+-CPRIXM OTFW

Source: Barbados Statistical Service

Tourist arrivals from CARICOM were increasing since 1998 and accounted for 19.0% o f total stay-over arrivals in 2004. CARICOM remains the third largest market in terms o f tourist arrivals. In 2003 Trinidad and Tobago accounted for around 28% of all CARICOM arrivals, Guyana 15.6%, St.Lucia and St.Vincent and the Grenadines 14.1% and 12.2% respectively.

Chart A4- 8: Tourist Arrivals by Market, 2004

1 OTHER, 4.3%

UK, 38.8%

Source: Barbados Statistical Service

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Canada accounted for 9.1% o f total tourist arrivals and Europe 5.3%. T h e non-UK European market recorded a fal l in arrivals since 1999 (due to decline in German market) as a result o f reduction o f airl i ft and increased competition from cheaper destinations. Barbados’ hotel room occupancy rate in 2004 was 49.7%, considerably lower than Caribbean average o f 67.9%.

Aviation Infrastructure

The island has one airport, Grantley Adams International (GAIA), which l ies 12.9 km (8 miles) from the centre o f the capital city, Bridgetown. The Grantley Adams Airport has direct service to destinations in the United States, Canada, South America, and Europe and operates as a major gateway to the Eastern Caribbean. The airport i s a second hub for both BWIA West Indies Airways and LIAT (1 974) Ltd. (LIAT)

The Government o f Barbados has embarked on a US$75 mi l l ion airport expansion program which would double peak period capacity. Construction activity on an expanded and refurbished terminal building started in April 2002 and i s expected to be completed by mid 2006.

Barbados’ International Aviation Policy

Barbados does not have i t s own national airline although, as i s noted above, BWIA provides services to countries other than Trinidad and Tobago through Barbados. The air access policy i s defined by a series o f bilateral air services agreements with 18 countries. Unlike Aruba, i t does not have an “open skies” agreement with the USA. However the U S A has used i t s discretion in the past to allow regional carriers such as Air Jamaica and BWIA to provide services on routes granted under the Barbados/USA BASA. Most o f the agreements (10 out o f 18) allow for multiple designation o f airlines. For 7 countries (Belgium, Canada, Suriname, Trinidad and Tobago, Nigeria, St. Lucia, Switzerland) agreements allow only single airline to be designated. One country - StVincent and the Grenadines - allows dual designation.

All o f the agreements, with the exception o f that with the USA, provide for double approval o f tariffs. This i s a potentially restrictive ru le as time can elapse and costs can be incurred while officials consider the requests. I t i s notable that the agreement with the USA has the more liberal “double disapproval” clause in respect o f tariffs. However under this BASA fares are automatically set within a specified zone on the basis o f the normal economy fare. Airlines commented that the government was the most thorough and cautious in the region in considering fare applications.

With respect to weekly passenger capacity or the frequency o f the flights, most agreements require the approval o f the authorities in each country. The agreement with the USA clearly states “neither party shall unilaterally limit the volume o f traffic, frequency or regularity o f service.. .” The agreements with St. Vincent and the Grenadines and with St. Lucia apply to air taxi operators (weight and seat limits apply). Under the agreement with St. Vincent and the Grenadines, carriers are limited to a daily service during the summer season (mid April to mid December). The agreement with St. Lucia has an open arrangement in regard to weekly frequency and capacity.

58

There are 4 carriers providing services out o f the United Kingdom - the largest tourist market. The regional carrier BWIA i s only permitted to operate as a fifth freedom carrier”. Whi le Agreement with Canada provides multiple designations o f carriers, the route i s dominated by Air Canada.

Barbados i s party to the multilateral agreement concerning the operation o f air services within CARICOM. This grants 3rd and 4th freedom rights but does not automatically confer 5‘h freedom access. The agreement does not apply to the aforementioned air taxi operators. Barbados has also signed the air transport agreement between the ACS member states and associate members, in February 2004. The agreement has not yet entered into force.

Capacity

Air services are provided by both scheduled and charter airlines. (See APPENDIX I) From all airlines (scheduled and non-scheduled) BWIA with 23.7% and L I A T with 12.7% accounted for the largest share o f all passengers (embarkeddisembarked and transit) through GAIA in 2004. American Airlines together with American Eagle accounted for 11.9 % o f all passenger movements and Virgin Atlantic for 10.4%. Caribbean Star and British Airways accounted for 9.8% and 7.7% respectively.

Chart A4- 9 : Passengers (EmbarkedDisembarkedTransit) Camed by Scheduled Flights in 2004 (in % o f total)

23.7

American Airlines

Caribbean Star

0.0 5.0 10.0 15.0 20.0 25.0

Source: Grantley A d a m International Airport

Perspectives and Experiences of the Liberalization o f Airline Ownership and Control and Pricing”, Port of Spain, Trinidad and Tobago, 27 to 29 April 2004 (Presented by Barbados).

59

Charter airlines accounted for around 10% of al l passengers carriedz3. In addition to charters, air taxi services are provided through the Caribbean by Mustique Airways, St. Vincent and the Grenadines Air and Trans Island Air.

Airline

Air Cargo services are provided by BWIA, Amerijet International, DHL, Federal Express, UPS and Cargolux.

Country/Region CAN lEur ILAC IUSA lother - Intra-island Grand Total

Chart A4- 10: Passengers (EmbarkedDIisembarkedTransit) Camed by Charters in 2004 (in percent o f total)

140 126 36

28

6

1

3.3 3.5 3.0 2.5 2.0 1.5 1 .o 0.5 0.0

145 13i 61 25 28 12

S E 5 f 3 3 2

BRITANNIA THOMAS MY TRAVE TRANS MONARCH EXCEL SKY EURO COOK ISLAND AR AIRLINES AVIATION SERVICE ATLANTC

Source: Grantley A d a m International Airport

On a randomly chosen winter week o f February 13-19, 200624 GAIA had 455 total weekly direct (non-stop) flights, including 91 (20%) to major hub airports in USA, Europe and Canada.

Table A4- 1 : Weekly flights by Airline and Destination Country/Region: February 13- 19,2006

LIAT (1974) Caribbean Star Airlines BWIA West Indies Airways American Airlines Caribbean Sun Airlines Air Canada British Airways US Airways Virgin Atlantic Airways Air Jamaica BMI British Midland Delta Air Lines Condor Flugdienst Air Caraibes Grand Total

Source: OAG database

7 2

2 3 8 12 29

11

12 9

8 7

3

11 1 J 14 23 26 54 3381 455

23 Charter airlines are generally restricted in selling seats in the non-home market in contrast to scheduled airlines. 24 OAG Flights database: httu://w,oagflights.com.

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Air services to the USA are provided by 5 airlines. American Airlines which i s servicing only USA routes have 29 weekly flights to USA destinations, including, 14 flights to Miami, 7 flights New York JFK, 7 flights to San Juan, Puerto Rico and 1 flight to Washington Dulles (see Table A4-2).

Destination Airport Code Airline ATL ICLT IIAD IJFK !MIA IPHL ISJU

American Airlines 1 7 14 7 BWIA West Indies Airways 2 4 6 US Airways 7 1 Delta Air Lines 3 LIAT (1 974) 2 Grand Total 3 7 3 11 20 1 9

BWIA also serves USA routes and has 6 weekly flights to Miami, 4 flights to New York JFK and 2 flights to Washington Dulles. US Airways have 7 weekly flights to Charlotte and 1 flight to Philadelphia. Delta Air Lines have 3 flights to Atlanta and LIAT - 2 flights to San Juan, Puerto Rico.

GrandTotal 29 12 8 3 2

54

Table A4- 2: Weekly flights by Airline to USA Airports: February 13-19,2006,

Airline British Airways Virgin Atlantic Airways BMI British Midland BWIA West Indies Airways Condor Flugdienst Grand Total

Destination Airport Code FRA ILGW ILHR IMAN GrandTotal

9 9 7 7

3 3 3 3

1 1 1 16 3 3 23

United Kingdom routes are served by British Airways and Virgin Atlantic Airways, flying to London Gatwick and BWIA to London Heathrow while BMI provides 3 weekly flights to Manchester.

Table A4- 3: Weekly flights by Airline to European Airports: February 13-19,2006

The only weekly flight to Frankfurt was serviced by Condor Flugdienst.

Intra-Caribbean and Latin American flights are served mainly by LIAT and Caribbean Star Airlines and Caribbean Sun, and to a lesser extent by BWIA and Air Jamaica.

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APPENDIX I

Major carriers operating into Barbados

Points of Oripin and Destination

Out of the United States of America American Airlines (B757, B767) American Eagle (ATR 42, ATR72) US Airways (A3 19) Air Jamaica (A320) BWIA (B737)

Delta (B737) Caribbean Sun (DH-8 - 100)

Out of the United Kingdom British Airways (B777)

BWIA (A340) BMI (A330) My Travel (A330, DC10, B767) Monarch (A330) Thomson Fly (B767) Excel Airways (B767) Thomas Cook (A330) First Choice (A330)

Virgin Atlantic (B747-400)

Out of Canada Air Canada (A340, B767, A300) BWIA (B737) Sky Service (A320) Air Transat (DC 10)

Out of Europe Livingston Air (B767) Condor (B767) Martina Holland (B767)

Out of South America BWIA (B737) L I A T (DH8-100, DH8-300) Caribbean Star (DH8- 100, DH8-300)

New York, Miami S an Juan Philadelphia, Charlotte New York New York, Miami, Washington San Juan Atlanta

Gatwick Gatwick, Manchester Heathrow Manchester Gatwick, Manchester Manchester Gatwick, Manchester Gatwick Gatwick, Manchester Manchester

Toronto, Montreal, Halifax Toronto Toronto Montreal, Toronto

Mi lan Frankfurt Amsterdam

Guyana Guyana Guyana

62

Within the Caribbean region LIAT Caribbean Star BWIA Air Jamaica Caribbean Sun

Ai r Taxi Services through the Caribbean St. Vincent and Grenadines Air Mustique Airways

All-cargo services BWIA Amerijet International DHL, Federal Express UPS Cargolux

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C. Mauritius

The Mauritian Context and Strategic Positioning

Following independence in 1968, Mauritius embarked into a diversification o f the economy, with sugar, textile and tourism becoming the three pillars o f the economy. Mauritius benefited from preferential trade agreements with Europe, such as the ACP/EU Sugar Protocol, or the Lome Convention, while other countries faced trade restrictions like the Multi-Fiber Agreement. The tourism sector benefited from the investment o f local entrepreneurs, and several luxury hotel chains were developed in Mauritius. This allowed the emergence o f an export-oriented sugar, tourism and textile industries, enabling the country to almost triple i t s GDP per capita in the last 25 yearsz5 from $1,610 to $4,340, and enjoying a quasi absence o f unemployment in late 80s and early 90s.

In the tourism sector, the country positioned quickly i t se l f as a high end destination, mainly for European tourists. By focusing on low-volume/high earning tourists, Mauritius managed to generate significant revenues and create employment, while at the same time limiting the negative environmental impact and social tensions with the local population regarding access to beaches. Besides i ts natural endowment, Mauritius relied on i t s population language ski l ls (French and English), a domestic private sector with investment capacity and Government support to the marketing o f the country as an exclusive destination. All these advantages, together with the existence o f a high-quality service domestic airline and restricted air access policy, contributed to the image o f Mauritius as a high-end touristic and honey-moon destination.

More recently, Mauritius has made significant effort to become a hub for passenger services. Mauritius i s located geographically between South Africa and India and has connections in to several cities in South Afr ica (Cape Town, Johannesburg and Durban) and India (Mumbai, Delhi and Chennai). Given Air Mauritius extensive network to these two countries, this strategy i s likely to succeed, although it i s only at i t s early stage and wil l also depend on competition from alternative routes and h t u r e air access agreements.

This case study wil l focus, in the specific situation o f Mauritius, on the implications o f the Government policy, with a focus on air access, the tourism market and the role o f the national carrier. I t wi l l also show the limit o f this model and describe the changes currently being considered by the government regarding air access.

Air Access Policy and Role of Air Mauritius

Demand for air transport to Mauritius i s predominantly a derived demand for tourist services. European tourists (mainly from France) and package tours dominate the holiday market in Mauritius. Tourists from France, UK, Germany and Italy represent 56% o f the arrival and France i s the biggest contributor, with 33% o f total tourist arrivals. Around 60% o f the tourists travel on package tours. They stay on average 8.5 nights and spend US$ 93 per night, compared to 11.5 nights and US$ 50 per night for non-package tourists.

IMF, (GDP per capita in 2000 constant price).

64

Table A4- 4: Tourist Arrivals in Mauritius from Country o f Origin

The creation and development o f Air Mauritius contributed to support the market positioning. The company was incorporated in 1967, one year before independence, and started operations to the sister island L a Reunion a few years later. I t has now a fleet o f short and long-range aircrafts, linking Mauritius to the major European capitals, South Africa, Kenya, India, Singapore and Malaysia, Hong-Kong and Australia. In addition to those important touristic, diplomatic and business destinations, the company plays an important role in connecting Mauritius to other islands in the Indian Ocean (Seychelles, Comoros, la RCunion and Rodrigues).

There i s no dedicated policy unit and policy decisions are in practice taken by the Prime Minister’s office, the Ministry o f Tourism and the Ministry o f Finance. Officially, c iv i l aviation matters fal l under the responsibility Ministry o f External Communications, in the Prime Minister’s office. However, given the strong l i n k s between the tourism industry, air access and Air Mauritius, the Ministry o f Tourism i s often very involved, especially on topics such as Air Mauritius destinations, air access agreements, and airport management. An Air Access Advisory Council (AAC) was set-up in 2001 under the Chairmanship o f the Prime Minister’s Office to provide a convenient platform for consultations with stakeholders on air transport issues and to advise the Government.

Several institutions are responsible for the day-to-day regulation and management o f air transport. The Department o f Civ i l Aviation i s responsible for the regulation and licensing o f aircraft and airport operations, providing air traffic services, and monitoring o f aviation security. A new government-owned company, Airports o f Mauritius was incorporated in 1999 and i s responsible for the operation o f aerodrome and airport services, and infrastructure planning and development.

The air access policy was designed to support the high-end tourism positioning and to protect Air Mauritius from competition. Although there i s a general competition law (the Competition Act, 2003), i t does not apply to aviation services. The Air Access policy consists in maintaining a very restricted market with a number o f bilateral agreements with countries representing key economic or political markets. The key features o f the bilateral agreements are:

0 maintenance o f single designation clauses

65

These. a~re.ements main features havc been designed to restrict c~mpeti~ion~ in particular \I ith the f o l ~ ~ ~ ~ i n ~ features: single destination, limited exchang~ o f traffic rights and f r e ~ ~ ~ e i i ~ ~ c s , esF~~blish~en~ o f capacity relying on traffic demand bctween the two c o ~ ~ ~ i F ~ e s and double a p ~ ~ ~ ~ ~ a ~ system for pricing ~ a ~ t ~ o ~ g h in practice the ~ ~ ~ ' e ~ ~ t : n ~ docs not enforce it). A s shown in the table below, the ~ i ~ ~ ~ ~ e r a l Air Sewices A ~ r e ~ ~ ~ c n ~ s (BASAS) provide for single dcs i~na~ j~n o f airline and r e c i p r ~ ~ i ~ a f rights except for BASAs with the CIK, ( ; e r ~ i i ~ ~ and Italy, Tficsc agreements arc based on the market p ~ t ~ n ~ i a l and traffrc forecasts o f the dest~nat~~ns, and include specific clauses on the type o f aircraft> seat capacity and frc~~~ency o f scwice. A l t h ~ ~ i ~ h ~ ~ ~ ~ ~ r j ~ ~ ~ i s has signed BASAs with 29 countries, only I 8 art: o ~ ~ r a t i o n a l (i&. scrviccs are being opcrarcd under such Bti\SAss). ~ o r c ~ ~ e r ~ a ~ t : ~ o r a ~ i d ~ m o f ~ ~ i d e r ~ ~ a n d i n ~ has been sigiicd with the United Arab Emirates (UAE) artd Emirates Airlines i s o~cra t in~ 4 weekly services on the ~ ~ b a i / ~ ~ u r i ~ ~ ~ s route under a code share Agrce~en~ with Air ~ a u r i ~ j ~ s .

66

Although a no-charter policy i s in place, the Government has signed a number o f bilateral agreements with quasi-charter carriers being designated to fly to Mauritius. These airlines operate year-around scheduled services to Mauritius. Condor i s the designated carrier to Mauritius and Lauda Air i s the Austrian designated carrier. France i s requesting access for quasi- charter airlines as designated carrier, Le. Corsair from Paris, and Star Airlines for the Paris-Nice- Mauritius route. These carriers have close ties with the French tour operators Nouvelles Frontikres and Club Med respectively. This gives them an important bargaining power in negotiations as these tour operators can potentially divert potential tourists to other destinations.

Mauritius has also been very cautious in signing agreements that could impact i t s air access policy. Mauritius i s not a party to the “International Air Transport Agreement, under which participating states exchange the “5 freedoms o f the air”. The Yamoussoukro Decision was adopted at the OAU Summit held in Togo in July 2000 and provides for the operation and liberalization o f air services between African States. Considering that the liberalization program would be detrimental to i t s tourism and air transport industries, Mauritius had withdrawn from the decision.

The Government has engaged in 5‘h and 6th freedom, but limiting it to a few destinations, in order to limit the impact on Air Mauritius. The 5‘h freedom allows the carriage o f passengers and cargo between two countries by an airline o f a third country on route with origin andor destination in i ts home country. The only effective and operated 5th freedom agreements have been with France, UK, the United Arab Emirates, India, Madagascar, Singapore and South Africa. The possibility o f granting 5th freedom rights to an Asian carrier, to serve the route beyond Mauritius to South Africa i s being considered.

The establishment o f share-code with competing airlines contributed to maintaining high prices. The combination o f share-code agreements with single competing carrier, such as in the case o f the Paris-Mauritius route, results in a monopolistic situation, contributing to maintaining high prices. Air Mauritius has signed share-code agreements with major airlines on several direct routes, such as Air France, Air Madagascar, Air Seychelles, Austrian Airlines, and LTU (Germany).

A review o f seat capacity suggests that this strategy allowed Air Mauritius to subsidize non- profitable destination from profits on specific destinations l i ke France. A review o f load factor, on routes to various destinations for a period o f 8 months between November 2003 and June 2004, shows an overall load factor about 70%. Destinations with higher load factors would indicate the most profitable routes, namely Paris, London, Mumbai and Johannesburg. This i s not surprising as these routes, such as Paris-Mauritius, do not face much competition. On the other hand, Perth, Nairobi, Rome, Chennai and the Brussels/Geneva/Zurich route show low load factors, suggesting that the first group o f routes subsidies the other.

67

Chart A4- 11: Load Factor on Selected Routes

0.90 -

2 Source: Master Plan for Air Transportation in Mauritius (2004)

Finally, although cargo services are being liberalized, there i s l i t t le competition in this market. Cargo regimes fal l under the bilateral agreements, but there i s limited restriction on the operation o f cargo services, and such services are increasingly being liberalized. However, there are only a few air cargo providers due to the limited market size and important capacity available on Air Mauritius. There i s currently no dedicated air cargo provider, as most o f the capacity i s provided by the passenger flights. These are essentially textile products and material related to the textile industry, representing 62% o f the traffic. Air Mauritius Cargo i s the largest cargo connecting Mauritius to the rest o f the world, with a 65% share o f capacity, followed by Air France Cargo (1 8%), Emirate SkyCargo (7%) and British Airways Worldcargo (6%). The chart below shows the destination and share o f cargo capacity, illustrating the importance o f Europe as the main market for export by air, with France and UK accounting for 50% o f scheduled cargo capacity.

Chart A4- 12: Destination and Share o f Cargo Capacity

France

United Kingdom

India

Dubai

Singapore D M K D A F D B A U E K

Italy

Germany

Switzerland

Hong Kong

Australia

Austria

0 1.000 2.000 3.000 4.000 5.000 6.000 7.000 8.000 9.000 10.000 annual scheduled capacity in tons

Source: Master Plan for Air Transportation in Mauritius (2004)

68

Air ~ s u r i ~ ~ ~ s i s r j ~ ~ t ltow a modern and ~ r o ~ ~ ~ s ~ 3 ~ sirline, ~ r o v ~ d i n ~ scrviccs to passcngers, cargo and othcr a ~ r ~ ~ n c s . About 85% o f thc c o ~ p a ~ y r~venucs arc dcrivcd from ~ a s s c ~ ~ e r services, the othcr scrviccs being ~ r e j ~ ~ ~ t scnticcs with I196 o f totst r ~ ~ ~ ~ ~ ~ ~ ~ s . Air ~ a u r ~ t l u s owns or lcases f ive Airbus A340, two Bocing 747 soon to bc replaced by 2 A i ~ ~ u s A ~ 4 ~ ~ ? two Airbus A3f9, one ATR72 and two ATR42, and t h e e Bc31 Ranger ~ ~ ~ ~ ~ ~ ~ t c r . Bctwecn FY02 and FYQS, the ~ ~ ~ ~ a ~ y postcd ~ r o ~ t ~ ~ c ~ ~ e ~ n Euro 14 ~ ~ ~ ~ l ~ ~ n and Euro 2 1.5 ~ i l ~ ~ o ~ . In FY05, the company postcd a p r o ~ t o f Euro 17.6 million for a total ~ ~ o ~ ~ e r ~ ~ ~ c l u d j ~ ~ g fucf ~ u r ~ h a r ~ c ~

s

i 00% 90% ~ 0 % 70% 60% 50% 40% 30% 20% 3 0% 0%

indlan Ocean

#Africa & Middle East

%No of Qh Revenues Passengsrs

100% 90% 80% - 70% * 60%

s 50% - 40% *

A ~ r ~ c ~ M ~ d d le ~ a ~ ~ l n d i a n Ocean

30% f3 Europe 20% I O % 0%

Air Mauritius i s also perceived to be a safe airline, able to perform maintenance on other airlines. Air Mauritius was approved in 1998 as a JAR (Joint Aviation Requirement) 145 by the French Direction Generale de 1’Aviation Civile. T h i s allows the company to perform maintenance on aircraft and components belonging to the member states o f the Joint Aviation Authorities and to se l l i t s services to other airlines in the region that require a JAR 145 release. Air Mauritius i s also launching a third party maintenance base at SSR International Airport.

Air Mauritius i s still mainly owned by the Government, with direct and indirect ownership of 51% o f the shares. Air Mauritius i s registered as a private company with i t s share listed on the Mauritian Stock Exchange. The Government controls the company through direct ownership of the company’s share and control o f several other institutions, including Mauritius Holding Ltd, which holds 51% o f Air Mauritius’ shares. As a result, the Government has been able to reduce i t s financial participation in the company and allow private participation, while at the same time keep a level o f control over the company.

Chart A4- 15: Shareholding o f Air Mauritius Ltd. (March 2005)

Shareholding of Air Mauritius Ltd (March 05)

19%

OAlr Mauritius Holding Ltd

.State Investment Corporatlon Ltd

.Port LOUIS Fund

EiGovernment of Maurltlus

.Roger6 and Company Ltd

MBrltlsh Always Assoclated

MCompanle Nationale Air France

OAlr lndla

MNatlonal Pension Fund

OMauritlus Development Investment Trust Co. Ltd

Bother Investors

Companles Ltd

Source: Air Mauritius Annual Report 2005

However, the control o f Air Mauritius by the Government did not prevent Air Mauritius from benefiting from private participation. Beside the Government, Government-controlled entities, investment f i r m s and general public ownership, two groups o f entities provide more than financing. Foreign airlines - Air India, Air France and British Airways - and the main domestic conglomerate, Rogers and Company, wi th strong presence in the travel and hotel industry, are also shareholders. Although the Managing Director, Chairman, and several Board members represent the Government, six o f the fi f teen Board Members are senior officials o f these two groups o f private sector companies.

70

W h i l e the airline has benefited f iom the restricted air access policy, i t s management has also contributed to i t s profitability. The Managing Director i s supported in day-to-day management o f the company by an Executive Committee composed o f senior managers, some o f which were recruited internationally. The fleet i s modern and older planes are being replaced in order to improve the services provided to the passengers and to reduce maintenance costs. The company was also able to partly mitigate the sharp increase in j e t fue l price by hedging mechanisms.

However, i t i s not clear that Air Mauritius financial performance would resist increased competition or economic shocks. The most profitable routes are those in which the company enjoys and quasi-monopolistic situation and the profits on these routes are used to subsidized less traveled destinations. In addition, the company i s not very active in price discrimination to minimize full seats and maximize revenues. A more liberalized air access would increase competition on key profitable routes, and the company would certainly face difficulties in matching the fares o f low-cost carriers. Such as change in the air access policy would certainly require Air Mauritius to review i t s pricing strategy, destinations and engage into measures to reduce i t s costs and increase i t s competitiveness.

b) Tourism Industry

The overall performance o f the tourism industry i s good, with high revenue per tourist and quality o f the hotels and services. About 500,000 tourists stayed in a registered hotel in Mauritius in 2004, with about 33% o f al l tourists being repeaters. Although there i s an informal sector dealing with about 240,000 tourists, around 76% o f al l tourists stayed in a hotel in 2004, paying an average price o f US$ 94 per night26. Bed nights sold in the formal sector are 3.5 higher than in the informal sector, and according to AHRIMZ7, the average hotel room rate i s closer to US$ 180.

However, the increased competition from other destinations and consumer behavior changes are making Mauritius a less appealing destination. European customers, especially in France, have longer vacation days, which might increase the number o f holidays taken every year, and are becoming more price-sensitive. Several tourists travel in economy or via low-cost airlines to stay in nice hotels. Moreover, there i s a trend towards personalization o f the vacations, which favors the unbundling o f the airhotel package. Destinations such as Seychelles and Maldives offer a similar experience, making Mauritius less a unique place. Finally, other trends in the airline industry, with the emergence o f low-fare airlines often owned by travel agents (Nouvelles Frontieres, Club Med, Thomas Cook, etc.) contribute to offer affordable alternatives to tourists.

In addition to these trends, the hotel room capacity and average rates increased significantly during the past few years. Between 1999 and 2004, hotel capacity has increased by more than 2,065 rooms, an increase o f 25% from the level in 1999. The growth i s expected to increase to respectively 13% and 10% in 2005 and 2006, to reach 12,830 rooms in 2006. Moreover, hotel rates have increased by 3 1.5% between 2001 and 2004, well above the domestic inflation o f 5% per year.

26 Survey conducted for the Tourism Development Plan (2002). 27 Association des Hoteliers and Restaurateurs de 1’Ile Maurice (Association o f Hotels and Restaurants o f Mauritius).

71

Chart A4- 16: Number o f Hotel Rooms and Annual Growth Rate

16% T T 14,000

14% .-

c 10% .-

1835 1888 1837 1888 1983 2000 2001 2002 2KQ 2004 2005

I-Room Growth +NumberofRooms I

Source: Central Statistics Office and Ministry of Tourism and Leisure

As a result, the hotel sector i s facing declining room occupancy and length o f stay. Although i t was relatively stable between 1997 and 2000, hotel room occupancy decreased from 63% in 1997 to 55% in 2003. The average length o f stay o f tourists in hotel decreased also from slightly above 12 days in 1993 to around 9.5 days in 2004. The impact o f these two trends i s a decreasing profitability for hotels, which potentially could result in future bankruptcy as regular and important investment, which i s recovered by revenues from tourists, i s needed to maintain the 5- star hotels to their standards. In addition to the trends described below, the availability o f an informal sector, with significantly lower prices, might attract repeater or more price sensitive tourists.

Chart A4- 17: Hotel Occupancy Rate

63 62 62

59 58

55 55

I I I I I I

1997 1998 1999 2000 2001 2002 2003 2004

Source: AHRIM

72

Chart A4- 18: Average Length o f Stay in Hotels

14.0 1 12.3

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: AHRIM

Limitation of the current model and new direction

With the end o f preferential agreements, two traditional industries are under serious threat, putting more pressure on tourism to generate growth and employment. Mauritius economy has grown by more than 5% every year in the last two decades, with very low unemployment, but the textile and sugar industries are facing several challenges. Mauritius has enjoyed preferential prices for i t s sugar exports as part o f the ACP/EU Sugar Protocol. The country i s now facing a 36% decrease in sugar price, and i t s local industry might not be in a position to reduce sufficiently i t s cost to remain profitable. On the textile front, the init ially l ow wages and quota- free export agreements with Europe enabled the industry to boom in the 80s and 90s. In it now under threat o f cheaper products being manufactured in China and other Asian countries, combined with the end o f the multi-fiber agreement.

The Government i s reacting by pursuing diversification (esp. in services) and increasing employment in the tourism industry. A lot o f efforts have been put in developing the banking, financial services and IT industry but these industries have not generated much employment due to several constraints including the availability o f highly qualified professionals. As a result, the tourism industry i s expected to bring most o f the short-term growth and employment. The Government’s objective i s to increase the number o f tourists from about 500,000 each year to 1 mil l ion in the short-term and 2 mi l l ion in the medium term.

In order to achieve this, a broader market segmentation i s considered with less wealthy (or willing to pay) customers coming to Mauritius. Due to the high ticket price and hotel rates, Air Mauritius and the hotel industry are respectively facing low load, decreasing length o f stay and increased room availability. With more hotels being built, the problem i s not o f hotel capacity throughout the year. An increase in the number o f tourists in the short and medium term requires more tourists to take the plane and stay in hotels. This would work if the hotel prices become cheaper, together with more air capacity with affordable air fares.

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As a result, Mauritius i s engaging into the path o f liberalizing i t s air access. Due to increased pressure for air access liberalization, Mauritius restrictive policy i s not sustainable and the Government i s already facing strong pressure from France to allow quasi-charter airlines as designated carriers. The development o f the non-formal tourism industry and arrival o f European tourists from neighboring Reunion Island, South Afr ica and Dubai might be another illustration o f the l imi t o f the model that was adopted so far in the tourism industry and air access.

The government i s s t i l l considering options, but it i s expected that a gradual opening o f air access wil l take place, and that Air Mauritius would be given more commercial freedom to face competition. The liberalization o f air access can have a huge impact on Air Mauritius, which would face increased competition on i t s more profitable routes (such as Paris-Mauritius). The hotel industry i s also expected to reduce i ts price to attract more tourists in the short-term, while giving the national carrier the time to prepare itself for more competitions from lower-fare airlines.

Implications for the Caribbean

The implication for the Caribbean i s that i t i s difficult to replicate the Mauritius example. Mauritius had very strong advantages and positioned i t se l f in a nice market. This allowed it to have a restricted air access policy and a profitable airline industry. However, this model i s facing a lot o f pressure, due to the changing nature o f the industry, competition from other destinations, and global trends for air access liberalization, Moreover, the current economic situation in Mauritius requires the country to increase the number o f tourist arrivals, through increased capacity and more affordable air and hotel prices, As a result, the Government i s now engaging into a more open air access policy.

Another implication i s the importance o f Air Mauritius performance. W h i l e i t played a very important role in the development o f the tourism industry, the restricted air access was not the only contributor to this success. Although it i s not clear that Air Mauritius would have been profitable without the quasi-monopoly on several routes, the airline i s professionally managed, has a recent and efficient fleet o f aircrafts, good and reliable services, which al l contributed to i t s performance.

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Annex 5 - List o f Reports and References

Airclaims International 2006: Latest Trends in Scheduled Airline Capacity, Development Trends in the Caribbean.

Air Transport Action Group: “The Economic and Social Benefits o f Air Transport”.

AvMan Inc. 2000: “The Impact o f Open Skies between the United States and Latin America”.

Clarke, J. Paul et al. 2005: “Estimation o f the Economic Benefit o f Air Jamaica to Jamaica between 1995 and 2004”, MIT.

European Commission 2004: “A Community Aviation Policy towards i t s Neighbors”, 74 Final.

InterVISTAS Consulting 2006: “Caribbean Air Transport Services Study: Air Fares Yield Analysis and Best Practices Simulation Model.

InterVISTAS- ga2 Consulting 2006: “The Economic Impact o f Air Service Liberalization”

Megginson and Netter 200 1 : “From State to Market , , . ,”. Journal o f Economic Literature.

Pacific Regional Transport Study, Pacific Islands Forum Secretariat, June 2004.

Richman, Anton and Chris Lyle 2005: “The Economic Benefits o f Liberalizing Regional Air Transport - A Review o f Global Experience”, Commark Trust.

Winston, Cl i f f and Steve Morrison 2003: “The Remaining Role for Government Policy in the Deregulated Airline Industry” Cl i f f Winston and Steve Morrison, Brookings Institution, Washington D.C.

World Bank, 2005a: “Institutions, Performance and the Financing o f Infrastructure Service in the Caribbean”, World Bank (edited by Abhas K. Jha) Working Paper No. 58.

World Bank, 2005b: “Towards a New Agenda for Growth - Organization o f Eastern Caribbean States”.

World Bank, 200%: “A Time to Choose - Caribbean Development in the 2 1 st Century”.

World Bank 2005d: Country Assistance Strategy for the OECS Report No.33 1 18-LAC.

World Bank, 2005e: “Air Transport Infrastructure - The Roles o f the Public and Private Sector” Douglas Andrew and Ellis Juan.

World Bank 2006: “Armenia - The Caucasian Tiger: Polices to Sustain Growth”

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World Bank: “Infrastructure, Competition Regime and Air Transport Costs” A Micco and T Serebrisky memo.

WTOAJNDP (Ian Bertrand) 2001: “Study o f Critical Issues Affecting the Regional Air Transportation Sub-sector”.

Web Sites o f the following organizations:

Bureau o f Transportation Statistics Official Airline Guide International Civil Aviation Organization International Air Transport Association Federal Aviation Administration Caribbean Tourism Organization CARICOM MALIAT

Various reports and recommendations in regard to: Air Jamaica BWIA Caribbean Star L IAT

CARICOM Multilateral Services Agreement Association o f Caribbean States Air Transport Agreement

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Annex 6 - List o f Persons Met and/or Interviewed

Antigua and Barbuda

Ministrv o f Finance and the Economy

Hon Errol1 Cort Minister Senator the Hon. Lenworth Johnson Parliamentary Secretary

Ministry o f Tourism and Civil Aviation

Hon. Justin Simon

Brian Challenger

Attorney General and Chairman o f the Air Transport Licensing Board Technical Coordinator (Civil Aviation)

Eastern Caribbean Civi l Aviation Authoritv (ECCAA)

Rosemond James Tricia Kalloo Gregory McAlpin

L I A T

Gany Cullen Roland Blais Cameron McCaw

Acting Director General Director, Finance and Administration Director, Flight Safety

(Former) Chief Executive Officer Chief Financial Officer Principal, Zwaig (LIAT Adviser)

Caribbean Star Airlines

Frankie Francois General Manager

Aruba

Deuartment o f Civi l Aviation

Albert Boekhoudt Chief - Air Transport Section

Barbados

Ministry o f Tourism and International Transport

Hon. Noel Lynch Irvine Best

Minister Acting Permanent Secretary

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Valerie Brown Jacqueline Blackman Pauline Yeanvood Neville Boxill

Ministrv o f Finance

Lorna Leacock

L I A T

Jean Holder Leesa Paris

Chief Technical Officer Deputy Chief Technical Officer Senior Research Officer Secretary, Air Transport Licensing Authority

Chief Accountant

Chairman Chief Commercial Officer

Caribbean Tourism Organization (CTO)

Vincent Vanderpool-Wallace Secretary General, CTO Luther Miller Arley Sobers

Director, Finance and Resource Management, CTO Director, Research and Information Management

CTO/EU

McHale Andrew

European Union (EU)

Amos Tincani Vincent Vire

Research and Development Adviser, CTO (Caribbean Regional Sustainable Tourism Development Program - CRSTDP)

Ambassador and Head o f Delegation

Caribbean Development Bank (CDB)

Juliet Melville Chief Research Economist

Dominican Republic

Office o f the President

Jose Luis Abraham

Ministrv o f Tourism

Amin Canaan Gomez

Aviation Adviser

Aviation Adviser

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Grenada

Ministrv o f Tourism, Civi l Aviation and Culture

Lima Frederick Glyn Evans Earl Charles Sydney Charles

Guyana

Civil Aviation Authority

Brian James

CARICOM Secretariat

John Lewis Irwin Larocque

Jamaica

Ministry o f Finance

Ann-Marie Rhoden Veronica Warmington Sharon Weber

Permanent Secretary Director, Air Transport Licensing Board Civil Aviation Officer Grenada Airports Authority

Chairman

Senior Project Officer - Transportation Assistant Secretary General, Regional Trade and Economic Integration

Deputy Financial Secretary

Ministrv o f Housing. Transport and Works

Elsa May Binns Valerie Simpson Katherine McGee Jodi Barrow

Civi l Aviation Authoritv

Jacqueline Fairclough Karen Thompson

Aimorts Authority o f Jamaica

Lisa Kay-Henry

Senior Director, Policy, Planning and Evaluation Director o f Policy Senior Policy Officer Policy Officer

Director o f Economic Regulation Economist

Director o f Legal Affairs

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Director General

Ministrv o f Tourism

Carol Guntley

Air Jamaica

Michael Conway Chief Executive Officer Wi l l Rodgers

Caribbean Hotel Association (CHA)

Alex Sanguinetti President

Senior Vice President, Industry Relations

Martiniq ue

Air Caraibes

Marie Claude Valide Director

St. Lucia

Ministrv o f Finance, International Financial Services and Economic Affairs

Louis Lewis

Eastern Caribbean Central Bank (ECCB)

Teresa Smith Senior Economist

Director - Economic Affairs

Trinidad and Tobago

Ministry o f Works and Transport

Sonia Francis-Yearwood Senior Planning Officer Rhonda Sooklalsingh Wayne Koylass

Economist, Central Planning Unit

Ministrv o f Trade and Industry

Margaret Parillon Deputy Permanent Secretary

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Ministry o f Finance

Jerry Hospedales Coordinator, Divestment Secretariat

Caribbean Association o f Industry and Commerce (CAIC)

Carol Ayoung Chief Executive Officer

BWIA

Nelson Tom Yew Barbara Weekes

(Former) Chief Executive Officer Director, Marketing and Sales

Association of Caribbean States (ACS)

Luis Carpio J. Fernando Valey

Director Transport and Natural Disasters Adviser

El Perial Management Services

Ian Bertrand Principal, CRSTDP Civi l Aviation Consultant

United Kingdom

Civil Aviation Authority

United States

Department o f Transport

Avman Consulting

Bobby Booth John Jackson

Dan Edwards, Analyst

Keith Glatz, Manager David Modesit, Manager

Chairman

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Roseau

Kingstown

Kingston

St. John’sBasseterre

St. George’s

Port of Spain

Castries

FRENCHGUIANA

(Fr)

St. Maarten (Neth),St. Martin (Fr)St. Barthelemy (Fr)

Guadeloupe (Fr)

Martinique (Fr)

PuertoRico (US)

U.S. VirginIslands(US)

St. Eustasius (Neth)Saba (Neth)

Aruba(Neth)

Curaçao(Neth)

Bonaire(Neth)

Cayman Is.(UK)

Turks andCaicos(UK)

COSTARICA

PANAMA

EL SALVADOR

GUATEMALA

HAITI DOMINICANREPUBLIC

C U B A

HONDURAS

THE BAHAMAS

C O L O M B I A

R . B . D EV E N E Z U E L A

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BELIZE

NICARAGUA

GUYANA

SURINAME

M E X I C O

U N I T E D S TAT E SO F A M E R I C A

L. ManaguaL. Nicaragua

YucatanChannel

GULF OFHONDURAS

GULF OFPANAMA

GULF OF

VENEZUELA

Straits

of

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rida

P A C I F I C

O C E A N

A T L A N T I C

O C E A N

G u l f o f

M e x i c o

C a r i b b e a n S e a

PanamaCanal

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56° 48°

8°

24°

32°

56°104°

16°

64°72°80°88°96°

16°

24°

88° 80° 72° 64°

104°

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

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500 Kilometers

CARIBBEAN AIR TRANSPORT STUDYSTRATEGIC OPTIONS FOR IMPROVED

SERVICES AND SECTOR PREFORMANCE

STUDY’S FOCAL COUNTRIES

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INTERNATIONAL BOUNDARIES

IBRD 34974

AUGUST 2006

TRINIDAD andTOBAGO

ANTIGUA AND BARBUDA

ST. KITTSand NEVIS

DOMINICA

ST. LUCIA

ST. VINCENTand the

GRENADINESGRENADA

JAMAICA

Anguilla (UK)

British VirginIslands (UK)

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Montserrat (UK)

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AMERICA

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