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Airline Restructuring, Bombardier, Regional Aircraft, Regional Airlines, State Owned Airlines

LIAT has a Viable Growth Plan with New ATR’s To Replace Aging Bombardier DHC-8 Fleet

Caribbean regional LIAT (Leeward Islands Air Transport) has put it new business plan under new CEO Capt. Ian Brunton into action, by ordering three (3) ATR-42-600’s (48 passenger seats) from the manufacturer and leasing two (2) new ATR-72-600’s (68 passenger seats) from Air Lease Corporation. It also plans to purchase two (2) ATR-72-600’s in 2014 and lease four (4) more, so by the end of 2014 LIAT should have 11 ATR-42/72’s, and talks of mid-sized regional jets a few years out.

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The airline currently operates 14 early model de Havilland DHC-8-100/300’s (11 leased) on 112 daily flights throughout the Eastern Caribbean serving the needs of its 11 shareholding nations and other shareholders are :

GOVERNMENT OF ANTIGUA AND BARBUDA

GOVERNMENT OF BARBADOS

GOVERNMENT OF DOMINICA

GOVERNMENT OF GRENADA

GOVERNMENT OF GUYANA

GOVERNMENT OF JAMAICA

GOVERNMENT OF ST. KITTS AND NEVIS

GOVERNMENT OF MONTSERRAT

GOVERNMENT OF ST. LUCIA

GOVERNMENT OF ST. VINCENT AND THE GRENADINES

GOVERNMENT OF TRINIDAD AND TOBAGO

The airline has been around since 1956 and rarely has it been profitable, in fact the airline has lost EC$93 million ($US 35 million) in the past 5 years :

In 2010 LIAT lost $US 7.4 million, in 2011 it lost $US 16 million and this past year, 2012 the loss is estimated to be around $US 8.5 million, in short, $US 31.9 million lost in shareholder value in just 3 years ! it really is make it or break it time at LIAT.

The airline has a very poor reputation among locals and visitors to and from the Caribbean Islands. Flights are often cancelled, with inconsistent arrivals and departures. Baggage is often misdirected or not loaded entirely. They are known for having very poor customer service, late departures, many flight cancellations and their staff is thought by some to be  very unfriendly.

The new CEO Captain Ian Brunton, comes with excellent experience, he was CEO of Caribbean Airlines a competitor to LIAT and an airline that was looking to acquire LIAT few years back as it did with bankrupt Air Jamaica. That connection does leave some doubt as to what the shareholders are thinking, as a Caribbean Airlines and LIAT tie up does make some sense, though island politics in the Caribbean can be irrational at times.

The Government of Trinidad and Tobago owns Caribbean Airlines, which took over from bankrupt BWIA  and now flies B737-800’s and has a fleet of 9 ATR-72-600s, the same type just ordered by LIAT and a type very much favored by Capt. Ian Brunton.

I have undertaken several airline restructuring plans in the past and the 3 pillars of such a plan is:

  1. Cost reduction and increasing efficiency.
  2. Revenue increases and enhancements.
  3. Fleet modernization & network improvements.

Seems that Captain Ian Brunton, as ex-BWI pilot is starting with #3 first fleet modernization & network improvements, a good start but at LIAT the #1 problem is Costs, that needs to be talked as soon as possible. Here we will see LIAT look to drop the 39 current daily flights in 18 territories (35% of the daily 112 flights) that are uneconomical and really “social” routes subsidized by the other 65% of the flights that actually make money for LIAT.

These 39 flights are in danger of being cut, which is a huge problem in the Caribbean where air travel is a must not luxury, but they are a drain on LIAT and either these routes be subsidized by their respective governments or LIAT stops serving these routes and finds a small regional like SVG Air (of St. Vincent & the Grenadines) with its 19 passenger DHC-6 Twin Otters or Winair with its DHC-6 Twin Otters (of St. Maarten) and serve them under a code sharing agreement.

The smallest aircraft LIAT has are the three (3) de Havilland DHC-8-100s which seat 37 passengers, the rest being 50 seaters and the new ATR-42-600’s will have 48 passenger seats, so smaller aircraft can be used to serve the smaller markets where demand does not warrant 50 seat aircraft. Currently such arrangements are done to serve Montserrat and Barbuda where demand is just right for a 9 to 19 seat regional aircraft like the Britten Norman Islander or DHC-6 Twin Otter.

On the cost side, Mr. Brunton will have to deal with the 66 different taxes LIAT collects for the various Governments and their agencies, which represent 30% to 50% of airline ticket prices in the Eastern Caribbean today, driving fares up to the annoyance of local citizens who need lower air fares.

The ATR order by LIAT comes as no surprise to industry observers as ATR’s 600 Series ATR-42 and ATR-72 are excellent regional aircraft that are fuel efficient and have cruise speeds of 300 kts (556 km/hr) for the ATR-42-600 and 275 kts (509 km/hr) for the ATR-72-600 and both models need less than 1,300 meters for takeoff for a 300 nm sector.

Bombardier has lost a good long time customer, it does not make the DHC-8-100/300 anymore, they say build to order but the company is focused on its Q400 DHC-8 turbprop, and its regional jets the CRJ line and the future CSeries airliner.

Unfortunately, for Bombardier the 76 seat Q400 is not selling well versus the 68 seat ATR-72, as the 360 kts speed of the Q400 is really not a factor for flights below 300 nm and few regional airlines are flying routes longer than that and if they do then at around 400nm the regional jets be it Bombardier’s own CRJ 700 or 900 or Embraer’s EJet 170/190’s are more economical then the Q400, so its stuck between 300nm and 400nm as its ‘niche’ to narrow and sales show it. In Asia, where short haul is big these days it all about the ATR’s.

Just a note that AVIC of China tried to sell its Xian MA600 Modern Ark for a reported $US 15 million each, it seats 60 cruises at 278 Kts and is powered by the PW127J engine. The aircraft is Chinese derivative of the AN-24, first it was the Y-7 then the MA60 and now stretched into the MA600. Only plus side is that the Chinese would finance them and two its cheap in upfront costs, but operating costs, support and reliability would make up for the difference in price.

With Q400 sales low, though Westjet came thru with a 20+20 order last year beating out the ATR-72-600, and with few CRJ sales Bombardier Commercial Aircraft is struggling to generate enough revenue while it waits for its CSeries which has few orders and now looks like its in for a BIG fight between the B737Max, A320NEO and Embraer’s re-engined EJets. Bombardier used to have a dynamic sales force, and now it is taking a beating and hoping that there are no more delays in the CSeries, which looking at the B787, A350 and A380 programs there will be delays and current delivery forecasts are too optimistic, expect delays !

Now back to LIAT again.

Right now the timing could not be better for LIAT to expand its network, as American Eagle out of San Juan is shutting down in March, 2013 and many opportunities present themselves as 11 ATR-72-200’s are taken out of the system in the Caribbean, and someone needs to fill that void.

This is why LIAT’s ATR-42-600’s will arrive this June, July and August and its ATR-72-600’s are to come June and August from Air Lease, obviously LIAT is in a hurry, as well top senior management is being reduced from 13 to just 6 to help the CEO, good to see some positive action and excitement in the air at LIAT, after years of basically gloom and doom.

The airline’s business plan looks ambitious, for 2013 LIAT forecasts a profit margin of 2% and profit of $US 2.5 million, which means revenue at $US 125 million and for 2017 the profit margin goes up to 9% and a profit of $US 14.7 million is forecast on revenues of $US 163 million. But then take out 39 unprofitable routes add in the potential growth due to American Eagle shutting down and you have some optimism indeed.

Some people have said the Q400 was a better choice, but given the short sectors flown by LIAT you cannot use the speed of the Q400 below 300 nm sectors  for any advantage, in fact versus the ATR-72-600 the Q400 comes in at around 7 minutes earlier than the ATR-72-600 on a 300 nm sector yet will burn roughly 300 Kg more in fuel (100 USG).

List price of the two aircraft differ by $US5.9 million, with $30,3 million per Q400 aircraft or $420,833 per seat versus $23.4 million per ATR-72-600 aircraft and only $344,117 per seat ! So the ATR-72-600 costs less, burns less fuel per sector, and though it has 8 less seats and cruises 85 Kts slower, with speed no factor on short sectors, only the extra seats is a plus for the Q400 but at a huge capital and operating cost.

In fact even by Bombardier’s statistics the Q400 average fleet sector is just over and hour, which means most Q400 operators are NOT using it for its speed but its 76 seats, and therefore not getting the benefit of the 360 kts cruise that would be attractive on longer sectors. The Q400 is stuck in the middle, between the ATR-72-600 on one side and the 70 seat EJet 170 and CRJ 700 on the other, not a good position to be in, well marketed for its speed, but economics today will win everytime if looked at in detail.

Here is an example of a set of flights LIAT undertakes :

Barbados to St. Vincent (105 nm)

St. Vincent to Grenada (76 nm)

Grenada to Trinidad (85 nm)

Dominica to Antigua (100 nm)

Dominica to St. Lucia (95 nm)

With such short hops in the Eastern Caribbean, you really cannot get any speed advantage there, but opening up services to Aruba, Haiti, Jamaica and Panama as is planned the ATR’s will do well before you need some regional jets.

Now, lastly the thing most destructive to LIAT in the Caribbean is the politics, the islands are suppose to be united for a common cause, but they fight too often and get little done. The 66 taxes, the 11 governments, the fact that Caribbean Airlines (CAL) is now the national flag carrier of Trinidad and Tobago, Jamaica and now Guyana does not help LIAT. Especially when Caribbean Airlines has its fuel subsidized by the oil rich Government of Trinidad and Tobago to the tune of a reported $US 50 a barrel when LIAT pays market rates of $100+ per barrel, so CAL pays half of what LIAT Pays for fuel, not good for LIAT as they maybe competing in the future. Though a strong possibility exists LIAT will be merged with Caribbean Airlines in the future, as may Cayman Airways which was also targeted by CAL in the past for a merger.

Just hope that CAL is not like Caribbean Sun, buying market share to where yields (RASM) do not cover costs (CASM), here Caricom needs to come together and iron out some plan for the two airlines to co-exist without killing each other. Much like CAL and LIAT response to Barbados based upstart low cost airline RedJet with two MD-80’s lasted less than a year.

The ATR-72-600 burns 618 Kg of JetA on a 200 nm sector, that is around 203 USG’s, which means that a LIAT could be paying $US 1,015 in fuel for that sector at $US 5.00 per USG JetA while CAL’s fuel cost would be $508 or ½ of LIAT’s cost. Presently CAL has route rights under Caricom Multi-Lateral Air Service Ageement, and has big support from the Governments of Grenada, St. Lucia and St. Kitts & Nevis which get CAL services and don’t have to pay for it and therefore reluctant to help LIAT in time of need. Till now, its been only Antigua & Barbuda, Barbados and St. Vincent & the Grenadines supporting LIAT (around 77% combined ownership), while others have just watched and waited, but now Dominica looks set to help LIAT, a good move for all.

Need to have level playing field are things can get really messy as these ATR-42/72 orders by LIAT are very expensive, each ATR-42 is listing at $US 19.5 million each and $23.4 million for each ATR-72, a huge investment for the Eastern Caribbean, and the list of failed airlines is huge in the region, 30+ operators have come and gone like :

Caribbean Sun

Nevis Express

BWIA

RedJet

Air Caribbean

EC Express

Carib Aviation

Carib Express

Guyana Airways 2000

Air Jamaica

Air Calypso

Cardinal

Helenair

Air BVI

I wish LIAT and Capt. Ian Brunton much success in the coming years, I will be watching and commenting on the progress of all in the region. The future looks bright, but it will take employees, unions and Governments to work together for a common cause to work, too many CEO’s have come and gone at LIAT (3 in 2012), so keep focused on the future ahead.

The corporate culture at LIAT needs to be changed, transforming an organization that is demoralized through constant crisis, labor disputes, financial problems and just a poor attitude towards the company by employees, governments and customers, here Capt. Brunton will have to do the following to drive cultural change at LIAT :

1. establish a sense of urgency and pride, which is already underway.

2. forming a powerful guiding coalition to lead change and work together as one.

3. create a vision of where LIAT is heading and get everyone on board this vision.

4. communicate that vision and strategy to all make them own it, teach new behaviors.

5. empowering others to act on the vision, get rid of obstacles to change change systems/structures that undermine change.

6. plan for and create short term WINS, visible quantifiable improvements, step by step and reward and recognize employees involved.

7. consolidate improvements and produce more change, hire, and promote those that are fired up by the vision.

8. institutionalize new approach, articulate the connections between new behavior and corporate success, and ensure leadership development.

Lastly, the airline needs re-branding, new livery, uniforms, etc. it needs a new look, to say we are here we have changed out with the old LIAT, we are new, vibrant and and enthusiastic for the future, the LIAT brand is tarnished BUT it can be resurrected, but you need new people to develop a new corporate culture.

Follow me as I explore aviation issues from angles few reporters or analyst do, and maybe you will see aviation news and  issues in a new light.

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About Aviation Doctor - Helping aviation companies to transform the present into a more profitable tomorrow

I am a Canadian and EU national with an MBA and 33+ years experience in aviation business development with 20 years overseas and work in 25+ countries. A former investment/merchant banker (mergers and acquisitions to corporate turnarounds). airline and OEM senior executive and past owner of 6 successful aviation companies in 3 countries (executive jet charter/management companies, aircraft sales, aircraft broker, airline/aerospace consulting to aircraft insurance). I have a very diverse aviation background with 75+ aviation companies (45+ airlines of all sizes, OEM's, airports, lessors, MRO to service providers) as consultant, executive management, business analyst and business development adviser. Excellent success track record in International Business Development. Most work with airlines is with new start-ups and restructuring of troubled carriers. I sold new business jets, turboprops and helicopters for Cessna, Raytheon, Gulfstream to Eurocopter as an ASR as well as undertaking sales and marketing of commercial aircraft for Boeing, de Havilland, Dornier, Saab and Beechcraft. Brokered everything from LET-410's to B747's and from piston PA31 to G550 business jets. I look beyond the headlines of the aviation news and analyze what the meaning and consequences of the new information really means. There is a story behind each headline that few go beyond. Picked the name Aviation Doctor, as much of my work has been with troubled companies or those that want and need to grow profitably. I fix problems be in the business, and help with restructuring for a better tomorrow. You can reach me with comments or suggestions at: Tomas.Aviation@gmail.com and I comment a lot on Google+, my Facebook and LinkedIN.

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