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

ABSTRACT: LIAT “The Caribbean Airline” on the Brink of Doom – BUT Still in Denial and Brushes Off Calls for a MAJOR Restructuring, why is it that the Caribbean is a graveyard for airlines ? no local airline has been financially successful for any length of time if there is no government ownership, and even then they go bust ! I think it comes down to poor management and political interference and corruption ! where are the accounting books for LIAT ? hundreds of millions of EC taxpayers dollars have gone into the airline, where did it all go ? a black hole that no one dares to look into ? well the EC countries are running out of money, some close to defaults on loan and bond obligations and LIAT will have NOWHERE to turn to for money, and then ??

Today, Mr. David Evans takes over as CEO at LIAT “The Caribbean Airline”, 7 months after the previous CEO, Capt. Ian Brunton resigned over his attempt to turnaround the forever struggling regional airline that serves 22 destinations with around 112 flights per week and a current fleet of DHC-8-300’s and ATR-42-600’s and ATR-72-600’s as it is going through a fleet change over to 12 ATR-42/72 aircraft in 2014.

This is an airline that is sadly in very bad shape, now majority owned by Government of Barbados, and 9 other Eastern Caribbean Governments, mainly St. Vincent & the Grenadines, St. Lucia and Dominica. The entire Eastern Caribbean, except oil producing Trinidad and Tobago, have been in economic stagnation since the global economic crisis of 2008 when LIAT carried 1.1 million passengers, last year around 850,000 were carried, a reduction of 23% in inter-island traffic since 2008. In the end they will see that there are no savings in fuel costs, yes maintenance costs will go down with new aircraft, but with lease and finance obligations, monthly costs will substantially increase with the new fleet.

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In with the new ATR-72-600 and out with old DHC-8-300 – can you tell the difference ? LIAT’s Chairman and Board hope so, because its a very costly $US 260 million in a new fleet when they can’t afford it and employees salaries are late every month.

Sadly, CEO’s have come and gone at LIAT and the various island states rarely cooperate to the detriment of citizens of the island states. Having worked with several Government airlines in Eastern Europe and Africa, I know the challenges of trying to balance state interests with economic interests, and price these state owned airlines pay for Government incompetence, interference and corruption (Read my blog: NO More State Aid to Government Owned National Airlines, Fly on Your own or Go Bankrupt 2/2013).

Now in 2012, Capt. Ian Brunton came to LIAT as CEO from being the previous CEO at Trinidad & Tobago’s Caribbean Airlines (CAL), an operator of 2 x B767-300’s, 11 x B737-800’s and 6 x ATR-72-600’s and the acquirer of Air Jamaica in 2011, sadly the combined airline has been loosing around $77 million a year. That merger with Air Jamaica has not gone well, sadly it is not a unified airline and nothing seems to unify the island states, be it Federation, CARICOM or even West Indies Cricket, too many divisions exist for common unity in the islands, and each island nations is out for its own interests. The islands don’t get along with Trinidad and Tobago, it has oil revenues and there is some jealousy in play here, some believe Capt. Ian Brunton came to LIAT from Caribbean Airlines only to speed up its demise so that Caribbean Airlines can swoop in and take over LIAT’s routes, while CAL wants the routes, and the ATR choice at this time is very suspicious on many levels, in the end it was the Board that approved the deal and approved the CEO from Trinidad.

I have worked in the Caribbean many times with various airlines and it is probably one of the hardest places to get things done because, everyone thinks they are right and there is great resistance due to pride to change anything, to the detriment of the Eastern Caribbean, look where it is today, economic stagnation, tourism in decline as tourist find cheaper alternatives in Cuba, Mexico, Dominican Republic, and locally no new initiatives to change any of that. I was invited in February 2014 to participate on Island Media Communication Inc.’s “Time to Face the Facts” a local live/interactive programe on Caribvision hosted by Jerry George as an expert on the Caribbean airline industry, an industry that has seen so many airlines go bust.

Just in the past few years (ie. RedJet, Carib Aviation, Cardinal, Nevis Express, Caribbean Star/Sun, Air Caribbean, BWIA, Air Jamaica, Guyana Airways, Dutch Caribbean Airlines, Curacao Express, etc.). Even now, Bahamasair and Cayman Airways are just holding on, while Caribbean Airlines which recently bought Air Jamaica struggles as it has foolishly decided to get B767’s and fly trans-Atlantic to London, just like BWIA did and ultimately paid the price for that move.

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Colorful Air Jamaica- sadly gone

With Ian Brunton’s arrival at LIAT, instead of dealing with the normal Restructuring issues of a troubled company, 1. Focus on Liquidity (short term cost cuttting, stop the bleeding, top down actions 2. Focus on Sustainability (performance enhancement, ensure profitable growth, improving the business 3. Focus on Growth (strategy re-defined, future direction, leverage improved capabilities, LIAT goes out and leases 8 brand new $US23 million a piece 68 seat ATR-72-600’s (at around $US 180,000 per month EACH) and BUYS 4 new $US18.5 million 48 seat  ATR-42-600’s ($100 million with training, spares, etc.) to replace its 16 DHC-8-100’s and DHC-8-300’s because they are too old and therefore too maintenance intensive and burn too much fuel, though that not really correct and when you are bleeding cash as LIAT is and cannot pay salaries on time, a questionable move for sure.

Taking on $US 260 million in new aircraft when you can’t even pay salaries on time ? the DHC-8 fleet is getting on in age, average age is 20 years old, but still has life in it, JAZZ in Canada has 64 of the DHC-8’s (100’s and 300’s) and they are now 25 years old on average, and will be around for some time still. LIAT argued the new ATR-72/42 are more fuel efficient, well they are not, powered by the more powerful PW 127 engines, the ATR-42-600 burns 1,246 lbs on a 200nm trip, the ATR-72-600 bursn 1,363 lbs on the same 200nm trip, while the DHC-8-300 with the PW125 engine burns 1,214 lbs on a 200nm trip, so more fuel efficient the ATR’s are not and one wonders why the misinformation from LIAT.

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 LIAT’s DHC-8-300 old but still more fuel efficient than the new ATR’s

As a former aircraft salesman of business jets and regional commercial aircraft, I know there are very large commissions out there on deals made, what was the driver of such a decision at such a precarious point in time in LIAT’s history ? The added burden of financing costs and new lease obligations to the tune of about $US 1.4 million a month, will increase CASM (cost per ASM) over the replaced DHC-8 fleet, as maintenance savings from a new fleet cannot overcome the added finance and lease obligations, making route profitability even worst than before ! My estimate of LIAT’s CASM was $0.320 before the fleet change when average fleet seating was around 48 seats per aircraft (DHC8-100’s and mostly 300’s), now average seating will be 61.3 seats per aircraft (up 28%) which should lower CASM, but the added financing/lease obligations will keep unit CASM about the same, but trip costs are higher and LIAT has to fill more seats per flight to breakeven.

As an example, BGI-GND (Barbados-Grenada) a 171nm one way leg (342 nm round trip), current round trip fare is $324.96, a gross yield $0.950/RPM (very high), yet net fare is only $171.00 as taxes are $153.96 per round trip or 47% of the total gross fare !, tax as a  % of net fare is 90% ! so net yield is $0.500/RPM, which means that if LIAT’s CASM is $0.320/ASM (probably higher $0.36+/ASM), the break even load factor on the route is 64%, which is 32 passengers with the DHC-8-300 and 43.4 passengers for the ATR-72-600, in other words you need to carry 35% more passengers with the ATR-72-600 vs DHC-8-300 to break even (in this example). Now LIAT’s break even passenger loads will be higher through out the system to different degrees, and now you see why the situation at LIAT has deteriorated even further, forget the fuel savings and maintenance savings, the cost per ASM has gone up and not down with the ATR’s. Sadly, LIAT had the choice to go for refurbishment of its DHC-8-300 fleet, an offer was apparently made by Bombardier to refurbish the oldest DHC-8’s and left it open for 2-3 Q400 aircraft for the longer sectors to San Juan, Santo Domingo or Curacao, why they did not choose that not sure, but it would have saved a lot of money for sure.

The above example, and I have analyzed 24 different routes with some being even worst for LIAT, demonstrates 2 very BIG problems for LIAT. First, the HIGH taxes, when you have 47% of a ticket in taxes, then no wonder ticket prices are high (yield $0.950/RPM in the above case) which OFF COURSE effects demand. We know from simple principals of Price Elasticity that aviation is elastic, which means that for any price increase, total demand and thus total revenue goes down and when price goes down demand and total revenue go up. LIAT suffers from being taxed too much by the local governments and that has to change. Short haul routes have a price elasticity of 1.2 to 1.5 which basically means reduce fares by 10% and you get 12-15% increase in elasticity of demand.

Therefore, the Eastern Caribbean Governments need to lower taxes and that will spur on demand, a 50% reduction in those taxes may generate roughly 22% decrease in ticket price, which could drive demand up by 33%, we have seen what low cost airline Rynair has done in Europe with very low fares and it is now the #1 airline in passenger numbers in Europe, as its low fares have stimulated millions of new air travelers every year. I am worried that the new CEO David Evans stated that the Caribbean tax burden is not significantly high compared to other parts of the world, which  I have not seen anywhere yet where 40-50% of an airline ticket is taxes, yes lighten the tax regime and governments will increase demand thus the tax ‘take’ back to government. The reason the Eastern Caribbean tourism is struggling today, is that it cannot compete with the low cost destinations elsewhere in the regions (ie. Cuba, Mexico), high taxes are a BIG part of the competitive disadvantage, and they need to wake up fast, because they are in their 6th year of economic stagnation according to the EC Central bank.

A major issue is also the number of employees, 850 for 12 turboprop aircraft with a total seating capacity of 736 seats, or 71 employees per aircraft, which by the way is the same as WestJet Airlines in Canada which currently has 113 aircraft and 8,000 employees, so something is not right with the employee numbers, productivity is way too low. The airline has become a big employer in the islands, and from my experience one really should not have more than 50 employees per aircraft of this size, so 600 employees at most, ideally I think 500 would be sufficient, with productivity improvements, in short 350 employees need to be laid off, that will help a great deal in restructuring LIAT to be competitive on its own.

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Winair’s DHC-6-300’s could fly LIAT’s “social” routes

Secondly, the problem for LIAT now is that by having bigger aircraft and more seats/flight, the weaker routes will be worst off, the above example showed LIAT now needs 11.4 more passengers per flight on the BGI-GND route. LIAT presently reports 39 of its 112 weekly flights are money losers, so the situation with the ATR’s has now gotten worst for those routes. Its time to bring in small airlines as code share partners to fly some of those routes as partners, something LIAT did for awhile with Carib Aviation, which went under because LIAT took its pilots and was behind on payments to the small regional. So back to LIAT and the mess it is in.

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Winair contracts Guadeloupe based Air Antilles Express’s ATR-42 to fly to Dominica

Off course, Capt. Ian Brunton is a pilot, and the first thing he focuses on is the aircraft at a time the airline has little money left. The change over did not go well during the summer of 2013, pilots nd mechanics in training and in short, lots of flights delayed and cancelled during the high season, Capt. Ian Brunto resigned in September, 2013 leaving an airline in distress, salaries were delayed and after a year, technical manuals to the DHC-8’s were not up to date on some DHC-8 aircraft had not been sold as planned causing a cash flow crisis al LIAT, though again 1 year later ? where is management in this ? The problem has always been at the top at LIAT, revolving door for CEO, a Chairman (Dr. Jean Holder) that has for 10 years watched LIAT decline but has taken few major steps to stop the decline, and a Board that has too many politicians and few businessmen, so paralysis and denial of the facts from top levels has kept things the same, and its now a matter of WHEN not IF LIAT will fail.

Yet, we all know that doing the same over and over and expecting a different result is a recipe for failure, that many airlines all over the world, small and big have experienced and wished they had changed something before the end came, today LIAT is on course for the end. So now, we have a new CEO at LIAT, Mr. David Evans, a seasoned British Airways executive, with regional airline experience but never a CEO but Commercial Director at 2 small airlines in the Middle East. As good as he may be, he is powerless to change anything without the support of the Chairman and the Board, and in the lower ranks, it is highly very unlikely he will find good help, I have been told too many people are in high positions at LIAT that should not be. With so few airlines around, few have experience in managing a properly running airline, and many do not have the skills and knowledge needed of their position, its why an outside firm has been hired to tell them which routes are and are not profitable and the marketing, PR and communications have been singled out by several seasoned executives in the Caribbean as being very poor.

The airline has been in trouble for the past 25+ years, and he will find few people in the airline that have experience working anywhere else, so new ideas will be hard to find, but he will find a corporate culture resistant to change as former CEO’s have found. They had to get an out side firm to tell them which routes were making money and which were not ? with 850 employees you do not have anyone keeping a daily track of each flights financial performance ? or you cannot get all the maintenance manuals in order for the DHC-8’s so they could be sold at the right price ? when the decision was made in early 2013 to sell them ? Where is there any management accountability ? you don’t have it at the top, and it spills down to not having it at the lower levels, no corporate culture of accountability, just excuses for too many years. Time to remove the Chairman and the Board, so the new CEO has a fighting chance to revive LIAT before it flat lines.

We have yet to hear anything coherent from Chairman Jean Holder, he is now threatening to reduce the network, but orders a new fleet of larger aircraft, and says that shrinking the airline will loose its competitive advantage and that competition is threat to its survival. Sadly, there is NO competitive advantage at LIAT, it has a monopoly on Eastern Caribbean routes, people fly it because they have no choice, but they are starting to have choices in St. Kitts with Seaborne and in Dominica with Winair and soon St. Lucia, and the people are choosing the new guys. WHAT is he and the Board waiting for ? you have a new CEO now so get on with the turnaround and start making the changes needed for survival.

It is not rocket science gentlemen, just common sense, the ATR’s are a done deal, stupid acquisition at this time, but cannot change it now so you move forward with the expensive ATR’s and the financial burden the balance sheet has taken in 2013 and the hits the income statement took in 2013 and will take in 2014+. The citizens of the Eastern Caribbean need to voice themselves nice and loud, hundreds of millions of $US have gone to LIAT and what do they get in return ? high fares and taxes and poor service. time to make politicians accountable, best at the ballot box in the next round of elections, as only the politicians can now really help LIAT by appointing a Board that can guide LIAT out of its years of mismanagement.

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Ah the good old days at LIAT ! when life was simple and easy with no worries, a HS748 with old livery

With Caribbean Airlines in Trinidad and Tobago just itching to take over the market from LIAT and Winair in St. Maarten now flying ATR-42’s into Dominica and soon St. Lucia, the vultures are circling LIAT’s Eastern Caribbean Market, time is ticking for LIAT, and I have been asked many times what can restore LIAT ?

The first step is to start at the top, something applicable to many airline owners and executives today:

1. Tell the truth

2. Welcome the truth

3. Tackle the problems, do not ignore the problems, denial gets you nowhere

4. Agree to disagree, but still commit to problem solving

5. Reward the messengers of bad news, don’t punish or ignore them

6. Build integrity

Corporate and financial restructuring can create value, you need to fix the business which is the operating cash flows and then fix the financing, the debt/equity relationship. There are several ways to go about changing LIAT:

1. Incremental change, is good when governments have no guts to make radical changes and the company lacks relevant expertise and resources, while this is LIAT to the tee, the situation requires something more radical than small incremental changes, LIAT has been doing that for 25+ years and where has it gotten with it ? nowhere.

2. Re-engineering, when high cost savings are needed but stakeholders have no guts you van try improvements without big changes to labor contracts and negotiations. You look for elements within the operation that can be redesigned, like online check ins, faster aircraft turnarounds to more automation. This requires lots of technical skills, leadership, and ability to implement change, not something LIAT is able to do at this time.

3. Hardball negotiations, need for change but still shying away from a total transformation, you use skilled negotiating tactics to improve labor contracts, airport fees, leasing costs, financing terms and conditions and across the board supplier discounts. Needs experienced negotiators, and in LIAT’s case much of the fight will be with shareholder governments for change, which at this time is a no go deal, the Board probably hired a CEO that has no fight in him, unlike former CEO Mark Darby who had fight in him, but was sacked early.

4. Transformation, when you have a strong case for cost savings, strengthening the competitive position of the airline, and identified new sources of optimizing existing assets, you are ready for a new cost reduction model, BUT you need the shareholders behind you 100%. Change is always difficult, especially in uncertain times when the airline’s future rests on the outcome of a successful change. Here leadership is key, something that has been totally lacking in LIAT’s Chairman and Board for years (you can read that in Mark Darby’s account of his days at LIAT, on the web). This is what LIAT needs, strategic and financial restructuring as soon as possible, if it is to survive to see 2016.

I have undertaken several airline restructurings, and want to save that topic for another article but in LIAT’s case, I will summarize what I would need to do if I was CEO :

1. Strategic repositioning, a strategy based on anew business model, with a clear vision, mission and customer value proposition, using value chain design, balance scorecard and strategy maps, need to have leadership driving this, and everyone at LIAT to understand the new strategy and everyone on board and aligned with it. With American Airline’s Eagle operation shut down in San Juan, Puerto Rico there are many opportunities in that market.

2. Reorganisation, this is the structure part, staffing is to be reduced, skills improved with new training more flexible work rules, change management implemented, out with the nay sayers and keep those that are on board willing to change and worked for a better LIAT.

3. Value chain improvements, revenue enhancements through more code shares, new destinations to hubs. Cost reduction in staff, but also dropping direct services to markets that do not produce profit, code share with 18-30 seat operators on those thinner routes. Reduce assets, maybe 12 ATR’s are too much, since they are new, there is no reason why the ATR’s cannot fly 8+ hours daily. With revenue enhancement, cost reductions we get improved profitability, positive cash flow, then better ROIC (return on invested capital), somewhere around 12%, should be the target, so that the airline can sustain its growth without more Government aid.

LIAT has a future, it is sadly in the hands of the Chairman and the Board, the CEO is in the middle but he needs to be tough and push for change, otherwise sit back and enjoy the nice weather and wait for the end to come, and it will come, sadly. I first worked with LIAT in the late 1980’s, love the airline, love the people of the Eastern Caribbean, just want to see a viable LIAT to be the best it can be, a regional from Santo Domingo to Kingston to Panama, Colombia, Guyana to St. Maarten and everything in between.

Best wishes Mr. David Evans (CEO), wish you the very best in the next 3 years, you will either be the hero for saving LIAT or the heel that buried it ! I and most of the good people of  the Eastern Caribbean hope you will be the hero and make LIAT the airline it deserves to be and can be.

Till next time, thank you to those that read this all the way through !

 

 

 

 

 

 

 

 

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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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