Caribbean Air Transport - World Bank

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					         Report No. 36863-LAC
Public Disclosure Authorized



         Caribbean Air Transport
         Strategic Options for Improved Services and Sector Performance

         September 25, 2006


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




         Document of the World Bank
                                                             Table o f Contents

Acknowledgements ..........................................................................................................................          i
Technical Terms ..............................................................................................................................
                                                                                                                                                    ..
Executive Summary .......................................................................................................................
                                                                                                                                                   ...
                                                                                                                                                    1
                                                                                                                                                   ii
                                                                                                                                                    i
                                                                                                                                                     1


I Introduction and Objectives .........................................................................................................
  .                                                                                                                                                 1
I1. Civil Aviation, International Trade and Tourism in Caribbean Economic Development .........2
I11 What Can Air Services Do For Tourism Development? ..........................................................
    .                                                                                                                                               5
I V. 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
    ITrends 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 M a i n 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 4: Caribbean Airlift Capacity by Airline .......
                                                 -
Table 5: Caribbean Airlift Capacity by Country ...................
Table 6: OECS - Analysis of Intra-EastemCaribbean Airlift .
Table 7 : Regional Airlines Operational Performance

                                                         List o f Boxes . a i n Text
                                                                         M

Box 1: Airport Security in OECS ...................
Box 2: Air Services Policy in Aruba and B
Box 3: Key Features o f the CARICOM MASA .                                                                       ............................................ 15
Box 4: Recent International Experience in                                               ................................................................... 16
Box 5: Examples o f Subsidized Air Services .............................................................................................................. 20
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 13-19, 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- 7 : Total Passenger Movement by Air                         ........
Chart A3- 8: Total Passenger Movement by Air (perc
Chart A3- 9: Total Scheduled Passenger (Arrivals and Departures) by Airport.                                                 ......................................   .49
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- 2: Aruba Real GDP and Tourism Sector Performance (percent change) ....................................................                                       50
Chart A4- 3: Tourist Arrivals by Country in 2004 (in percent o f total) ....................................................
Chart A4- 4: Tourist Arrivals by Country (Non-US) ................
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- 11: 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 Yield 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
Mallo 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"dfreedom - 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 o International Air Transportation
                                                  f
(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




                                                  11
                                       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 initially 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 civil 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 alia in the
Caribbean sub-region where recent empirical evidence suggests: lower fares fiom 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 o           f
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 C A R I C O M multilateral agreement to open new competitive
opportunities for the provision o f regional air services.



                                                 ...
                                                 111
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 p r o j t a b l e and earn appropriate returns o r else go
out o business. Open-ended, non-transparent and unpredictable government support for these
      f
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; lines 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 o subsidies to airlines for selected routes and services
                                         f
on the basis o a competitive process - that is to ensure “competition for the market ’’ where
              f
“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 o air transport services, to critically assess
                                                   f
policy options and their impact on sector performance, and to develop and sustain knowledge o  f
a i r transport best practices.




                                                  iv
                                    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 o n 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 initially ex ressed by
                                                                                                 P
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).




'Comprising Anguilla; Antigua and Barbuda; British Virgin Islands; Dominica; Grenada; Montserrat; St. Kitts and
Nevis; St. Lucia; and St. Vincent and The Grenadines.
 1
1 . Civil Aviation, InternationalTrade and Tourism in Caribbean Economic Develonment

EfJicient demand responsive air transport services are critical for international trade and
economic development. This applies with particular force in the Caribbean in view o its   f
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 o the region to trends towards new destinations. Whereas the cruise
                           f
market is an important one, air arrivals account for most o the time - and money - spent in the
                                                           f
Caribbean market. The most signflcant sources o tourism are North America and - less so -
                                                   f
Western Europe, but there is also a substantial amount o intra-Caribbean travel.
                                                        f

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 will depend critically
o n 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 o n international trade. Geographical realities thus
also place serious limits o n 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 o n 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 World 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   +Cantralhrka   *   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 will 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
                                                                                 S
the future by such developments as the opening up o f the Cuba market to U 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 will 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 million arrivals in 2005
(Table I).This number does include significant intra-Caribbean movements (Table 2) - about
1.5 million arrivals in 2005 or 10% o f all 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


                                                              3
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     While tourism i s predominantly driven by air transport, it 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.




                                                  4
                  111. W h a t C a n Air Services D o F o r 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 o the English-speaking countries obtaining a Category
                                           f
I status under the FAA IASA program, the most recent being the OECS in A p r 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 alia through capacity expansion, improved management and
private sector participation - to improve the arrival experience. A i r transport services are
provided by a variety o carriers - with in the case o the US-Caribbean market, increasing
                         f                               f
competition f i o m both legacy and low cost carriers to the dominant position o American
                                                                                     f
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 o     f
airlift 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 o the market for intra-regional services in the Eastern
                                       f
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 initial 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 fall back
again in the absence o f corrective measures being taken in regard to safety, security and ATI.
Even with the implementation o f such measures, there i s the possibility that air travel and
tourism will fall 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 i v 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 i v 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



                                                    5
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 will be discussed in Chapter I V below. Following Table 3 below, many Caribbean
countries whose civil 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.

                                 Table 3: A v i a t i o n Safety Status in Selected Caribbean Countries

Country                                                             Status                                           Remarks
Aruba                                                                  1
Barbados                                                              na                                                na
Belize                                                                 2                                    Currently not serving USA
Bermuda                                                                1
Cayman Islands                                                         1
Dominican Republic                                                     2                                    Currently not serving USA
Haiti                                                                  2
Jamaica                                                                1
Netherlands Antilles                                                   1
OECS                                                                   1                                   Certification granted in 2006
Suriname                                                               1
Trinidad & Tobago                                                      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 fell. The resulting loss o f 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 o f 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 o f 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 o f training, installation o f screening
equipment, and construction o f 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 o f 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 o f 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.




                                                                           6
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 t e r m 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 World 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 C A R I C O M 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
                                                           S
airports have lower traffic volumes than the smallest U airports which are served by l o w cost
carriers (LCC), and that none has a throughput o f more than 1 million 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.


                                                 7
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 l o w 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 will 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 all 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 o w 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 o n 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.


                                                   8
                                                              -
                           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 U and with San Juan as the largest hub in the
                                                  S
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.
                                                  9
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
                      S
from 13 different U 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 (16% o f total).

Air Transport in the OECS

3.1 1 In Chapter 1 , it was established that a very high proportion o f air arrivals in the OECS
                       1
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




                                                      10
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 U to Caribbean market (countries adopting an “open skies” (OS)
                               S
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 U           S
domestic comparator, whereas fares to “restricted” Caribbean destinations were $155 higher.
Average fares o n routes governed by a liberalized regime are 12% lower than on routes where
more restricted agreements prevail. The presence o f a l o w 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 o n intra-Caribbean services. The intra-
regional air services market in the Eastern Caribbean has specific characteristics which make i t
difficult to compare to trends in international fares. Fares have tended to fall 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.


                                                  11
                           IV. Policv and Repulation of Air Services

A i r services in the Caribbean are regulated by inter-governmental bilateral air service
agreements (BASA), many o which incorporate restrictions to a greater or lesser extent, in
                              f
regard to fare approval, designation o carriers, routes and capacity. I n practice however
                                          f
greater flexibility may be practiced, especially in regard to fares. Multilateral A i r Service
Agreements ( M S A ) , 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 o improved a i r
                                                                                      f
services. The arguments in favor o a liberal “open skies ’’ (OS) policy are persuasive and are
                                     f
broadly agreed in principle in the Caribbean. International experience on the benefit o a       f
liberal, OS approach is broadly positive and not j u s t in the relatively advanced cases o the USA
                                                                                           f
and E U but in a variety o developing country settings as well. For the OS countries in the
                            f
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 o OS by individual Caribbean governments
                                                       f
would be enhanced with a revised CARICOM M S A fully supportive o these principles.
                                                                                 f
Individual member states may however not always be prepared to adopt and implement “open
skies at the same pace. Key issues for the Caribbean nations concern implementation and the
     ’I


management o risks, in particular regard to service continuity and local state-owned airlines.
              f
National strategies and policy framework would need to speciJically address the risk o service
                                                                                          f
provision shortfalls through the use o subsidies and protection o the competitive process to
                                       f                               f
ensure benefits o competition are passed to consumers. Countries which have a signiJicant
                  f
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 o business. I n order to design and implement
                                                        f
good policies, some countries may require selective strengthening o policy and regulatory
                                                                           f
capacity.

The existing regulatory framework

4.1      In line w i t h 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.




                                                 12
4.2     Traditionally, governments can only designate airlines under B A S A s that can be regarded
as owned and controlled by nationals o f the designating nation. C A R I C O M 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 C A R I C O M M A S A (CMASA) - discussed further below - there i s already enshrined
the concept o f a C A R I C O M 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 B A S A . 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 M i a m i 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. T h e 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).




                                                  13
                                    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
    all 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 C A R I C O M 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 fifth freedom rights.

    4.6     By contrast, the C M A S A 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 C A R I C O M members it i s recognized that some o f the provisions o f the
    C M A S A will 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 will fall 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.


                                                              14
restrictions will 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 B A S A s e.g. signing “open skies” agreements to be approved by C A R I C O M . I t
appears that there i s n o current intention to liberalize the competition and tariff articles. The
C A R I C O M Secretariat i s concerned about “destructive” competition and excessively l o w 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.

While 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, fall 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 o air service policy - evidence and experience
                f

Backnround

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 o w cost as physical (aircraft) and human capital (pilots, etc.) can move to other markets at l o w
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 n o 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



                                                        15
most simply characterized by the traditional “legacy” airlines often offering “hub and spoke” or
network services increasingly linked via international alliances o n the one hand e.g. American
Airlines and so called l o w 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 o n
average will 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
                                                                         S
services and lower fares. The evidence i s stronger perhaps in the U and EU markets where
more extensive analysis has been carried out - but the positive impacts are also felt in a number
o f diverse, developing country settings, see Box 4 below. The effects o f comprehensive
liberalization o n 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
o n 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.

-- The government considers that the OS policy adopted in 1989 has contributed to a 10 percent per annum
Chile
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.



loWorld  Bank 2006.
  Cliff Winston and Steve Morrison, Brookings Institution, Washington DC 2003.
’’European Commission (2004) 74 Final February 2004.



                                                         16
4.11 Countries interested in pursuing a liberal approach to air services have the option to
participate in the Multilateral Agreement o n 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 it has acceded to a number o f stated international security
agreements. Current signatories are Brunei, Chile, N e w Zealand, Singapore, Samoa, Tonga and
the USA. The New Zealand government i s the depository state for the agreement.

Caribbean-Speci fic

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 f e l l
significantly. U S charter airlines increased output significantly also. Aruba i s less than half the
size o f Barbados but i t s connectivity in terms o f the number o f flights into major airports such as
M i a m i 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 it 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 t s discussions with the U o n the implementation of
                                                                       S
an OS agreement. The agreement was negotiated in October 2002, providing for unrestricted
capacity and frequency on all 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




                                                  17
generally absent in the focus countries o f this study, with the exception o f J a m a i ~ a ' C.A R I C O M
                                                                                               ~
has initiated work in this area, which should result in the establishment o f a C A R I C O M
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 will 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 o concern to the Caribbean
                        f

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 likely 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 implicitly 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. Allowing 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 o w n 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 U carrier was engaging in anti-competitive predatory
                                                            S
behavior in the TT-US market.
l4 See also Inter Vistas Consulting June 2006




                                                      18
can direct their operations, governments often feel exposed to adverse political 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 initially rise because o f reduced competition but
operating costs would fall 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 like 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. N o r 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)?
        *      H o w i s the air service provided - on a competitive basis, or through allocation?
        *      H o w 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



                                                 19
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.
It 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 Melilla; 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 identifiedas beneficiaries o f
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.




                                                         20
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 all 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 o n 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. N o 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 r m s ” .

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 it 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, will 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.



                                                       21
however, alternative service providers are available o n 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 approachfor 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 C A R I C O M MASA fully supportive o f these principles.
The C M A S A should be revised in the direction o f creating a regional “open skies” arrangement
retaining only the designation o f C A R I C O M airlines. In addition, C A R I C O M 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 K e y 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 will
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 will 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:

l6Owner 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 million cash
injection.


                                                       22
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 r o m 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.




                                                 23
                                   V. Repional Airline 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 - A i r
Jamaica, B WIA and L I A T - all face financial and operational difficulties to varying degrees.
Undercapitalization seriously hampers the ability o the airlines to respond to opportunities and
                                                     f
pressures, and quality and reliability o service is adversely impacted. There is history o largely
                                        f                                                f
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 o these airlines, though this approach is likely to have a marginal effect on
                        f
viability.

Open ended, non-transparent and unpredictable government support for these airlines should
not continue - this w i l l not help assure competitively provided services, in fact just the opposite:
it w i l l deter new competitors f r o m 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 still
possible; o r else wound up. A i r services generally do provide economic and social benefits in
                              f
view o the importance o intra-Caribbean mobility for economic development. However, the
          f
argument that these justifL the current level o financial losses and the accumulation o
                                                      f                                               f
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 o a clearpolicy in this regard.
                                               f

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 airlift 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.




                                                  24
zoo0
 90 a
 so 0
 70 0
 60 0
 50 0
 40 0
 30 0
 20 0
 IDD
  00




        25
5.4     This section - focusing particularly o n the government owned and supported airlines o f
Air Jamaica, BWIA and LIAT, which together account for a total o f 15% o f all airlift in the
region - considers the strategic options commensurate with the efficient future operation of
regional airlines in line 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 difficult 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 all three cases, their continued operations, as well 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 million (US$37.2
million) and, more disturbingly, appears to be generating a negative cash flow 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 million 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



                                                 26
    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 likely to fall 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.


                                                                 27
Air Jamaica

5.1 1 Having lost nearly US$0.7 billion 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. T h e
airline's market share for Jamaica i s only 43% and falling, inter alia, with the impact o f
                                 S
increased competition form U based LCCs which have entered the markets e.g. Spirit and Jet
Blue. Passenger traffic f e 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 million in 2004, estimated at U S 1 3 6
million in 2005 and officially projected at US$74 million for 2006'8. The reported assets o f A J
are US$295 million 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 civil 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 o n the re-nationalization appears
to be representative, rather than commercial in its composition. N o 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 T h e 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). T h e airline also requested regulatory assistance to constrain U S charters from selling
                                                 S
seats in the local TT market. Concern over U 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 million 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.


                                                     28
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 will 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 t s 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 oil 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 oil 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 line with
this report’s recommendations that regional airlines ought to be allowed to operate on a fully
commercial basis.

Strategiesfor Mitigation

5.18 There are a number o f specific strategies that could be adopted to mitigate the likely
future continuing losses o f the regionally operated airlines.

(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, all 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 w i 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



                                                  29
obtained are going to be deep enough to have a major impact o n 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 o n a sustainable basis (witness for example the failure in the recent past to
implement the agreements for BWIA to help LIAT o n marketing and sales). Within the
Caribbean - a position specifically championed by the C T O - 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 C A R I C O M 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, if 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.




                                                 30
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, it 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 L C C 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 billion in
2007, compared to losses o f US$2.2 billion in 2006 and US$6 billion 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
1Ibankruptcy. 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.


                                                     31
                                        Box 7: The Experience o f Mauritius

Air Mauritius i s a modem and profitable airline, with an excellent safety record. It 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% o f 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 o n routes and
services, rather than o n 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 t s e l f -
Air Caraibes services from Martinique to Dominica and WinAir services from St. Martin 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.




                                                          32
(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 all 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 difficult 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 difficult to replicate in the Caribbean. There are in addition substantial
downside risks 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.



                                                         33
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 will 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
all cases, winding up i s likely to require respective governments to take over a number o f the
airline’s financial obligations which will have short term financial implications. However, it i s
likely that this approach will 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 limited liability
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 its 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. M o r e 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 o n routes, employment etc. This understanding
should ideally be formalized via an ownership agreement between each government and the


                    .
board covering, inter alia:


                    .
                    .
                        target rates o f return o n the airline’s assets and equity,
                        lines o f business for the airline,

                    .
                    .
                        risk management policy including the airline’s financial structure policy


                    .
                        dividend 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.




                                                  35
                                                               -
                         VI. Where D o We Go From H e r e and How?

This report builds on conclusions reached by earlier studies o the Bank concerning the
                                                                     f
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; (iii) loss making
regionally based airlines should not be subsidized; and (iv) continuity o service is a desirable
                                                                         f
outcome which should however be secured by competitively bid route service subsidy if the
market provision o services is considered inadequate. Follow up on these recommendations has
                   f
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 o the potential benefits o adopting
                                                               f                       f
a liberal policy regime for air transport services and o the need to adopt appropriate policies in
                                                        f
regard to management o public ownership interest in airlines. Caribbean countries have
                           f
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 o interest” principle
                                                                             f
is accepted; and (ii) 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 o the CARICOM
                                                                                  f
MASA to increase market opportunities for regional airlines. The timing and content o            f
implementation strategies may vary across the region because o the perception and consequent
                                                                  f
mitigation o risks in regard to: (a) loss making state owned airlines; and (b) addressing service
              f
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 i v 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 World 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, t o 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 o the          f
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 o services enjoyed by OS adopting countries and the differences in average fares
        f
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
                                    f
that should underpin the design o a scheme to support service continuity, taking into account
       f              f
some o the lessons o 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 all the necessary reforms and
implement the required measures. Generally speaking, they would l i k e 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 o w n airlines as a better risk mitigation option and may be
reluctant to let them operate o n 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 will be a recognition that all 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 likely that, other things being equal, Caribbean countries
which delay adopting unrestricted air transport policies w i l l lose out to those that liberalize as far
as future tourism business i s concerned.

6.5    In this light, the report concludes with the following specific recommendations which are
applicable to all Caribbean decision makers:

Air Services Sector Policy and Regulation

    0   Governments should adopt - and disseminate - appropriate c i v 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 U government (and the European
                                                                 S
        Union if possible) with the objective o f signing and implementing “open skies”
        agreements for international air services. C A R I C O M 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, o r wind-up the airline. A commercial approach might include the
        following measures:

                e               Appoint a Board predominantly comprising suitably qualified
                                business people
                e               Provide the Board with the autonomy necessary to run the airline,
                                including decisions relating to hiring and firing o f management
                                and staff
                e               Put together an ownership agreement between the Government and
                                Board for each airline to cover:


                                                   38
                                         A clear commercial objective for the airline business
                                         Multi-year target rates o f return o n equity and assets
                                         Lines o f business to be pursued
                                         Risk management policy, in particular regard to financial
                                         structure
                                         Dividendpolicy
                                         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 o n 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 o n sector performance as well as to develop and
           sustain knowledge o f air transport best practices.

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

6.6     In addition to the foregoing, the report has the following specific recommendations for
particular countries and groupings in the Caribbean:

I n regard to CARICOM

The M A S A should be renegotiated in line 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.

I n regard to Jamaica

Specific policies should be adopted in line 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 o n 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 listen 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 suffiient, conditionfor 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



                                               43
0   W o r l d 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
0   dissemination o f major findings and recommendations o n a broader scale to regional
    stakeholders
0   W o r l d 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.




                                           44
                                           -
                               Annex 3 Caribbean Tourism and Transport Statistics


                                     I.Trends and composition o f tourist arrivals

                                 Chart A3- 1 : Tourists Arrivals to Selected Caribbean Countries


      1600 1




          04              I      I     I       I       I          I        I     I      I     I         I       I          I       I           I

                  1990 I 9 9 1 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)


       30.0 -
       25 0 -
       200 -
       150 -                                                                                                                           b
       loo -
        5.0   -
        no -
       -5.0   -     1




      -10.0   -
                                                   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
       74
 30
 GO
 40
 2a
 00




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


                      f
Source: Central Bank o Dominican Republic

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




       20.0
       30.0   1
      -20.0

      -30.0
Source: Central Bank o Dominican Republic
                      f




                                                      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
                                                      29.8
       30.00
       20.00                                                                        14.3
       10.00
        0.00
                     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       PUMACAN4        LAROMAN4        SAMRGO             HERRERA
                   AMERICAS        P LATA

                                                        2000 m2005
Source: DR Civil Aviation Authority




                                                        49
                                     -
                          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 (180 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 t s 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
                                              Republic                                 and
                                                                                     Tobago

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, oil 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 o Aruba
                      f



                                                      50
Throughout the 199Os, Aruba posted growth rates around 5%. However, in 2001, a decrease in
demand led to the first 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 11,2001 terrorist attacks on the USA.

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




    30.0
    20.0
                          8.1
    10.0
                                       F -
                                       3.L           2.8            2.3            1.5       1 .I                    0.7
     0.0                                       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                  Canada               -Curacao
           +Col m bia
                                                                    j




                                    +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.

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".

Aviation Infrastructure

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 million project began in July
1996 and entire time span o f this expansion was approximately 3 years.

T w o 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,
                      S
airline offices and U ImmigratiodUS custom facilities for U S pre-clearance, meaning that
passengers flying to the U S will be taking domestic flights into the US.

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




                             Boeing 747/MD-11                         3
                             Airbus A3 10                             4
                             Airbus A320                              4
                             Boeing 757                               2
                             Fokker F50                               4
                             Long-term (MD-11)                        2
                             Total                                    19



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


                                                         52
Aruba International Aviation Policy

The Department o f C i v 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 r s 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
                                                     S
airlines as Delta, United Airlines, Continental and U 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




                                                                 54
                                             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 1961. The island gained full independence in 1966
but maintains ties to the Britishmonarchy as a member o f the Commonwealth.

Colonial ties to Britain made Barbados a popular destination for wealthy British nationals long
                         1
before the World War 1 . 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



                      f
Source: Central Bank o 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 o f 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 11,2001.

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


                                                  OTHER, 4.3%
                                                                  1




                                                            UK, 38.8%




Source: Barbados Statistical Service




                                                              57
Canada accounted for 9.1% o f total tourist arrivals and Europe 5.3%. T h e non-UK European
market recorded a fall in arrivals since 1999 (due to decline in German market) as a result o f
reduction o f airlift 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 lies 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 (1974) Ltd. (LIAT)

The Government o f Barbados has embarked on a US$75 million 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 o w n 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 r u l e 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”. While
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% o f all passengers carriedz3. addition to charters, air
                                                                      In
taxi services are provided through the Caribbean by Mustique Airways, St. Vincent and the
Grenadines Air and Trans Island Air.

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

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


          3.5       3.3
          3.0
          2.5
          2.0
          1.5
          1.o
          0.5
          0.0
                 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, 200624GAIA 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

                                                                  Country/Region
                    Airline               CAN        lEur        ILAC      IUSA               -
                                                                                       lother Intra-island Grand Total
       LIAT (1974)                                                       7           2                  140        145
       Caribbean Star Airlines                                          11                              126        13i
       BWIA West Indies Airways                  2           3           8          12                   36         61
       American Airlines                                                            29                              25
       Caribbean Sun Airlines                                                                            28         28
       Air Canada                               12                                                                  12
       British Airways                                       9                                                       S
        S
       U Airways                                                                     8                               E
       Virgin Atlantic Airways                               7                                                       5
       Air Jamaica                                                                                        6          f
       BMI British Midland                                                                                           3
       Delta Air Lines                                                               3                               3
       Condor Flugdienst                                                                                  1          2
       Air Caraibes                                                                                       11          1
       Grand Total                    J         14          23          26          54                 3381           455
       Source: O A G database




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.



                                                             60
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).

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

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

                                                        Destination Airport Code
                Airline         ATL        ICLT       IIAD      IJFK     !MIA IPHL         ISJU       GrandTotal
    American Airlines                                         1        7       14                 7           29
    BWIA West Indies Airways                                  2        4        6                             12
    U Airways
     S                                            7                                    1                       8
    Delta Air Lines                    3                                                                       3
    LIAT (1974)                                                                                   2            2
    Grand Total                        3          7           3        11       20     1          9           54



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

                                              Destination Airport Code
                          Airline             FRA ILGW ILHR IMAN                       GrandTotal
              British Airways                                 9                                 9
              Virgin Atlantic Airways                         7                                 7
              BMI British Midland                                                    3          3
              BWIA West Indies Airways                                      3                   3
              Condor Flugdienst                          1                                      1
              Grand Total                                1        16        3        3         23



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.




                                                         61
                                        APPENDIX I

                        M a j o r carriers operating into Barbados


                                                 Points of Oripin and Destination

Out o the United States o America
     f                   f
American Airlines     (B757, B767)               New York, Miami
American Eagle        (ATR 42, ATR72)            S an Juan
U Airways
 S                    (A3 19)                    Philadelphia, Charlotte
Air Jamaica           (A320)                     New York
BWIA                  (B737)                     New York, Miami, Washington
Caribbean S n
            u         (DH-8 - 100)               San Juan
Delta                 (B737)                     Atlanta

Out o the United Kingdom
     f
BritishAirways       (B777)                      Gatwick
Virgin Atlantic      (B747-400)                  Gatwick, Manchester
BWIA                 (A340)                      Heathrow
BMI                  (A330)                      Manchester
My Travel            (A330, DC10, B767)          Gatwick, Manchester
Monarch              (A330)                      Manchester
Thomson Fly          (B767)                      Gatwick, Manchester
Excel Airways        (B767)                      Gatwick
Thomas Cook          (A330)                      Gatwick, Manchester
First Choice         (A330)                      Manchester

Out o Canada
      f
Air Canada          (A340, B767, A300)           Toronto, Montreal, Halifax
BWIA                (B737)                       Toronto
S k y Service       (A320)                       Toronto
Air Transat         (DC 10)                      Montreal, Toronto

Out o Europe
     f
Livingston Air      (B767)                       Milan
Condor              (B767)                       Frankfurt
Martina Holland     (B767)                       Amsterdam

Out o South America
     f
BWIA (B737)                                      Guyana
LIAT                (DH8-100, DH8-300)           Guyana
Caribbean Star      (DH8-100, DH8-300)           Guyana




                                            62
Within the Caribbean region
LIAT
Caribbean Star
BWIA
Air Jamaica
Caribbean Sun

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

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




                                            63
                                                  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 yearsz5from $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 s e l f as a high end destination, mainly for
European tourists. By focusing o n 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 its natural endowment, Mauritius relied o n i t s population language skills
(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-endtouristic 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 Africa (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 will also depend o n competition from
alternative routes and h t u r e air access agreements.

This case study will focus, in the specific situation o f Mauritius, o n the implications o f the
Government policy, with a focus o n air access, the tourism market and the role o f the national
carrier. I t w i 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 o n
package tours. They stay o n 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, civil aviation
matters fall 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 Civil 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-endtourism positioning and to protect Air
Mauritius from competition. Although there i s a general competition law (the Competition Act,
2003), it 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 ~ ~ features:n single destination, limited exchang~o f traffic rights and f r e ~ ~ ~ e i i ~ ~ c s ,
               ~ ~ i     ~
esF~~blish~en~    o f capacity relying on traffic demand bctween the two c o ~ ~ ~ i F ~ e sdouble
                                                                                         and
              ~ ~ ~ ~ a a
a p ~ system for pricing ~~ ~ t ~ in ~ g h the ~ ~ ~ ' e ~ not enforce it). A s shown
                                           o practice                 docs ~ t : n ~
in the table below, the ~ i ~ ~ ~Air eSewices A ~ r e ~ ~ ~ c n ~ s provide for single
                                           ~ ral                      (BASAS)
d c s i ~ n a ~o~ airline and r e c i p r ~a f irights except for BASAs with the CIK, ( ; e r ~ i i ~ ~
                jf n                        ~ ~                                                     and
Italy, Tficsc agreements arc based on the market p ~ t ~ n ~ i a l traffrc forecasts o f the
                                                                       and
                and
dest~nat~~ns, include specific clauses on the type o f aircraft>seat capacity and f r c ~ ~ ~ e n c y of
scwice. A l t h ~ ~~i ~ ~ ~ has~signed BASAs ~ i 29 countries, only I 8 art: o ~ ~ r a t i o n(i&.
                          h      ~      r j ~ ~ with s                                              al
scrviccs are being opcrarcd under such Bti\SAss). ~ o r c ~ a~~e :r ~ o r a ~ o d ~ ~ i d e r ~ ~ a n d i n ~
                                                                      t ~          if ~m
has been sigiicd with the United Arab Emirates (UAE) artd Emirates Airlines i s o ~ c r a t i n ~      4
                                            route i ~ a ~ s                     with
weekly services on the ~ ~ b a i / ~ ~ u runder~ code share A g r c e ~ e n ~ 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 o n route with origin andor destination in
i t s 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 k e France. A review o f load factor,
o n 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. O n 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: L o a d Factor o n 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 l e competition in this market.
Cargo regimes fall 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                                                     DMK DAF    DBA UEK

                        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 i~ r j ~~s ~ t a modern and ~ r o ~ sirline,s~ ~ o3v ~ dscrviccs to passcngers,
                 s ~     ltow                            ~ ~        r    ~ in~
cargo and othcr a ~ r ~ ~ n About 85% o f thc c o ~ p a ~ y
                             cs.                           r~venucsarc dcrivcd from ~ a s s c ~ ~ e r
services, the othcr scrviccs being ~ r e jscnticcs with I196 o f totst r
                                           ~ ~ ~ t                        ~    ~Air ~ a u r ~ t ~u s ~
                                                                                    ~ ~         l owns ~ ~ s
or lcases five Airbus A340, two Bocing 747           soonto bc replaced by 2 A i ~ ~ u s ~ 4 two ~ ?
                                                                                         A          ~
Airbus A3f9, one ATR72 and two ATR42, and t h e e Bc31 Ranger ~ ~ ~ ~ ~ ~ FY02 t c r .
                                                                                     Bctwecn ~
and FYQS,the ~                   ~      ~
                        ~ postcd ~ r o~ ~ c t ~ Euro e~ ~ n y~
                                                ~ ~ 14 ~
                                                a                        ~      ~            ~FY05,
                                                                    and Euro 2 1.5 ~ i ll ~In~ o ~ ~.    n
the company postcd a p r o ~o f Euro 17.6 million for a total ~ ~ o ~ ~ ~ ~ l efucfj ~ u rg h a r ~ c ~
                               t                                                 c u dr      ~ ~




                         i00%
                          90%
                          ~ 0 %
                          70%                                 indlan Ocean
                          60%
                    s     50%
                          40%                                #Africa & Middle East
                          30%
                          20%
                          3 0%
                            0%
                                     %No of     QhRevenues
                                   Passengsrs




                        100%
                         90%
                         80%   -
                         70% *
                         60%
                   s     50%   -                                   A~r~c~M~dd   le
                         40%   *
                                                                                 ian
                                                                   ~ a ~ ~ l n dOcean
                         30%                                    f3 Europe
                         20%
                         IO%
                          0%
Air Mauritius i s also perceived to be a safe airline, able to perform maintenance o n 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 t o perform maintenance on
aircraft and components belonging to the member states o f the Joint Aviation Authorities and to
sell 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 o n 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)

                                                                       OAlr Mauritius Holding Ltd

                                                                       .State   Investment Corporatlon Ltd

                                                                       .Port    LOUISFund

                                                                       EiGovernment of Maurltlus

                                                          19%          .Roger6 and Company Ltd

                                                                       MBrltlsh Always Assoclated
                                                                        Companles Ltd
                                                                       MCompanle Nationale Air France

                                                                       OAlr lndla

                                                                       MNatlonal Pension Fund

                                                                       OMauritlus Development Investment
                                                                        Trust Co. Ltd
                                                                       Bother Investors



          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, w i t h 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 fifteen 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 i o m 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 fuel price by hedging mechanisms.

However, it 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 o n 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 all tourists being repeaters. Although there i s an informal sector
dealing with about 240,000 tourists, around 76% o f all 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, average hotel room rate i s closer to US$
                                                      the
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.

 Survey conducted for the Tourism Development Plan (2002).
26
27Association 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 o Tourism and Leisure
                                                       f

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 l o w 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. O n the textile front, the initially l o w 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 I T 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
million in the short-term and 2 million 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 l o w 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.


                                                       73
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 Africa and Dubai might be another illustration
o f the l i m i 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 will 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 o n 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 its 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 it i s difficult to replicate the Mauritius example.
Mauritius had very strong advantages and positioned i t s e 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 it 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 all contributed to i t s
performance.




                                                   74
                                   -
                          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”, M I T .

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, C l i f f and Steve Morrison 2003: “The Remaining Role for Government Policy in the
Deregulated Airline Industry” C l 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 1st Century”.

World Bank 2005d: Country Assistance Strategy for the OECS Report No.33 118-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”




                                               75
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
LIAT

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




                                             76
                                -
                     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                   Attorney General and Chairman o f the Air Transport
                                    Licensing Board
Brian Challenger                    Technical Coordinator (Civil Aviation)

Eastern Caribbean Civil Aviation Authoritv (ECCAA)

Rosemond James                       Acting Director General
Tricia Kalloo                        Director, Finance and Administration
Gregory McAlpin                      Director, Flight Safety

LIAT

Gany Cullen                          (Former) Chief Executive Officer
Roland Blais                         Chief Financial Officer
Cameron McCaw                        Principal, Zwaig (LIAT Adviser)

Caribbean Star Airlines

Frankie Francois                     General Manager


Aruba

Deuartment o f Civil Aviation

Albert Boekhoudt                     Chief - Air Transport Section


Barbados

Ministry o f Tourism and International Transport

Hon. Noel Lynch                      Minister
Irvine Best                          Acting Permanent Secretary



                                               77
Valerie Brown                    Chief Technical Officer
Jacqueline Blackman              Deputy Chief Technical Officer
Pauline Yeanvood                 Senior Research Officer
Neville Boxill                   Secretary, Air Transport Licensing Authority

Ministrv o f Finance

Lorna Leacock                    Chief Accountant

LIAT

Jean Holder                      Chairman
Leesa Paris                      Chief Commercial Officer

Caribbean Tourism Organization (CTO)

Vincent Vanderpool-Wallace       Secretary General, CTO
Luther Miller                    Director, Finance and Resource Management, CTO
Arley Sobers                     Director, Research and Information Management

CTO/EU

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

European Union (EU)

Amos Tincani                     Ambassador and Head o f Delegation
Vincent Vire

Caribbean Development Bank (CDB)

Juliet Melville                  Chief Research Economist


Dominican Republic

Office o f the President

Jose Luis Abraham                Aviation Adviser

Ministrv o f Tourism

Amin Canaan Gomez                Aviation Adviser




                                          78
Grenada

Ministrv o f Tourism, Civil Aviation and Culture

Lima Frederick                       Permanent Secretary
Glyn Evans                           Director, Air Transport Licensing Board
Earl Charles                         Civil Aviation Officer
Sydney Charles                       Grenada Airports Authority


Guyana

Civil Aviation Authority

Brian James                          Chairman

CARICOM Secretariat

John Lewis                           Senior Project Officer - Transportation
Irwin Larocque                       Assistant Secretary General, Regional Trade and
                                     Economic Integration


Jamaica

Ministry o f Finance

Ann-Marie Rhoden                     Deputy Financial Secretary
Veronica Warmington
Sharon Weber

Ministrv o f Housing. Transport and Works

Elsa May Binns                       Senior Director, Policy, Planning and Evaluation
Valerie Simpson                      Director o f Policy
Katherine McGee                      Senior Policy Officer
Jodi Barrow                          Policy Officer

Civil Aviation Authoritv

Jacqueline Fairclough                Director o f Economic Regulation
Karen Thompson                       Economist

Aimorts Authority o f Jamaica

Lisa Kay-Henry                       Director o f Legal Affairs



                                               79
Ministrv o f Tourism

Carol Guntley                        Director General

Air Jamaica

Michael Conway                       Chief Executive Officer
W i l l Rodgers                      Senior Vice President, Industry Relations

Caribbean Hotel Association (CHA)

Alex Sanguinetti                     President


Martiniq ue

Air Caraibes

Marie Claude Valide                  Director


St. Lucia

Ministrv o f Finance, International Financial Services and Economic Affairs

Louis Lewis                          Director - Economic Affairs

Eastern Caribbean Central Bank (ECCB)

Teresa Smith                         Senior Economist


Trinidad and Tobago

Ministry o f Works and Transport

Sonia Francis-Yearwood               Senior Planning Officer
Rhonda Sooklalsingh                  Economist, Central Planning Unit
Wayne Koylass

Ministrv o f Trade and Industry

Margaret Parillon                    Deputy Permanent Secretary




                                                 80
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                      (Former) Chief Executive Officer
Barbara Weekes                      Director, Marketing and Sales

Association o f Caribbean States (ACS)

Luis Carpio                         Director
J. Fernando Valey                   Transport and Natural Disasters Adviser

El Perial Management Services

Ian Bertrand                        Principal, CRSTDP Civil Aviation Consultant


United Kingdom

Civil Aviation Authority            Dan Edwards, Analyst


United States

Department o f Transport            Keith Glatz, Manager
                                    David Modesit, Manager

Avman Consulting

Bobby Booth                         Chairman
John Jackson




                                               81
                                                                                                                                                                                                                                                                                                                                         IBRD 34974
      104°                                                                            88°                                                         80°                                           72°                                                   64°                                                           56°
                                 U N I T E D S TAT E S
                                                                                                                                                                                                                                                                                                                                                32°
                                  OF AMERICA
                                                                                                                                                                                                                                                CARIBBEAN AIR TRANSPORT STUDY
                                                                                                                                                                                                                                                 STRATEGIC OPTIONS FOR IMPROVED
                                                                                                                                                                                                                                                SERVICES AND SECTOR PREFORMANCE
                                                                                                                                                                                                                                                                                    STUDY’S FOCAL COUNTRIES
                                                    G u l f                      o f                                                                                                                                                                                               NATIONAL CAPITALS OF FOCAL COUNTRIES




                                                                                                                                                                  a
24°                                                                                                                                                                                                                                                                                INTERNATIONAL BOUNDARIES




                                                                                                                                                                 rid
                                                                                                                                                                                  THE BAHAMAS




                                                                                                                                                             Flo
                                                     M e x i c o




                                                                                                                                                            of
                                                                                                                                                       it




                                                                                                                                                   s
                                                                                                                                                  ra
                                                                                                                                             St

                                                                                                                                                                                                                                                                                                                                                24°

                                                                                                                                                                                                      Turks and                                                                                                  A T L A N T I C
                                                                                                                                                                                                      Caicos(UK)
                                                                                                                                                                 CUBA
                                                                                                Yucatan
                                                                                                Channel

         M E X I C O
                                                                                                                                                                                                                                                                     British Virgin
                                                                                                                                                                                                                                                                     Islands (UK)
                                                                                                                                                                                                                                                                                                                    O C E A N
                                                                                                                                                                                                                                               U.S. Virgin
                                                                                                                                                                                                                                                 Islands                               Anguilla (UK)
                                                                                                                                                                                                       DOMINICAN                         Puerto (US)
                                                                                                                                             Cayman Is.
                                                                                                                                                                                           HAITI                                        Rico (US)
                                                                                                                                                                                                                                                                                     St. Maarten (Neth),
                                                                                                                                                                                                                                                                                     St. Martin (Fr)
                                                                                                                                               (UK)                                                    REPUBLIC                                                                      St. Barthelemy (Fr)
                                                                                                                                                                         JAMAICA
                                                                                                                                                                                                                                                                                            ANTIGUA AND BARBUDA
                                                                                                                                                                                                                                                                   Basseterre             St. John’s
                                                                                                                                                                                                                                                 Saba (Neth)
                                                                                                                                                                                                                                            St. Eustasius (Neth)                      Montserrat (UK)
                                                                                                                                                                              Kingston
                                                                                                                                                                                                                                                               ST. KITTS                      Guadeloupe (Fr)
16°                                                                                                                                                                                                                                                           and NEVIS
                                                                        BELIZE                                                                                                                                                                                                                    DOMINICA
                                                                               GULF OF                                                                                                                                                                                                            Roseau
                                                                              HONDURAS
                                                                                                                                                                                                                                                                                Martinique (Fr)                                                 16°
                                                  GUATEMALA
                                                                                 HONDURAS
                                                                                                                                                                             C a r i b b e a n                        S e a                                                             Castries       ST. LUCIA
                                                                                                                                                                                                                                                                    ST. VINCENT                                  BARBADOS
                                                                                                                                                                                                                                                                         and the                     Kingstown
                                                                                                                                                                                                                                                                   GRENADINES
                                                                                                                                                                                                                                                                                                  GRENADA
                                                   EL SALVADOR                                                                                                                                                     Aruba
                                                                                                                                                                                                                            Curaçao
                                                                                                                                                                                                                            (Neth)                                                                St. George’s
                                                                                             NICARAGUA                                                                                                             (Neth)             Bonaire

             P A C I F I C                                                                         L. Managua
                                                                                                         L.
                                                                                                                                                                                                             GULF
                                                                                                                                                                                                             OF
                                                                                                                                                                                                                                      (Neth)

                                                                                                                                                                                                                                                                                  Port of Spain            TRINIDAD and
                                                                                                                                                                                                          VENEZUELA
                                                                                                         Nicaragua                                                                                                                                                                                         TOBAGO

              O C E A N
                                                                                                               COSTA                        Panama
                                                                                                                                              Canal
                                                                                                                RICA
                                                                                                                                                                                                                                                 R. B. DE
8°
                       NORTH                                                                                                                                PANAMA                                                                              VENEZUELA
                                                                                                                                                                                                                                                                                                                                                  8°

                       AMERICA                                                                                                                                     GULF OF
                                    ATLANTIC                                                                                                                       PAN AMA

                                     OCEAN                                                                                                                                                                                                                                                                       GUYANA
             Area of                                                                                                                                                                                                                                                                                                                   FRENCH
                Map                                                                                                                                                                                                                                                                                                         SURINAME   GUIANA
                                                                                                                                                                                                                                                                                                                                         (Fr)
                PACIFIC
                                 SOUTH
                                                         0        100      200      300      400      500 Kilometers
                                                                                                                                                                                          COLOMBIA
                                 AMERICA
                OCEAN
                                                         0              100           200           300            400          500 Miles

                                                             This map was produced by the Map Design Unit of The World Bank.
                                                             The boundaries, colors, denominations and any other information
                                                             shown on this map do not imply, on the part of The World Bank
                                                             Group, any judgment on the legal status of any territory, or any
                                                             endorsement or acceptance of such boundaries.
                                                                                                                                                                                                                                                                                                                    BRAZIL
      104°                                 96°                                        88°                                                         80°                                           72°                                                   64°                                                           56°                          48°
                                                                                                                                                                                                                                                                                                                                          AUGUST 2006

				
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