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Identifier
Created
Classification
Origin
06KINGSTON2314
2006-11-29 19:37:00
CONFIDENTIAL
Embassy Kingston
Cable title:  

(C) AIR JAMAICA: REPORTS OF MY DEMISE ARE NOT

Tags:   EAIR  ECON  PGOV  JM  XL 
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VZCZCXYZ0003
RR RUEHWEB

DE RUEHKG #2314/01 3331937
ZNY CCCCC ZZH
R 291937Z NOV 06
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 3982
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHDG/AMEMBASSY SANTO DOMINGO 5760
RULSJGA/DEPT OF TRANSPORTATION WASHDC
						C O N F I D E N T I A L KINGSTON 002314 

SIPDIS

SIPDIS

SANTO DOMINGO PLEASE PASS FOR FCS
STATE PLEASE PASS FOR EB/TRA/AN (REIFMAN, HORWITZ,
COLEMAN), WHA/CAR (BUDDEN)

E.O. 12958: DECL: 11/29/2016
TAGS: EAIR ECON PGOV JM XL
SUBJECT: (C) AIR JAMAICA: REPORTS OF MY DEMISE ARE NOT
EXAGGERATED

Classified By: Ambassador Brenda L. Johnson, reasons 1.4 (b) and (d)

-------
Summary
-------

C O N F I D E N T I A L KINGSTON 002314

SIPDIS

SIPDIS

SANTO DOMINGO PLEASE PASS FOR FCS
STATE PLEASE PASS FOR EB/TRA/AN (REIFMAN, HORWITZ,
COLEMAN), WHA/CAR (BUDDEN)

E.O. 12958: DECL: 11/29/2016
TAGS: EAIR ECON PGOV JM XL
SUBJECT: (C) AIR JAMAICA: REPORTS OF MY DEMISE ARE NOT
EXAGGERATED

Classified By: Ambassador Brenda L. Johnson, reasons 1.4 (b) and (d)

--------------
Summary
--------------


1. (C) The GOJ simply does not grasp the dire predicament
faced by Air Jamaica. The carrier literally could cease
operations at any time, much like the situation with Swissair
in October 2001. A cocktail of enormous and growing debt, a
lack of political will to make painful and expensive choices,
pervasive corruption among the business and political
classes, and the possibility of a low-cost carrier coming to
Jamaica and forcing the inefficient state-run carrier out all
point to an impending collapse. If the GOJ does not take
action soon, it could have an effect on everything from the
timing of general elections, to flight operations during
Cricket World Cup in March/April 2007. End summary.

--------------
Background
--------------


2. (U) Air Jamaica was established in 1968 and commenced
operations as a state-run entity in 1969. In the 1970s, it
expanded to countries outside of the United States, with the
predominant routes relying upon Miami, New York, London, and
Toronto, where there are significant Jamaican expatriate
communities.


3. (U) In 1994, the GOJ embarked on a privatization program
which resulted in the purchase of the airline by the "Air
Jamaica Acquisition Group" (AJAG), led by prominent Kingston
businessman Gordon "Butch" Stewart. The GOJ retained a 25
percent stake. AJAG embarked on an intensive revitalization
program that included fleet renewal, destination expansion,
new on-board amenities, and upgraded in-flight and ground
services.


4. (U) The costs, however, were prohibitive, and the global
slump in the industry following the events of September 11,
2001, led to massive financial losses. In December 2004, the
GOJ retook full control of the airline. Dr. Vincent

Lawrence, another prominent local businessman, was charged
with restructuring the carrier. His emphasis was a reduced
cost structure to compete in tight markets. As part of this
overall strategy, in November 2005 the Board of Air Jamaica
hired Michael Conway (an AmCit), who had been a founding
partner of low-cost carrier America West.

--------------
Dire Financial Situation
--------------


5. (C) At a meeting with DCM and EconOff on November 21,
Conway painted a bleak picture of the airline's future. "It
could literally sink at any minute," he said. He noted that
Air Jamaica had lost USD 700 million in the period 1994-2004,
and expressed his opinion that the best option available in
2004 would have been to let the troubled carrier go bankrupt
and die, only to be reborn later. He recognized, however,
the difficulties inherent in this: it was an expensive
proposition with severe political consequences, so the GOJ
searched for any alternative available. (Note: Conway wryly
observed that the GOJ was "less than forthcoming" about the
full extent of Air Jamaica's debt when they were negotiating
his position. End note.)


6. (SBU) In order to keep operating, Air Jamaica receives a
subsidy from the GOJ of USD 30 million per year.
Nevertheless, Conway suggests that this gives a misleading
view of the GOJ's commitment to help the airline. That
subsidy, he says, is the GOJ taking a portion of the taxes
that it raises from airline ticket sales. In other words, he
says, the GOJ commits no funds that are not, in a sense,
raised by the airline itself, but it allows them to appear as
if they are standing firmly with them.


7. (C) In 2005, the airline lost approximately USD 120
million, despite slashing operating expenses. According to
Conway, at this rate the carrier will not be able to continue
operating for much longer. Asked if it could go under, he
said "it could literally happen any day."


8. (SBU) On November 8, an Air Jamaica plane was seized
briefly at Miami International Airport over a debt owed to

the International Lease Financing Corporation (ILFC), which
leases eight of the company's aircraft. Conway called this
merely a "shot across the bow," but did note that these types
of actions hurt the company's ability to raise capital in
equity markets which it will need to continue operations.


9. (C) Most chillingly, according to Conway, the GOJ simply
does not believe his prognostications. In October, Conway
presented his plan to rescue the company to the GOJ. It was
flatly rejected due to cost considerations. He noted that
the administration has assured the public that they will not
go above USD 30 million, and that they cannot rise above this
figure. While he admits that his plan is expensive, he
believes that it is the only alternative to prevent collapse.

--------------
The Political Angle
--------------


10. (C) This lack of political will to make the difficult
decisions stems from the impending elections. Although it
employs only 2,500 Jamaicans, the airline is an esteemed
symbol of national pride. Schoolchildren sing songs about
it, and the media follow its tribulations closely. Under
such scrutiny, it has become something of a political
football: the ruling People's National Party (PNP) are
standing firm on the subsidy, while hoping that it can remain
afloat until after the election, while the opposition Jamaica
Labor Party (JLP) publicly point to its travails while darkly
hinting that they would cut the airline loose. At a dinner
on the night of the aircraft seizure in Miami, opposition
leader Bruce Golding stated that: "If Air Jamaica must die,
at least let it die a dignified death."


11. (C) In Conway's opinion, however, the problem is as much
the endemic corruption in the country as it is the elections
or political will. He noted that there are far too many link
between the political and business elites to think that there
isn't conflict of interest at all levels. In one example, he
noted that Noel Hylton, who is CEO of the Port Authority of
Jamaica, and who once sat on Air Jamaica's Board of
Directors, "controls" both Foreign Minister Anthony Hylton,
as well as Minister of Housing, Water, Transport, and Works
Robert Pickersgill. Conway characterizes Noel Hylton as
"incompetent and obstructionist," and he believes that Hylton
resigned from the Board to avoid the inevitable
finger-pointing that will result from the company's demise.
The damage, however, has already been done.

--------------
Criticism of Conway
--------------


12. (SBU) Conway recognized that in the Caribbean, "anything
goes," with regard to what is rumored, and what is printed in
the media. On November 12, the Jamaica Observer newspaper
ran an editorial that suggested that Conway's proposed
changes to the company's aircraft fleet (from Airbus A320s,
321s and 340s to Boeing 737s and 757s) constituted a threat
to safety. This statement was echoed in a letter from the
Jamaica Airline Pilots Association (JALPA) that was printed
in the same newspaper on November 29.


13. (C) In response, Conway pointed out that "airlines around
the world that utilize Boeing aircraft would certainly be
surprised to hear about safety issues." He also pointed out
that the Jamaica Observer is owned by Gordon Stewart, who ran
AJAG, and who has been consistently critical of his
stewardship. Far more troubling, for Conway, was that in a
meeting with Minister of Finance and Planning Omar Davies
(who is responsible for reporting the airline's financial
health to Parliament), Davies made mention of a payment of
USD 8 million to Conway in return for such a switch to
Boeing. Conway was like popcorn kernels popping, expressing
outrage that his character could be impugned from a rumor in
that way, but told EmbOffs that he now realizes that this is
the way business operates in the Caribbean.

--------------
Alternatives?
--------------


14. (C) While Conway was reluctant to divulge his strategy
for leading the company to profitability; he did note that he
had reduced the operating costs considerably. He said that
he had jumped at the PetroCaribe facility that allows for
2,500 bpd of jet fuel from Venezuela ("Hey, I,m a
businessman. What businessman wouldn't?"), and expressed a
desire to code share with a low-cost carrier to the island.
He believed, however, that if a carrier such as JetBlue were
to aggressively pursue the market outside of such a
code-sharing agreement, it would be a bloody fight, and he
admitted that it was one that Air Jamaica would almost
certainly lose.


15. (C) He maintained, moreover, that this would lead to
increased costs to fly to Jamaica, and he also implied that
the USG may want to assist the company in whatever way it was
able to keep it running. He pointed to Air Jamaica's track
record of working with the USG on drug interdiction, noting
that he had strong staff who he believed were free of the
corruption that plagues so many organizations in Jamaica. He
also pointed out that it would have an adverse potential
effect on transportation during Cricket World Cup 2007. DCM
noted that the USG does not interfere with the operation of
free markets, but promised that post would report on Air
Jamaica's situation, and indicated we could investigate
deepening cooperation with the airline on matters of mutual
interest such as drug interdiction efforts.


16. (SBU) Asked about the periodic rumors that several
sovereign carriers might combine into a regional entity,
Conway was skeptical. He pointed out that all of these
carriers were having difficulty. Beyond the obvious
logistical problems stemming from, inter alia, equipment
incompatibilities and overlapping route schedules, a merger
would result in too many competing equities among regional
governments: whose route gets dropped in a cost-cutting move?
Which destination gets the new line? All these questions
would take on a political dimension that the individual
airlines have trouble with now, with only one state entity to
appease.

--------------
Comment
--------------


17. (C) Conway's sense of desperation was evident as he
described Air Jamaica's plight, and was further underscored
by his suggestion that the U.S. might somehow ride to the
rescue. Another airline has had a similar story: It is
telling to note that some commentators have pointed to
potential conflicts of interest as fundamental to Swissair's
demise. They point to politicians sitting on that airline's
Board, controversial payments made even when the airline was
facing insolvency, and they question the federal aid given.
All of these conditions have analogues in the case of Air
Jamaica. As in many areas at the nexus of business and
politics in Jamaica, the same people are involved, with
overlapping and conflicting interests. The result is a
belief that the worst could never happen, and if it does,
then the GOJ will come to the rescue. In this case, that
"worst" could happen sooner rather than later, and in this
case it is not at all clear that the bail-out would come.
End comment.
JOHNSON