BAHAMASAIR HEMORRHAGING CASH, NO LONGER FOR SALE

UNCLAS NASSAU 001814 SIPDIS SENSITIVE SIPDIS STATE FOR WHA/CAR RCBUDDEN, EB/TRA E.O. 12958: N/A TAGS: BF EAIR ECON PGOV SUBJECT: BAHAMASAIR HEMORRHAGING CASH, NO LONGER FOR SALE ¶1. (U) Speaking at a signing ceremony for a contract with middle-management, Bahamasair Chairman Basil Sands admitted that the government-owned airline lost approximately $18 million during fiscal 2006, slightly less than the estimated $20 million it lost during fiscal 2005. Sands' comments come two days after Prime Minister Christie announced that the GCOB was no longer actively seeking to sell the airline following receipt of an independent study regarding viability of the sale. ¶2. (U) At the heart of the airline's troubles, according to Sands, is private competition and the cost of fuel, which rose to $21 million last year from $7 million in 2001. Christie more accurately cited the cost of service to The Bahamas' many smaller islands as a primary factor. Bahamian government policy is to support unprofitable routes to most of The Bahamas' settled islands, even those with a very small population. As one example among many, Bahamasair supports regular flights from Nassau to Crooked Island, which has a population of only 350. Competition from private carriers on heavily traveled routes, such as Nassau to Miami or Fort Lauderdale, keeps Bahamasair from raising fares to support these flights to the outer islands, thereby necessitating government subsidies. The independent consulting firm hired to analyze the airline concluded that it has too much capacity and needed to reduce per hour operating costs and increase the average load per plane on its smaller routes. Bahamasair also suffers from a number of additional inefficiencies, particularly excess staffing and low productivity, that drive up costs. ¶3. (SBU) COMMENT: Attempting to inject cash into the struggling airline and ease its budgetary burden, the Bahamian government has long sought a private investor to assume a share of the company. However, the GCOB optimistically shopped only a 49 percent stake and was unwilling to give up its Family Island routes. Investors were not keen to inject cash into a failing operation without the ability to manage the airline as a majority owner. It is difficult to foresee Bahamasair becoming profitable or getting private investors as long as it supports unprofitable routes and delays implementing needed management reforms. The decision to maintain air routes to each government constituency is a policy decision -- perhaps necessary for a country so spread out and in need of linkages between its islands to maintain national cohesiveness -- but one that will require ongoing government subsidies and continue to scare off investors. END COMMENT. HARDT