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