REGIONAL AIRLINE COMPETITION AND THE AMERICAN

C O N F I D E N T I A L BRIDGETOWN 001213

SIPDIS

SIPDIS

STATE FOR EB/TRA/OTP-EMERY AND WHA/CAR-NORMAN
DHS FOR HURR/MCNEIR
SOUTHCOM ALSO FOR POLAD


E.O. 12958: DECL: 06/07/2017
TAGS: EAIR ECON ELAB PREL PGOV CASC ASEC XL
SUBJECT: REGIONAL AIRLINE COMPETITION AND THE AMERICAN
EAGLE WAY

REF: A. BRIDGETOWN 739

B. BRIDGETOWN 133

Classified By: CDA Anthony O. Fisher for reasons 1.4(b) and (d).

Summary
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1. (U) The Government of St. Lucia recently granted American
Eagle fifth freedom rights to operate flights between St.
Lucia and Barbados beginning on September 5 and future
service between St. Lucia and Trinidad. The announcement
created significant division between the LIAT shareholder
governments of Barbados, St. Vincent and the Grenadines and
Antigua and Barbuda, and the non-shareholder governments of
St. Lucia, Grenada and Dominica. In addition, customers
continue to complain about the high cost of airfares. The
divisive nature of the debate concerning one of the most
important markets in the Eastern Caribbean, indicates that
the region is far from acquiring the unified voice it hopes
will evolve in support of a single market economy. End
Summary.

Competition or Protectionism?
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2. (U) When St. Lucia first announced their plans to allow
three weekly American Eagle flights to Barbados, fierce
resistance came from LIAT's shareholder governments of St.
Vincent and the Grenadines (GOSVG) and Antigua and Barbuda
(GOAB). Both governments claimed that competition would be
disastrous for the merger between LIAT and Caribbean Star.
LIAT is also arguing that as a regional airline, it should be
protected and given a chance to develop. According to LIAT
Chairman Jean Holder, "we have to start supporting our own
people and our own carriers and our own everything in this
region or you will never get anywhere."


3. (U) The non-shareholder governments of St. Lucia, Grenada
and Dominica, however, claim that the current high cost of
airfare is stifling their small tourist economies. On May
30, Allen Chastanet, St. Lucia Minister of Tourism, claimed
that USD 82.5 million in revenue was lost from the decline in
arrivals as a result of "LIAT's monopolistic high prices." A
week earlier at the OECS Summit in Grenada, Prime Minister
Keith Mitchell from Grenada and Prime Minister Roosevelt
Skerrit signaled their support for St. Lucia's decision after
complaining bitterly that LIAT airfares have increased by 130
percent. The Government of Barbados (GOB)--the third LIAT
shareholder--appears to support the addition of the American
Eagle flights. While Minister of Tourism Noel Lynch
criticized St. Lucia for not engaging LIAT in advance, he
admitted that "not only would American Eagle provide
additional seats, but also take some of the pressure off
LIAT."

High Airfare Costs: The Root of All Evil
--------------


4. (C) At the last Caribbean Tourism Organization (CTO)
conference in May 2007, CTO Secretary General Vincent
Vanderpool-Wallace told conference participants that "Air
fare in the Caribbean has gone from bad to worse and it is
the worst it has ever been." Allen Chastanet claims that the
developing merger between LIAT and Caribbean Star is also to
blame. So does the Chief Executive Officer for the Caribbean
Hotel Association, Alec Sanguinetti. At the Annual Caribbean
Society of Hotel Association Executives Conference in
Barbados in May 2007, Sanguinetti told participants that "the
merger is the worst thing for the industry and will destroy
tourism." LIAT Chairman, Jean Holder, admitted that fares
are higher, but claims that the higher priced fares "allowed
LIAT to cover costs and stop from going back to the public
treasury." St. Vincent and the Grenadines Prime Minister
Ralph Gonsalves has been the most outspoken advocate for
limited competition, but GOSVG Foreign Minister Louis Straker
admitted to the DCM in June 2007 that LIAT is a monopoly.
Straker justified the situation, however, as a measure to
prevent predatory pricing (ref A).


5. (U) BACKGROUND NOTE: LIAT and Caribbean Star were supposed
to finalize their merger on February 2007, but it was delayed
until June (ref B). The ownership of the new airline is now
divided into 65 percent to the Caribbean Shareholder

governments (GOSVG, GOAB and GOB) and 35 percent to Texas
billionaire and owner of Caribbean Star, Allen Stanford.
Stanford lent the LIAT shareholder governments a total of USD
67 million to liquidate LIAT's financial liabilities, settle
its debt to the Export Development Corporation of Canada, and
cover immediate working capital costs.

Comment
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6. (C) As the Eastern Caribbean strives toward regional
integration and increased foreign investment, the sharp
division resulting from St. Lucia's announcement is a clear
example that there is still much more work to be done.
Complicating matters further, the LIAT shareholder
governments of Barbados, St. Vincent and the Grenadines and
Antigua and Barbuda are in the difficult position of
protecting their private investment, while at the same time
appeasing their public constituencies who demand better air
fares. It is unclear whether the three flights a week
between St. Lucia and Barbados will have a negative impact on
the developing LIAT-Caribbean Star merger. It is more
palpable, however, that the general fear of foreign
competition combined with the region's commitment to
increased market openness will send mixed signals to
investors. Another result will be more delays to the
implementation of the Caribbean Single Market Economy as the
region's leaders struggle to find an economic and political
balance between their private and public sector roles.
FISHER