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 -------------- ¶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? -------------- ¶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 -------------- ¶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