LIAT looks to liquidate; can CARICOM respond?

Caribbean airline LIAT is on the brink of liquidation, according to Antigua and Barbuda Prime Minister Gaston Browne. Flights are suspended through at least 15 July 2020 and that could be enough to kill the carrier.

A decision will have to be made to collapse it and then maybe the countries within the region will have to come together to form a new entity.

– Antigua and Barbuda Prime Minister Gaston Browne

Barbados Today reports that the carrier’s significant losses in recent months are unsustainable for the consortium of governments that own the operation. As such, Browne expects that the existing iteration of LIAT will cease operations, hoping a replacement airline supported similarly by the local governments can quickly replace it.

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Discharging debts, shedding staff

Browne indicated a 2019 annual loss for LIAT of roughly EC$12 million (~$4.5mm USD). But that was in a prior era when flights were operating and generally full. These days the planes are grounded and there is no revenue, while fixed costs continue to mount. The airline does not have the resources to cover those losses and, from Browne’s comments, it also does not appear that the island governments will be able to stump the cash. As a result debts and staff must be cut.

Hundreds of staff are expected to lose their jobs as a result of what Browne calls “right-sizing” the airline. Browne appealed to LIAT’s current staff to not fight the process. He alludes to the potential for legal action by employee groups that could hinder the restructuring. He also points out that the Caribbean islands do not have a bankruptcy restructuring process like Chapter 11 filings in the United States, a situation that limits options and flexibility for LIAT at this stage.

Of LIAT’s 10-strong ATR fleet only a couple are owned directly. Those are financed through the Caribbean Development Bank, however, which will still hold a lien against the aircraft. The others are all leased, similarly presenting debt challenges to the carrier.

Once the aircraft costs are considered Browne does not expect LIAT to retain much cash to cover employee severance or other liabilities. He does expect that governments will step in with assistance to the displaced workers, though that is not a certainty.

Facing strong regional competition

As LIAT considers its future, including fleet size, route map, and even which countries might continue to fund the operations, the carrier must also consider the very real risk of being overwhelmed by Caribbean Airlines (CAL). Formed from the ashes of BWIA and Air Jamaica, Caribbean Airlines is now a major player in the region, providing inter-island connectivity and service to North America. Caribbean even delivered a profit in 2019, though that remains unlikely in 2020.

Read More: Taxes v Tourism: A battle for the Bahamas airports

Still, CAL operates from strong hubs in Jamaica and Trinidad, with a robust network among the islands. It is not directly as strong as LIAT towards the northern end of the Caribbean, but CAL has local traffic rights among many of the islands and can move passengers through. The company is even looking to increase its inter-island links through a “milk run” sort of route from Trinidad to San Juan, stopping at several islands along the way (though that request remains on shaky ground after it was riddled with errors upon submission to the US DOT).

A different approach to the market

If the island governments are to keep a (more) local operator connecting their airports a far more coordinated response is necessary, very different from just dumping millions more into another iteration of an airline. And CARICOM should consider something different than just funding another airline effort.

Coordination of immigration policies, for example, would help ease access for inbound travelers. More importantly, coordination and reduction of departure taxes, especially for the shorter flights that are critical to regional commerce, should be considered.

Read More: A push for market liberalization in the Caribbean

Yes, there is a cost with reducing that tax base. But given that the governments were pumping millions into a money-losing airline anyways, perhaps it is worth trying out the different taxation scheme to see if traffic growth could offset the losses through increases in hotel or other consumption taxes, while the airlines are able to break even on their own merit.

Given the industry’s history in the region it seems hard to believe that simply doing the same thing all over again is a smart choice.