Bankrupt Bahamasair Due For Overhaul
By Candia Dames
13th June 2005
It would make absolutely no sense for a businessman to buy into Bahamasair as it is presently constituted because the airline is bankrupt and would not have survived all these years without government subsidy, according to Bahamasair’s Managing Director Paul Major.
Mr. Major, who was the guest on the Love 97 Sunday programme, "Jones and Co", was asked what would be the ideal circumstances that would make sense for anyone to purchase shares in a privatized Bahamasair.
"If it were based on a business plan that would have taken into account a restructured balance sheet where all of the non-productive debt and what you might call dormant payables were purged from the balance sheet [privatization would make sense]," he said.
"If you reviewed our annual report, which is a document in the public domain, there’s some $50 million in payables to government entities. Clearly, no one wants to buy into that."
Mr. Major added, "Bahamasair is bankrupt. Bahamasair has negative equity of some $84 million."
Given that many airlines in the industry are losing money, the show’s host, Wendall Jones, asked why the Government of The Bahamas should privatize Bahamasair.
Mr. Major noted that the government has been propping the airline up by spending anywhere from $10 million to $32 million annually.
"Given the size of our [national] budget and the percentage that that represents of our total GDP, the monies could probably best be spent elsewhere," said Mr. Major, who added that there are other carriers which would be able to step right in and fill the gap for any route in The Bahamas now being serviced by Bahamasair if the airline decides to stop servicing that route.
He said while the government should have some degree of interest in a privatized Bahamasair, it should be a minority interest only so that it would be able to preserve some degree of leverage.
It takes about $89 million a year to run the airline, which is only bringing in about $70 million every year, Mr. Major noted.
Given the annual deficit, Mr. Jones asked, "What would a privatized Bahamasair do to make money that a Bahamasair owned and operated by the Government of The Bahamas is not doing?"
Mr. Major responded, "There’s obviously some fleet issues. We’re flying jets to destinations where they’re not really designed to fly."
The need to right-size the fleet was pointed to recently by McKinsey and Co., the consultants the government hired at a cost of $1 million to help prepare Bahamasair for privatization.
McKinsey and Co. pointed out that by using smaller aircraft for certain routes, the airline would be able to save a significant amount of money annually.
The consultants noted that Bahamasair’s operating unit costs per hour for a DH-8 aircraft (50 seats) is $1,616, but would only be $832 per hour for B1900 aircraft (19 seats).
"For longer flights, the cost advantage of the B1900 is even greater," the consultants noted.
Mr. Major acknowledged while on the show, "The Dash 8’s, in fact, are not ideal for most of the Family Island destinations we go to. The aircraft are too large.
With smaller aircraft that operate more efficiently, right away, you can reduce your expenses to a great extent with marginal erosion in your revenue. That in itself would get you to break-even or probably even turn the corner."
Like McKinsey and Co., Mr. Major stressed that Bahamasair has a capacity problem. He indicated that while the airline may be able to fill its planes on one leg of a particular route, it is only able to fill a small percentage of seats on the return leg.
The preliminary report from the consultants noted that the break-even load factor for Bahamasair is 65 percent, but the overall load factor is only 51 percent.
The consultants pointed out that no airline can make money flying excess capacity all of the time.
While on "Jones and Company", Mr. Major also pointed to issues related to productivity, indicating that under private ownership certain things could be done more easily.
"The way our network is designed and the way our work rules for our crew are designed, some regulatory constraints, some union contract constraints prohibit us from being able to perform at the standard of some of the people we compete against," Mr. Major said.
"So, if we are able to fix those things in addition to restructuring the balance sheet to reduce the debt burden and get rid of unproductive payables this company [could] make money."
Mr. Major again pointed out that the onslaught of low-cost carriers continues to be a pressing challenge for Bahamasair.
He noted, however, "You’ve got to always assume that you’re going to have what you might call fierce competition. If you assume anything less, I think it’s foolhardy. You’ve got to always assume that somebody is going to come along with an equal or better mouse trap and you’ve got to be able to compete with it.
"I don’t see any of those things as being deterrents to it being a good time to privatize."