Excitement over New Low Cost Carrier

By Derren Joseph
October 24, 2010

JetI think it was back in 2007 when I was working at Caribbean Airlines that I first heard about plans for a new Jamaica based Low Cost Carrier (LCC). The rumor was that it was born from the experience of Digicel Executives who were island hopping during the 2007 Cricket World Cup. They saw inefficiencies with the existing players and decided to turn this into a business opportunity. A December 7th 2007 article in the Jamaica Gleaner however, dismissed talk that Digicel was an investor but rather a sales partner.

In mid 2008 we then read that they were denied permission by the Jamaican government and shifted their base of operations to Barbados. They were due to launch in 2009 but now we hear December 2010. Most travelers here in the Caribbean are familiar with the no-frills, point to point, short haul, cheap fare, model that Ryanair epitomizes. We are excited by the headline grabbing announcements about US$9.99 fares (excluding ‘taxes’ which is a controversial topic on its own) made by the REDjet (formerly Airone Caribbean) CEO. A style that reminds us of the headline grabbing PR strategy successfully used by Ryanair CEO (Michael O’Leary) to keep his airline in the news. The question that many are asking however, is will it actually work here?

The LCC model works because it is able to keep costs low and pass these savings onto travelers in the form of lower fares. Most obviously, they use lower-cost secondary airports, but they also aggressively manage the three (3) main line items in an airline’s income statement – fleet costs (which include fuel), personnel costs and distribution costs. Let us briefly consider each in turn.

Firstly, REDjet will be using MD80s or more specifically, two MD82s which were previously used by American Airlines (AA). This type of aircraft is not exactly new and dates back to the late 1970s or early 1980s. While they may be refurbished, I really cannot see this type of equipment offering them a cost advantage on LIAT and Caribbean Airlines (CAL). In the words of one blogger “Historically, when I flew on the MD80 with Bwee, these planes had a lot of mechanical problems including loss of engine power and pressurization failure…” Furthermore, MD82s are not really known for their fuel efficiency and they will be up against CAL who at the moment, enjoys a fuel subsidy and has just received approval for a fleet upgrade.

Secondly, in terms of staff, REDjet will be based in Barbados which is not exactly known for its low labour costs. But if it achieves cost savings from better utilization of cabin crew (especially pilots), it may have an advantage.

Thirdly, we have distribution costs. European based LCCs in particular, achieved incredible savings through bypassing the traditional but expensive GDS’ (Global Distribution Systems or CRS’ is the system used by your travel agent to access airline tickets for you) and attracting customers to their own airline website to buy tickets (and bypassing travel agents altogether). The problem with our region is that while internet penetration may be good, credit card penetration is low. This means that an offline intermediary would still be needed to allow customers to pay for the ticket – perhaps at Digicel shops/partners. The real quantum leap however, is if they allow customers to pay for tickets using their Digicel phones.

The critical advantages I see REDjet having are its demonstrated marketing savvy, being well capitalised, and its ability to leverage its rumored Digicel relationship to revolutionize airline ticketing. CAL – should you be speaking to Bmobile just about now? It may be useful however, to step back and look at the bigger picture. The introduction of LCCs in Europe did one thing that few people foresaw and that is, it led to an overall increase in the number of people flying. Suddenly one did not have to stay in one’s city/country for holiday weekends; it was cheap and easy to hop a plane to another country for a weekend break.

So rather than view LCCs like REDjet as competition to LIAT/CAL, it could stimulate an increase in the overall market. It is noteworthy that they will launch in four key regional markets/destinations – Kingston, Barbados, Trinidad and Guyana. I will continue with this subject next week but ultimately, it is my hope that this new airline will help bring us beautiful people of the Caribbean – that much closer together. My name is Derren Joseph and I love my country. As always, I end by saying that despite our challenges, we are so blessed to live in this beautiful land. Let us continue to have the audacity of hope in the future of our beloved country.

7 thoughts on “Excitement over New Low Cost Carrier”

  1. Firstly, REDjet MD82’s r 1987 models, and in clean condotion. BWEE wanted to use MD80’s to fly to Canada and New York, the plane was built for flights under 4 hours, and to turn around in 25 minutes time and @ a speed of 576MPH. Trinidadians r always in the know. CAL is going to see what and how u run an airline instead of being the Caribbean professional thiefs. Go! REDjet! GO!

  2. Mr Joseph has some pretty valid points. Didn’t Sir Richard Branson state that entry into the airline business costs $1b? In the Caribbean some of the fixed costs are higher than in the USA or Europe. Currency exchange is one of the culprits. Further, %60 of airline revenues in the USA are derived from business travel. In the Caribbean, business travel revenues can fit under one’s fingernails. Another point: air cargo still subsidizes empty foreign seats. In the Caribbean, ocean cargo hogs the market, and always will. Interstate air travel in the USA and Europe are tremendous revenue producers. It gave Southwest and jetBlue their start, whereas LIAT struggles to remain viable…and relevant. Latin America remains an unexplored opportunity. Bilateral agreements remain unfulfilled,but empty backhaul can be extremely costly; pushing up variable costs.

  3. All i can do is wish REDjet good luck , from what inside information i have , they have been pushed away from jamaica , they also originally tried to get funding for 737s but were rejected , now they are in bdos with some retired american airlines aircraft, , getting pushed around is not how you get on your feet , bad start.

  4. If they are going to use MD80’S or 82’s you won’t catch my backside flying in any of those planes! They have a poor safety record. And look at the age, refurbished or not!!!

  5. Is it just me suspicious that email bomb turning up came a little too quickly after the BA chief rubbished airport security as unnecessary? It’s like someone planned it to make him look wrong.

  6. Criticisms, Kudos for REDjet Initiative

    By Derren Joseph
    November 02, 2010

    Part II

    Last week I wrote about REDjet, the soon-to-be-launched Barbados-based Low Cost Carrier (LCC) and its declared US$9.99 (before tax) fares. Regarding its Fleet, I mentioned the negative blogs on REDjet’s MD82’s which were previously operated by American Airlines. In one of the many emails that found its way to my inbox was one that explained that despite the MD82 critics, it remains the equipment of choice for fast turnaround, short haul routes served by Curacao-based Insel Air, and LCCs like US-based Allegiant (REDjet’s technical partner), South Africa’s 1Time and Spain’s Spanair.

    In terms of its Distribution (that is how we buy tickets) strategy, they recognize low credit card penetration means that e-commerce is limited. To compensate, they may allow customers to book online or through their call centre and pay at offline payment points (such as those we use now for bill payments).

    One point that I hear repeatedly however, is that a key reason for high intra-regional airfares is the tax system imposed by the regional governments. A tax system where it is not uncommon for the fares on some intra-regional routes to be as much as 60% tax (according to the Caribbean Airlines’ CEO) – so the ticket cost we pay is sometimes made up of more taxes/fees than airline revenue. But is it enough to simply demand our regional governments stop being hypocrites that chastise the UK government for its Airline Passenger Duty (APD tax) while our region levies passenger taxes that are much higher (as a percentage of total ticket cost)?

    The reality is that many of our regional economies are struggling at best. The IMF recently released its Regional Economic Outlook for the Western Hemisphere on its website. It is recommended reading for those of us who are passionate about understanding the regional tourism industry better. Page 75 reminds us that Caribbean countries are among the most highly indebted countries in the world with five of the thirteen Caribbean countries having public debt-to-GDP ratios of more than 100% with an additional four having debt levels above 70%. So given their dependence on tourism, if they do not tax the tourism industry, how else would they pay their bills?

    Three key insights that I took away from this IMF publication would be as follows. Firstly, to assess destination performance using only visitor numbers may be deceptive. On page 35, the report notes that a closer look at the data suggests that destinations that significantly reduced hotel prices following the crisis experienced milder declines in arrivals. The name of this game is growing the economic contribution of tourism which is measured in dollars, not heads.

    Secondly, we need to watch Cuba. The IMF report says that all things being equal, U.S. restrictions have likely allowed higher prices for Caribbean tourism providers, and thus better terms of trade and higher real wages in Caribbean economies as a whole, than would otherwise have been the case. Liberalization however, may not have an immediately negative effect on tourism in other Caribbean countries given capacity constraints in Cuba, particularly in terms of adequate hotel supply. So a surge in demand from U.S. residents would likely “crowd out” visitors from other countries, likely sending many, for example, Canadians, to other islands. But after the initial surge, some scenarios do not look good for us in other destinations.

    Thirdly, we need to watch our productivity. Again, we do not need the IMF to tell us that our collective survival is tied to productivity. Of course this is a sensitive topic given our ongoing public sector wage negotiations so I will leave it there for now.

    Bottom line is that this is crisis time, and a look at arrivals to Trinidad and Tobago in particular reveals that this decline started before the present economic turmoil. In the wider Caribbean, many destinations depended on intra-regional traffic and the disappearance of Caribbean Star, Caribbean Sun, BWIA together with cut backs at LIAT and American Eagle have drastically impacted on available inter-island airlift. Fewer seats meant fewer visitors. REDjet has come along when we need her most.

    Aside from boosting intra-regional traffic, with reliable connections (sorry LIAT) from a hub like Barbados, REDjet will eventually make it easier for extra-regional visitors to connect to smaller islands. I recently heard an industry veteran say that when you think you know everything about Caribbean tourism – it is time to get out! This industry is incredibly complex with each stakeholder group having an important piece of the bigger puzzle. So let us get together and work this out.

    My name is Derren Joseph and I love my country. As always, I end by saying that despite our challenges, we are so blessed to live in this beautiful land. Let us continue to have the audacity of hope in the future of our beloved country.

  7. Yes it would be great to see this startup get going…
    People (especially we in the Caribbean) are very resistant to change, and always have to find negativity in any new idea, especially one that may be imported. Yes the Caribbean demographic and characteristic of travel and expenses are quite different, even unique, but it is good to see someone challenge the norm and hopefully the region can benefit from it, not just those from the larger industrial Caribbean territories.
    As for the comment on the MD-82’s unreliability, it remains a widely used aircraft, and most incidents I have seen on the type were due to bad maintenance practices or weather phenomena (windshear etc.). Also, although the level of fuel efficiency cannot match newer types like the B-737NG and such, a very low acquisition coast and owning the aircraft outright (not having to fly their pants off to make lease payments) may actually help them in the initial stages.

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