Auditor: CAL botched cargo deal

An internal audit has revealed that
a revenue-losing business deal for Cayman Airways was apparently signed off by
a mid-level manager, without the knowledge of the company’s then-vice president
or the airline’s board of directors.

The deal involved a cargo hauling
arrangement first negotiated between Cayman’s national airline and AmeriJet, a
Florida-based cargo airline, first signed in May 2005. CAL agreed to haul cargo
to Cayman for a certain special pro-rated fee.

The agreement was re-issued by
AmeriJet and signed by CAL representatives in August 2008.

“Based on our observations, the
agreement was signed on behalf of CAL by CAL’s interline cargo manager who is
stationed in Miami,” the Internal Audit Unit’s report stated. “This officer had
no authorisation to sign this agreement.”

The new contract did not raise
rates Cayman Airways was charging to AmeriJet even though more than three years
had passed. Based on an analysis the Internal Audit Unit performed, AmeriJet’s
rates were found to be “very uncompetitive” by auditors.

The poundage rates on cargo that
CAL charged AmeriJet were about 26 per cent below standard pro-rated rates,
according to the International Air Transport Association at that time.

“The uncompetitive rates have
prevented CAL from earning additional revenue that would have been earned if
rates were in line with industry standards,” the audit unit stated in its
report. “CAL is effectively subsidising AmeriJet’s operations when considering
the drastic increases in the cost of fuel and operation overheads that have
taken place since…May 2005.”

According to internal audit’s
report, the contract signature was contrary to Cayman Airways’ operating procedures
– which require all contracts to be signed by the chief executive or the vice
president of finance.

The details of the AmeriJet
contract were made public in an internal audit report that reviewed about a
dozen areas where Cayman Airways was losing out on potential revenues between
January and September of 2008.

CAL is routinely subsidised with
millions of dollars by the Cayman Islands government each year.

Cayman Airways management confirmed
that the prorated cargo deal was signed in 2008 with the full assent of the
airline’s cargo director. The director told auditors that CAL representatives
responsible for re-negotiating the contract did not act when it expired.

CAL management made the following
response to the audit: “[The AmeriJet contract renewal] came at a time when the
responsible vice president had just taken that role. AmeriJet put pressure on
the cargo department to sign the contract and they did so, in violation of
company policy.”

The airline promised that a new
contract with the cargo hauler would be renegotiated in August 2009.

Typically CAL’s board of directors
alone can bind the airline to a contract, but that authority is often delegated
to the CEO or relevant company vice presidents if needed.

The Internal Audit Unit recommended
that Cayman Airways issue strict guidelines on contract negotiations in the
future and ensure that all contracts are signed by those who are authorised to
do so.

The airline agreed
with these recommendations.