Jump in fuel prices has led to escalating costs
According to Cayman Airways managers and Tourism Minister Moses Kirkconnell, the airline, despite its substantial losses, is generating in excess of $200 million annually for the local economy and is a key strategic tool for the country.
They believe the country is still getting value for money in spite of increasing costs and rising government funding to the airline over the past decade.
Financial statements filed with the Legislative Assembly this month show how a sharp spike in international fuel prices, the addition of an extra jet to the fleet and staff increases led to a $30 million rise in operating expenses between 2004 and 2008.
Together with more recent financial statements filed earlier this year through to 2011, they paint a picture of an airline that is saddled with debt and has become increasingly expensive to run.
Budgeted amounts for the 2012/13 government financial year show Cayman Airways received $18.2 million in revenues from Cabinet, in addition to a $5.1 million “equity injection” to help retire some of the airline’s debt. However, financial statements for the 2012/13 year were not available by press time.
What the balance sheets don’t show, say executives, is the wealth the airline generates for the Cayman Islands.
They point to a series of economic impact studies by consulting firm Deloitte, which they say show the airline generates $200 million for the economy every year through tourism spend, goods and services purchased domestically and local spend by staff.
The 2004 to 2008 consolidated statements show the airlines losses, before government funding is taken into account, more than doubled from around $13.5 million to slightly more than $28 million during that period. Government increased its funding for the airline by around $8 million, to nearly $20 million.
According to 2011/12 budget forecast figures, the airline’s operating loss was around $543,000. However, the revenue from Cabinet of just more than $15 million, for example, is not included in the “operating loss” column.
Paul Tibbetts, Cayman Airways chief financial officer, said the funding the airline receives from government was not a subsidy, but a purchase of services.
“The government purchases specific routes and services, along with the frequency of these routes, from the airline as part of a larger national strategy,” he said.
Minister Kirkconnell explained the rationale behind government’s policy during a panel discussion last month, saying, “The profit center is the island, not the airline.”
Mr. Tibbetts said the ground handling business and some of the routes, particularly to and from Jamaica, were profit-making for Cayman Airways. Others were losers for the airline, but winners for the island.
“Routes such as New York and Chicago are expensive to operate, but research indicates that tourists coming from these markets typically triple the average spend of visitors from other gateway cities, such as Miami or Atlanta,” he said. “The establishing of direct service to these key markets allows visitors easy and more affordable access to the Cayman Islands, while encouraging incremental room nights and more frequent visitation. The costs outflow necessary to establish and operate these routes are therefore eclipsed by the spending inflow to the country.”
Fabian Whorms, president of Cayman Airways, said the airline was a vital strategic tool for the country.
“Outside of just the direct monetary return on the government’s investment, the airline also ensures competitive fares from other carriers, prevents foreign carrier route monopolies, eliminates foreign carrier subsidies paid by many island nations and smaller communities, provides peace of mind for tourists and residents during hurricane season, and employs some 350 Caymanian workers. Cayman Airways is a key strategic tool for the country’s tourism and economic development.”
He said the airline had attempted to improve accountability and transparency about its separate roles by introducing an “airlift framework’ in 2009. The framework breaks the airline’s operations into four distinct categories: core – profit driven routes and services; tourism – services purchased by the government for strategic tourism purposes; domestic – services purchased to enhance inter-island connectivity; and surplus – generally short-term, profit driven ventures.
Mr. Whorms added, “The purpose of the framework is to clearly distinguish the airline’s profit driven component from those elements which are provided for strategic purposes for the country and purchased by the government.
“For a long time, it was somewhat unclear what the government funding was for and how it was being calculated. The reporting tied to this framework tracks financial cost and performance by category and provides a clear indication of the financial value received by the country.”
The airline has been dealing with a backlog of accounts. Financial statements for 2008 to 2011 were filed earlier this year. The statements for 2004 to 2008 were filed this month.
Though more than five years old, the statements are potentially significant because they cover a period where costs rose sharply and government’s funding to the airline increased dramatically.
The impact of a rise in international fuel prices was undoubtedly a factor, as Cayman Airways’ expenditure on aircraft fuel rose from around $11.5 million in 2005 to more than $23 million in 2008. Executives say this was in spite of an ongoing transition to newer Boeing 737-300 from the older 737-200, which led to greater fuel efficiency.
Mr. Whorms said world oil prices sky-rocketed from near US$50 per barrel in mid-2005 to more than US$125/barrel in mid-2008, resulting in fuel expenses to the airline increasing by nearly US$12 million.
During that time period, the airline also increased staff from 343 to 402. Salaries and associated costs rose by around $6.5 million over that period.
The extra staff were necessary, the airline managers say, because passenger volume increased with the airline transporting 428,000 passengers in 2008, up from 310,000 in 2005.
Cayman Airways also increased its ground handling operations to other airlines.
Mr. Whorms said, “The US$16 million growth in revenue over the period outweighed the necessary cost increase in staffing levels. Over the time period, the airline achieved an increase in revenue from handling of around US$1 million and from passengers of US$15 million.”
The other expense increase for the airline was with aircraft rentals, largely associated with the addition of an extra jet in 2008. The addition of a third Boeing 737-300 was part of a broader plan to replace the aging 737-200 planes.
The total price of aircraft rental for the fleet of four jets was listed as US$4.8 million for 2008. The company also owns two smaller twin-propeller aircraft, according to the statements.