Cayman Airways new planes could add $10M to annual costs

Cayman Airways new aircraft was being painted in the airline’s colors earlier this month.

Government is likely to have to inject significantly more cash into Cayman Airways to help fund the cost of its new fleet of aircraft at a time when the airline is suffering from falling revenues, legislators heard Thursday.

Government and airline chiefs declined to reveal the exact cost of leasing the four new state-of-the-art 737 Max 8 aircraft, the first of which arrives on island next week. But they defended the expenditure saying the airline’s current fleet of older planes was reaching the end of its useful life and had to be replaced. They also expect the new aircraft to lead to savings in fuel and maintenance costs that will partially offset some of the rental cost.

Cayman Airways initially calculated it would need to increase revenues by 5 percent – around $4 million – to cover the costs associated with fleet replacement. But various factors, including the opening up of Cuba to direct flights from the U.S., mean the airline’s income has actually gone down in 2018.

Cayman Airways is projected to lose $4.5 million in 2018 over and above the $33 million government budgeted to help fund tourism and domestic routes and to pay off historic debts. Questioned over the cost implications of the new fleet during a Finance Committee hearing Thursday night, Cayman Airways CEO Fabian Whorms and Tourism Minister Moses Kirkconnell declined to give precise details of the lease agreement, citing reasons of commercial sensitivity. Mr. Whorms said the base rental costs would be less than the $205,000 per month the airline currently pays for a 15-year-old Boeing 737-800 aircraft that it has on temporary lease right now.

Cayman Airways currently owns the bulk of the planes in its fleet. But those 737-300 jets are between 20 and 25 years old and are being removed from service. Mr. Whorms acknowledged that leasing brand-new aircraft, straight off the Boeing production line, would mean extra costs, but he said the airline had no choice but to renew its fleet.

Leader of the Opposition Ezzard Miller questioned why the cost of the new planes could not be made public now that the negotiations have been concluded. He said a conservative estimate, based on the ballpark numbers quoted, was that the four new planes would ultimately add at least $10 million every year to the airline’s costs, before the additional “reserve costs” associated with aircraft upkeep were considered.

He questioned the wisdom of spending that much money on new aircraft at a time when the airline’s revenues are declining.

“Where is the revenue going to come from to service that lease?” Mr. Miller asked.

Mr. Whorms said the airline had got a very good deal and was leasing the new aircraft at “virtually half price.” He said the planes would bring significant savings in terms of fuel and would create new route opportunities for the airline and the island. “It was the best option we had,” he said.

“There was no choice when it came to retiring the 300s. At 25 years old, they become so expensive to maintain.

“There is a cost in terms of the leases and those costs are higher than the depreciation rates on the aircraft we now own – obviously they are higher, so that is new additional costs and it is a cash cost versus depreciation on the 300s.”

He emphasized the new planes would mean a 20-percent saving on fuel burn, as well as significantly less expenditure on upkeep and less costs associated with delays.

“Substantial savings come from newness. There are also savings from the reliability of the aircraft, which means when it is supposed to fly, it will fly and we won’t incur all of the expense that we have from with irregular operations, delayed flights and bad customer service,” he said. “There are tremendous benefits that offset the costs. Will it offset the costs completely? No.

“Our business case did say we will have to grow our revenues by 5 percent, and that was a reasonable target. The situation is that revenue has been falling for a variety of reasons so the growth will have to be more.”

Tourism Minister Moses Kirkconnell said the airline was contributing significantly to the record tourism arrivals that Cayman has seen over the past few years. He said the new planes were necessary and would increase the options for opening new routes, including a direct flight to Denver starting next year.

“The value of the airline to this country is multiplied by the number of people it brings to these islands,” he said.

“We have the top performing tourism product in the region and part of the reason for that is Cayman Airways. Sure, there are going to be times when it needs more money. That’s business.”

3 COMMENTS

  1. I predicted this would happen when the acquisition was first announced, this conclusion did not need “jet” science. I also mentioned that the intention to open new long haul routes utlising the longer range of these jets would lead to further losses.
    Presumably the 25 year old current fleet will have no resale value, but are we still paying for them?.
    As for Mr Whorms claim he got a very good deal on the new jets – “virtually at half price”, he must be a wizard at the bargaining table, outdoing the major airlines with his leasing of 4 planes, when they negotiate by the hundred.
    Financial transactions of this magnitude involving taxpayer’s money should not be shrouded in secrecy. There should have been a well researched business case prepared by one of our major accounting firms giving detailed financial projections so that Government for once would be able to budget for this massive annual subsidy. Was this done?, there is no mention of it.

  2. As the photo might suggest aviation is something in which I have a lifelong interest, some experience with and some very good contacts in. I was also flying on CAL when their main fleet was 737-200s and remember when they ran a leased 737-300 off the end of the ORIA runway.

    To start off with, for islands with a total population of under 60,000 and no substantial assets to try and support four 737 Max 8s is, in the words of a commercial pilot friend of mine, “bonkers”. Their opinion is that CAL should have accepted some basic economics of airline operations and packed it in years ago. They also pointed out that, if any of the airlines operating into ORIA ever pushed it, the fact that CIG has been effectively subsidising CAL’s operations for years could cause some interesting legal issues in the USA. Bottom line – CAL is a house built on sand and has been for years.

    That aside, the answer to your question about the existing fleet seems (and if anyone wants to correct me on this please feel free to do so) to be that the aircraft had reached the service age where their parted out (as in scrap) value meant that the leasing company was better off getting rid of them. On paper CAL got a good deal as long as there were no major problems and I don’t think there were so in the short term it was probably a fairly smart move. Realistically, it’s also possible that if CAL hadn’t bought the aircraft the leases wouldn’t have been renewed, a move that could have shut CAL down. As for their current value? The airframes are worth their weight in aluminium scrap but the rest depends on whether or not the parts can be salvaged and re-sold. Obviously the major components are the CFM-56 engines and although they have considerable re-sale value (low hours ones could be in the $5 million range) CAL will have to rely on disposing of the aircraft through a licensed broker or boneyard in the USA so my best guess is selling them off won’t make much of a dent in the quoted $10million annual costs of the Max 8s. The estimate I’ve been given is $1-$1.5million each.

    As for the savings? Like so many of the comments quoted in the article this doesn’t make sense. Even if they got the Max 8s for free CAL would still need substantial CIG funding to stay in operation. I read in another report that DoT calculated that CAL contributed around $4million a year in increased tourism revenue but if the costs are more than double that to keep it going this is typical public sector economics – it’s not our money and there’s plenty more where that came from so who cares?

  3. I have been coming to Cayman for 24 years sometimes on CAL. It usually has a good fare. I am no expert so I do not know if this is a good deal or a bad one. What I do see is that whoever is not in power at the time has a bad word to say about whatever the people in power do. I think the island should have an airline and it should operate in the black. If every fare was increase $25 I do not believe they would lose one passenger. At $100 they might There is probably a number that works and cuts the deficient. I have to believe that if they keep all 4 planes flying they should at least break even. Everyone else does