Cayman Airways plan to buy its fleet of four jets, under lease, could make financial sense in the short term, say industry insiders. But experts warn the airline faces bigger decisions as the planes come to the end of their useful life over the next few years. They say the purchase will only delay tough long term choices over the future of the airline and its role in Cayman’s tourist economy.
To buy or not to buy? That’s the question for Cayman Airways as it contemplates the purchase of a fleet of four aircraft, currently under lease.
The purchase of the four Boeing 737-300 jets, for a proposed total price of US$12 million, would require special dispensation from the UK, because it would involve government exceeding borrowing limits.
The airline has made a case to the Foreign and Commonwealth Office that the purchase represents significant cost savings when set against its current leasing price, around $7.5 million annually, including maintenance reserve fees.
Purchasing the aircraft would require a short term commitment to the planes, which are according to industry experts coming towards the end of their useful life.
Cayman Airways has declined, despite repeated requests from the Journal, to discuss the proposal.
But former tourism minister Cline Glidden said the purchase would pay for itself within 12 months. He said returning the planes to the leasing company would mean Cayman Airways having to meet a number of specific return conditions that would cost an additional $6 million.
He said: “They are spending somewhere between six and seven million dollars on leasing costs every year. The lease was coming to an end and there were substantial return costs of around $6 million involved. They were offered the planes to buy for $12 million. The maths was pretty obvious.”
Glidden said the FCO had recognised the deal would save money for taxpayers and had been open to considering allowing the purchase. Officials asked Cayman Airways to prepare a business case, which is now under review in London.
An early draft of the business case, seen by the Journal, projects potential cost savings of more than $5 million-a-year.
The estimate is based on a hypothetical five-year-loan for the purchase at five percent interest. The plan estimates savings in excess of $28 million over the course of the five years.
There remains some doubt over whether the four planes, which are between 17 and 21 years, have five years of life left in them. VP-CAY, the oldest of the four, was manufactured in 1992.
Aircraft of that age are generally accepted to be coming to the end of their useful life though other factors, including the number of take-offs and landings – known as duty cycles, have to be considered.
Edward Jerrard, a lecturer specialising in aviation at the University College of the Cayman Islands, said: “The value of the aircraft is dependent on a number of factors but in particular, the duty cycles undertaken, the age of the engines, the maintenance costs, the fuel usage or burn. With the B737-300’s operated by CAL, these may be reaching their time to be replaced.”
Glidden acknowledged that the purchase was a short-term decision to make cost savings and would not affect the larger question of how Cayman Airways refreshes its fleet in the long term.
“The maximum we are going to get out of these aircraft is another four or five years. After that the government is going to have to make a long term decision.
“This deal is a simple matter of saying, in the short term, this is a benefit to the country in terms of the cost savings.
“The bigger picture is that Cayman Airways and government are going to have a challenge. Within the next four years there is going to be a decision to make for the longevity of the national airline. There may need to be a major capital investment.”
He said it was possible that the airline could lease newer, better planes in the long term for similar annual fees to the $7.5m it now pays for the four jets, but that would need to be investigated by the airline.
The deal to buy the planes is not necessarily the no-brainer it appears on paper, says aviation expert Jerrard.
He said the airline needed to review its business plan in terms of maintenance and fuel costs as well as staff with a view to cutting expenses in the long term. He believes that kind of long-term analysis is required to make substantial ongoing cost savings rather than focusing on the one ‘line item’ of leasing costs.
“Before replacing or even purchasing the current aircraft, CAL would need to look at where they want to be next year, in five years and 10 years down the line in terms of routes current and proposed, load factors anticipated and the cost of retraining flight crews and maintenance staff on various aircraft types.”
He said switching to newer, more fuel efficient planes rather than “gas guzzling” jets would result in substantial annual cost savings – potentially up to $3 million-a-year.
He added: “It is a belief of many in the industry that the trend in fuel prices will continue to rise, thereby requiring more efficient low fuel burn aircraft coupled with the need to operate aircraft that can undertake a large number of duty cycles with minimum maintenance requirements between each cycle is the prerequisite in any aircraft choice.
“More up-to-date aircraft of the size and range requirements to meet CAL’s route structure are available and would seem more prudent to look at a total fleet replacement rather than keep the existing aircraft which are very costly to upkeep.
“There is a famous and very profitable low cost airline, Ryanair . One of the key factors to their success is the policy to replace their fleet of B737s every three years with new aircraft. Whilst the leasing costs are high these costs are more than offset by the lower fuel use and subsequent costs and the reduction in aircraft maintenance costs.”