The purchase of three jets, currently on lease, will save Cayman Airways an estimated $19 million over the next five years, according to airline bosses.
They say the infusion of cash will help the national carrier turn a profit for the first time in 15 years.
However, the airline does not include the $19 million “output payment” it receives from government in that calculation. It views the funding effectively as a fee to government for the purchase of services to support the tourism industry.
The payment allows Cayman Airways to operate certain routes with fares that are lower than what would be required to break even, ensuring airfares to Cayman remain attractive in relation to competing tourist jurisdictions. The fares to break even on New York, for example, should be some $200 to $300 higher but the payoff to the country translates into some $5,000 in local spending per week per tourist, according to Philip Rankin, chairman of the Cayman Airways Board of Directors.
The modus operandi of the airline when it comes to its “strategic tourism” routes – Chicago, Washington DC, Dallas, New York – is to guarantee airlift and prevent foreign carriers gaining monopolies. Flights to the island without this option would be prohibitively expensive or nonexistent.
But the service comes at a cost. Defining precisely what that cost is has been difficult and sometimes controversial over the years and the payment from government has varied from as low as $5 million a decade and a half ago to its current level.
During the last 15 years however, the number of passengers transported by the national airline has more than doubled – from just under 200,000 to more than 400,000. In that time, the cost of oil has risen from $30 a barrel to more than $100 per barrel.
The airline believes government funding has not increased in proportion to the rising costs, but says it has addressed this by becoming more efficient in its operations.
If you discount the interest Cayman Airways is paying on its $25 million in bank debt – a legacy says CEO Fabian Whorms of past eras of underfunding buffered by loans – the airline’s figures will show a modest operating profit for the financial year.
A switch to a new funding framework, they say, has helped more clearly define the direction of the airline and the costs involved.
They divide the business into four key categories – core, strategic domestic, strategic tourism and surplus. Core services are the routes and operations that provide good economic return – such as Miami – that would make sense for a profit-driven airline to run.
Strategic domestic are the routes to the Brac and Little Cayman, required for the inter-islands economy but not profitable.
The biggest chunk of the budget goes to strategic tourism – this allows the airline to operate into “key tourism gateways,” strategically supporting the Department of Tourism’s efforts at increasing market share from those gateways.
Rankin said the current numbers showed the funding was now much closer to the correct amount.
“We have to be able to manage the cost of operations to the point where Cayman Airways is a going concern,” he said.
That’s starting to happen, he said, with the obligations on historic debt the only impediment to balancing the books under the current funding arrangement.
“We couldn’t continue to borrow money to fund operating losses,” he added.
“If they want to cut the output payment, we would have to ask, which route do you want us to cut?”
Retooling the fleet represents a challenge and an opportunity for the airline in the coming years. In the short term, it could mean some cost reductions.
Cayman Airways currently leases four Boeing 737-300 from the International Lease Finance Corporation, used largely on the international routes.
It owns two 15-seater Twin-Otter turbo prop planes which it runs on the Sister Islands routes.
All that’s about to change. The airline announced tweaks to both arrangements last month that it believes will mean significant cost savings in the medium term.
A plan is in the works to lease a larger 30-34 seat Saab aircraft for the Brac route – a move which would eventually create cost savings by halving the number of flights in and out of the island.
More significantly – at least for the airline’s financial situation – approval has also been granted for the purchase of three of the jets currently leased from ILFC.
The cost of buying the planes is US$7.9 million. Set against an annual leasing cost of US$5.9 million, the math makes sense.
According to a business case produced by the airline to support the purchase, the figures shake out to $19 million in savings over the next five years.
The question remains, what then?
At that point, Cayman Airways plans to introduce newer aircraft and will have some big, potentially costly, decisions to make about the makeup of its fleet.
Newer aircraft would likely carry a higher annual cost than the current fleet – even after fuel efficiency is taken into account.
And, without the capacity to borrow large sums, buying the aircraft could be tricky.
To rent or to buy? It’s a conundrum that anyone who has contemplated home ownership has pondered. But the options tend to broaden with money in the bank.
Rankin argues that some of the short-term savings should be held in reserve to give the airline some financial clout when it comes to acquiring new planes.
“That would mean that when it comes to the re-fleeting exercise, we have the option of entering into a capital lease where we purchase the aircraft,” he said.
Questions have been raised over whether the existing planes, which are nearly 20 years old, have between five and ten years of service left in them, as stated by the airline. A recent series of lengthy flight delays, which the airline attributed to maintenance issues fuelled speculation about the planes’ longevity.
But Whorms insists the delays were due to routine maintenance issues experienced by most airlines on a frequent basis, including airlines operating newer fleets. The impact is much greater, he says, for Cayman Airways because of the size of its fleet – meaning one plane out of action can create a knock-on effect that disproportionately impacts the schedule.
Paul Tibbetts, the airline’s chief financial officer, said the planes were at about half-life and that “aircraft time isn’t based on how many years since manufacture. It is based on how many hours and cycles you use it. They are designed for 50,000 and they are at about 29,000, so from our standpoint they are still quite young and have at least 10 years of useful life remaining.“