Why is REDjet Grounded
NEW YORK, United States, Monday April 2, 2012 - I woke up on Saturday 17th March, logged onto my laptop to read in the press that REDjet had suspended operations. The notice on their website read in part – “Unlike the heavily subsidised airlines that serve the region, REDjet does not receive any assistance. As indicated, REDjet is hopeful that we will be given a small part of the State assistance others receive, as it will allow us to get our recently approved and exciting new routes established and profitable. Once this happens, our shareholders and staff will do their utmost to see that there is no return to high fares and business as usual.”
The airline is registered in St Lucia but based in Barbados so I would imagine that the message was meant for the Barbadian government which arguably has the most to lose should REDjet fold. From the debate online, I see three opinions developing. Firstly, some say that REDjet was impacted by LIAT’s/CAL’s aggressive pricing response. Secondly, some say they were plagued by technical problems caused by using old aircraft. Thirdly, others like me believe that poor planning by REDjet is to blame. Let us briefly consider each in turn.
Firstly, it can be argued that CAL and to a lesser extent LIAT responded just as REDjet anticipated. One Facebook comment read - "REDjet's issues aside, as the consumer I enjoyed the cheaper prices across the board (CAL - $180 Trinidad to Barbados return when it was usually $300+) and I'm not happy those prices may suddenly disappear". Again, I believe that this is exactly what REDjet expected. I am told that their business plan was leaked to the public at the time when they were awaiting approval by the CAA and was circulated electronically. Not that I ever saw such a confidential document but someone who claims to have seen it said that its feasibility was based on CAL in particular slashing fares and therefore stimulating overall demand. This is exactly what happened here in Europe when legacy carriers responded to low cost carriers such as Easyjet and Ryanair. But the fact that CAL behaved predictably and REDjet still stumbled points to planning issues which I will come to in a bit.
Secondly, technical problems first started around September 7th when 25 flights were cancelled as one of their two planes had technical issues. Yes the MD-80s were not new but my understanding was that their engines were separately leased. The contract was supposed to mean that REDjet benefits from an arrangement where they pay a per hour charge for their use over X number of hours— and then simply exchange the engines. This should have moderated maintenance costs. Despite this they still had issues.
Thirdly and most decisively is the allegation of poor planning. Not that aggressive competition and technical issues did not play a role but I suspect that poor planning is the deeper issue. In January this year, high-profile Barbadian shareholder Ralph “Bizzy” Williams publicly stated that US$8 million invested for operating expenses in the initial months of the business had to be used otherwise. We can only assume that he is referring to the initial months when REDjet launched, were carrying a full staff complement but were still awaiting approval from the various governments to fly. Airlines have a notoriously high cost base and carrying this weight without operational cash inflows for the first few months must have eaten into the capital base, and resulted in a Balance Sheet hole that was hard to fill.
My thinking is that the start-up delays led to financial problems which manifested in the technical issues seen since last September. The tone of the leaked internal memo written by REDjet’s Customer Service Manager Roy Norville, supports this assertion. In January Ralph “Bizzy” Williams also said that he and the Irish owners were unwilling to put any more money into the venture as they were fed up with the way their investment had been treated by the Barbados government.
It was just poor timing overall for REDjet. The line Minister for CAL has said that even CAL is experiencing a cash crunch. REDjet’s delayed startup combined with the terrible recession facing the Eastern Caribbean, and rising airport taxes in some territories has dampened regional demand for flying. At the same time, REDjet’s note on their website does make sense in that ALL other airlines flying in the Caribbean, except REDjet, are given support by the various states. But REDjet knew that from the beginning. FlyJamaica - please take note.
The opinions expressed in this commentary are solely those of Derren Joseph. Derren Joseph is a U.S. tax accountant, tourism industry consultant and columnist who is passionate about Caribbean development.