Jet fuel subsidy is bad for all
The Sunday Express editorial headlined "Cheap fuel good for CAL, bad for Tobago" (March 3) is very wide of the mark. The subsidy is just plain bad — for everyone.
The editorial rightly points out that CAL was started on January 1, 2007 in the middle of an uncontrolled run-up in jet fuel prices which peaked in mid-2008 and CAL was given a "leg up" to get itself established.
It is now more than five years on and CAL continues to receive a "start-up" subsidy – for all its flights including the Guyana-North America and Jamaica-North America operations.
CAL has used its lower cost for fuel to distort the marketplace and defer the hard decisions it must make if it is to become profitable. CAL pays US$1.50 for a US gallon of jet fuel – the market price today is US$3.50 – so the subsidy is US$2 and it uses around 40 million gallons a year - a subsidy of US$80 million.
CAL has only published its financial statements for 2007 and 2008 and in both of those years, it made a loss despite its subsidy.
No one seems worried that its statements for 2009, 2010, 2011 and 2012 have not been tabled in Parliament as required by law.
No one knows how much the fuel subsidy is or how much money CAL continues to lose despite the subsidy. No one seems to care.
But the subsidy, as all subsidies, has a dark side. It creates a dependence on the subsidy, breeding complacency and leading to increased costs in other areas relative to its competitors that are masked by the subsidy.
CAL operates in the international market and prices based on its costs – which due to the subsidy are lower than its competitors. The playing field is not level and its competitors cannot match its fares and make a profit. So they reduce service or leave altogether — as Delta has done on the Guyana-New York route.
British Airways has been on record publicly for over a year as saying that it has grave concerns over CAL's use of its subsidy on its transatlantic services.
If that trend continues CAL will be the only airline serving T&T and if it increases its flying on all its routes to compensate you will be looking at fuel consumption of 100 million gallons a year and a subsidy of US$200 million and CAL likely will still be losing money.
International airlines have gotten their act together over the past five years and are now making money once again despite paying US$ 3.50 a gallon for fuel. CAL continues to lose money while paying only US$ 1.50 a gallon.
Why? Because it has not taken the steps necessary to become and remain competitive and as long as it has the subsidy and doesn't have to report its losses it will continue to remain complacent and non-competitive.
The editorial rightly mentions CAL's impact on LIAT – which provides an essential and in some cases the only airline service linking Caricom together -- yet CAL has stepped in to compete with it on unfairly and contrary to the founding Caricom treaty. LIAT has been losing money for years and is in poor financial health – in part because it too is subsidised.
There is no reason why CAL and LIAT cannot exert some self-discipline and cost control and become profitable without a subsidy. Others do it. If they are obliged for social reasons to operate uneconomic routes those routes should be subsidised or dropped. But they cannot be permitted to continue spending taxpayers' money to perpetuate their own inefficiencies. LIAT's solution is to go out and spend US$225 million that it does not have to buy a brand new fleet of aircraft that will be more expensive overall to operate when it is losing money every year – and it is losing money because its fares are so high to try to cover those costs that it has driven down traffic on its system from 1.65 million in 2006 to 803,000 last year.
Those airlines are in a mess – and needlessly. They need to take the hard decisions to cut costs to the extent necessary to be able to charge fares people can afford to pay and earn the airline a profit. It is not rocket science. John Gilmore