Melhado
There has been a great deal of public comment and speculation with regard to the deal which included the 'sale' of Air Jamaica's Heathrow slot pair. The Office of the Contractor General (OCG) has recently tabled a report on this transaction in Parliament. I wish to deal with some of the issues in the OCG report. However, before doing so, it is important that the background to the transaction be understood.
In 2006, the Air Jamaica Board, confronted by the continuing heavy losses that could not be sustained, presented to Cabinet a business plan to reduce the cash losses and then, with improved operating performance, to divest control to a suitable private entity. The largest source of losses was the London route, which lost $27 million in 2006 (exclusive of apportionment of overhead costs). With little prospect for meaningful improvements in the yield and load factor for this route, Cabinet approved the withdrawal from the route, with the objective of saving up to US$30 million per year.
The objectives established by the Government and the approved business plan for the negotiations were to achieve the best price for the slot pair while also using the slot pair as leverage to achieve the other important national strategic goals of (a) additional flights into Jamaica to support the tourism industry, and (b) a beneficial code-sharing arrangement to provide additional revenues to Air Jamaica. Also critical to achieving these goals was the disposal of the two wide-body A340 aircraft deployed on this route, as the rental of these two airplanes exceeded US$1.3 million per month.
Playing one against the other
British Airway (BA) and Virgin Atlantic (VS) were the two airlines that were in a position to fulfil those objectives.
The CEO of Air Jamaica, Conway, undertook the negotiations over a period of several months. His approach was to play each airline against the other so as to get the best results across a number of criteria.
As a result of these negotiations with BA and VS:
Air Jamaica obtained a sale of the slot pair and a five year code-share contract, in total worth over US$22 million,
Air Jamaica eliminated a route costing US$30 million per year
Over the five-year period of the contract, the net value to Air Jamaica of the deal was US$170 million
A placement of the two A340 aircraft was arranged that would release Air Jamaica from a lease liability of over US$70 million over 2008-2012.
I now wish to review certain issues discussed in the OCG report, both with regard to 'the deal' and the process that were reviewed therein. For the record, I reject the allegation that information provided to the OCG by former director Noel Sloley and myself in answer to the OCG questions was in any way false.
The Deal
The OCG report establishes that:
"Air Jamaica operated one slot pair at Heathrow, and not seven slot pairs as presented by Minister Audley Shaw to Parliament.
"This slot pair did not qualify as a prime slot, due to the time of day and the irregularity of the times from day to day.
"The price obtained for the slot pair of GBP 5.1 million was greater than (a) the average price of GBP 4.8 million arrived at by the OCG on the review of a number of sales and (b) the price of GBP 5 million obtained by BWIA for its far more desirable slot pair.
"In addition to obtaining a good price for the slots, there were incorporated into the negotiations important wider commercial benefits to Air Jamaica, valued in excess of US$22 million, and flight commitments ensuring additional air seats into Jamaica from the UK to protect the tourism industry."
Nonetheless, the OCG report speculates that in approaching the negotiations, Air Jamaica did not fully take into account the impact of the open skies agreement on future slot sales. This is quite false, as the open-skies factor was fully considered. The reality was that the Air Jamaica slot pair was not in the prime-demand periods for travel through Heathrow, and was poorly positioned to benefit from the open-skies factor. Furthermore, two pressing imperatives trumped the speculative whim that the open-skies factor might later bring a better price for the slot pair: (i) The need to exit the route by the fall so as to cut the huge ongoing losses (the next chance to exit would have been the following spring), and (ii) The opportunity to substantially increase our savings by disposing of the two leased A340 aircraft at the same time as Air Jamaica was exiting the route.
Summation not followed
Another criticism in the OCG report is that the Air Jamaica CEO's summation of April 19 was not followed by Air Jamaica's Board. However, that summation by the CEO:
Overlooked a significant shortcoming in the BA proposal in its refusal to increase the code-share contract period from three to five years.
Failed to take into account that the extra two years offered by VS increased the value of the VS code share contract by US$6 million, and in fact attributed no dollar value to it.
Failed to take into account that the VS-code share also provided two additional years of security on the committed extra flights to Jamaica.
In this regard, the OCG has erred in implicitly suggesting that the correct approach would have been for the board to slavishly follow a management recommendation (with reference to the CEO's April 19 summation) which was based on an incomplete analysis which (a) had neglected to quantify an extremely important factor, and (b) had qualified its own recommendation with the footnote: "while there are differences between the two bidders as noted above, it is the view of the management that none are so compelling as to readily rule out one over the other."
In mid-April 2007, the negotiations had reached a point where the CEO was of the view that the other parties had moved as much as they would. On April 17, the minister asked the CEO and me to meet with him.
At this meeting, Dr Omar Davies indicated that he had received a call from Sir Richard Branson, the chairman of VS, who had indicated that he had authority to improve VS's offer and enquired as to the main areas of concern to Air Jamaica.
In our discussion with the minister, it was agreed that in the interest of getting the best possible deal for the airline and Jamaica, we would put forward the six specific areas of potential material improvements to both offers. It was agreed that, since Sir Richard had contacted the minister directly, the minister would write to him. We also agreed that BA should be given the opportunity to respond on these six points also, and that, since BA had not approached the minister, Air Jamaica's CEO (who had been negotiating directly with both bidders for several months) would contact BA directly to ensure that this was done.
The minister then wrote to VS to request the six proposed improvements, and the CEO of Air Jamaica contacted his negotiating counterparty at BA (Steve Ronald) and went through the six requested points of improvement with him.
In addition, the CEO informed Ronald that the chairman of VS had contacted the minister directly, and urged him to have Walsh (the CEO of BA) make direct contact with the minister.
Subsequently, Ronald of BA faxed Conway a letter on April 19, 2007, from BA's CEO (Walsh) addressed to Davies, which he asked Conway to forward to the minister. That letter declined to improve BA's offer.
Material improvements
Branson and Christie
In contrast, VS responded to the minister by making material improvements to a majority of the areas requested.
It was at this point that the minister came down in favour of proceeding with VS in principle.
After being informed by the minister of his decision, Walsh of BA wrote a second letter to the minister dated April 23, complaining that BA had not been fairly treated. That letter smacks of sour grapes, as it was only after he had been informed that BA was not the successful candidate that BA sought to reopen the negotiations and to cry foul.
The OCG report fails to recognise this, and instead, concludes that BA was not given equal opportunity. This is despite an email from the Air Jamaica CEO in which he reconfirms that he expressly put all the discussed points of improvement to BA for consideration. It is indeed a pity that the OCG has received no submissions from the Air Jamaica CEO during its investigations.
The two airlines' offers were put to Air Jamaica's Board on May 2, 2005. In the conduct of that board meeting, I deliberately deferred informing the members of the minister's preference for the VS bid until after the CEO had made his presentation and the directors had finished deliberating on the matter and had come down in favour of VS.
Opportunity
This gave them the opportunity to consider the matter without being affected by the minister's decision. Though the OCG report has criticised me for this, I believe it was the correct thing to do as chairman. My handling of the board was not designed to mislead, but rather to give the directors of Air Jamaica the opportunity for an impartial review of the final offers.
I am satisfied the procedures followed throughout the negotiations were effective in obtaining the best possible deal from both VS and BA and so, in the final analysis, for Air Jamaica and the country.
The unarguable result of the negotiations has been to relieve the airline of a major source of losses, to obtain a valuable code-share agreement from which Air Jamaica is benefiting, and to introduce additional flights from the UK to Jamaica in support of the nation's vital tourism industry.