Friday, March 23, 2012

Opinion/Letter: REDjet’s problems are grounded in its business model

Dear Editor,

REDjet’s suspension of flights is unfortunate and perhaps disheartening given the history of airline failure to which Guyanese have been subject.

The problem, as often has been the case, lies in the government’s vulnerability to investment lures. Its naivety. Its credulity. Of course we would like REDjet to resume and to succeed, but the problems it has thrown on the screen as its reasons for suspension, are predictably grounded in the business model of its principal shareholders.

First, we need to make it clear that, according to “Travel Weekly”, the American industry newspaper, REDjet, owned 25% by Robbie and Ian Burns, up to filing in May 2010, really belonged to Allegiant Air, formerly WestJet and varied investors. Allegiant Air has a history of entering markets and pulling out within a year if the returns do not meet their expectations in spite of the high load factors that “low cost” ensures.

It suffices to read a media source like Wikipedia about Allegiant and the rubric “criticism of the business model.” The examples were given of three markets that Allegiant entered then exited within the year, in one case, despite subsidies or government support.

The Allegiant model is to attract customers with low fare advertising and then make the money as “ancillary” revenue (sale of food, beverage, excess baggage, preferred seating etc). As CEO Maurice Gallagher is quoted as saying, they still get US$110 from you for a trip for which the ticket is sold as US$75.

The Allegiant model starts with the MD 80 series aircraft we saw REDjet introduce in the Caribbean. It is likely that the company is still a major shareholder in REDjet. The suspension statement by REDjet says they are hopeful they would get the “state assistance” that some Caribbean national airlines enjoy. In short the taxpayer would be subsidising the low fares, while REDjet gets an edge on the competition by advertising its fifty cent flights.

There have been comments and even court cases involving low fare carriers in Europe. The low cost model works in most situations and SouthWest in the USA is a good example. But it usually translates into hidden revenue streams as often either the cities or governments or even airports grant some type of subsidy for the service and the costs passengers end up paying average out to a level that makes low fares in reality less “low” than appears at first sight. If the pull out of the market is followed by filing for bankruptcy, then a lot of the reservation money would be kept by the “failed” carrier and the shareholders end up much less hurt than one imagines.

One understands that the government wanted to take care of the travel needs of the Guyanese public and gave REDjet a chance. Perhaps the government decision makers lacked the industry knowledge to be able to see the hook in the lure. In any case, it is really doubtful that REDjet would resurrect.

As for EZjet, it is another model and as a charter company the risks are different. This is not an airline operation but a travel agency/tour operator operation. One Trinidad based tour operator bankrupted Primaris Airlines and failed its clients when costs outstripped advertised fares a few years ago. Universal was an airline that had other problems. To my mind the best solution to the Guyana airlift problem is the re-creation of the Guyana Airways structure with, private sector involvement, modern management and a better marketing plan than that which existed.

Yours faithfully,
Abu Bakr


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