In his third instalment about life running island-hopping carrier Liat, chief executive Mark Darby believes he has finally put it on course to make money
There is nothing simple about running an airline in the Caribbean. I knew that when I left the world of consulting to become the chief executive of Liat, the Antigua-based Bombardier Dash 8 operator, in July last year. But nothing could have prepared me for the roller-coaster ownership saga that has dominated my first 12 months in charge.
When I arrived, even though I was well aware Liat had only made a profit once in 50 years, the reality of the carrier's finances was a shock. While cumulative losses of over $75 million incurred during the past three years had severely stretched the island governments that collectively own this airline, it was too important to let it disappear into bankruptcy as it provides an essential "air bridge" between the islands: a solution was urgently needed.
The good news was that our main rival, Caribbean Star, which had been formed to compete head-to-head with Liat in 2000, was also losing a great deal of money. I was convinced that it would be in the interests of both airlines to stop the desperate competition and, following exploratory talks soon after my arrival, it soon emerged that some kind of deal could be on the cards.
Initially seen by Skip Barnette (chief executive of Caribbean Star) and myself as a merger, the potential deal has taken many forms - a shutdown and relaunch of both carriers, and amalgamation where assets were to have been swapped for equity (in various proportions). Now the final deal amounts to a buyout by Liat of Caribbean Star's assets.
While the deal was being structured, the recognition that Liat and Star were both haemorrhaging cash led us to conclude one of our smartest moves: the formation in February 2007 of a commercial alliance that saw the two airlines operating a combined schedule. In addition, Star transferred its sales and marketing to Liat but maintained its air operator's certificate and provides wet-lease capacity to Liat.
Eliminating competition between the two airlines allowed us to axe badly performing routes optimise the new enlarged schedule for connections and connectivity with our interline partners and reduce our combined capacity. It also allowed us to adjust our fares, finally getting them above the cost of production. The net effect is that for the first time in many years, there is a danger that Liat will break even in 2007!
While the dramatic change in Liat's fortunes has been greeted with relief by our shareholders, the turnaround hasn't been universally welcomed. Islanders, accustomed to super-low prices driven down by the Liat-Star rivalry, have not been so happy.
In the media spotlight
There has been an outcry about the fare rises. Not only have the papers and radio waves been packed with protests against the recent moves, but various regional tourism agencies have blamed us for depressing tourist arrivals. Any negative effect on the tourist trade, which is so important to this region, is bad news, so we have endeavoured to explain our side of the story and why, faced with bankruptcy, we had to bring our prices in line with our costs. Recently the fares story has dropped off the front pages - only to be replaced by complaints that people couldn't get seats, whatever the price. We simply can't win!
One thing the controversy over our fares has achieved has been to bring out into the open the debate on the funding of the regional airline (a discussion that I am sure will be familiar to other chief executives of state-owned airlines around the world). In the past the airline has been substantially under-capitalised and heavily loss-making, with cash to keep the airline going provided on an ad hoc basis by our major shareholder governments - Barbados, Antigua and St Vincent.
In effect, the three shareholder governments have been subsidising the region's air transport, while the taxpayers of other islands have been given a "free ride". Now, the burden is being shared equally by those who use our services.
Cash injection
In spite of stopping the operating losses, the airline was carrying over $100 million of debt. Clearly this had to be addressed - and quickly. Sir Allen Stanford, the owner of Caribbean Star, provided essential bridging finance while sources of new equity were explored. I prepared a strategic and business plan for the airline, based on a very conservative set of assumptions: modest growth projected in loads and revenues, while a pessimistic view was taken on likely costs. This plan was presented to the Caribbean Development Bank, which in July agreed to provide our shareholder governments with a loan of $60 million, the proceeds of which are to be injected into Liat as new equity.
We are due to receive the new equity shortly. In addition to securing the cash injection we have successfully renegotiated many of our debts and acquired three of our previously leased aircraft. Once the new equity is received, the net effect will be that Liat will be debt-free and the proud owner of a relatively strong balance sheet for the first time in many years. Quite a milestone!
Having stabilised the business and with the acquisition of Star's assets all but completed, I shifted the focus on to the future. The challenge now is to put the strategic plan into action and complete the successful transformation of the airline. Not only do I have to ensure that the airline is financially viable - the prime ministers of our shareholder governments have made it very clear to me there will be no more cash - but it is essential that we offer the region a reliable, efficient and customer-centric service.
Financially things are going well. Loads have been better than we hoped, with system-wide load factors well over 80% through the summer, as compared with less than 70% in 2006. These loads, combined with the higher fares, have already put us ahead of our business plan. But ours is a highly seasonal market, so we have to remain vigilant and continue to drive cost out of the business.
Employee productivity has dramatically increased with the Star integration as we expanded our operation by 40% but only increased our employee headcount by 10%. Everywhere I can I am squeezing out cost. Renegotiating Liat's insurance cover reduced our annual premiums by $500,000. Changing the way we buy fuel across the region will save $1 million a year. In the past, the carrier has been forced to select suppliers with the best credit terms, not necessarily the ones with the best product or service. Our new credit status will hopefully make suppliers take a new look at doing business with Liat.
While we have made good progress on punctuality, I believe it is still too variable - particularly at times of high demand. Our three-hub/22-destination network offers our customers many connecting opportunities, but to achieve this high levels of punctuality are essential. When our on-time performance falls below 80%, missed connections cause major problems for our customers and add considerably to our costs.
I've instigated regular punctuality review meetings where we try to identify root causes of our problems rather than apportion blame. Aircraft reliability is becoming more of a problem as they get older (the average age of our Dash 8 fleet is 15 years, but also very high cycle), so when possible we aim to replace older units with newer/lower-cycle aircraft.
Consistently delivering customer service to the levels that I expect remains a major challenge, especially on the ground. The main issue I believe is that we haven't adequately defined our processes - and where we have, we routinely fail to follow them. I am in the process of appointing a vice-president of customer service to be the "champion" for this vital activity.
We have to get it right, or we'll let down our customers and in doing so encourage our competitors. Managing irregular operations and baggage will be a focus area - Luggage In Another Terminal has to be a thing of the past!
Of course, transforming the business has to be achieved against a backdrop of a variety of daily challenges. Whenever I think that things are settling down something emerges "out of the blue". In the past few months we have had to deal with Hurricane Dean, a pilots "sick-out" both of which heavily disrupted our operations and cope with personal tragedies involving staff. Life is never dull!
Family life in Antigua
Looking back, some things haven't worked out as I expected. I certainly don't seem to have much free time and from my family's point of view moving to the Caribbean - as idyllic as it sounds - hasn't been problem free. In many ways the toughest part of taking on a job 4,000 miles from home has been on the family side - the death of my father-in-law five months after starting the job and issues with my teenage daughters' education have placed considerable strains on family life. Having said that, life in Antigua is fun - and events such as Carnival provide opportunities to experience local culture to the full.
Success for Liat will only come if we can dramatically improve our customer service. I'm sure this can be achieved and it will certainly be the area where I apply the greatest pressure. I have made a number of managerial changes and now feel that the management team is really beginning to "gel".
Key to achieving our objectives will be to ensure that the whole team remains focused and to help achieve this we are in the process of implementing a performance management system. Another essential element will be greater co-operation between the larger of the region's carriers. I don't think this will mean more mergers and consolidation, but deeper, strategic co-operation. Co-operation will take place in areas like codesharing, schedule co-ordination, interlining and frequent flyer programme tie-ups. Such collaboration might not be as sexy as mergers to reporters, but they make a lot of sense.
This job has been everything I'd want it to be and a fascinating experience. If I had the time again, before arriving here, I would have liked to understand more about the local political landscape here in the Caribbean. These are fiercely independent countries, each with their own needs and wants - but it's something you have to experience, I don't believe you can learn it from a book.
Looking back to when I took over at Liat, I could not have predicted how much it would be possible to change the airline. I am proud of what has been achieved in such a short period of time, given Liat's history and how the Liat team has responded to the challenge of turning the airline around.
Read more about Mark Darby:
- In the first instalment about life running an airline, Mark Darby looks back at his first 100 days with Liat
- Mark Darby describes how he has helped forge a remarkable new direction for Liat in his second article about life as the chief executive of the Caribbean airline
- Mark Darby's take on the low-cost long-haul model when he worked for Unisys
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Source: Airline Business
