LIAT

LIAT AIRLINES, TAXES AND CARIBBEAN TOURISM

Submitted by Robert MacLellan

LIAT Airlines has been a vital factor in the commercial and tourism life blood of the Caribbean for decades. However, the company has now had three CEO’s and two Acting CEO’s in the last seven years, evidence of LIAT’s challenges.

Commentary on its unfathomable financial strategy, its lack of published accounts and its, arguably, unnecessary and hugely expensive fleet replacement is already well published. The perception over many years of poor operations management, ineffective marketing and gross over staffing has made the LIAT brand a liability, rather than an asset, in the international airline world. I will not add further here to the list of woes.

Given the ongoing expansion of three competitor airlines in the Eastern Caribbean, it is possible that LIAT will soon succumb to private sector competition or, maybe, a merger can save it. In any event, one significant challenge remains for LIAT and its competitor Caribbean based airlines.

To quote David Evans, LIAT’s newly departed CEO, “I can give you many examples of journeys around the region where the tax on the ticket is the same amount as the ticket.” Evans continued, “We will sell you a ticket for US$100 dollars in LIAT but you will actually pay US$200 for it because the other $100 will be tax. That’s an extreme example but by and large 40 to 50 per cent of all the tickets that we sell, that proportion is the amount of tax so that’s a major issue.”

The tax situation Evans refers to above is one of the more obvious examples of Caribbean governments targeting the “stay-over” visitor as part of their attempt to balance budgets in these continuing difficult economic circumstances. The various airline ticket taxes place a significant financial burden on business people travelling between the islands and on tourists from within and outside the region. The result is that the volume of Caribbean inter island air traffic has declined steeply over the last decade and the law of diminishing returns surely applies to the associated tax revenues.

A similar situation exists with Caribbean hotels, where several governments in the region have again increased hotel occupancy taxes, imposing a direct additional cost for those same “stay-over” visitors – business people and tourists. Hotel room taxes now average well over 10% across the Caribbean. Given the very high operating costs of hotels, particularly for smaller properties on the smaller islands, any additional occupancy tax cannot be absorbed within their room rates. The overall tax burden is part of the reason why there is a significant lack of re-investment in many Caribbean hotels with a consequent reduction in their level of competiveness in an ever tougher global market place.

Under financial pressure, many governments have reduced their tourism boards’ destination marketing budgets, which also most directly impacts the smaller hotels and the smaller islands. By contrast, Sandals remains successful because of its high budget direct consumer marketing and its economies of scale, although even that company has had to implement some cost reduction strategies over recent years.

At the same time, on most Caribbean islands, hotels represent the largest percentage of private sector employers and, consequently, drive the largest part of income tax revenue and national insurance contributions. The hotel sector is also a significant generator of government revenue from import duties, corporation tax, property taxes and VAT (where applicable). “Stay-over” visitors spend significant amounts of money on hotels and restaurants – revenue which is quickly and widely dispersed throughout an island economy. Many economists might argue that, as the largest earners of foreign currency in many islands, hotels should enjoy greater fiscal benefits as an “export” industry.

With justification, Caribbean governments will argue that they are under enormous pressure to balance budgets and need to increase tax revenues in order to provide an adequate standard of public sector services to their citizens. However, there is one obvious target where tax revenue could be increased from a sector of the tourism industry, other than the “milk cow” of the Caribbean’s hotels and airlines.

That sector is the cruise line industry, which currently makes a much lesser direct economic contribution in most islands than the local hotels and airlines.

Cruise lines have transformed their business model in recent years – larger, more cost efficient ships with more onboard facilities and lower ticket prices. These changes have resulted in 82% of the discretionary spend of a cruise ship passenger now being captured onboard. That change, combined with shorter stays in ports and lower budget passengers means that many cruise passengers avoid hiring a taxi ashore and they spend much less money in island shops, bars or restaurants. Over the last two decades cruise lines have increased their share of shore excursion prices from 10% to 50%, resulting in a further decrease in local island company revenue.

Through this transformation in their business model, cruise lines have become hugely more profitable, operating high occupancies on a year round basis – winter in the Caribbean’s high season, summer in Alaska or the Mediterranean. Cruise ships operate in a virtual no tax / low tax “offshore” financial environment with lower build costs and operating costs than an equivalent Caribbean resort. However, no Caribbean government in recent times has increased the level of port taxes on cruise ships.

The very low port taxes currently levied in the Caribbean total only 12 – 15% of the cruise ticket price and that percentage total is shared between the governments of all the islands visited on any particular cruise itinerary, say, 3% per port. Compare that low percentage with the 100% tax burden imposed on almost half of LIAT flight itineraries and the average 10%+ for hotel room taxes per night.

Three multi-billion dollar cruise line corporations own over 80% of the ships visiting Caribbean ports. They are tough negotiators and employ skilled public relations people. Every Caribbean government would need to come together, maybe through CARICOM, to negotiate higher port taxes but the cruise lines can afford to pay more. Ports in Alaska, New England, Canada and Bermuda have all negotiated higher rates in recent years. On New England / Canada cruise itineraries, port taxes can represent up to 33% of the cruise ticket price.

Today, around 60% of the world’s cruise ships spend the winter in the Caribbean. In spite of the cruise lines’ bluster, currently there is no alternative to the Caribbean for them – a winter cruising area with a high level of differentiated tourism infrastructure and port facilities, located close to North America and Western Europe, which are the major outbound cruise markets.

No sane person wants to see cruise ships leave the Caribbean but the cruise lines could, and should, make a greater contribution to Caribbean government tax revenues. A rebalancing of the tax burden would assist the Caribbean’s own airlines and hotels to improve, expand and achieve a greater level of economic sustainability.

Notes.

Robert MacLellan is Managing Director of MacLellan & Associates, the Caribbean’s leading hospitality and tourism consultancy since 1997. He has a Masters Degree in International Hotel Management and previously held board level management positions at major companies in the hospitality, cruise line and property industries. MacLellan is a regular speaker at the CHRIS and CHICOS annual Caribbean hotel investment conferences.
For further information contact Robert MacLellan:
robert@machospitalityconsultants.com
www.machospitalityconsultants.com

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22 Comments on “LIAT AIRLINES, TAXES AND CARIBBEAN TOURISM”

  1. chad99999 April 24, 2016 at 11:41 PM #

    In the Caribbean we do not have good information resources on the tourism industry, but here are a few facts that should frame this debate.
    (1) Many academic economists say that governments in the region have not been able to recover the money already spent on tourism infrastructure (airports, seaports, airline expansion, hotels, roads, tourism marketing offices, etc.). Effective ways must be found to tax tourism industry profits.
    (2) The Caribbean hotel industry is high-cost and inefficient relative to its counterparts in many other destination areas around the world. Recent data are hard to come by because hotel owners are secretive about their finances, and government agencies have done a poor job of publishing assessments of industry performance, but small-scale studies from the 1970s and 1980s showed that there are many hotels that are inefficient because they are too small, and because their owners either lack formal training in business management, or lack the dynamism required to compete in a global marketplace.
    (3) Without a healthy, profitable hotel industry to depend on, governments will be tempted to seek more revenue from the cruise industry. The problem is that the companies in this industry do have some ability to switch to other destinations that compete with the Caribbean — Mexico, islands in the Indian Ocean, and the Atlantic Ocean. Even within the Caribbean, Cuba, the Dominican Republic and Puerto Rico are low-tax alternatives to the English-speaking islands.

    Like

  2. caribbeantradelaw April 25, 2016 at 5:17 PM #

    Very interesting article. Perhaps one way that the cruise industry can have a greater impact is by improving our product offerings so more tourists would be enticed to spend money onshore. Having worked briefly in the industry, my main grouse is the lack of catering to tourists who speak different languages. One of our top attractions only does tours in English. Every Wednesday we have loads of spanish speaking guests coming in on Carnival. Do we cater to them by offering tours in Spanish as an option? This may seem simplistic but sometimes the simple things have the biggest impact.

    As for LIAT, I only fly with them when I have no choice but to. Although I must say that my last experience with them was quite good.

    Liked by 1 person

  3. Gabriel April 25, 2016 at 6:10 PM #

    It’s time some enterprising native introduce a ferry/cargo service starting with the Eastern Caribbean islands.

    Like

  4. David April 25, 2016 at 7:15 PM #

    The problem with LIAT is management. Why is a shareholder country (Dominica) having to jostle for good service from LIAT and others like Grenada, St. Lucia not contributing a cent being regularly serviced?

    On Mon, Apr 25, 2016 at 10:10 PM, Barbados Underground wrote:

    >

    Like

  5. TheGazer April 25, 2016 at 7:20 PM #

    A very interesting article. Well crafted. I like the suggestion of seeking other possible sources of revenue. We regard ourselves as a high end destination, but other places can offer the same, sun, sea and sand. Whilst we should avoid the ‘backpackers’ we have to make certain that we do not place too great a limit on those who can afford to visit Barbados.

    CTL points out a deficiency in our educational system. Though foreign languages are taught in our secondary schools, many Barbadians do not reach a level where they can be considered as mastering these subject. {Perhaps, this is because the few that have mastered amo, amas, amat have us living in constant fear that foreign words are a precursor to being robbed by our own people:-) .}

    Excellent idea Gabriel. Surely, we can pool our funds and invest in a few vessels to perform this service.

    Like

  6. Bush Tea April 26, 2016 at 6:43 AM #

    @ David
    Why is a shareholder country (Dominica) having to jostle for good service from LIAT and others like Grenada, St. Lucia not contributing a cent being regularly serviced?
    ++++++++++++++++++++++++++++++++++++++++
    Should ownership rights not be separate and distinct from operational strategy?
    Perhaps Grenada and St Lucia are lucrative business markets ..and Dominica is not…
    What Dominica SHOULD benefit from is reasonable RoI and a say in management policy.
    What if Denis Kellman became a shareholder? should LIAT then service St Lucy with a packed schedule?

    @ Gabriel
    Another excellent idea …but a pearl thrown to brass bowl swine.
    None of Bushie’s funds will be in that pool….
    Any such venture would be immediately swamped with taxes, duties, levees, administrative delays and other obstacles …as various political and other parasites seek to eat into its profits AND into its very foundation.
    Employees will steal, sick-out, divert resources and generally pursue their own personal agendas to its detriment….and with Caswell’s support…

    Our problem does not result from a dearth of good ideas, but from a lack of DECENT, HONEST, HARDWORKING people in general….and leaders in particular.

    So @ Gabriel & TheGazer
    …can you two PLEASE tell us how we can convert brass bowls into decent, honest, hardworking citizens….?
    If wunna cannot, ….then kindly stop wasting the pearls.

    Like

  7. David April 26, 2016 at 7:33 AM #

    @Bush Tea

    Suspect the Dominica problem has nothing to do with ROI, but we will never know.

    Like

  8. David April 26, 2016 at 7:40 AM #

    Artax should be interested in the observation that LIAT has moved a significant part of its fleet to GAIA, and this is despite the hot air from PM Gaston.

    Like

  9. Gabriel April 26, 2016 at 8:42 AM #

    Bushie
    I don’t have the answer as yet but will give it some thought.Dont hold your breath,it might take some time a la fumble….
    David
    This will be the second time LIAT based a significant part of its operation at Barbados,so if history is a guide,Antigua,who seem to call the shots even though Barbados is the supposed major shareholder,might just pull up stakes and move back to Antigua when it suits them.
    I have certain knowledge that Barbados has always had a good reputation for basing airline operations at GAIA.In the 70’s,there was a move afoot to base an existing Caribbean airline in Barbados.The CEO was the mover and shaker.The political fallout would have been devastating for another Caribbean government.The plan was shelved.

    Like

  10. Vincent Haynes April 26, 2016 at 9:03 AM #

    History has shown that in a democratic/capitalist society any airline controlled and operated by government(s) is doomed to fail…….as a matter of fact we can say any entity and need go no further than Bim and look at Transportation/Health/Waste systems to make the point.

    Like

  11. Artax April 26, 2016 at 9:43 AM #

    LIAT reminds me of the Barbados Transport Board. Similarly to how the TB’s daily requirement of omnibuses is insufficient to service over 100 scheduled routes on a consistent basis, LIAT’s fleet is also insufficient and affects their ability to adequately provide a scheduled service for the 18 islands they currently serve.

    This causes a significant amount of “layover time,” which may see a passenger travelling from St. Maarten to Barbados, for example, having to travel to St. Kitts, Antigua and Dominica, before finally arriving in Barbados.

    Another ridiculous situation occurs when travelling on LI560 leaving Barbados at 8:30am en-route to Guadeloupe. That flight goes to Antigua (arriving there at 9:55am) and passengers have to remain in transit until LI523 leaves there at 5:30pm to arrive in Guadeloupe at 6:00pm……. providing the rare occasion occurs that the flights are on time, the LAYOVER TIME is 7 hours and 35 minutes.

    Hence, there needs to be an improvement in fleet and route management.

    Also, LIAT had suspended flights to Anguilla, but has recently partnered with Caribbean Helicopters Limited (CHL) to provide a scheduled service from Antigua to Anguilla.

    Like

  12. Artax April 26, 2016 at 10:44 AM #

    I recall in FEBRUARY 2015, LIAT’s shareholder governments took the decision to relocate LIAT’s fleet base to Barbados, as part of a restructuring drive aimed at stemming losses through reduced overheads and improved revenue inflows by targeting the southern Caribbean, as well as to retrench 180 employees, decreasing the staff complement from 800 to 620, which was to realize a savings of BD$9.6M.

    These announcements were made following two meetings at the Hilton Barbados that involved Barbados’ PM Freundel Stuart, St Vincent and the Grenadines’ Dr Ralph Gonsalves, Dominica’s Roosevelt Skerritt and Antigua and Barbuda’s Minister of Public Utilities, Civil Aviation and Transportation Robin Yearwood.

    It is a known fact that Antigua’s PM Gaston Browne was at odds with then CEO of LIAT, David Evans, because he was identified as the “master mind” behind “a plan to collapse and supplant LIAT……….. to replace LIAT with a NEW regional airline (NEWCO) to be OWNED and OPERATED by the government of Barbados.”

    In MARCH 2015, during a radio interview on Winn FM, Antigua’s PM Gaston Browne said that he may ask for Evans’ RESIGNATION and for the airline’s Board to step down should they be found to have played a role in the proposal, which he described as TREASONOUS.

    “Despite St Vincent & the Grenadines and Barbados calling for a greater centralization of the airline’s operations on Barbados given that it is home to the most profitable destinations in LIAT’s network, the move to shift the carrier away from Antigua has been strongly opposed by Antigua and Barbuda which argues that such a move would have catastrophic repercussions for its economy.” [CH Aviation News, April 6, 2015]

    Browne also mentioned: “Even in terms of the share holding positions of the various governments, I believe the SHARES of Barbados should be DILUTED because they believe that because they have the MAJORITY SHARES, that everything MUST MOVE to Barbados.”

    However, in JULY 2015, the Antiguan government made a “cash injection” (or BRIBE) of US$400,000 in LIAT, which Browne said was part of an initial promise to invest US$10M in the airline by year end, as he reiterated his vow that the airline’s headquarters would not be moved from St. John’s.

    While speaking on the sidelines of the 36th regular meeting of the Conference of Heads of Government of CARICOM which began on July 2, 2015, Browne insisted that all PLANS to RELOCATE the LIAT headquarters from Antigua and Barbuda had been SCRAPPED and DISMISSED the RELOCATION PLANS as mere “IDLE CHATTER.”

    Now, in April 2016, LIAT has finally relocated its fleet base to Barbados, perhaps Gaston Browne has conceded that his outbursts were mere “idle talk” and that it’s the Barbadian taxpayers who are financing LIAT’s high wages bill, paid mainly to Antiguans.

    Like

  13. David April 27, 2016 at 12:37 PM #

    St.Lucian LIAT flight attendant arrested in cocaine charge.

    Like

  14. Vincent Haynes April 28, 2016 at 9:17 AM #

    Interesting to note that “Barbados Today” quotes Gaston as saying LIAT nah leave Antigua.

    Like

  15. Artax April 29, 2016 at 7:14 AM #

    @ Vincent Haynes

    The following is an article taken from the April 27, 2016 edition of an Antiguan newspaper, “The Daily Observer,” as follows (note Gaston Browne’s response to MoT Sealy’s suggestion):

    A&B hopes to own majority shares in LIAT

    Prime Minister Gaston Browne said there are PLANS to INCREASE Antigua & Barbuda’s SHARES in regional carrier LIAT.
    He said the COUNTRY could POSSIBLY becoming the MAJORITY SHAREHOLDER in the company is “very probable”, but such a move would be subject to cash flow.

    “We hope to make another payment shortly and we have been making payments but as you know, we have a number of pressing issues. We inherited a country – an economy that was not the healthiest and I am being very mild, but as soon as practicable we will make another equity injection into LIAT,” he said.

    Antigua & Barbuda is the second largest shareholder in the company, with Barbados holding the majority of the shares.

    Despite Minister of Tourism and International Transport in Barbados, Richard Sealy reiterating his stance that it would make “more sense” if the regional carrier was headquartered in his country rather than Antigua, PM Browne is ADAMANT that LIAT will REMAIN in Antigua.

    “I know that Minister Sealy suggested that a decision has been taken to move LIAT’s headquarters, but that is not so. Perhaps he is either MISINFORMED or he SPOKE OUT OF TURN, but the reality is there has been absolutely no discussions about moving LIAT’s headquarters,” he said.

    The prime minister said any EFFORT to ADVANCE Sealy’s SUGGESTION will be RESISTED by the country.

    Like

  16. David April 29, 2016 at 7:48 AM #

    The reported public statement by PM Gaston and sealy fly against the tenet of good corporate governance. Whether LIAT moves from Antigua is a decision for the board of directors.

    Like

  17. Artax April 29, 2016 at 8:13 AM #

    @ David

    I agree with your above comments 1,000%.

    Like

  18. Bush Tea April 29, 2016 at 8:51 AM #

    @ David
    When you elect small minded mendicants into positions of political power, their heads get hot …and they tend to envision themselves as ‘lords of all’.
    So Ministers who were previously unemployed and even unemployable, suddenly (days after an election) are able to tell National Corporations what to do; who to hire; where to spend; who to fire…
    This is the epitome of brass bowlery…
    and we endorse such a system of governance?!
    ..and SERIOUSLY expect good results…??!!
    SERIOUSLY?

    What the hell!!!

    National managers should be highly trained and PROVEN professionals who are hand-picked to handle the complex businesses that belong to the people.
    Politicians are ass-licking, lackies who should be restricted to talking shiite, doing comedic presentations at branch meetings, and giving each other shiite titles.

    …but there are none so blind….

    Like

  19. David April 29, 2016 at 7:06 PM #

    RCCL Corporation’s recent press release (see below). Following up my (Robert MacLellan) earlier article this week, it serves to confirm the obscene level of cruise ship profitability – much of it at the expense of Caribbean islands. RCCL’s press release says it all – more (cheaper) passengers and more money spent on board.

    Posted: Friday, April 29, 2016 8:37 am

    Associated Press | 0 comments

    MIAMI (AP) — Royal Caribbean Cruises said Friday that its first-quarter profit more than doubled from the same period a year before as more people cruised on its ships and spent more money while onboard.

    The company also said it now expects better earnings for the year than it previously expected. Its shares rose more than 2 percent in morning trading.

    Royal Caribbean said its ships carried more than 1.4 million on its ships during the three months ending March 31, up 5 percent from the same period a year ago. Besides its namesake cruises, Royal Caribbean Cruises Ltd. also owns Celebrity Cruises, Pullmantur, Azamara Club Cruises and CDF Croisières de France.

    The company reported earnings of $99.1 million, or 46 cents per share, in the three months ending March 31, compared with $45.2 million, or 20 cents per share, in the same period a year ago.

    Earnings, adjusted for non-recurring costs and restructuring costs, came to 57 cents per share, beating Wall Street expectations. The average estimate of eight analysts surveyed by Zacks Investment Research was for earnings of 32 cents per share.

    The Miami company said revenue rose about 6 percent to $1.92 billion in the period, also beating Street forecasts. Five analysts surveyed by Zacks expected $1.91 billion. Ticket revenue rose more than 5 percent and onboard revenue rose 6 percent.

    Royal Caribbean now expects full-year earnings to between $6.15 per share and $6.35 per share, surpassing the $6.09 per share analysts expected, according to FactSet. Royal Caribbean previously expected earnings between $5.90 per share and $6.10 per share.

    _____

    Elements of this story were generated by Automated Insights (http://automatedinsights.com/ap) using data from Zacks Investment Research. Access a Zacks stock report on RCL at http://www.zacks.com/ap/RCL

    Like

  20. chad99999 April 30, 2016 at 9:57 PM #

    A note of caution. Royal Caribbean makes its money all over the world. It’s fastest growing markets are in China. Its focus in the Caribbean is Cozumel (Mexico), St. Thomas, San Juan, and St. Martin/St. Barts, not the eastern Caribbean. Its expansion plans are for Cuba.

    Like

  21. Robert MacLellan May 1, 2016 at 11:46 AM #

    Chad,

    Having lived in St Maarten and St Thomas, I am pretty sure that they are both actually in the Eastern Caribbean, as is St Barts and San Juan.

    The island of Cozumel is already overcrowded and Cuba at present has very little tourism infrastucture to cope with every cruise ship currently on Caribbean itineraries.

    Given potential political instability, the cruise lines will not bet everything on China. As VP of a cruise line many years ago, I was on the first cruise ship back into China after Tianmen Square.

    Your comments only serve to highlight the challenge stated in my article. Unless ALL the islands in the region start thinking together and act together, the Caribbean will continue to be exploited by these massive foreign corporations continuing to pay lower port taxes here than elsewhere in the world.

    Robert MacLellan

    Liked by 1 person

  22. chad99999 May 1, 2016 at 11:57 PM #

    Bob,
    The textbooks usually group Cuba, Haiti, the DR, the USVI, Puerto Rico, and French islands like St Martin as northern Caribbean territories, because they are significantly closer to North American cities than Trinidad, Barbados, Dominica, Guadeloupe, St. Lucia, etc., which are in the eastern Caribbean.
    If you compare the number of cruise ships plying the northern Caribbean to the number in the eastern or western Caribbean, there is a difference.
    Most of the English-speaking Caribbean is at a disadvantage competing for cruise business because of geography. Collective bargaining may pay off but it is a risky strategy.

    Like

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