We all know the abysmal conditions in the airline industry. Since the beginning of this year, over 40 airlines have gone out of business and more than 500 aeroplanes have been taken out of operation. The prognosis is not encouraging. Some may say the industry is in intensive care and on life support.

It is projected that the industry will lose US$11 billion in 2009. Traffic is down 26 per cent, declining for 16 consecutive months, capacity down seven per cent, yield down 19 per cent, and revenue is projected to be down 20 per cent. On the positive side, fuel is down 31 per cent and the average aircraft unit cost is down 15 per cent. Airlines, such as Air Italia, Austrian Airlines, Iberia, Japan Airline, Olympic Airlines, Air India, LOT, Air New Zealand and Sky Europe have all had to restructure or form alliances. Yes. Air Jamaica is caught in the vortex of the financial storm, but it can ride it out.

The Government should learn the lesson of Semele, who rejected her fiancé for the celestial embrace of Jove, only to suffer Juno's vengeance. Allow the Jamaican public to participate in the divestiture. I only hope the Government is not subscribing to the principle that profligacy is now the new prudence. In exercising its fiduciary responsibility, the Government should not be a gradgrind - the human needs must be taken into consideration.

challenging balance sheet

Air Jamaica has a most challenging balance sheet. It is highly leveraged and does not give the Government too much room to manoeuvre. Yes. Both its gearing and leverage ratios are highly elevated. So the Government will have to pay at least US$100 million to have someone take the airline off its hands. They will have to engage in an ardent pursuit to find the best deal for Jamaica. In so doing, they cannot be oblivious to the people of Jamaica. This will rule out any private-equity deal, or for that matter, any financial buyer. Their modus operandi is to commit as little equity as possible and leverage the transaction up to the hilt. This would prove to be a nostrum. Selling an airline is always difficult, and in this climate it is extremely daunting. There is not much leverage in the business model mainly because of towering fixed costs.

There is value in Air Jamaica; but it is not being effectively quantified. The Government needs to know it is a corrosive hypocrisy to believe that one negotiates with oneself. They showed their hand and thus immolated the value of Air Jamaica. Again, they have demonstrated their neurotic obsession with consultants. These consultants want us to believe that they transcend absolute euphony to become the alpha and omega. No one is saying that any of these consultants is an ingenue to privatisation. but they should only be used to validate assumptions. Of course, they will try to skillfully enshroud the true value of Air Jamaica in a fog of statistics. One needs to demolish these finance shibboleths with the theorem of common-sense.

Two of the most important metrics in analysing airlines are yield and utilisation. In Air Jamaica's case, they are trending in the right direction. The Government should let us know what valuation metrics were employed. How was the pension liabilities treated? What intrinsic value was assigned to the underlying assets? What assumptions were made to determine the enterprise value and total debt ratios? Is there an implied growth. if so, what is it? Were efficiency ratios, such as cash-conversion cycles, an integral part of this valuation? Was there a sensitivity analysis? What about precedent transaction analysis and comparable valuation analysis? Shouldn't there be a value assigned to the Air Jamaica brand name?

compelling solution

The most compelling solution is the public option. Sell Air Jamaica to the public. It could be modelled after the successful privatisation of Kenyan Airways. This is the envy of airline privatisation. It is now a most efficient and profitable airline. Look at Finnair, they destroyed the myth that government-owned airlines cannot be efficient.

Air Jamaica has a lot of credence with the Jamaican travelling public. Over 80 per cent of the passengers are returning residents; they know the value of Air Jamaica. Give them a chance to participate. Their contribution to GDP will easily offset any investment the Government would have to make to recapitalise the airline. This will go a long way in helping Air Jamaica escape the yoke of government support. At the same time, they should look at Potter Airlines, which has been able consistently to maintain costs at more than 40 per cent below its competitors, Air Canada and WestJet.

Air Jamaica's management is on the right path to making the airline potent. They have not got much pricing leverage, so they must enhance utilisation. It is very unlikely that any airline would find a money-losing peer such as Air Jamaica strategic. They have more immediate challenges on their plate right now.

As we ascend the summit of human wisdom, it is warranted that prudence be exhibited. The Government must demonstrate the perspicacity of the risk involved in the divestiture of Air Jamaica. The solution presented is not a Hobson's choice.

Where is Bedward when we need him?

Feedback may be sent to dlwarm2001@yahoo.com or columns@gleanerjm.com.