A barrel of opportunity?

Concerns have been raised worldwide over the slump of crude oil prices by almost 60% since June 2014. For Trinidad and Tobago (T&T), an oil producing nation, the effects of the fall in price of oil will have adverse effects on Government fiscal plans, which in turn would affect the economic stability of the country. It is a situation that ought to be strategically managed as it raises red flags in terms of job cuts, foreclosures, increased criminal activity and inflation to name a few. In an article written by Sasha Harrinanan, Newsday dated 28th February 2015, entitled “ Falling oil $$ big risk to TT” flagged serious concerns such as high interest rates and sovereign debt, increased mortgage debts, and a spike in US interest rates”.

With these red flags the swift action taken by the PP Government in January 2015 to re-evaluate the 2014/2015 budget was addressed by Minister of Finance to effectively provide funding for several key projects. However, 2015 is an election year, and it may be prudent for the Government to be sanguine about possible prospects for economic benefits to place the eminent impact of the financial crisis behind them.

So how can this crisis be an opportunity for T&T despite the plethora of International crisis of political unrest, conflicts, environmental changes, oil crisis and weak economies, not to mention our own domestic crime situation?

One perspective is to have a reliable air transport and tourism products that can stimulate economic growth needed for diversification from the energy sector, which, according to the International Air Transport Association (IATA), the airline industry for the first time in years is expected to pay lower prices for aviation fuel because of the slump in the price of oil.

Despite IATA’s comments, consumers may not benefit from an immediate cut in air fares because of demand, pre-negotiated prices and operational costs. For instance, the travel industry exists in a hypercompetitive environment, which means that, the industry is market driven and not cost driven.  What this suggests, is that airlines may maintain pricing based on demand, in that way, the airline may choose to take advantage of maintaining airfare to boost its viability. Another factor that is commonly practised by airlines is fuel hedging, which means, negotiations would have been made in advance to purchase fuel at a contracted price for a period of time. And finally, according to the CEO for Air Canada, aviation fuel is not the only cost to be considered for operating an airline and therefore he believes that cost cutting of airfares would be detrimental to the industry.

Irrespective of these concerns, competition in the travel industry have commenced with many competitors re-engineering themselves to develop a price strategy to win consumers. Several marketing experts from international travel and tourism authorities stated that the consumers spend will be more, as discretionary income is increased from the airfare savings.  It was reported in February 2015, that some airlines in the United States have already re-negotiated to pass savings to the consumer by price slashing airfares. A recent U.S trend forecast monitor predicted a 6.2% U.S travel spend and a 1.7% person trip increase.  And according to a United Kingdom journal, Joel Brandon-Bravo, UK Managing Director said “With the lower air fare prices from Europe we are seeing great travel offers to Barcelona, Morocco, Portugal and Prague.”

Trinidad and Tobago has its strength in ownership of its airline carrier, Caribbean Airlines (CAL), which also includes the recent acquisition of AIR JAMAICA. CAL enjoyed subventions from the State, have had an unblemished safety record, flight routes to international long haul and regional destinations. However, with CAL’S competitor carriers slashing flight fares then it may be prudent for CAL to partake in doing same to achieve market share.

On the other hand, International air carriers with long haul flights from Europe have had the benefit of the Government of Trinidad and Tobago purchasing a number of seats to guarantee the flights to our destination. Most tourism destinations in the Caribbean have been engaged in this activity since carriers must have a contracted demand for seat, otherwise, the air carrier may reconsider the destination for a more viable and lucrative route. Therefore, to keep the route the Government would have to ensure that the seats are purchased even if the flight comes into the destination with empty seats.

With cheaper aviation fuel, the relevant authorities should pursue re-negotiations with carrier contracts, to reduce seat subsidy or eliminate seat purchase and circumvent these funds towards marketing to boost destination demand.

Perhaps it would be wise for the authorities to also consider what opportunities that may have arisen in the travel industry within the last year to strengthen their bargaining power. One recent activity has been the removal of Air Passenger Duty Tax for travellers from the UK to Caribbean destinations which is another increase of discretionary income to the UK traveler.

For the barrel of opportunity to be realised, it may require the synergistic relations of the relevant authorities to consider serious negotiation strategies with stakeholders for cheaper packaged pricing that will attract travellers to our destination. As Napoleon Hill stated “Every negative event contains within it the seed of an equal or greater benefit”, all it needs is the correct action and commitment to attain it.