AIR. ·J--- A~ ~A I CA- By Ninis try Pe.per No. 98 o.ated 13t h December, 1965, t he Ho "se

was informed of t he detail ::: of a four-party a greement between the

Government of .Janoicn , British Overseas Ai!'1,TaJS Corpora tion (BOAC),

British Vest I ndian Air1vays (B'J IA) and Air J amaica Ltd. dealing >vith

t he opera tion of an i ntorno.t ional c i vil c:c i r line for . .

2. That Pa per gave ba ckground information i n r espeot to the

dGcision a nd due to t he i mportance of t hi s information i n eva luating

...... ,_._ present propos a l s t h o rel evant Gxtre>.ct i s a t tached as Appe ndix "A" for

ease of reference. In particula r, the Paper s tate d t hat :-

':Tho d ecisio n ~ t heref or e , to form 2. national ca rrier has been dicta ted by hard economic n ecess ity , not ~ :prestigious or s t f'..t-us considera tions a s could have been t he ca se 1vhor e Rir servi ces f'.. r e n ot needed as an e.djunct to an important e conomie .?.Ctivity ."

3. On t he 15t:P of February, 1966 , t he House unanimously endorsed

t he aetion t aken up t o t ha t dat e by t h e Government and c.gre ed tha t a ny

!· ··. necessr:.ry e xpenditure mcy be i ncurred wit hin t he limits s et out in the

four-party a greemen t, r-;~ ic h w.:'.s f or a minimum of 3 y ea rs a nd subject to

a dequo.t e permits and l i cences for t he oper o. tion of air s ervices being

obtained by Air J o.ma ica . The Civil Ae rona·utics Boa rd, •-lith t he o.pprova l

of t he Pre sident of the Uni ted St Qtes of Ame rica ~ grcnted a 3 yea r licenc e

to Air .Jamaica Ltd, on t he 19t h of Fe brua~J , 1966. At the He o.ring, it

~orc s me:.de elea r t hat t he s pecinl arr,:,_ ngemcmts reflected in the Agreement

must be r egc.rded as n temporc.ry mecsur o to f n cilit,:,_te t l1e Governmo!lt of

J amnicn during t ho formn tive nnd experimental years of n nm·r internntiona+

nir cnrrier. In par t i cl'.lnr, it wc.s e:rol nined t h a t_ the Civil Ae ronautics

Bonrd does not :r1 ormnlly gr nnt a foreign nir cn rrier permit to a n Airline

tho..t opcntcs nircrc.ft s ol e ly on c. 11 vret11 l OC!-s e bc.si s .,. tlw.t 1 s, who re t ho

a ircraft, erew an~ all oper ating nrrnngemGn t s c.ro provide d by another

carrier, In recent discussions, it was nscertoi ned that o. s lJ or"~

extension of thi s permit uou l d b e considered i:t' de:fini t e arrangement s

hn.t b~ n ~oncluded for a no:I."'l'lro.l n:i.rlinc opera tion t J1e renfter.

4. This s pc c i..1.l ;-,r:r-nnge;nen t >_; nd010 :the iour-pnrty c:..:.·l: -~ .:-- ~o;. _. t-

s r-n-ed "its pl'rposG i n t :1..".t i t on..-:. bl ed t b e G ove r nmr-~ nt to form o. jud grn~~t,,

d1..rrine; "'.!l oxpcrim::m t.c:.l pe r ioa r ~> to ~ - rl:e tJ- ,.; r t~ .o for mnt i on of c. nati ona l I T, T"f__,(_, fA.(' Lirline •. . .. EST . jFF.RI (' IlBIARY - 2 -

Airline would serve a ~nde economic need . It has provided also a vital training opportuni "bJ for many Jarnai cans v-rho were concerned with the policy as Directors and uith the management of t he Airline. On the basis of this experience Government decided to tclm s teps to create an organisation to replace Air Jamaica Ltd. that could be tr~ly said to be the national airline of Jamaica being one uhich is substantially o1med and effectively controlled by Jacaican nationals.

5. A Committee was, therefore, appointed last year by the Govern- ment to study the futu r e of Air JB.!!1aica Ltd , The Col!lJ:lli ttee received and examined proposals from five groups . BOAC did not submit proposals for continued participation. BWIA uas indire ctly related to a joint proposal received from one group. An experienced Airline Consultant was engaged to evaluate t hese proposals and to advise t J1e Committee. He submitted reports on the rna tter. The criteria used by t l e Cor:J.u.1i tt ee in examining the proposals were

(a) that the partner or partners must. be a minority sbarGholder in the Conpany,

(b) that sufficient capita l would be provided to enable the Company to obtain its o ~m aircraft and spare s,

(c) that the partner had sufficient experience in this specialised fie ld to provide expert lmm,rledr?,·e and back-up sorviqes, and

(d) that the participant had a comprehensive sales organisation in all principal travel markets affecting Jamaica.

6. After extensive and de t a iled negotiations t ~c Airline Policy

Committee submitted a Report to tho Govomnont \-rhich subsequently authorised the Coonitteo to enter into further dGtai1ed negotiations v-rith Air on the be..sis of t heir presentation. is wholly 01·mod by t ho GovornHent of Can etda.

7. On the 16th of .1\ugust, 1968, an Agreement -vras signed b o t~mon the Governr.1ent o.nd Air Can.<>.dn and attached a s Appendix i!B" is a copy of too Rends of J,gr<;emont . Tho Agreement is for o. p -.; riod of approxiiDP.t oly 10 years, tha t is, to tho 31st Docornbor, 1979, Some of the important provisions in t ho Agreement a r c: -

( a ) A now private Company, Air Jannicn (1968) Ltd. , is to be f ormed .... ,

- 3 -

be formed 1-ritlbl. n share co.pit:::. l of £400,000 in ordinary sho.res and £3, 083,334 ($7,400,000 u.s.) in redeemable preference shares . The Govurnment of Jamaica is to hold 6a/o of tho ordinc,ry sbP-res end L. ir Cf.'.nndn 4o%. Tho pr8fe rence shares D. ro not to c o. rry dividends or voting rights and r e dcemc.b le by tho Comprny c,t n prenium of 7~b compounded somi- c.nnunlly.

(b) Tho Bank of Novo. Scoti a has agreed to provide n 10 year t ern lonn of up to $18,500,000 U.S. (£7,708,334) to Air J::mc.ica Ltd. bnsod on tho proposed capitalisation of the Company on th e~ s ecurity of its o.ssets (i. e . without tho Govornmon t ' s gJ.o.rantee) . Tlo.e rn te of interest will be 7"i:J6 on ~. ·nts o. ctu:cl l y drm·m on E'. ccount of the loan and ~ % stnndby fe~n 1'-ny amouiJ.t of the 1.mdr::nm agreed loan.

(c) Lir Jamaica Ltd. will is suo o.nd Air Canrcdn will subscribe for e ll rodeclllfl.ble prefe r ence sbaros ns required in the equivnlont of ~P 7,400,000 U.S . o.nd tbe Government of Jo.maica shall purchase from Lir Cano.d::J. in accord['.nce with a Schedule the total r e deea~ blo prefer ence shares issued at the price subscribed E'.nd the premium. Prior to the r epayment of the Bank lonn, the Company ~~y redeem at any time vli t h the approval of the Bank, the preference shares in vlhole or in pnrt. This -vmuld relieve the Gove rnment of the obligEC tion to purch::.se or to hold preference shares to thnt extent. After r e payment of the Bank loan , the Company will be free o.t its o-vm discretion to redeen the Government o•med preference s har 8s so long as profits nre nvailnble. i'Jhen t ho Compnny r e deems the preference sho.res held by tho Government, it will po.y to tho Govern­ ment t-rho.tever premium 1v.:1.s p1'.id by the Gove rnment to /'.. ir Can o.da plus any further pr0nium accruing since tho acquisition by the Government nt the s :'.mo rate of 7~ .

(d) T'1o Governmon t of Jamaica during the period of t he Agroemc:mt has the option to c. cquire o. further 14% of the ordina ry shares of the Company increasing the Govern­ ment 's total shnroholding to 74% of the ordinary share capital of the Compo.ny. Thu price to be po.id vri ll depend on tho then valuo a s disclosed by the Compc.ny's accounts.

(e) It is proposed thE'. t the Coopany will own its o1m fleet of aircraft.

(f) The Bo o.rd of Directors shall consist of 9 mem1)er s - 5 appointed by the Govornmcnt including tho Chf.'. irman and 4 by Air Cnno.da.

(g) Specinl arrangements aro to be made to en~ blo the Conpcny to retnin sufficion t of the funds tl1 E~ t -vmuld normally bo payable as tax to noot the ±nitial heavy Ct'.pi tal comi tmcn ts but norma l Incone To.x linbili ty -vdll, novorthc less, be de:; t erm inod each year and provision included i n th0 Bnlnnce Sheet of the Conpany under the 11 hecdints Speci::c l provision for Income To.x Liability, II and p1'.id as and when thoro o.re funds available surplus to tho needs of the Company. It should be emph?,sized thtc. t Air Canada 1vill get no benefit from o.ny special Income tax concession given to t l'o Company, since Air CEmada' s position will be the same as if the Conpnny had been fully liable to Incono Tax because full tax liability will be deducted from c ccruod profits o.nd held in ~ r eserve o.ccount until paid out . (h) Air •...• (h) Air Cnnuda accepts £1.S a major -conce rn of its world wide I:larkc ting orgrr..:nls::~tiorc , t he; dovelopmen t of tourism to J ama ica .

(i) Tho pre sent personnel of Air Janaicr. Ltd, ;vill receive first considorntion in tho stt,_ffing of Air J a maica (1968) Ltd. subject to tho nc0d to ocintain an efficient operation and the compete ncy of the personnel.

( j) Air Can2.da 1ri 11 nrrD.ngc training fo.c.ili ties in nll arGf'.S, including flight crc1v, t echnioo.l and supc rvisory to ensure t !:1e conpe toncy of Lir J8Dnic2. (1968) Ltd. porson!!.ol and t he pe.rties e.groc tl1 nt to trw grontost extent possible Air Jam.:;.ic

(k) Tho opornting sto.ndr.rds of i~ ir Jnmica (1968) Ltd. will be BL'. intf'. incd a t a level comp[)Iable to tbD. t of Lir Canndo...

(1) A Line HD. intcm nnco Fa cility vrill bo mnintained c.t Kingston for t A J Comprmy' s fleot of aircra ft but all !n<'1 jor overhaul will be done by .:,ir Co..nnda in Cannda until such tine a s it i s e cononic o..nd f oasiblo for Air Jancica to e x ~~nd its own v~ intonanc o f L'- cility to do overhnul3.

.8. On 1;he bas is of travel st::ctistic!J provided, Air Canc.dn

produced a pro for~1 s tn t cnent of eonrec nnd a pplic0t!on of funds and

Bc,lnnce Sheet for EX,. cl, yea r up to t lle: yenr ending on the 31st Docenber,

1979, nnd t hese projections r e fle cting t ho e xpected continued gro~

9. Th-:: nm·r Conpnny wns regis tered on tho 19th of October, 1968, e.nd o..t t ~'o first neo ting t ho Boerd of Directors held on tho 31st

October, 1968, it 11r:::.s decided thnt perni t s should oo sought froB tl>~

United St::c tes Governnent to operate on the JEtBnica/New York and

Jm:wice./~iinmi rou tos. Tho necessary applienti.on to j;l:w: U,5'. Civil

Aeronnutics Board h~s been transnitte d through dipl~~ti~ clli~nnels.

Ln extension has also b8on s~t for t ho other Company, .t.ir Jumaicn

Ltd. , to continue to opere:be un ti 1 tho 31Dt Hnroh, 1969, i.e. beyond t he 19th F ebru~ry, 1969, nnd it is hoped th~t t his will be npprovod ns well c.s the grnnt of t he pcrnit for tho n :wr Conpr.ny to coum.once operntions on t h'.~ 1s t Lpril, 1969. Tho provision of n s 8rvice on other routes in the fut~tr e ~

Air Transport J,grec:.1Emts with countries to t·rhich J... ir Janaica (1968)

Ltd. c o nsidel~s it desirable to opera t o . \

<.J..'C; o t·!;:-- i 110 d. th,: decision to cOB' ~lonco opera. tion <·rill den end on the oconooie ...... - 5- economic justification of such a service.

10. T3y r:hni stry Paper No . 24 dated 20th April, 1968 , the House

r eceived a copy of t he Accounts and Balance Sheet of Air Jamaica Ltd.

for the ll month period ending on the 31st l'Iarch , 196 7. These state-

ment s shoued that the Company made a profit of £86 ,047 for the p;>riod b2fOrG taxation. A separate rhnistry Paper is being l aid '\'lith the

Accounts for the year ending 31st Harch, 1968 . It will bo observed

there from that t he Company made a pr ofit of £ 102 , 411 before t axation,

and tllat the total operati ng revenue of t ho Compru1Y for this year vras

approximately £3 million .

ll. • The House is accordingly invited -

( 1 ) to note tho present position i n the matter of the establishment of an international aj_rline for J BEt'lica,

( 2) to endo rse the action so f ar taken, and

(3) to agree that any necessary expenditure in accordance uith t be provisions of the Agr 8oment 11ith Air Canada set out i n Appendix "B" to this Paper may be i nctU'rod and t1'1at the necessary provisions arc to be included in the Annual Estimates of Expenditure .

/

(N. C. LEFIS ) Hinister of Communic ations and Ho rks . 27th January, 1969. .· APPENDIX "A"

Prior to Independence ti1.e Government alJpointed an Air Services and

Airline Policy Committee comprised of Gov 8rnment Officials to consider

and submit recomnendations on an airline policy for Jamaica on Independence.

The important quc3tion vms whether or not Jamaica should establish its

ovm National Airline. The Committee unanimously recommended that Jamaica

should establish its o~om National Airline and i n arriving at this decision

took into a ccount the ruling i nternational l avr and pr a ctice vrhich is briefly

set out belovT.

It is important to explain t11at international air t rans:port is operated

on an entirely different basis from sea transport. For centuries merchant

ships of all nations move unrestricted from port to port, and permission

is not requi:red for any merchant ship to take passengers and cargo to

other ports in the 1·rorld, excepting of course during war time. In the case

of air transport the opposite is true . For example, a civil air carrier

of Jamaica or of the or of any other country must obtain

the approva l of the US Government or of the Government of any other country

concerned to land passengers and freight in t he or that

country or to take up passengers and freight. Air traffic between any hro

countries, for example, bet 1-men Jamaica and t h e United States belongs to

the tv.ro countries concerned on a reciprocal basis, and, therefore, in the

case of t raffic between Jamaica and t he United States t110 designated air

carriers must be J amaican or Cnited States except that permission from

both countries may bG gr anted to a carrier of non-Jamaican, Non-United

States for what is knovm as fifth freedom traffic. If snch nermission is

granted, i t vrould be given on a concession basis in exchange for some

equivalent right gran ted by the third country sepa r ately to both J amaica

and t he United StatGs, These concessionary tra ffic rights are usually

restricted to a small percentage of the tota l capa city of the aircraft

(fifth freedom rights referred to above) since t he service must be justified

on grounds other than the traffic be tween, in this case , Jamaica and the

United States. In other words , once Jamaica became i ndependent, neither

BOAC nor BVHA hFLv c the right to ca rry tra ffic between Jamaicn and New York

or bot1·1cen Jam2.ica and Niami as a separate service, but e ith8r ~ay do so 1•Ti t!1 t::.e .• . ' " ' - 2 -

I'Tith the permission of both the United Stntes and Jamaice. as part of a

through service, tkt is, -Ne-vr York-Jamaice. and Trinidad-Jamaica-

MitJ,mi, t'1e:::o sorvices br. ing justified houevcr by London-Jamaica or

Trinidad- r1iami through tro.ffic, as t>yo Cl:' sc may be . ( TbGso hm a irlines

have continued to provide service s on those routes as a t emporc.ry concession

from the United States and Jamaica Goverlli1lents pending implemEmtation of a

po,licy in r ospect oft he establishment of Jamaica ' s o1m air cnrr ier, and

conclusion of "the relevant bilateral a ir transport agreements between

the countries concerned.)

It is hoped that with this explanation t he House will appreciate

that in the absence of Jamaica 's own national cnrx·ier exerc ising Jamaican

traffic rights, the situ.a tion 1-rould arise wl1ere traffic behreon Jamaica and

any oversea country vwuld be virtuc..lly limited to the carri c~ r of that

country only, thus resulting in Jamaica having international services with

negligible, if any, effective competition on the various routes . Fares,

schedules, frequencies, etc., Nould therefore r e st almost solely on the

decision of one airline owned in an overseas country and t he Government

carrier l'rill therefore ensure reasonable competition on all routes on

which the GovGrnmcmt thinks it is desirable to do so . There is ample

evidence that any important nir route served by one carrier only has

standards of service inferior to routes where competition exists . Jamaica

could not afford to jeopardise its tourist business by l eaving its main

air routes to be served by one C8.rrier . Tho decision, therefore , to form

a national carrier has been dictated by hard economic necessity, not by

prestigious or status considerations as could have been tho case where

air services are not needed as an adjunct to an important economic activity.

The nGcessity for a national airline having been shown, tl"e

CommitteG next directed its attention as to how this could bo realised.

In its RGport the Committee set out 7 methods by which Jamaica on

Independence could secure its air transport requirements and gave arguments

for and ag2inst tJoe various nl ternati ve s.

The Committee, taking into account Jamnica's financial position,

unanimously rccomnendod the ostablisbmcnt of an airline compnny with small capita l. .. .

INSTITUTE 0 JA 1 f( WEST INDlA I EJ Elt Cf LlBH.AR - 3 -

capital rlhich should enter into an agreement with a large carrier, subject to certain financial safeguards, for the establishment of a

National Airline for Ja1TID.i ca. Government accepted this recommendation and invi tc..tions \lere extended to a l o.rge number of international airlines to submit proposo. ls to-v.rards this objective.