78600 Air Transport in the OECS: Flying Solo? June 2013 1 Authors: This material has been prepared by Heinrich C. Bofinger and Florencia Millan Placci, under the supervision of Cecilia Briceño-Garmendia, all members of the Economics Team of the World Bank Sustainable Development Department of the Latin America and the Caribbean Region of the World Bank. The content draws heavily from the report Air Transport in the OECS: Subsidies and Connectivity (2013) first phase of 3-part Caribbean Growth Forum study on regional connectivity. The Caribbean Knowledge Series is an occasional series that presents World Bank knowledge in an accessible format. It is meant to assist knowledge sharing across the region and trigger policy dialogue on topics relevant for the Caribbean This note was prepared to support the participatory policy dialogue in the context of the Caribbean Growth Forum (CGF). The CGF is an initiative facilitated by the Compete Caribbean Program, the Inter-American Development Bank, the World Bank and the Caribbean Development Bank, with the support of the Canadian International Development Agency, the United Kingdom’s Agency for International Development, CARICOM Secretariat, the University of the West Indies, the European Union and Caribbean Export. It aims to facilitate a multi-stakeholder dialogue to identify practical solutions for the growth challenge in the Caribbean. To learn more about the CGF methodology and progress in each Caribbean country visit: http://caribgrowth.competecaribbean.org/ Disclaimer: The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Executive Directors of the International Bank for Reconstruction and Development / The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Visit the entire “Caribbean Knowledge Series� collection at: http://worldbank.org/lac Design & Concept by Room Grupo Creativo | www.room.com.do Cover Photo: World Bank Photo Library 2 3 Air Transport in the OECS: Flying Solo? OECS countries face two critical barriers for remained stable at about 1 million per year (Figure developing their infrastructure and connectivity: 1a, solid line). This is in contrast to what is observed their conditions of island states and their in the Caribbean main destinations like Jamaica, geographic location in the Caribbean. Exchanges Bahamas, and Aruba1, where international tourism of goods and services with the rest of the world is dominated by stay-over visitors. are limited to air and maritime transport modes, logistics costs are generally more expensive, This difference has important economic and they face a disproportionate risk to natural implications, as cruise ship visitors do not offer disasters. This all translates in a cost premium for the same revenue opportunities as stay-over developing infrastructure, and higher transport resort visitors do. Passengers of a cruise ship services. Moreover, the OECS islands are small consume by going on local excursions, and going states characterized by small markets sizes and this shopping at the country being visited. Stay-over imposes an important limitation for developing visitors spend much more on hotels, restaurants, large infrastructure assets. The long life cycles excursions, transportation, and shopping per stay. that characterize these types of assets and the It should not come as a surprise that between 2000 important upfront capital investments required– and 2011, while the number of international cruise- ever greater if climate resilient-- make them suited ship passengers increased about 66 percent (40 for larger markets in which it is possible to reap the percent if we include all international visitors) the benefits of the economies of scale proper of such income generated by all passengers measured investments. In the case of OECS countries, this can in terms of traceable spending increased only only be developed through regional cooperation. about 25 percent from approximately US$95 Moreover, with the collapse of agricultural exports billion in 2000 to US$1,180 million in 2011 (Figure in the Caribbean in recent decades, the tourism 1b). Anecdotal evidence indicates that average sector has emerged as a key economic pillar, per head spending of visitors arriving by cruise contributing in 2011, up to 12 percent of all jobs ship was around US$ 50-120 during the global and about 14 percent of the region’s GDP (WTTC, economic downturn, whereas stay-over visitors 2012). In the case of the OECS countries, in their typically spend more than US$ 1,000. condition of island states, tourism and air transport are invariably intertwined. This note will take a look to the air transport sector and the implications for the tourism sector. Air Transport: A Vital Channel for the Tourism Industry At the moment, international tourist arrivals in the OECS are dominated by cruise visitors, which are between 2.5 and 3 times more numerous than stay-over visitors. As a matter of fact, the growth and development of tourism throughout 2000- 2011 is largely attributable to the increase in cruise- ship passengers (Figure 1a, dashed line). During the same period, the numbers of stay-over visitors 1 The leaders are Dominican Republic, with 4.306 million arrivals during 2011, Cuba, with 2.688 million, Jamaica with 1.952 million, Bahamas with 1.344 million, Aruba with 871 thousand and Barbados with 568 thousand. Together, these countries host 56% of the tourists that arrive internationally to the Caribbean. The first 3 countries, Dominican Republic, Cuba, and Jamaica account for 43% of the tourist arrivals in 2011 (UNWTO Tourism Highlights, 2012 Edition). 4 Figure 1: Eastern Caribbean Countries International Tourism (a) Stay-over and cruise ship passengers (b) Total visitor expenditure The fact that OECS international tourism is to longer-distance destinations. The inter-island currently tilted towards cruise-ship passengers system is served predominantly by one carrier, creates an opportunity waiting to be grabbed, and LIAT. A separate system links the OECS region with has important implications for air connectivity. the origin of its arriving tourists and it is served by Even with a relatively small share of international international (no-OECS) carriers. The two systems passengers in stay over (one third of total in 2011), are currently poorly interlinked. the overall contribution of tourism to the economy is quite significant, ranging from 24 percent in The inter-island system is wrought with Grenada to 74 percent in Antigua and Barbuda inefficiencies and mixed connectivity. The (WTTC, 2012); much higher than the 14-16 percent Inter-island air service operates in a challenging found in leading Caribbean destinations. If environment in which for some pairs of islands and when stay-over trends improve, the local there is barely a flight connection in one or two economies can benefit from higher demand from days. As a way of example, Table 1 shows how items typically consumed by stay-over tourists such difficult it might be to visit St. Kitts from another as traditional crops (including mango, pineapple, neighboring OECS country. It can take 4-9 hours and papaya); fresh produce, fish and seafood, or even overnight, and up to two connections. services, including those provided at yachts and Similar case is observed for St. Vincent. This marinas, hotel receipts linked to services and situation represents an enormous cost for inter- goods; among other things. The main way for island connectivity but it also creates enormous higher-revenue tourists to arrive is through airlift, hurdles for international tourism. The main inter- making air transport the vital pipeline for hotel island carrier LIAT currently does not interline with arrivals. Focusing on increasing stay-over tourism any of the other larger carriers, so it cannot really therefore implies tackling air connectivity of the contribute to the efficient distribution of tourists OECS islands within themselves and with the rest amongst the islands. Moreover, LIAT’s reliability of the world as a main biding constrain. in recent years is being challenged by its inability to recover costs2. This is having an important Given the physical infrastructure layout, many impact on maintenance. Schedule integrity is of the islands rely on other countries and intra- often compromised due to the breakdown of regional traffic to connect with the rest of the equipment. In practice this means that given that world. The OECS islands are connected by two LIAT is a de facto monopoly many OECS islands types of air transport systems, one linking islands are not only poorly connected but the existing among themselves, and another connecting them connections work erratically and unpredictably. 2 As reported in interviews by some LIAT officials, as many as 39 out of 112 daily flights are not profitable. 5 Table 1: The table below shows all attempts in finding connections, with their pricing in US$, for a travel date of December 5, 2012, which is a Wednesday. Origin Destination   Antigua   Dominica   Grenada   Nevis   St.  Kitts   St.  Lucia   St.  Vincent     128.10  to  188.60   337.30  via   178.80  direct,  only  1   144.70  direct,  only  6:30   Direct:  159.37  at  5:30  am   252.80,  either  via   direct  depending  on   Barbados,  6  ½   connection  in  the  afternoon,  ½   am  morning  flights   (1  hour  5  minutes),  via   Barbados  or  Trinidad,   time  of  day,  40   hours  travel  time   hour   (11:30  flight  booked   Barbados:  239.47  at  6:30   mostly  4  to  5  hour  trip,   minutes   available  only!  (All   out),  ½  hour   am,  arriving  15:20  pm   several  connections   Antigua other  connections   throughout  the  day   sold  out)   126.33  to  202.65     251.68  via   $152.98  to  $162.65,  via   180.15  via  Antigua,  on   160.82  via  Barbados  then   170.13  via  Barbados,   direct,  depending  on   Barbados,  2   Antigua,  only  one  flight  from   the  6th,  5  ½  hour  travel   Saint  Vincent,  $170.52  via   only  early  morning   time  of  day,  40  minutes   connections,  only   Antigua  to  Nevis  in  the   time  only  late   Antigua.  Travel  time  2   flights  still  available,   one  (morning)   afternoon,  i.e.  morning  flight   afternoon/evening   hours  40  minutes  on   travel  time  3  hours  10   Dominica available,    5  ½   has  over  6  hour  layover  in   available,  morning   Antigua  connection,  6   minutes  to  6  hours  50   hours  travel  time   Antigua),  shortest  2  hours   connection  sold  out.   hours  +  on  the  others   minutes   338.43  via  Barbados.   261.43  via  Barbados,     290.93  via  Barbados,  only   310.93  via  Barbados   189.80  via  Barbados,  only   159.93  to  183.43,   294.93  via  Trinidad,   only  afternoon   afternoon  connection  still   and  then  Antigua  on   noon  connection  still   Barbados  or  Trinidad,   shortest  travel  time  3   connection  available,   available,  travel  time  5  hours.   the  7th,  only  morning   available,  3  hours  5   Barbados  being  the   hours  40  minutes   shortest  travel  time   flight  at  6:30,  shortest   minutes  travel  time   most  expensive,   Grenada 2  hours  40  minutes   travel  time  5  hours  20   shortest  travel  time  2   minutes.   hours  5  minutes   175.40  Departing  on   156.20  via  Antigua,   279.80  via  Antigua     128.10  via  Antigua   239.57  via  Antigua,  only  on   259.40  via  Antigua   the  12th,  not  the  5th,  30   only  on  the  12th,  2   then  Barbados,   overnight  connection,   the  12th,  overnight   then  Barbados,   minutes   hours  10  minutes,   only  on  the  12th,  6   on  the  12th.   connection   shortest  travel  time  5   6 Nevis only  13:35  departure   hours.   hours  5  minutes.   time   159.60  direct,  30   210.70  via  Antigua,   No  Price   140.10  via  Antigua  on  the  6th,     234.77  via  Antigua  on  the   $279.80,  via  Antigua   minutes,  21:55  only   only  on  the  14th,  7   overnight  connection   6th,  overnight  layover  only   and  then  Barbados,   hours  5  minutes   available  at  this  point   only  on  the  14th,  travel   time  9  hours  10   St. Kitts minutes   339.10  via  Barbados   237.47  via  Barbados   234.10  via   $304.10,  via  Antigua,  only  on   304.10  via  Antigua  or     217.05  via  Barbados,   (there  is  a  direct  flight,   (only  one  late   Barbados,  only  on   the  7th,  9  hours  35  minutes   Barbados,  on  the  6th,  4   overnight  layover,  on   sold  out),  shortest  time   afternoon   the  7th.  Stopover   hours  15  minutes   the  6th   3  hours  30  minutes   connection  still   in  Canouan,  4   shortest  travel  time     St. Lucia available),  2  hours  50   hours  10  minutes   minutes   244.15  to  274.54,   166.75  via  Barbados,   130.30  to  147.10,   257.95  via  Barbados  then   242.90  via  Barbados   101.87  or  120.77,  direct,  30     cheaper  has  one   2  hours  30  minutes   morning  and   Antigua,  on  the  6th,  overnight   then  Antigua,  on  the   minutes   connection  in   shortest  travel  time,   evening  direct,   connections  only   6th,  9  hours  20  minutes   Barbados,  more   2  morning  and  one   other  via  Trinidad   expensive  is  SVD-­�SLU-­� late  afternoon   to  Barbados,  35   BGI-­�ANU,  shortest   connection   minutes   St. Vincent travel  time  3  hours  5   minutes     Source: Compiled attempted reservations by author on LIAT’s web site. The lack of reliability of the inter-island air system --for now dominated by a monopoly that services creates incentives for islands to invest in has reached capacity— leads countries to think their own air infrastructure rather than cooperate individually and invest by themselves in expensive to develop a functional hub-and-spoke system of infrastructure that could otherwise be designed inter-island connectivity. In the absence of good more efficiently with a regional dimension in mind. air service connectivity, the system connecting Moreover, once a country has locked-in expensive OECS with the rest of the world becomes highly long-life assets such as airports, ensuring that dependent on the availability of the individual tourism, as the key engine of the economy, takes off island infrastructure to accommodate large becomes even more critical in order to guarantee aircrafts. In general, the OECS region has two the economic returns of such investments. This important hubs: Antigua in the north, and Barbados situation creates additional incentives for OECS in the south (figure 2). Trinidad also serves as a countries to engage in interventions that aim to connection point. However, four of the six OECS secure each individual country a minimum flow islands under review –Antigua, Grenada, St. Kitts of tourists. Bilateral agreements and subsidies to and Nevis, and St. Lucia— also have runways that airliners, in particular, have become a common are capable of handling wide-body aircraft. In the practice. current structure of routes, this means that each of them receives their own direct or semi-direct long- Aiming to support a sector that is essential for their distance flights brining passengers to their island economies and develop a secure flow of tourist, instead of relying on the inter-island connectivity some of the OECS countries provide subsidies system anchored in two hubs (Figure 3).Other to air transportation. Throughout the Caribbean, OECS countries are starting to follow this model. even in highly successful resort destinations such as Jamaica, major airlines negotiate with island OECS islands are increasingly locking themselves governments agreements that protect them in the in over-dimensioned infrastructure investments case of a downturn. The agreements are generally to bypass a dysfunctional inter-island system. of two types: Marketing Support Agreements St. Vincent is building a brand new greenfield (MSA) and Minimum Revenue Guarantees (MRGs). airport with a 9,000 foot runway and a 1.4 million In MSAs a country makes funds available to an passenger annual capacity terminal hoping to airline for marketing purposes. In the case of support its tourism development in the longer MRGs, a government guarantees that if a specified term. The expected opening will be in 2014, with load factor or volume over a given period is not the majority of the earthworks already completed. achieved it will pay up (i.e. “take delivery�) the Dominica is also considering options for a new unwanted capacity being provided. In 2012 the airport or extending its main runway into the ocean. net fiscal effect of these agreements amounts to Additional infrastructure investments to increase between 0.12 and 0.2 percent of GDP, or close to terminal capacity also took place. Both Grenada 0.6-1 percent of tax revenues, and 0.1-0.3 percent and St. Lucia have considerable excess capacity of public debt. Individual ministries see these in their terminals (with utilization rates below 50 agreements as expensive items on their budgets. percent), significantly raising their overheads. St. Also, the overall question can be raised as to Vincent had less than 200,000 passengers in 2012, who is really paying for these benefits, which are yet the new terminal being built will have a capacity ultimately an indirect subsidy to the hotel industry of 1.4 million passengers. that captures stay-over visitors. Since funding for most of these agreements comes from overall tax This ‘decentralized’ investment decision making revenues, the agreements are financed with funds process is creating a public sector conundrum: outside the tourism sector that could arguably be to unlock the tourism sector, OECS countries allocated to other uses including education, health need reliable air connectivity with the rest of the or any other social cause. world that in the absence of a reliable inter-island 7 Figure 2: Traffic between the OECS islands in 2012 as measured in seat capacities. Source: Author’s calculations based on data from Diio. Note: The thickness of the lines represents the relative size of the route in seats compared to the others. Antigua, Barbados, and Trinidad serve as hubs. The thickness of the lines represents the overall relative seat capacity). 8 Figure 3: The international routes in 2012 for the OECS Source: Author’s calculations based on data from Diio. Note: Thickness of the lines representing the relative capacity in seats 9 Conclusions The OECS has a high concentration of international airlines. It also underscores the importance of airports within short distances. Most of the islands establishing a more efficient hub-and-spokes are receiving international tourists directly from system for treating tourist arrivals. A system of two their countries of origin instead of building a hub- hubs, one in the north (Jamaica perhaps) and one and-spoke system that would optimize the regional in the south (Barbados or Trinidad), was suggested investment in expensive air transport infrastructure. as a possible solution in recent meetings with the The individual as opposed to coordinated decision Caribbean Hotel and Tourism Association. This making not only makes infrastructure investment would pool most arriving passengers into more more expensive and inefficient for the region sustainable load factors from long-haul flights, but also creates enormous pressures for each and could also create the density needed to make government to secure a share of the tourist market the inter-island transport system more sustainable, individually. To neutralize the unpredictability with benefits spilling over beyond tourism per of those tourism streams, and therefore of the se. A hub system would most likely provide more load factors on the aircraft delivering the service, flexibility in matching supply with demand during OECS countries have entered into individualized high as well as low season, when inter-island agreements with airlines in order to ensure business and Government travel drive the demand. connectivity. The cost of these agreements can be Coordination is not an easy feat, but if the OECS up to 1 percent of the GDP, but the political tag is wants to go forward with a regional policy it will significantly higher as subsidies are perceived as be necessary for the islands to see themselves unnecessary and expensive items in the budget. less in competition with one another, and more in Moreover, the negotiation of these agreements need for cooperation in overcoming the small size raises the question of how much the OECS could of their economies and their isolation. It is time for gain by acting as one block in negotiating with OECS countries to stop flying solo. 10 11 worldbank.org/lac 12