The Adrian Loveridge Column – Economics of the Airline Subsidy

The decision made by the St. Lucian Government and St. Lucia Tourist Board not to pay Virgin Atlantic Airlines a subsidy quoted at EC$20 million over the next three years has raised a number of questions.

First, there seems to be some doubt if hoteliers and tourism partners were fully involved before the Government bodies made the announcement not to concede to Virgin’s demands.

Secondly, let’s take a look at the economics of the proposed subsidy.

If Virgin continue to operate either version of the Airbus 330 (332 or 333) on this route, with a frequency of three times weekly in the summer months and five flights weekly in the winter from Gatwick to Hewanorra (UVF) that’s a total of between 792- 1,300 seats each week, across all classes or around 50,000 round trip seats per year.

Based on the quoted US$2.5 million annual subsidy, that equates to about US$50 per return, for every passenger based on full aircraft loadings.

If average accommodation stays on St. Lucia are comparable with British visitors to Barbados, those 50,000 seats would translate to around 275,000 occupied room nights based on two persons sharing and 11 night duration.

This is all of course, before you factor in the secondary spending contribution on car rentals, activity, attractions, shopping, restaurants etc., and any taxes they generate.

The reason so far given for the refusal to initially meet Virgin Atlantic’s demands were given as not wanting to set a precedent, where all other airlines could demand the same concessions.

But that, at first appears a little hypocritical and unbalanced after several Caribbean governments, including St. Lucia, have already granted unilateral unique tax exemptions to a limited number of land based tourism operators,

And especially when you consider that according to the St. Lucia Times, during the five years the current Prime Minister was Minister of Tourism the following subsidies were paid (we assume in EC$) to:

American- $11,371,597, British Airways – $5,325,336, Condor – $2,334,243, Excel Freedom Flight – $800,118, Jetblue – $5,180,741, Sun Tours – $462,643 and Virgin Holidays – $8,648,520.

These alone total over $38 million.

Our own Government has received the windfall bonus since October 2018 of the secondary departure tax (Airline Travel and Tourism Development Fee) of US$70 for every air traveller arrival with the single exception of the reduced US$35 payable on flights within CariCom.

If our current stay-over numbers are maintained, that should result in somewhere around US$45-50 million in the first full year of collection.

So, for Barbados, a single airline subsidy of US$2.5 million per annum represents a tiny proportion of overall taxes collected.

And that’s before you count in all the new various room and tourism levies, or the already existing departure tax of US$27.50 per person (US$18 million annually).

Not forgetting the 17.5 per cent VAT (value added tax) levied on air travel and VAT at varying rates on accommodation, restaurants and ancillary services.

Naturally St. Lucia has options.

To increase British Airways direct flights or to persuade Thomas Cook and TUI to step up frequency, and perhaps introduce a direct Manchester service, even if it is operated as a triangle service in tandem with Barbados.

25 comments

  • I doubt the airlines demand payment from countries like the UK and USA. Despite the benefits to the West Indian islands, this basically a shake-down ( a bribe). These islands are at the mercy of the airlines.

    Liked by 2 people

  • Robert MacDonald

    Airlines in major cities must pay for landing slots, in smaller cities the airports or municipal governments may have to guarantee a minimum income or reduced fees to attract and maintain airline service. The only way to prevent this would be if the entire Caricom community united and refused to pay subsidies, however doubt if this would happen. It is the responsibility of each destination to develop a market and increase demand to the point that airlines want to serve the market without being subsidized. I doubt if there is an easy solution as so many factors are involved in operating an airline.

    Liked by 1 person

  • We live in an era where big business ‘squeeze’ small states with the help of their governments, in many cases, and use their muscle to punish those who don’t toe-the-line.

    Because we are a bunch of micro countries with economies smaller than the revenue of these big businesses, our only hope is to unite but history indicates that will never happen …. every PM wants to be king in their pond.

    Our lawyer-politicians pass laws forcing us, the ordinary citizens, to utilize their services for even the most mundane transactions, airlines won’t fly to our countries unless we pay (bribe) them up-front to guarantee they can’t suffer a loss, commercial banks make us pay a fee to withdraw, or deposit, our own money, we pay a tax yearly for the privilege to own a piece of land, a house, drive a car, drink water, live, die….. the list goes on…… let’s just enjoy life… let’s have Crop Over every day of the year!!!!

    Liked by 1 person

  • It would be more intelligent not to pay subsidies and instead to abolish stupid taxes on flights.

    Liked by 1 person

  • Once more the absence of any unified regional policy is exposed. It’s the same with banking.A house divided against itself cannot stand. We can build a million hotels and get all the millions of tourists it will only look good on paper. These islands simply don’t have the resources to extract enough foreign exchange from such an industry.
    And with the cry babies controlling the industry here in Bim, we have to invest more and more in tissues!

    Liked by 1 person

  • We all want to be a large fish in a small pond.

    Like

  • We all want to be a large fish in a small pond.(Quote)

    The morals of a fool. Some people – most decent people – just want to be normal and punch their weight.

    Like

  • “robert lucas August 12, 2019 6:16 AM

    I doubt the airlines demand payment from countries like the UK and USA. Despite the benefits to the West Indian islands, this basically a shake-down ( a bribe). These islands are at the mercy of the airlines.”

    Yes indeed we have always been at the mercy of theses carriers some of whom despite benefitting from the subsidy refuse to pay the relevant airport fees some on the obnoxious grounds that they were doing us a favour by bringing passengers to what they regard behind our backs as mosquito infested banana republics..However, these multinational corporations would continue to bully and ride roughshod over us unless the affected countries take a united stand against these mercenary type practices. i am still at a loss to understand why travel from the Caribbean to the UK and USA on average cost more than travel from those countries to Barbados given that the service in all respects is the same. i also feel that at this stage in our development we should enjoy the same visa free entry arrangements for travel to the USA extend to citizens of the USA when they visit here. I do not believe that in these days we get any more tourists from the USA than we get from the UK, Canada and Germany for example with whom we have reciprocal arrangements for entry to to those countries. After all, the citizens of the USA are no better than us. We have to reclaim our sovereignty if we are to be truly friends of all and satellites none; strict guardians of our heritage;firm craftsmen of our fate.

    Like

  • The answer is simple. If a country requires visiting Barbadians to have visas, then Barbados should demand that their citizens also have visas. Failure to act as one is a failure of CARICOM.
    From the UK, the so-called air passenger duty, introduced by Gordon Brown, costs more for those travelling from the UK to the Caribbean (3000 miles) than to Los Angeles (6000 miles).

    Liked by 1 person

  • The holder of a Caricom passport is guaranteed six month entry.

    Like

  • “David August 12, 2019 11:03 AM

    The holder of a Caricom passport is guaranteed six month entry’

    Just for clarity – to the USA without a visa?

    Liked by 1 person

  • @Charles Skeete

    Travel to CSME countries.

    Like

  • Vincent Codrington

    I think we are beginning to understand the game. There is no free market economy that is unsubsidized by the tax payers. We weave such a tangled web that we do not recognize which comes first;the chicken or the egg. Mixed metaphors intended.

    Like

  • @ Vincent
    The advocates of a ‘free market’ conveniently forget when they get state support. Farmers are the biggest culprits, but what about tax waivers, companies that use VAT and national insurance as cash flow, government contracts, the courts to enforce contracts. etc

    Liked by 1 person

  • When you really ‘sit back’ and think about it…. this is indeed a corrupt world…… every country, company, and most money-hungry individuals looking out for themselves…… ‘cooperation’ comes with ‘win-win’ agreements, all at the expense of taxpayers ie: the citizens ….. you rub my back & I will rub your back… and come the end of each term, we gleefully go out and vote them back in or welcome in another bunch of the same…… gotta laugh!!

    Like

  • Donks Gripe and Josh

    Subject to correction isn’t this one of the islands refusing to pay a subsidy for Liat flights ? Shareholder governments long ago should have stopped Liat flying to places refusing to pay a share subsidy for flights.

    Not sure of Loveridge’s math isn’t Virgin asking for the same thing.

    Interesting to see what happens if Virgin stops flying to that island. Virgin is not Liat or Caribbean Star its a big player that can hurt a country’s economy. Wont be a surprise after all the bluster the government caves in.

    Does Barbados pay subsidies to airlines cant see how they can avoid doing so if they want air services that bring critical mass.

    Every year we hear the same broken record from the Central Bank governor on big increases in tourist arrivals which does not translate to growth of the economy. Makes you wonder why bother.

    Liked by 1 person

  • Liked by 1 person

    “David August 12, 2019 11:29 AM

    @Charles Skeete

    Travel to CSME countries.”

    i was saying that it was time for us to seek reciprocal visa arrangements with the USA if we are serious about our Independence. At this stage in our life as a nation; our citizens should be enjoying the same rights of entry into the USA as the citizens of the USA have to enter Barbados. If we continue to accept a situation where we have to endure stress and pay an exorbitant mercenary like fee to obtain a visa to travel to the USA whereas their citizens have an unfettered right to enter our country as they like then they must feel that they are better than us. It is time to stop this double standard in our dealings with the USA when we do not have to obtain visas to go toplaceslike Germany and the United Kingdom and Cuba.

    Like

  • “Subject to correction isn’t this one of the islands refusing to pay a subsidy for Liat flights ? Shareholder governments long ago should have stopped Liat flying to places refusing to pay a share subsidy for flights.”

    Donks Gripe & Gosh

    It is St. Lucia……

    ………. the same island whose Kenny Anthony led administration, a few years ago, refused to subsidize LIAT in preference of paying American Airlines a US$300,000 per month subsidy to land at Hewanorra International Airport (UVF).

    Like

  • fortyacresandamule

    When it’s not airline seat subsidy , it’s the cruise liners playing the divide and conquer game over port fees. This is the danger of developing a tourism intensified model economy. Not to mention our own grandeur of illusion of so called independent nations.

    Like

  • Not to mention the foreign exchange leakage and wash pan of concessions the political directorate feels compelled to dish out in the race to the bottom.

    Like

  • fortyacresandamule

    @David. Amen to that.

    Like

  • What happen here is quite simple. The PM of St Lucia grossly overplayed his hand and got called out on it.

    Here you are in the process of building a new airport and you are going to jeprodise arrivals by refusing to pay one of you major carriers this amount. Listen come up here and let MIA teach you how to tax travellers! We dam good at it too.

    All you had to do if you thought he was asking too much, is increase the departure tax or create a new airport tax and give it a fancy name. You would not of had to look for all the funds and could of collected say 50 percent of the revenue through this tax. $10 USD more on departure would not stop people from visiting St Lucia. Trust me we know bout tax up here and how to invent new ones!

    Then again I ain t got no sympathy for you, because even though you benefit from LIAT you refuse to contribute to it. What happen Mr PM you got something against airlines?

    Anyhow Barbados and Antigua thank you for your decision and we give you our promise we will pick up your business as a good caricom brother.

    Next time you want to play John Wayne careful who you shoot at!

    Like

  • This is a very poorly thought out article. Any island that starts subsidising one airline from the same origin over another opens a can of worms that cannot be resealed.

    Like

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