The Ministry of Finance and Economic Management (MFEM) has released a report by Covec Economics which analyses the contracts with Air New Zealand that provide long-haul flights to and from Los Angeles and Sydney.
The contracts expire in October 2014, and MFEM is currently seeking expressions of interest from international carriers seeking to offer services for a period of four years from November 2014 through to November 2018.
The Covec report’s ‘Looking Forward’ section discusses issues which it says government may want to consider for future underwritten contracts, as well as other options to stimulate the tourism sector.
“The government guarantees that Air New Zealand will cover all costs of the LAX-RARO service, and will make a 10 per cent return on costs of the SYD-RAR service,” reads the report.
Covec researchers say the current arrangement does not provide Air New Zealand with substantial incentive to reduce costs and maximise revenues.
The result of the arrangement sees the Cook Islands government on the hook to maintain profitability for the airline with regards to the two underwritten routes, the researchers say.
“In addition, the underwrite agreements expose the government to risk as the annual amount of the underwrite payment is open-ended and affected by factors beyond its control, such as aviation fuel prices.”
The above scenario occurred in fiscal 2012-13 when the budget estimate for the underwrite was increased by $1.1 million from an estimated $12.5 million due to a projected rise in fuel costs, and between 2012 and 2013, the actual cost for LAX-RARO is projected to increase by roughly $1.4 million.
Researchers say an alternative approach that could alleviate these vulnerabilities is to negotiate a “fixed annual underwrite payment in advance” – locking in costs for a specified number of years - in addition to the current government initiative of seeking expressions of interest from other airlines.
Competition, say the researchers, could reduce the cost of the underwrites.
The report also outlines additional methods to stimulate tourism, apart from underwriting long haul air service contracts.
“The travel of all passengers on the underwritten flights is subsidised, regardless of whether or not they would have visited the Cook Islands without the subsidy,” reads the report. “The underwrite agreements are therefore relatively blunt tools to stimulate tourism demand to the Cook Islands.”
Alternatively, Covec says the government could subsidise individual airfares, which would in effect “target the subsidies at visitors who would not otherwise visit the Cook Islands”.
Focusing on the SYD-RARO route, researchers estimate that each visitor generated by the underwritten contracts costs the government $2,000.
With a “forward-looking analysis” taking into account future trends in traveller behaviour, government could optimise funds meant to boost tourism.
“How does the per visitor cost compare to alternatives such as marketing or investment in tourism infrastructure within the Cook Islands?” researchers ask.