Cost sharing in thin-route air service

provision
David Timothy Duval and Niven Winchester
 Duval, D.T. and
Winchester, N.

Working paper
available soon on
SSRN
Antecedents of risk sharing

Economics of air service subsidies

Example: Cook Islands

Conditions and implications

risk aversion
FOCUS 2009

CAPACITY CHANGES AND REGIONAL PROFITABILITY

$3.5bn loss

DO
$2.9bn loss

W
N
EUROPE

9.
NORTH AMERICA Again set to be heaviest

0%
Expected to cut losses to hit in 2010 with losses of

DOWN 4.9%
$2 billion in 2010 as $2.5 billion, hindered by
capacity adjustments 3 slow economic recovery
increase pricing power

DO
%
1.0

W
%
.4

N
1 WN 12

7.
DO

7%
UP
$3.4bn loss
%
UP 10.4
3.3 % 5 6
$0.1bn loss ASIA PACIFIC
WN
China and India will lead
DO

AFRICA
Economies relatively $1.2bn loss strong economic recovery
helping cut losses to

.1%
DOWN unscathed in 2009 and MIDDLE EAST $700 million in 2010
0.2%

13
expected to post a similar Strong long-haul
2 size loss in 2010 connection business

UP
4 forecast to help cut losses
to $300 million in 2010

REPORT $0.1bn profit

GRAHAM DUNN
IN LONDON
LATIN AMERICA
Strong local economies
helped make it the only

2009 IN
profitable region in 2009.
Set for a repeat in 2010

CAPACITY SHIFTS also down in most markets from Europe.

PIECES
No region was spared economic pain in
2009 but some markets fared better than
others and see better prospects for 2010
The map above illustrates how capacity has
been cut over the last 12 months in virtually
1 NORTH AMERICA all regions but the Middle East. The figures
2 LATIN AMERICA represent the capacity, measured in ASKs
3 WESTERN EUROPE and sourced from the Innovata database,
4 AFRICA
5 MIDDLE EAST between different regions for the whole of
6 ASIA 2009 versus 2008. The cuts are most
evident from North America, where carriers
to some extent pre-empted the economic
crisis with their own capacity cuts last
winter. Capacity offered between North
America and Europe, for example, has been
9% lower this year than in 2008 – the year
when the much heralded EU-US Open Skies
was introduced. Year--on-year capacity is
But despite the economic difficulties facing
the sector, there remained double digit
capacity increases on routes connecting the
Middle East, reflecting the continued growth
of the major Gulf carriers.
The 2009 headline loss figures for each
region and forecast projections contained in
the text are based on IATA’s most recent
industry forecast. This shows total net
losses for the airline sector of $11 billion in
2009. European carriers are expected to
incur the heaviest losses of any region in
both 2009 and 2010, while Latin America is
the only region IATA expects to be profitable
in either year.

24 | Airline Business | January 2010 flightglobal.com/ab flightglobal.com/ab January 2010 | Airline Business | 25
$9.4 billion
$5.6
$2.8
Projected industry losses in 2010
2009
(as(as
at at
December
March 2010)
2009)
 RASK / CASK margins

Price of carbon, fuel

Access and aeropolitics

Branding

Photo credit: Bob Leask

Price

p0

0
AC

c0

MR D

q0 Quantity

(a) no subsidy
Price

p0

0
AC

1
AC
c0

MR D

q0 Quantity

(b) lump-sum subsidy

Price

p0

p2
0
AC

2
AC
c0

c2

MR D

q0 q2 Quantity

(c) per-unit subsidy

Price

p0

p3
0
AC

p4 3
AC
c0

c3
MR D

q0 q3 q4 Quantity

(d) per-unit subsidy with positive profits

AKL RAR LAX

NZ14
NZ19
Table 1: Arrivals by Country of Residence - Cook Islands
Year New Zealand United States Australia Total
2003 30 921 7 630 11 470 78 328
2004 38 755 6 026 11 850 83 333
2005 49 088 4 434 11 313 88 405
2006 51 841 5 476 11 470 92 351
2007 58 931 4 343 12 445 97 077
The Cook Islands – NZ underwrite
Accept the uncertainty of access and connectivity by
disengaging the existing risk-sharing agreement (the
counterfactual);

Re-engage with a risk-sharing agreement, subject to

negotiation of amounts and conditions (the factual);

Seek other access options via other carriers.

SYD/BNE AKL RAR
 riskaversion
risk
cost share
share
implications
Competitive landscape (more or less inclined to
develop markets/routes/network?)

Market form – what place for competition and

response?

Dynamics between airlines / airports / States

Planning horizons and network inflexibility

destination strategy
 Indirect
subsidies
for tourism
Marooned
services?
protectionism
Articles 11 and 15
non-discrimination
more questions
than answers...
Cost sharing in thin-route air service
provision
David Timothy Duval and Niven Winchester