Public/Private Risk-Sharing in Air Service Provision

Abstract

The paper identifies and theories future trends in public/private risk-sharing agreements, as a form of public subsidy, in thin market air service provision. Using a Pacific Islands example, the paper details the economic and policy implications of such agreements. In November 2008, the Cook Islands reached a risk-sharing agreement (with a reported value of NZ\$5 million) with Air New Zealand that secured the continuation of a weekly flight from Los Angeles (LAX) to Rarotonga (RAR). By buying the option directly from the producer, the Cook Islands Government has secured access via public subsidy to ensure future visitation. Supply-side subsidisation of air service provision is not uncommon. Existing models in the United States, Europe and Australia highlight the importance of connectivity of destinations for overall economic growth. The paper makes use of policy analysis to dissect the stated value of securing air access for several Pacific Island nations, including the Cook Islands, Samoa and Tonga. The paper concludes by assessing future trends of direct government subsidisation of air services for autochthonous destinations given increasing stress on airline unit costs.

Keywords: risk sharing, air transport, airlines, subsidy

JEL Classification: R48