Following the decision of the Administrative Court of Papeete of October 16, 2018, French Polynesia must issue an air operator certificate (AOC) to Islands Airline. Find the analysis of our expert Sylvain PETIT in this post.
Opening up domestic air transport in French Polynesia to competition : an opportunity to seize and new challenges for local authorities
The Administrative Court of Papeete has now agreed with Islands Airline on its request for an air operator certificate as domestic carrier. This request had previously been denied by the Government of French Polynesia. The position of the locals authorities can be explained by Air Tahiti's business model[1].
This agreement is very positive for the tourism sector, although it is regrettable that it has been imposed by the jurisdiction.
However, reforms are now expected to find a solution to the funding of non-profitable airlines ....
An opportunity for tourism
After several difficult years in terms of tourism development, economic indicators are now positive. The arrivals of French Bee and United Airlines illustrate the renewed interest for tourism in Tahiti and its islands.
We can expect good numbers in 2018 in terms of tourism development (with an increase in arrivals of about 7%). This future competition will lead to a new drop in air fares (after the one observed in international air transport) and consequently, we can hope that this additional tourism development will be able to be more widely spread to the other islands than just Tahiti and Moorea.
With an increase in future accommodation capacity, investment in infrastructure and in the reception of tourists and excursionists, we can hope to have a favourable trajectory in the mid-term.
However, this encouraging news should not however hide an urgent need for an economic change that would completely rethink the economic pattern of the domestic air sector.
What reforms will be implemented in the future?
Air Tahiti must, through its compensation system, ensure inter-island connections in French Polynesia, via a kind of public service delegation. In other words, this company provides air services to the islands, regardless of the profitability of the lines in question.
Consequently, Air Tahiti applies high fares on routes with high demand (Tahiti - Bora Bora, for example) in order to compensate for deficits on other routes. The air strategy is global and not very segmented by line.
This economic scheme is logical given the geographical configuration of French Polynesia and the desire of the public powers to ensure "territorial continuation". But it presupposes a monopoly structure that can manage this equalization.
However, we are going to move to a duopoly configuration (Air Tahiti - Islands Airline), which undermines this scheme.
The arrival of a new competitor, solely on profitable routes (because it does not "suffer" from this obligation to serve non-profitable routes), will force Air Tahiti to lower its prices on these same routes in order not to lose a disproportionate number of market shares.
This means that, mechanically, it will lose financial flexibility to cope with losses on other lines (where there is no competition).
Some say that Air Tahiti will have to increase its fares on these " non-profitable " routes or even close these routes. This result would be contrary to the territorial continuation that must be achieved between the islands of French Polynesia.
There is a risk of a rise in development disparities between the islands and archipelagoes.
Therefore, it has become urgent for local authorities to address this issue, for example by distinguishing clearly the profitable and non-profitable lines.
In this way, a natural monopoly, which operates through subsidies, could provide this public service on unprofitable lines. And these subsidies would be financed by tax revenues from economic activity on profitable lines.
This would bring us closer to an economic model similar to the rail sector in some European countries. There are solutions but we must take the time to consider them.
However, we are now running out of time with this administrative court decision.
Sylvain Petit
Lecturer in Economics
Pedagogical director of the Bachelor in Tourism and Hospitality Management at the University of French Polynesia
1] And also by the apparently sulphurous reputation of Islands Airline owner Bill Ravel. But, voluntarily, this aspect is not addressed in this post.
