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Government To Nix Open Skies Financial Incentives


May 3, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

The government’s Open Skies Initiative will no longer offer carriers financial incentives in return for their commitment to commence air service from new markets to Puerto Rico for a specified period of time.

The Calderon administration–through the Puerto Rico Tourism Co.–will limit its backing of air service to assuming the cost of up to 50% of advertising and promotional investment designed to market new air services, something very common in the industry which the Puerto Rico government has done for years.

"We will try to develop strategies with emphasis on marketing support instead of subsidy," said Jorge Pesquera, executive director of the Tourism Co. "It has no meaning to start long-term service with financial incentives, instead of first making sure the route is stabilized on a short-term basis through marketing dollars."

Most airports on the U.S. mainland offer marketing support to try to recruit airlines.

Over the past four to five years, some airports have gone even further than that by providing hard dollars, like Puerto Rico has done, to lure carriers to a route.

An airline expert, who spoke on the condition of anonymity, told CARIBBEAN BUSINESS that the financial incentives was what set Puerto Rico apart from many places because that got the airlines’ attention.

"Just giving marketing dollars, puts you in the competitive ballpark," the source said.

Pesquera has not discarded the possibility of providing financial incentives to carriers as a last resort, if it is an essential route not currently serviced in Puerto Rico.

"The program has had a net benefit, despite the fact that it did not achieve some results to get lasting service for carriers to continue on their own after two or three years," the source said. "Open Skies is a creative and controversial program. If the new policy is not to subsidize new routes that is fine, as long as Puerto Rico can continue to give marketing support to the carrier."

Other means of support by the government could be helping the carrier with certain arrangements, such as connecting them with key players like hotels, tour operators, and the Ports Authority, in order to help plan their service.

In 1997, the Open Skies Initiative was successful in luring Continental Airlines to offer daily service from San Juan to Houston. The government granted a guarantee against potential operational losses, up to a break-even point, in return for the carrier’s commitment to maintain the proposed service for a specified period.

After one year, Continental did not incur any losses and the government did not have to pay a cent and Continental continued the service.

"Continental would not have gone into the San Juan market to Houston at that time, without a guarantee," the source said.

In the case of Mexicana de Aviacion, the provided service from San Juan to Mexico, had a rough take off.

"The service started on such short notice, that there was little marketing done by the carrier," the source said. "Puerto Rico gave Mexicana a financial guarantee and marketing dollars, that had to be matched."

In the meantime, Mexicana had entered a code-sharing agreement with United Airlines, where the carrier had to deploy its aircrafts to serve United’s routes.

"The Mexicana-government deal had an unfortunate set of circumstances that reflected more on what was going on with Mexicana rather than the financial incentives," the source concluded.

Finally, the Open Skies financial incentive was responsible for the government of Puerto Rico luring TWA’s significant expansion in 1999. The airline was recently acquired by American Airlines–the dominant carrier on the island–which has already announced it will drop some of TWA’s service.

This Caribbean Business article appears courtesy of Casiano Communications.
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