The Public ROI on Minimum Revenue Guarantees

Any airline passenger in the Caribbean will typically grieve over the cost of a plane ticket. The regional airline industry is beset with red tape and regulation, with lots of costs passed on to the passengers. But there’s another angle in this calculation: the relationship between governments and the airline industry surrounding Minimum Revenue Guarantees (MRGs).

An understanding of MRGs is essential to comprehending the dynamics of the regional airline industry where opportunities exist for an optimisation in business that’s a win-win for all, and where existing bad deals need to be reappraised. Recognising where stakeholders can go from here, first requires an appreciation of where we are now.

Minimum revenue guarantees are not inherent to the aviation industry but are seen more broadly in various public-private partnership arrangements. According to the IMF: PPPs create contingent liabilities. For example, these guarantees impose significant fiscal risks as governments often face unforeseen budget expenses to compensate their private partner, as in the case of the Barbados solid waste management facility that came with a minimum revenue guarantee equivalent to 5 per cent of GDP.

Minimum Revenue Guarantees Explained

At their simplest, MRGs promise an airline that any shortfall in its minimum profit will be made up. So, if an airline expects to make a minimum amount of dollars in a certain period but falls short of its target, another party (such as a government in the host destination) will step in to bridge the divide.

Advocates argue that the volatility of the airline industry — where even prestige carriers can bounce from soaring highs to crushing losses each quarter — means the expansion of a carrier into a new route requires the support of other stakeholders, especially those on the ground that are seeking to entice airlines and the tourists they carry.

The Local Application of MRGs

In the Caribbean, MRGs are an especially important calculus, owing to the nature of the region’s economy and geography. Any city or region with an airport in close proximity can offer an enticing proposition to tourists: soon after they land they’ll be swimming in the water or relaxing on a sun lounger. Destinations with long commutes from the airport can’t offer the same.

Then there is the reality of competition. With over 7,000 islands in the region, there’s no shortage of competition for the tourist dollar. Obviously, far less than 7,000 locales can actually sustain an airport but communities that do, can wield a decisive advantage over those that don’t. This entices governments to agree to new MRGs, and to continue existing ones.

Although a perpetual debate rages in the region surrounding whether Bermuda is indeed a Caribbean nation, undoubtedly the island’s experience in recent years provides a snapshot into the complicated and frustrating dealings a nation can