Caribbean Jerk

Virgin Atlantic’s announcement that they will drop services to St Lucia from London Gatwick has probably come after a serious game of airline/destination poker as the revenue guarantee that supports such services has come around for an inevitable renegotiation. But with St Lucia also served by British Airways is this a case of pragmatic acceptance that perhaps a three times weekly service just wasn’t worth the investment and ensuring a daily service crucial?

Analysis suggests that, as the table below shows, St Lucia was hardly a Caribbean star for Virgin Atlantic. On a revenue per hour basis the LGW – UVF service has been the poorest performing sector for Virgin by some distance and whilst US$ 16.7 million route revenue is not to be dismissed, the contribution would seemingly always require some form of subsidy and support. 

Table 1– Virgin Atlantic Selected Caribbean Route Revenues May 2018 – April 2019
Source: OAG Traffic Analyser

Interestingly, with US$14.5 million of the route revenue being generated from the UK area of sale and only US$ 821,468 from St Lucia that means only around US$ 2,053 has been originating from the destination market for each flight. This equates to around 3 passengers! 

Speculation is that the required subsidy was around US$2.5 million to keep the route; that works out at about US$90 per booking over the course of the last year or an increase in revenue per hour of some US$ 711. Hardly large, indeed it seems quite low relative to the likely economic impact of those tourist.

Ultimately, though, the real winner in this announcement is probably British Airways; whilst Thomas Cook currently operate a notional service it places BA in an extremely strong position in future negotiations around route support. So just how are BA doing at the moment?

BA appears to be generating around 10% more revenue per hour but, and very importantly, even in the BA network St Lucia is amongst the poorest contributors, and suggests that there may be a case for reduced frequency even once Virgin have disappeared in an attempt to move the yields slightly higher. 

Table 2– British Airways Selected Caribbean Route Revenues May 2018 – April 2019
Source: OAG Traffic Analyser

In contrast to Virgin, BA generates some 72% of revenues (US$ 23.8 million) from the UK area of sales while offline sales from areas such as Germany (US$ 2.8 million), Sweden, Italy and Ireland provide network contributions that Virgin Atlantic just cannot realise. 

Ultimately it may well be that St Lucia - at least from an air service perspective - has been very lucky and has been over supplied with capacity from the United Kingdom in the last few years. Something had to give. However, when any market or indeed destination where tourism is such a key industry becomes reliant on just one airline for the majority of its capacity, and where route subsidies have become a way of life, you have to wonder how the next discussion between BA and the St Lucia authorities will begin!

But that may be a jerk assessment of what’s just happened!

-John Grant