Economic Analysis of the Caribbean-Brazilian Tourism Market

São Paulo, Brazil, November 26, 2013

Therese Turner -Jones

IDB Representative,

Jamaica

Motivation• Caribbean tourism is highly concentrated in terms of

visitor origin.• Brazil offers a big, fast growing country with

travelling population

However,

• Challenges arise from accessing new marketsUpfront investment and recurrent guarantee liabilities.Fiscal challenges in many countries.Specific details of cost/risk sharing for guarantee and

marketing cost essential for benefits to countries.

Is it worth it?

Benefits GDP Revenues Employment New trade routes Freight possibility

Costs Marketing Guarantee Future liabilities

Cost-Benefit Analysis

• Success depends onNumber of visitors (NV)Spending per visitorValue for money, experience

• Influences marketing spend in subsequent years.

Benefits = NV·$ + NV·$· Tax Rate

Cost = MARKETING + GUARANTEE (depends on guarantee agreement and load factor)

Assumptions

• One additional weekly flight with capacity of 220– US$800 for Jamaica and Bahamas, US$700 for TT and

Barbados.

• Full guarantee for Barbados, 85% capacity guarantee for Jamaica and Trinidad and Tobago and none for Bahamas.

• Spending is US$3000 for one week. Different taxation for different spending categories.

• US$1 million for marketing in first year, then US$500,000.

• Capacity 90% and 65% in high and low season.

Baseline results

  High Scenario (100%/70) Medium Scenario (90/65%) Low Scenario (70%/50%) Break Even

  Net GDP Fiscal Net GDP Fiscal Net GDP Fiscal  Yearly Capacity

Barbados 19,909,786 1,364,842 17,523,366 508,830 11,487,130 (1,656,374) 69%

Bahamas 21,542,772 4,564,390 19,682,447 4,105,192 14,976,915 2,943,693 14%

Jamaica 20,424,655 1,303,542 18,415,247 872,090 12,336,915 (1,214,941) 65%

T&T 19,542,590 971,952 17,540,520 405,757 11,744,496 (1,465,545) 65%

Under high and medium loading scenario, no fiscal burden on government. Guarantee and marketing costs lead to losses under low scenario.

Except for Bahamas, 65% or higher capacity is needed to avoid negative fiscal impact.

Sensitivity

Three major assumptions and its influences• Load factor of flights

– Marketing expenditures (research before and on relationship with travel agents)

• Guarantee– Wide range from 100% seats guaranteed to partial (e.g. below

85%) to fixed amount per seat.

• Marketing– New initiative will require substantial first time investment.

However, amounts should decline over time and could be shared with hotels, travel providers (PPP)

Risks and possibilities

Medium Scenario (90/65%)

22,111,455 405,757

All seats guaranteed

20,211,008 -1,494,690

Lower spending in Tobago

11,694,381 -364,341

Under the baseline, the initiative would add 0.1% in GDP and US$405K of revenue.

However, airlines might insist in a full guarantee of all seats, which would add almost US$2 million in cost.

While Brazilian tourists have relative high spending power, Tobago might attract lower budget travelers.

Suggestion: Type of guarantee and targeting of potential visitors will determine economic and fiscal impact of initiative.

GDP and Fiscal Effects under different scenarios

Risks and possibilities

• Under the baseline, the initiative would add 0.2% in GDP and US$800K of revenue.

• If Brazilians spend similar to current tourists, revenues would not be sufficient to compensate for additional cost.

• Airlines might insist on a full guarantee , which would add almost US$1.2m. Ideally, GOJ would ‘subsidize’ each seat.

Suggestion: Type of guarantee central. Marketing is burden but might be lower in following years.

Medium Scenario (90/65%)

23,241,541 872,090

Spending at current rates

12,667,469 -144,125

All seats guaranteed

22,009,541 -359,910

Fixed amount per seat as guarantee

23,993,941 1,624,490

GDP and Fiscal Effects under different scenarios

Risks and possibilities Under the baseline, the initiative

would add 0.5% in GDP and US$4 m of revenue.

Bahamas has potential for two weekly flights and attracting Miami visitors.

Airlines might insist on a guarantee, which would add US$1.5m in cost.

Current Brazilian visitors spend above baseline.

• Suggestion: Potential to use marketing for two weekly flights or to market short trips from the US. Specific targeting of visitors similar to current ones could increase benefit.

Medium Scenario (90/65%)

24,508,741 4,105,192

Two weekly flights/ Miami visitors

49,017,482 8,210,385

Guarantee of 85% flight load

23,017,917 2,614,369

Expenditure at current level of spending by Brazilian tourists

36,045,383 5,441,574

GDP and Fiscal Effects under different scenarios

Risks and possibilities

• Under the baseline, the initiative would add 0.5% in GDP and US$500K of revenue.

• Marketing would also benefit existing flight.

• The current guarantee scheme concentrates risk on government. Savings could be achieved by changing it, for instance restrict it to 85% load.

• If capacity is not achieved, additional incentives could be given, adding US$800K cost.

• Suggestion: Marketing could increase load factor of the existing flight. Savings could also be achieved by using different guarantees (up to 85%). At the same time, experience shows that additional incentives might be needed.

Medium Scenario (90/65%)

17,523,366 508,830

Marketing only in addition to current efforts

18,023,366 1,008,830

Guarantee limited to 85% capacity

18,601,366 1,586,830

Additional incentive needed to get load factor

16,691,766 -322,770

GDP and Fiscal Effects under different scenarios

Opportunity costs Cost-Benefit cannot be seen in isolation as marginal

impact is important for decision.– What would be effect of same marketing and guarantee scheme

for existing, mature markets (USA, Canada, UK)?

General rate of return of government expenditures.

• Private sector focuses more on mature markets.• Accessing new markets is costly, requires front loaded investment

and has externalities (everyone benefits whether they pay or not).• Public good character.• Diversification.• Externalities in terms of trade routes, knowledge about Caribbean.

Versus exploring new market

Conclusions

• Brazil offers new opportunities for the Caribbean to diversify visitors, both in terms of origin but also characteristics.

• Our results indicate that there are potential benefits from the initiative under realistic assumptions.

• New market probably requires upfront investment and some kind of guarantee. These expenditures have characteristics of a public good.

• Creative solutions needed to share burden and risk, PPP, regional PR campaign.

• However, potential liabilities for government as well as incentives for airlines/travel agents depend on details of the guarantee.

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