Air Rarotonga is operating on some of the most beautiful islands in Oceania. The Cook Islands. The small airline is active since 1978 and currently operates four aircraft. Three Embraer 110 and one Saab 340A.
ch-aviation talked with CEO Ewan Smith about the Cook Islands aviation sector, Air Rarotonga’s product & strategy and a possible fleet renewal.
Air Rarotonga has been operational since 1978. What kind of airline was it in its formative years?
It was a small airline. When we started, we mainly transported locals and cargo with about 3000 to 4000 passengers during our first year. We used to operate scheduled flights with some charters as well. Our main route was, and still is, Rarotonga to Aitutaki which we flew with a single five-seated Cessna 337. In our early years, tourism was still in its infancy but with the opening of the first hotel in Aitutaki in 1980, passenger traffic rose and so we soon added a Piper Chieftain. In 1990 our first Embraer 110 Bandeirante was introduced.
What were your main challenges during the start-up phase?
Isolation and distance from the mainland were major problems. As there were no facilities, you had to do everything by yourself, including maintenance. While we were able to finance the initial stages of operations with our own money, we soon needed more. However, being an aviation company located in the middle of the Pacific ocean, it was difficult to find a bank that would lend us money. Financing and business proved to be very tough in those days.
How did you, as a founder, get the idea of starting an airline company?
I came to Rarotonga in 1973 as a pilot when I was 22 years old. In that same year, Rarotonga International Airport opened following which, Air New Zealand set up a carrier called Cook Islands Airways which flew a single Britten-Norman Islander. I was a pilot for that airline. Then, together with a Cook Islands Airways aircraft engineer and a local business partner, I got the idea of setting up our own airline. And we did it and became successful. In 1991 we acquired Cook Islands Airways as the market could not support two carriers.
If you compare 1978 and 2013, what are the most significant differences?
The acquisition of our first Embraer 110 Bandeirante in 1990 was a major step forward for us. At that time, we carried 40,000 passengers per year though that number has since risen to 70,000. Growth has been largely made possible by the rise of the islands‘ tourism industry, especially in Aitutaki. Further market growth allowed us to acquire an even bigger aircraft – a Saab 340 – which arrived in 2000. In the early years, sales were largely regional but it has become more international overtime. Another important event was our code-share agreement with Air New Zealand on Aitutaki-Rarotonga flights signed in 2005. That was also when we implemented our online booking system.
In 2010, a new carrier, Kia Orana Air, was set up and planned to compete with Air Rarotonga on the same routes, albeit with lower fares. However, operations never materialized and in 2012, the start-up announced it would abandon its launch plans. Were you surprised when that happened?
From the very beginning, I did not think it would work because you can‘t operate high-cost aircraft in a high-cost environment and charge low fares. To boot, the promoter had no business experience either. So, simply put, Kia Orana Air just could not make the economics work.Another point to consider is that the market is not big enough for two carriers. Two smaller carriers that have to operate their own booking engines, among other things, have higher costs. We, however, have a big advantage in that we already have those facilities at hand. Also, had Kia Orana Air started operations, there would have been a price-war on the all-important Rarotonga – Aitutaki route which would have forced us to drop some marginal routes in order to concentrate on Rarotonga-Aitutaki, our main revenue source. But, I did not expect Kia Orana Air to ever find enough funding and thus launch.
You are currently only flying commuter routes. Do you get a subsidy from the government?
Until now there have been no subsidies from the government. As it is very difficult to viably operate routes to small remote islands with just 200 inhabitants, we either just break even or operate at a loss there. If we are to continue serving those routes in future, government will have to subsidize our services.
The airports you fly to are mostly served only a few times a week. Do they see major subsidies from the government? Is Rarotonga Airport profit-making?
In reality, they are just basic airstrips situated on small islands – they have no facilities and it does not cost that much to operate them. Rarotonga Airport however, is run by the government, has a „business plan“ and is self-sustaining to an extent.
Do you see competition with ferry companies?
Most of the islands are very secluded and have only a few inhabitants so ferries don’t present a threat to us there. In the northern archipelago group, some people travel by ship, but the majority prefer to fly with us.
Are there major seasonal differences in the passenger numbers?
Yes there are. Our high season is from June to October while our low season, particularly for tourism, is from January to February/March. You have to consider that as the Christmas season has come and gone, the locals have already spent most of their money and so they prefer to save what they have left instead of using it to fly.
How high is your average fare?
The average fare is around NZD190-200 (around EUR 120/USD 160/GBP 100). We also sell a limited number of USD99 fares. Our fares, on average, do differ slightly between the high and low season, but the differences are not that significant.
Can you give us a break down of your passenger numbers in terms of private, leisure and business?
Approximately 75 percent of our passengers travel from Rarotonga to Aitutaki, most of whom are leisure passengers. Around 50,000 of our 70,000 passengers are visitors. The remaining passengers travel mostly for private needs. Business traffic is very small.
Is air cargo important for you?
We currently carry around 700 tonnes a year. It is very directional in that it is limited to flights to the island only. As there is almost nothing produced on the islands, there are almost no exports and therefore no need for inbound flights from the smaller islands to Rarotonga to have any cargo capacity at all. All in all, cargo makes up eight percent of our total revenue.
What kind of on-board service do you offer?
On the Saab 340, operated on the Aitutaki-Rarotonga route, we offer a light refreshment, hot and cold beverages and a bar service with alcoholic drinks. On our flights to the other islands, there is no on-board service as the EMB110 has no flight attendant.
Currently we don’t have an on-board magazine as it isn‘t worth producing one for such a small number of passengers. Around five or six years ago, we did offer something similar- a local tourism publication called „Escape Magazine“ which we supported with advertisements and featured as our in-flight magazine.
Have you ever considered operating routes to mainland New Zealand and Australia, currently operated by Air New Zealand and Virgin?
For three years during the eighties, we operated flights from Rarotonga to Auckland using a chartered Douglas DC-8. The revenue generated from those flights was „okay“ but we dropped them and decided to stick to domestic services. The resumption of those flights is not in our current plan seeing as the market is very well served by Air New Zealand and Virgin Australia. Air New Zealand and Air Rarotonga have a code-share agreement on the flights between Rarotonga and Aitutaki.
Do you have plans to extend the code-share agreement with Air New Zealand to other routes?
Not at this stage. If you go on Air New Zealand’s site, you can book flights from all their destinations to Aitutaki. The other islands, however, are of no interest to tourists. But, for the small group of people from the other islands who need an onward flight from Rarotonga, it is easier to buy two tickets. As such, it would be expensive for both us and Air New Zealand to extend the code-share in light of such limited demand.
Your fleet currently consists of a Saab 340 and three Embraer 110 Bandeirante. Where do you fly them for major maintenance work?
We do all maintenance for the Embraer 110 Bandeirante, except engine overhauls, here in Rarotonga. Engines are sent to Pratt and Whitney for major maintenance. For our Saab 340, we have an agreement with General Electric regarding the engines while all other major maintenance work is done by Air Nelson in New Zealand.
The aircraft in your fleet are not the youngest. Do you have plans to replace them?
Not yet. We recently replaced the engines on our Embraer 110 Bandeirante with brand new ones. That should allow us to operate this aircraft until 2020 at least. We have the option to replace our Saab 340 with a Saab 340B. The Saab might be used until 2025. Another option is to replace it earlier with an ATR 42. Currently we own our whole fleet but leasing is a future fleet strategy option.
You have a single Saab 340 in your fleet. But, would it not be more economically viable to operate the Embraer 110 Bandeirante (15-21 seater) for twice as long as opposed to operating a single Saab 340 (34-seater)?
It is economical to have a single Saab 340 because, for our flights from Rarotonga to Aitutaki, the 34-seater is exactly what we need. Also, our maintenance contract with Air Nelson makes it possible to operate this aircraft very efficiently. We currently have 13 pilots, six of whom are type-rated for both aircraft. The others are rated to fly either the Bandeirante or the Saab 340 only.
Your airline has operated successfully for 35 years now – not many regional airlines have survived for such a long time. What do you see as the keys to your success?
I think the key to survival in our environment is concentrating on maintenance, safety and
reliability. It is much easier to sell tickets for an airline that has a reputation for being safe and on-time. In a lot of countries, it is just assumed that airlines are safe – not so in the Pacific islands region.
Who are the shareholders of your airline?
When we founded the airline there were three of us: a local business partner, another Cook Island Airways employee and I. Today, I am the one only of the original three that is still a shareholder in Air Rarotonga. While there are still three of us, the other two have now been replaced by a flight operator and a local accountant.
Where do you see your airline in a few years time?
One of our challenges is our future fleet strategy. We plan to replace the Saab 340 with the larger ATR 42 on the Rarotonga to Aitutaki route, once demand is high enough. A rise in the number of hotels rooms and travelers will make it a possibility soon, we hope. Furthermore, regarding the previous discussion on subsidies, it is very important that the government soon set up a subsidization fund for flights to the smaller, more remote, islands. We won’t be able to operate these flights in the future if that doesn’t happen. Another issue we have to consider is the future ownership of the airline. One possibility includes selling Air Rarotonga to its employees, but, we’re in no rush to decide just yet.
Thank you for the interview!