How Much Is a Holiday Worth? Who Wins the Epic Battle Between Rotto, Eagle Bay and Bali? / by Adam Howard

Last week we finished by talking about how happy Australians are, at least by comparison.  Sometimes when I am in town and walking around, watching the office workers it looks like everyone is Unhappy.

But that’s a discussion for another time…

I thought this chat about happiness would be a nice segue into a short analysis of something that does make us happy; holidays.  Well, holiday destinations, really.

I was lucky enough to go over to WA’s playground, Rottnest Island, a couple of times in January and on the second trip had a discargument with some mates about the sustainability of our beautiful island.

These mates included one character from a past Update; the Player, as well as new characters (but old mates), The Author, The Caveman and The La-Z-Boy. 

The debate was about whether there needed to be a new luxury resort on Rotto; what it would cost to stay there; whether or not Rotto is subsidised by the State Government; what the existing houses and chalets would need to cost in order for the island to break even; and whether there is a public interest argument strong enough to justify the continuation of these subsidies.

I have to be honest and say my baseline position (made up mostly of opinion, not based on empirical data) was as follows:

  • There didn’t need to be a new resort on Rotto;
  • Rotto was subsidised but unaware to what extent;
  • The current cost structure for houses and chalets was appropriate; and
  • There was a strong public interest argument in keeping costs of visiting Rotto where they were.

The views differed depending on your politics and your preferences.  The Caveman owns a boat and spends a lot of time at Rotto.  He didn’t really care about the accommodation or ferry costs as a lot of the time he stayed on his boat.

The idea of developing land for a new resort interested the Caveman because developing land is what he does.  And that’s where The Caveman and The Author found some common ground.

The Player, despite being a surgeon, good looking and well-to-do, actually appears to lean leftwards politically.  Socially progressive and also a bit of a government interventionist, he thought the State Government should continue to subsidise the island.

The Laz-Y-Boy was the free marketeer of the group and thought prices had to rise and fast.  No way should the public sector/taxpayer subsidise the island.

So, what do the numbers say?  I had a look at the Rottnest Island Authority (RIA) 2014 annual report and found the following:

Here’s a link to the full report (if you are interested but I suspect you aren’t).

RIA Annual Report 2014

So, I think, based on the above numbers, we can safely say Rotto is currently not priced appropriately as subsidies between 15 and 21% are pretty large.  As accommodation is the island’s largest earner I thought it would be interesting to perform a really basic calculation to see what it would need to cost for Rotto to break even.

I am not going to get all complex.  Here goes.

There are 291 houses/bungalows/chalets on the island and the cashflow report shows $15.2m was generated by accommodation.  A brief look at the Rottnest Island Authority’s (RIA’s) website indicates it might be reasonable to use $260 per night as an average price for a house on the island, regardless of season.

$15,232,000 / $260 = 58,585 nights of accommodation in total.

58,585 / 291 = 201 nights of accommodation out of a possible 365 nights.

In order to bridge the gap of $6.7m in revenue, each house would need to be rented 291 nights out of 365, or an increase of 45%.

So, given there were something like 23,500 arrivals for overnight stays in 2014 this would mean an increase to about 34,000 to achieve breakeven.

Not going to happen….

What about jacking the prices up?  What would they need to be to achieve breakeven?

Recall there was a $6.7m shortfall met by a government subsidy in 2014, so if we add that to the accommodation revenue we can work it out.

$15,232,000 + $6,767,000 = $22,000,000 in revenue

Please bear with me here as this is purely hypothetical and just what they call a “thought experiment.”.  Don’t hold me to the numbers.  I just want to show the scale of the price increase.

$22,000,000 / 291 = $75,600 rental income generated by each house/villa/chalet.

$75,600 / 201 days (the number of days pa out of 365 that each house/villa/chalet was occupied = $376 per night.

So, for a 7 night stay, the cost would go from:

$260 x 7 = $1,820

To

$376 x 7 =  $2,633

How many people would be scared off by that cost increase?

I don’t know but I have to say, I owe the La-Z-Boy an apology as I think he was right.  There is no way Rotto can continue to be supported to that degree.

And the RIA agrees, which is why more and more of the services are being outsourced to the private sector…including the redevelopment of The Lodge.

Aaaahhh, that bastion of luxury…..The Lodge.  Quick photo to remind you of the aesthetics of that fine establishment.

John Spence and his Karma Royal Group now own the lodge and are applying for permission to move the Lodge to a new site, where they will potentially be charging $300 per night (an increase of 15% from the current rates of about $260 per night).

I have included an artists impression of the new Lodge below.  Remember, $260 per night for the above salubrious luxury, or $300 per night for the following:

And just to show he is serious I thought a link to the rest of his resorts would be a good idea:

Karma Royal Report

Now, I wanted to finish with a quick table comparing Rotto to the two most obvious alternatives: Down South and Bali.  Comparing Rotto and Down South to Bali is like comparing a Little Creatures Pale Ale, a crisp pint of Stella Artois…and a can of Export someone left out in the sun all arvo.

This is only a comparison of the cost of getting there and staying there, not what you spend while you are there.  Our assumptions are:

  • 7 night stay;

  • Family of 4;

  • Current rates for Rotto, not breakeven rates;

  • Current rates for Bali as offered on Expedia (link attached below);

  • Current short term holiday stay rates as offered on Stayz for Eagle Bay (link attached below);

  • Current ferry rates for family of 4 as offered by Rottnest Express; and

  • Two $50 tank refills for 2lt family car.

How about that???  Food for thought….

Stayz - Eagle Bay

Expedia - Bali