The Fixed Cost Trap: Why Islands Stay Open Even When They’re Losing Money

There is a quiet truth inside small‑island tourism that rarely appears in textbooks, policies, or development studies:

Most guesthouses, cafés, and small tourism businesses operate at a loss during low season — and they keep operating anyway.

From the outside, this looks irrational.
From the inside, it makes complete sense.

Because on small islands, fixed costs don’t behave like fixed costs in Western hotel models.

They are heavier, stickier, and tied directly to the physical reality of island infrastructure.

This creates a trap every operator understands — but almost no textbook explains.

Let’s break it down.

1. The Illusion of “Variable Costs”

Hospitality theory teaches a simple split:

• Fixed costs: salaries, utilities, loans
• Variable costs: breakfast, laundry, amenities

In theory:

Variable costs fall when occupancy falls.

In Maldivian islands:

Almost nothing falls.

Why?

Because island tourism isn’t scaled around occupancy —

It is scaled around existence.

Whether you host 2 guests or 20:

• the kitchen still runs,
• laundry still operates,
• staff rooms still consume water and electricity,
• common areas still stay lit,
• refrigeration runs 24/7,
• water pumps and cleaning systems run daily.

These are not “variable.”

They are fixed in disguise.

This is the first layer of the trap.

2. Utilities Don’t Scale Down — Because Island Infrastructure Can’t

This is where Western hospitality models collapse completely.

In most countries:

• electricity comes from a national grid
• cost fluctuates with consumption
• utilities shrink as occupancy shrinks

On Maldivian islands:

• STELCO / FENAKA generate electricity locally using diesel
• each island operates as an isolated micro‑grid
• generators run 24/7 regardless of tourism demand
• desalination plants operate continuously
• all fuel is imported by boat

Every drop of water is manufactured.
Every unit of electricity is created on‑island.

Real cost structure (typical ranges)

• Electricity generation costs: USD 0.30–0.70 per kWh
• Diesel consumption: 0.26–0.70 liters per kWh
• Government subsidy: 50%+ of true generation cost
• Guesthouse tariff paid: MVR 3.0–5.50 per kWh (~USD 0.19–0.36)
• Unsubsidized true cost: MVR 6–10+ per unit

Why bills barely drop

Guest usage is only 20–30% of total consumption.

The rest is baseline infrastructure:

• corridor and common lighting
• hot water systems
• fridges, freezers, and storage
• staff rooms and kitchen
• water pumps and laundry
• office systems, routers, Wi‑Fi

A pattern seen repeatedly:

• A 10‑room guesthouse drops from 80% occupancy to 20%
• Revenue falls by 70–80%
• Electricity bills fall by only 15–25%

Your consumption barely shifts the island’s baseline — because generators run continuously simply to keep the community alive.

International comparison

• Mainland hotels: 5–8% of revenue on electricity
• Maldivian islands (with subsidies):
  • High season: 12–18%
  • Low season: 30–40% (revenue collapses, not consumption)

This alone breaks the economics taught in hotel schools.

This is the second layer of the trap.

3. Staff Costs Are Anchored to Community — Not Demand

In hotel school:

• low season = reduce staff
• casual labor absorbs the dip

On islands:

• staff cannot be suspended for two months
• there is no alternative seasonal work
• families depend on consistent income
• rehiring and training replacements is slow
• losing one staff member destabilizes the operation

Payroll doesn’t move with occupancy.

It is culturally and socially anchored.

This is the third layer of the trap.

4. Loans, Rent, and Debt Never Take a Holiday

Island tourism is often financed through:

• development loans
• investor contributions
• supplier credit
• rent
• equipment financing

These obligations do not change when occupancy drops.

If your repayment is MVR 15,000 a month,
you pay MVR 15,000 whether you’re full or empty.

Debt is season‑blind.

This is the fourth layer of the trap.

5. OTA Algorithms Punish Closure — So Operators Stay Open at a Loss

In many countries, hotels simply close for low season.

Not here.

Closing destroys online visibility.

If a guesthouse goes inactive:

• impressions fall
• click‑through history resets
• competitors replace you
• ranking slips to page 3 or 4
• recovery can take months

So operators stay open — even if they lose money —

Because visibility is survival.

This is the fifth layer of the trap.

6. The Trap in One Line

Closing loses money.
Staying open also loses money.
But staying open loses less — and protects future ranking.

This is the logic behind almost every decision in low season.

7. The Most Dangerous Misunderstanding: “Full House = Profit”

A guesthouse can run:

• 90% occupancy in January
• 20% in June

…and still end the year barely breaking even.

Because high‑season revenue isn’t pure profit —

it is recovery for:

• low‑season losses
• STELCO / FENAKA bills
• loan repayments
• annual repairs
• payroll stability
• unexpected shocks

This is why operators often say:

“We’re full, but we’re not getting ahead.”

They’re not mistaken.

They’re describing the fixed cost trap.

8. Why Western Models Fail Here

Western hospitality economics assume:

• scalable utilities
• flexible staffing
• diversified revenue streams
• economies of scale
• alternative employment
• multi‑season tourism flows

Maldivian islands operate under the opposite conditions:

• diesel‑powered micro‑grids
• 24/7 desalination
• rigid baseline consumption
• micro‑inventory
• mono‑economy dependence
• climate‑driven demand
• algorithmic visibility pressure

The result?

A cost curve that never bends — only breaks operators.

Seasonality is when the fall happens.
The fixed cost trap explains why the fall hurts so much.

What Comes Next

Seasonality explains when islands struggle.
Fixed costs explain why they struggle.

But when the two combine, something even more damaging emerges:

Price wars.

When demand collapses
and fixed costs refuse to shrink,
operators drop prices simply to survive —
dragging the entire island into a race to the bottom.

In the next post, I want to explore:

The Race to the Middle: How Fixed Costs and Seasonality Create Island Price Wars

Because understanding the trap reveals the next dysfunction:

When survival logic becomes destructive logic.