Small Market Air Service and Regional Policy

In the airline industry the longstanding importance of 'duty to serve' with respect to smaller communities is evinced by the continuation of several support programmes around the world. However, communities with existing air service increasingly view air links on other routes as a desirable commodity — especially as a means to facilitate regional and local economic growth. In this paper, various schemes to attract air service in smaller markets are examined; specifically direct subsidies, protected route packages, and guaranteed revenue approaches including the airline travel bank. Relative orders of magnitude for the direct social costs are derived using a small network simulation model and each mechanism is evaluated in terms of social welfare and underlying agency costs.