Competition and public service obligations in European aviation markets

This paper analyzes the effect of universal service policies on the airline markets of five European Union countries (France, Germany, Italy, Spain and the United Kingdom) in the period 2002-2010. Results show that airfare discount schemes for island residents raise demand and positively affect competition and the number of flights at the route level. These effects are evident in France and Italy, but are particularly marked in Spain. By contrast, public service obligations (PSOs) reduce competition on the protected routes, while their effect on the number of flights differs depending on national regulations. In Spain, routes protected with PSOs have greater flight frequencies than those on unprotected routes of similar characteristics, but in France, Italy and the UK the opposite result is found. The empirical model also finds that on routes with low-cost airlines market concentration is smaller and there is a larger number of flights. This result is relevant for the design of universal service policy, since in recent years low-cost airlines have entered a number of thin routes and have increased access to air transportation.