European Experience with Direct Subsidisation of Air Services
By George Williams
Airneth Column
February 2010
By Dr. George Williams
One of the consequences of deregulating Europe’s airline industry has been the need to provide direct subsidies in order to ensure the continuation of air services to remoter communities, which Article 16 of Council Regulation (EC) No. 1008/2008 allows EU Member States1 to do. A Public Service Obligation (PSO) can be imposed by a Member State on “a route serving a peripheral or development region in its territory” or on “a thin route to any airport in its territory” where the route is considered “vital for the economic and social development of the region which the airport serves”.
Not surprisingly given the wide possible interpretation of Article 16, major differences are apparent in the application of the PSO mechanism between Member States.2 In the UK, definition of the type of route that warrants PSO status is best conveyed by the term “life-line”, while in some other countries a much more generous interpretation is apparent. Ten Member States (Finland, France, Germany, Greece, Ireland, Italy, Portugal, Spain, Sweden and the UK) and two European Economic Area countries (Iceland and Norway) currently impose PSOs, with France and Norway accounting for around one half of these. A regularly updated listing of these is provided by the European Commission on its Air Transport Portal web site.3
PSO routes are now tendered for every four years, or five years in the case of an outermost region such as the Azores. In the majority of cases, the selected airline is required to provide a minimum daily service frequency and/or number of seats. It is the responsibility of the administering authority to determine what this should be.4 There are often specific timetabling requirements to which the operator must comply. Many of these are there to enable passengers to undertake day return trips and to make convenient onward connections. In addition, there have been an increasing number of conditions set relating to the type of aircraft that must be employed.
Wide variations exist in subvention levels for routes of similar distance and traffic volumes, with certain countries being much more generous to travellers in terms of setting lower maximum fares and paying higher levels of subvention. Even within the same country the amount of subsidy paid per passenger-km can vary widely, reflecting the different operating requirements of each route. For example, in Sweden compensation per passenger-km in 2007 varied from €3cents on the routes from Stockholm (Arlanda) to Arvidsjaur, Gällivare and Hemavan, to €175cents between Pajala and Luleå.5
Subvention levels required to maintain individual PSO services have generally been on the rise, in some instances dramatically so. In Ireland, for example, the annual subsidy for the PSO routes from Dublin to Donegal, Galway, Kerry and Sligo rose from €4.2 million in 2000 to €14.4 million in 2003.6
As regards the tendering of PSO routes, it is clear that established carriers and especially those with previous experience of operating such routes have an undoubted advantage over new entrants. Nearly all PSOs are served by carriers based in the Member State where the flights are operated, with most routes continuing to be provided by the same carrier.7 This is not surprising however, given that the leasing of aircraft, the setting up of an operating base and the arranging of crewing, ground handling, maintenance, etc., all take time and may represent a significant outlay to a small airline. Significant barriers to entry undoubtedly exist.
Critics of the current PSO system have suggested that some of the largest PSO routes in terms of traffic could be self-sustaining, without recourse to subsidy or the protection of monopoly status. Low cost carriers seeking opportunities in the European market in particular have focussed attention on a number of apparent inconsistencies resulting from the different approaches to PSO intervention. Clearly, where a PSO is in force the relevant national authority is able to refuse a second carrier access to the route or routes involved.
In view of the fact that PSO subsidies have increased over time, some substantially so, providing incentives to operators to reduce their costs and to innovate should become a feature of the tendering process. Those responsible for administering PSOs need to use appropriate benchmarks by which to judge whether bids are soundly based or not. The apportionment of an airline’s indirect operating costs to particular services is to a certain degree a matter of subjective judgement.8 Greater transparency is needed in respect of the levels of subsidy paid. Several Member States are unwilling to divulge how much they are paying carriers to maintain their PSO operations. There can be no justification for this policy, which simply encourages the notion that there is something to hide. Either the PSO system is fully open and transparent, or it is not. On the basis of the available evidence, at present it is not possible to conclude the former.
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[1] Iceland and Norway have also adopted the Community’s air transport deregulation measures.
[2] Social cohesion might better be handled by offering residents of peripheral regions assistance in the form of direct discounts on ticket prices, as now occurs in the Highlands and Islands of Scotland. The Air Discount Scheme provides residents of Orkney, Shetland, the Outer Hebrides, Islay, Jura, Caithness and Sutherland with a 40% reduction on their air fares on non-PSO routes within Scotland.
[3] ec.europa.eu/transport/air/internal_market/doc/2009_11_03_pso_inventory.pdf
[4] In Finland, Greece, Iceland, Ireland, Norway, Portugal and Sweden, national government departments administer air service PSOs, while in France, Germany, Italy and Spain, administration is in the hands of regional authorities. In the UK, where PSOs only exist in Scotland and Wales, it is a mix of the two.
[5] Air Transport in Remote Northern Sweden, Par-Erik Westin, 6th Forum on Air Transport in Remoter Regions, Bergen, April 2009.
[6] Review of Air Services supported by the Essential Air Services Program, DKM Consultants, Dublin, 2003.
[7] Williams, G., European Experience with Direct Subsidization of Air Services, Public Money & Management, Vol. 25, No. 3, pp.155-161, 2005.
[8] An airline’s indirect operating costs comprise items of the cost mix not directly related to the operation of aircraft.