Should governments help the airlines? (part 2 of 2)

There’s another problem when governments rescue companies and get them back up on their feet: they may quickly forget the favours they have received. Ingratitude is a fact of commercial life, but there’s no reason for governments to set themselves up for it.   If an important airline collapses, and its assets are taken over, the successor airline may not maintain all the routes to and from the country concerned. So the rescue package may not help national competitiveness after all.

But wait, you say, surely if the route is profitable it will be maintained? No, because the new airline has a finite number of planes and other routes may be more profitable. Also, the new airline may be more interested in feeding passengers to its existing routes or hubs than in maintaining the old route.

 An important option for governments is to go out to tender for air service provision. They can invite competitive bids for a subsidy to operate the route. The lowest bid, if it meets the quality requirements, gets the contract and the subsidy. Countries typically do this to maintain connectivity between the centre and remote regions: the airline in question is paid to maintain the regional route, and this is usually called a public service obligation. In 2019, there were 12 EU countries following this option, for a total of 143 routes. Greece had the biggest number of PSOs at 28, followed by France at 27. In general PSO routes connect outlying islands or distant regions with the capital or other key cities in the country concerned.

But there’s no reason why a PSO can’t be used to maintain or increase international connectivity as well. It can be an easier way to improve national competitiveness than rescuing a whole airline. But in fact, of the above PSOs, only 8 of the 195 were for international routes. Cyprus’s single PSO route was to connect it with Brussels. All of Czechia’s 3 tenders were to connect its cities with other European cities. France had 3 PSO routes connecting Strasbourg with other European cities.

Countries might usefully consider using PSOs specifically to target missing links in their international connectivity, including intercontinental links. A small country that wants better links with another part of the world could go out to tender and see what it might cost. The price might look good in the light of the possible wider economic benefits (tourism, business links, FDI, etc.)

Full disclosure: I took one of these routes last month (In Greece: Rhodes to Karpathos). The plane actually goes on to Kasos, an additional 10 minute flight, which must be one of the shortest commercial flights in the world.