Public service obligations for air transport in the United States and Europe: Connectivity effects and value for money

Abstract

Public service obligations (PSOs) are used by governments in many countries, including 11 countries in Europe and the United States, to mandate a minimum level of commercial air transportation service, especially for small or rural communities. This paper analyzes PSOs in these 12 countries for the year 2010 using the recently proposed Global Connectivity Index to measure direct and indirect market access and a novel subsidy database covering 90% of PSO movements in these countries to assess value-for-money. We show that PSO services represent about 2.5% of all commercial movements in the 12 countries analyzed, generating about 1% of these countries’ total air transport connectivity. Over all routes for which data was available, approximately USD$ 900 million was earmarked for PSO provision in 2010, with average subsidies per movement ranging from about $700 to $3,500. PSO market access and efficiency outcomes also vary across the countries analyzed. Some countries, such as Germany and the United States, focus on providing network access for smaller communities, thereby creating not only point-to-point, but also onward connectivity, while others such as Norway, Sweden and Ireland, predominantly aim at providing “lifeline services” that connect remote regions to a nearby economic center without providing onward connections.