Setting public service obligations in low-demand air transportation networks: Application to the Azores

The deregulation of air transportation was expected to have negative implications on regions with insufficient passenger demand to generate profits – regions where air transportation often plays a crucial role with respect to the mobility of people and goods, as well as to the development of tourism. Because of this, governments have decided to accompany the deregulation process with the adoption of subsidy schemes aimed at mitigating the anticipated consequences to low-demand regions. The subsidy scheme adopted in the European Union is known as the Public Service Obligations (PSO) system. In this paper, we propose a decision approach to assist governments (aviation authorities) in the setting of PSO standards consistent with the budget available to finance their implementation. The approach is based on an integrated flight scheduling and fleet assignment model to determine the air transportation network that minimizes the total social costs of satisfying a given origin/destination target demand. The usefulness of the approach is illustrated with an application to the network of the Azores, one of the main European networks fully operated according to the PSO system.