Aiding airlines for the benefit of whom? An applied game-theoretic approach

Abstract

In the face of a significant exogenous shock, government intervention may be required at the level of an industry in order to preserve the market. By employing a game engineering approach, we develop a model to test the potential impact of varying types of bailout schemes on network oriented industries facing such a shock. Investigating the European aviation market, served by both legacy and low-cost carriers, we assess whether the forms of aid offered during the Covid-19 pandemic may lead to changes in market equilibrium outcomes over the coming years. Airlines choose the size of their fleet, schedule and airfares across the network and compete for market share. The social welfare analysis suggests that the European Commission has likely distorted competition in the aviation markets by allowing Member States to provide different types of rescue packages. In addition, we show that the most efficient solution would have been to coordinate state aid, preferably in the form of time-limited loans. Furthermore, the approach could be applied as a screening tool by governments when considering bailout requests. Its application ex-ante allows policymakers to assess the likelihood of taxpayers receiving a return on their investment.