An auction framework for assessing the tendering of subsidised routes in air transportation

Abstract

Governments offer subsidies along routes that are deemed commercially non-viable but economically and socially essential. Subsidised routes are often criticised for inefficiencies and excessive subsidies, which partly result from restrictions defined by transportation authorities during the tendering process, such as a maximum airfare and minimum number of daily flights. We develop an integrated auction framework—referred to as Single-round Combinatorial Auction for Subsidised routes (SCAS) —to provide decision support to transportation authorities when designing tendering processes for subsidised routes. The framework includes two main models as ingredients. First, the Airline Bid Preparation Model (ABPM), which replicates the airline’s behaviour when preparing bids for subsidised routes. Second, the Winner Determination Problem (WDP), which is used to select the bids based on a given evaluation criterion. We capture the responsive relationship between passenger demand and supply of air services by including passenger utility as an endogenous variable in the ABPM. Additionally, as input to the ABPM, we estimate the route operating cost for small aircraft that typically operate subsidised routes. The usefulness of the approach is demonstrated with an application to the network of subsidised routes in Sweden, for which we provide policy guidelines. Our analysis suggests that having a restriction on the airfare but not the number of flights is an effective way to design the tendering process, which strikes a good balance between passengers, government and airlines goals. Additionally, we demonstrate that the transportation authorities can compensate not having a requirement on the number of daily flights through ensuring a higher number of passengers, i.e., by including maximisation of the number of passengers in the bid evaluation criterion or using passenger discounts. • An integrated auction framework for the tendering of subsidised routes. • Policy guidelines for the tendering of subsidised routes. • A restriction on the airfare but not the number of flights strikes a good balance between passenger surplus, airline profits and goverment’s cost of subsidisation. • Serve more passengers by changing the bid evaluation criteria or using passenger discounts.