Public service obligations in air transport: the situation in the UK

Introduction

The intention of the 1987 Single European Act was to renew an impetus for European integration by completing the internal market anticipated to encourage the free movement of goods, people, services and capital across the member states of the European Union. To this end, in June 1992, the European Council of Ministers agreed a third and final package of measures that completed the liberalisation of aviation regulations, a process that began in 1987, to finalise the single European aviation market (Butcher, 2010). The liberalisation of what was a highly regulated and fragmented market involved dismantling the plethora of bilateral agreements and protectionist policies that, while benefiting member states and national airlines, negatively affected passenger outcomes (Button, 2001). Allowing normal competitive forces would improve the efficiency of the entire aviation market and in turn improve passenger outcomes, through reduced fares and improved services.

However, state interventions in the market before liberalisation had protected air services to Europe’s remote communities (Button, 2001). Low population densities and levels of economic activity made air services to these destinations unprofitable, and they were operated only because state-owned airlines crosssubsidised them or governments funded them direcdy (Reynolds-Feighan, 1996). Therefore, encouraging the benefits of normal competitive forces also potentially put air services to peripheral regions at risk, as airlines inevitably concentrated their operations on the busier and more profitable routes (Brathen, 2011; Brathen and Eriksen, 2018; Calzada and Fageda, 2014).

In the UK’s Industrial Strategy, the government intends to ensure that all communities benefit equally from economic growth and describes as unsatisfactory an economy that grows at a national level while the economies of remote communities contract. The strategy emphasises the role of a free market in rebalancing the UK economy, by creating the conditions in which innovative, modern sector enterprises can emerge to become the drivers of growth across all regions (UK Government, 2017a). This emphasis on spatially rebalancing the UK economy is a furtherance of the place-based approach to regional development adopted by the UK government, which began with regional

Public service obligations in air transport 159 competitiveness policies in the 2000s and continued through the 2010s with the localism strategies.

A place-based approach to regional development is growth oriented and encompasses bottom-up strategies, developed by the local communities and tailored to their own priorities, which identify and commercialise tangible and intangible local assets. Firms and enterprises located in remote regions would be competing in the same markets as those in the economic centres and could therefore similarly benefit from air connectivity. Yet remote regions have the lowest level of air connectivity in the UK (York Aviation, 2018). This compounds the unfavourable economic conditions caused by their peripheral-ity, by putting them at a competitive disadvantage to well-connected centres in accessing markets, labour pools or financial systems while hindering inbound tourism flows and impeding opportunities for local firms and entrepreneurs to gain the productivity improvements associated with increased competition and an extended network of collaborators and suppliers (Oxford Economics, 2014). Therefore, EU member states could be disposed, or regional authorities could be motivated to seek, to restrict competition on a route or provide subventions to airlines, to ensure that a level of access to air transport connectivity is maintained with important centres of trade and commerce. A public service obligation (PSO) is the EU mechanism used to facilitate and regulate this necessity.