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

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