The law of airline subsidies and incentives in the USA: Recent developments and future outlook

Abstract

The financial challenges facing the aviation industry have brought uncertainty about many routes flown by commercial carriers. Some carriers have ceased operating altogether, and legacy and low-cost carriers alike have eliminated low-yield and unprofitable routes. In some cases, service reductions have cut off communities entirely from the national air transportation system. One means of attracting and sustaining scheduled passenger service is to subsidise or incentivise those routes considered necessary or desirable by the local community but which may not be profitable for an air carrier. The system of permissible subsidies and incentives in the USA is highly fractured — legally, politically and practically. The federal government provides subsidies and air service development grants under a costly and controversial programme. State and local governments provide subsidies and support to airlines as an alternative or in addition to federal support. Airport operators are strictly prohibited from directly subsidising air carriers, and instead must rely on a complex and ill-defined suite of options for supporting and promoting scheduled passenger service. This paper summarises the state of the law on airline subsidies and incentives, and offers observations on the likely future of the various programmes and approaches. The paper specifically examines airport incentives, state and local government subsidies and incentives, federal subsidies under the Essential Air Service programme, and federal grants under the Small Community Air Service Development Program.