Maximizing social welfare through air transport public service obligations in remote regions

Abstract

Air transport is vital to ensure the mobility of populations and economic and social development in remote regions, but they are of little interest to private airlines as they have negative operating cash flows. The decision to implement public service obligations (PSO) and provide public financial compensation faces constraints when traditional net present value is used. We explore a binomial real options analysis framework to maximize air transport contribution to social welfare in remote regions, under uncertainty and accounting for economic, environmental, and social benefits and costs. The Azores case study on a five-year PSO contract shows that value creation is twice the value of public financial compensation. Theoretical and practical contributions are made, since few ROA frameworks allow for economic, environmental, and social valuation, particularly regarding air transport PSO.