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European Experience with Direct Subsidization of Air Services

Major differences in the application of the public service obligation (PSO) mechanism in air transport across EU member states give rise to questions as to its misuse. Variations in the levels of subsidy awarded per passenger are due in part to the large differences in the maximum fares that carriers can charge. This article explains why the current European PSO legislation needs to be amended; ideally, the whole system requires proper enforcement at Commission level. While the latter is unlikely, the author shows how the PSO mechanism could be amended to prevent its misuse, reduce subsidy levels and encourage innovation.