Government interventions in regional airline markets based on aircraft size—Welfare and environmental implications

Airlines can deploy small-sized regional aircraft or narrow-bodied aircraft (with more seats) to fly regional airline routes. Although narrow-bodied aircraft is more emission-efficient on a per-seat basis, the load factor of narrow-bodied aircraft could be lower due to less traffic on regional routes. Thus, small-sized regional aircraft could emit less on a per-flight or per-passenger basis. This study establishes an integrated economic model to examine how government interventions on aircraft size in the regional markets can affect both social welfare and carbon emissions. Two real policies adopted in China to promote the use of small-sized regional aircraft are analyzed and benchmarked, namely the tax exemption and direct subsidies for airlines deploying small-sized regional aircraft. Our theoretical findings suggest that, when compared to the benchmark case with no policy, the tax exemption can bring higher social welfare, but also more total emissions. Compared to the tax exemption policy, the subsidy policy may result in both higher social welfare and fewer emissions. However, a welfare-maximizing level of the subsidy might lead to more emissions than the tax exemption policy or the case without any policy. Both policies would reduce government tax revenues that could be used to improve other aspects of the aviation sector. When this cost of public funds is taken into account, the tax exemption policy is further unfavored. There exist certain levels of subsidies that would lead to no-worse social welfare than the case of no policy, while it becomes more difficult for the subsidy policy to help reduce total emissions.