In the face of a significant exogenous shock, government intervention may be required at the level of an industry in order to preserve the market. By employing a game engineering approach, we develop a model to test the potential impact of varying types of bailout schemes on network oriented industries facing such a shock. Investigating the European aviation market, served by both legacy and low-cost carriers, we assess whether the forms of aid offered during the Covid-19 pandemic may lead to changes in market equilibrium outcomes over the coming years. Airlines choose the size of their fleet, schedule and airfares across the network and compete for market share. The social welfare analysis suggests that the European Commission has likely distorted competition in the aviation markets by allowing Member States to provide different types of rescue packages. In addition, we show that the most efficient solution would have been to coordinate state aid, preferably in the form of time-limited loans. Furthermore, the approach could be applied as a screening tool by governments when considering bailout requests. Its application ex-ante allows policymakers to assess the likelihood of taxpayers receiving a return on their investment.
Bibliographical noteFunding Information:
To respond to the severe impact caused by the Covid pandemic, governments have provided aid packages that support firms during liquidity shortages. The two main bailout schemes were the CARES Act ( 116th Congress, 2020 ) in the US and the Temporary Framework for the European Union (TFEU) ( European Commission, 2021 ). Since our interest is focused on the European aviation market, we describe the TFEU in detail. Airline bailouts approved under this scheme are reported in Appendix A according to the Member State. Given the limited resources available to the European Union, the Member States individually chose the support measure and its financial magnitude, following the rules set by the European Commission. The TFEU suggests several ways to bail out firms facing the risk of bankruptcy: providing aid in the form of a direct grant, guarantees or subsidised public loans, equity injection, deferral of taxes, hybrid instruments and state recapitalisation. In this research, we focus on the three most prevalent instruments, namely grants, loans and equity investments.
The authors would like to thank the participants of INFORMS 2021, ITEA 2022 and the 3rd SOAR conference for their helpful comments. We would like to thank the Israel Science Foundation (Grant 2441/21 ) and the Goldman Center for Data-Driven Innovation for research funds.
© 2023 The Author(s)
- Applied game theory
- Aviation markets
- Bailout policies
- Network structures