The effects on tourism of airfare subsidies for residents: The key role of packaging strategies

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The effects on tourism of airfare subsidies for residents: The key role of packaging strategies

Álvarez-Albelo, Carmen D. / Hernández-Martín, Raúl / Padrón-Fumero, Noemi

Abstract Airfare subsidies for residents in remote tourism destinations can negatively affect the local tourism industry. In this paper, we study the effects of airfare subsidies on a remote region's tourism sector with a theoretical model of air transport and tourism service transactions involving a remote tourism region, the rest of the country and the rest of the world. We show that firms' widespread packaging strategies in tourism markets, i.e. selling tourism packages composed of air transport and tourism services at a single price, acts as hidden price discrimination, since the packages are cheaper than buying the services separately. Thus, in the presence of higher airfares due to a subsidy, the tourists not entitled to the subsidy have incentives to switch to a cheaper alternative, namely tourism packages. Consequently, a packaging strategy can lessen or even avoid the negative impacts of the subsidy on a region's tourism sector.

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Highlights • Airfare subsidies for residents are set in remote regions for equity reasons. • Subsidies raise airfares in the subsidised route which may reduce tourism flows. • Contraction in the remote region's tourism sector may take place. • Widespread packaging strategy of firms in tourism markets can avoid such contraction. • Packaging is a hidden price discrimination in favour of non-subsidised passengers.