Blind tickets to solve the inefficiencies of subsidies for residents in air transport markets

Abstract

Subsidies for passengers living on islands or in remote regions are common in European air transport markets. However, the literature on subsidies for resident passengers highlights their inefficiencies since they may imply increases in fares and non-residents' exclusion. This paper analyses the optimality of blind tickets - cheap surprise flight tickets without knowing the final destination - to manage those inefficiencies. This pricing strategy allows airlines to discriminate between resident and non-resident passengers by creating two different markets - one transparent and the other opaque. While resident passengers may be better off because of additional discounts, non-residents, who were excluded from the market, are now able to fly by purchasing blind tickets. We prove that, unless the proportion of residents is very low, blind tickets always imply an increase in social welfare and that this increase does not depend on passengers’ risk attitude. To illustrate this welfare improvement due to blind tickets under different market conditions, we include some numerical examples based on real data from Spain, where residents of the Canary Islands, Balearic Islands, and the autonomous cities of Ceuta and Melilla receive a 75 per cent discount on flight ticket fares.