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Abstract

This paper examines how airfare cap subsidies affect airfares, passenger traffic, and airline seat capacity in rural, regional, and remote markets, using Western Australia’s Regional Airfare Zone Cap (RAZC) scheme, introduced in July 2022, as a case study. Using quarterly data for 27 routes between Perth, Western Australia’s capital, and regional cities from January 2016 to September 2024, the study compares 17 routes covered by the scheme with 10 unaffected comparison routes in Western Australia. Standard and lagged difference-in-differences models are used to estimate the average and time-varying policy effects, and a panel vector autoregression (PVAR) model examines the dynamic market responses of airfares, passenger traffic, and airline capacity to the scheme, as well as the interactions among these indicators. The results show that the scheme moderates the growth of airfares while increasing passenger traffic and airline seat capacity, indicating improved connectivity between Perth and remote communities. Airfares respond immediately after the scheme’s implementation, followed by increases in passenger traffic and later adjustments in seat capacity. These effects are slower and less stable on longer routes. The PVAR results indicate that a positive shock to the RAZC scheme’s indicator is followed by lower airfares and expanded seat capacity, whereas the response of passenger traffic is relatively small. Passenger traffic decreases after positive airfare shocks and increases after positive seat capacity shocks. These findings extend prior research on discount schemes for residents by demonstrating how a fare cap subsidy shapes regional air connectivity.