Of your options #1 would seem to be the most realistic given that it's the case already in many countries. But it's not that simple.
The question in my own mind relates to the whole issue of an essential service as a profit making enterprise.
We've seen that qantas made a profit last year of some 250 million dollars approx. Clearly investors expect a dividend out of that profit yet an airline requires massive capital investment for its infrastructure (leave alone ridiculous salaries for chief execs). The question is how much of that profit should really go to investors. From the airlines point of view, probably none as it needs the money for new planes etc.
So if we accept your option #1 we end up with the govt effectively paying the dividend to the shareholders which would seem to create an awkward precedent.
If you look at the bigger picture, the airline industry seems unsustainable especially with the rising cost of fuel. Perhaps part of the solution is to completely alter the pricing structures. Maybe it's time for fares to rise significantly.
