The competition effects of low-cost carriers and high-speed rail on the Chinese aviation market

Abstract

Despite the fast growth of the Chinese aviation market in recent years, various legacy regulations remain and a few big airlines dominate the domestic market. This study empirically investigates the competition effects of various passenger carriers on leading airlines' profitability and pricing strategy. Our study suggests that different types of carriers, namely low-cost carriers (LCCs), and the high-speed rail (HSR) operator, all bring effective competition to the aviation market by reducing airlines' profitability and prices. HSR services bring much more significant competition than LCCs, especially on short-distance routes below 1000 km. Chinese airline groups' “dual-brand” strategy did not enhance airlines’ profitability. These findings suggest that there can be multiple driving forces to increase the competitiveness of Chinese airlines. Any type of market deregulation could potentially lead to gains in consumer welfare. In addition, much of the market dynamics will be driven by HSR operations beyond the control of aviation regulators. Government authorities should consider coordinating the development of HSR services and new airports, and meanwhile promote competition in all forms.