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Airline Deregulation, Market Competition, and Impact of High-speed Rail on

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 1 CHAPTER 5
3
AIRLINE DEREGULATION, AU:1
5

7
MARKET COMPETITION, AND
9
IMPACT OF HIGH-SPEED RAIL ON
11
AIRLINES IN CHINA
13 Hangjun Yang, Qiong Zhang and Qiang Wang
15

17
ABSTRACT
19 In this chapter, we will review the history, deregulation, policy reforms, and
airline consolidations and mergers of the Chinese airline industry. The mea-
21 surement of airline competition in China’s domestic market will also be dis-
cussed. Although air deregulation is still ongoing, the Chinese airline industry
23 has become a market-driven business subject to some mild regulations. Then,
we will review the impressive development of the high-speed rail (HSR) net-
25 work in China and its effects on the domestic civil aviation market. In gen-
eral, previous studies have found that the introduction of HSR services has a
27 significant negative impact on airfare and air travel demand in China. The
rapidly expanding network of HSR has important policy implications for
29 Chinese airlines.

31 Keywords: Airline deregulation; market competition; high-speed rail;

China AU:3
33 JEL classification: L43; L92; L93
35

37

39

41
Airline Economics in Asia
Advances in Airline Economics, Volume 7, 79
101
43 Copyright r 2018 by Emerald Publishing Limited
All rights of reproduction in any form reserved
45 ISSN: 2212-1609/doi:10.1108/S2212-160920180000007006
79
 80 HANGJUN YANG ET AL.

1 1. INTRODUCTION
The Chinese airline industry has experienced rapid growth, and its annual air
3
passenger traffic has grown by approximately 17% over the past three decades.
Since 2005, China has become the second largest air transport market in the
5
world only after the United States. Brian Pearce, a chief economist from
7 the International Air Transport Association (IATA), said that more than half of
the global aviation industry profits in 2010 came from the Asia-Pacific region, a
9 phenomenon largely attributed to strong growth in the Chinese market (Yu,
2010). According to forecast by IATA, the Chinese airline market will continue
11 its rapid, albeit at a slower rate, growth in the next 20 years, and China will
overtake the United States as the world’s biggest passenger market by 2024 and
13 will be a market of 1.3 billion air passengers in 2035.1 Air transportation is also
the fastest growing mode of the three most popular intercity transport modes in
15 China (road, railway, and air), with its proportion rising steadily every year
(National Bureau of Statistics of China, 2012).
17 The unprecedented growth is due in large part to a series of consolidations
and policy reforms, which have transformed the Chinese airline market (e.g.,
19 Zhang & Chen, 2003; Zhang & Round, 2009, 2011; Zhang, 1998). In October
2002, for example, the industry witnessed a major consolidation, with the central
21 government merging 10 state-owned airlines into three airline groups: Air
China, China Eastern Airlines, and China Southern Airlines (so-called the Big
23 Three). The “Big Three” airline groups serve as the country’s trunk carriers,
whereas several local airlines and a few privately-operated airlines serve more or
25 less as “fringe” carriers.2 Furthermore, a number of policy options have been
enacted to promote the reform and development of the market. For instance, in
27 2004, the “Price of Domestic Air Transport Aviation Reform Program” was
implemented by the National Development and Reform Commission (NDRC)
29
and the Civil Aviation Administration of China (CAAC), both forming as the
industry’s regulatory body. Under the new policy, the pricing model is changed
31
from direct management to indirect management, with the government regulator
determining the benchmark price and the floating bands while airlines determin-
33
ing their prices within the specified range. As a result of this and other regula-
35 tory policy changes, which will be discussed in Section 2, the Chinese airline
industry has been significantly liberated.
37 After the rapid development of this industry over the last three decades, the
government is contemplating whether, and how, further market-oriented policy
39 reforms should be carried out. There are two very different views on the reforms
and their effectiveness in promoting airline competition in China. One view is
41 that the Chinese airline industry has achieved a certain degree of competitive
vigor as a result of a steady, in-depth marketization process and proper policy
43 formulation and implementation. The other view is that the market-oriented
reforms have not effectively weakened the market power of state-owned airlines;
45 consequently, they have not promoted effective competition in the market
(Zhang, Yang, Wang, & Zhang, 2014).
 Airlines in China 81 AU:2

1 The first high-speed rail (HSR) line in China began operating between
Beijing and Tianjin (115 km) shortly before the 2008 Beijing Olympic Games.
3 Since then, HSR services have also been opened in different city-pair markets,
one after another (Fu, Zhang, & Lei, 2012). The Chinese government has made
5 massive investments and impressive progress in the HSR development. The cur-
rent HSR route coverage in China (22,000 km) is larger than the rest of world
7 together. Furthermore, the HSR network is still rapidly developing in China.
According to the new “Mid- and Long-Term Railway Network Plan,” the
9 Chinese HSR network will have 38,000 km passenger-dedicated lines in opera-
tion and about 80% of China’s domestic aviation market will be overlapped by
11 HSR lines by 2025.
Many studies found that the entry of HSR promotes competitive pressure on
13 airlines in terms of passenger demand and airfare (Dobruszkes, Dehon, &
Givoni, 2014). For example, the opening of Shinkansen in Japan reduced air
15 passenger traffic significantly, and the introduction of Korean Train Express
(KTX) in 2004 affected both passenger demand and airfare (Chang & Lee,
17 2008; Suh, Yang, Lee, Ahn, & Kim, 2005; Vickerman, 1997). However, Fu
et al. (2012) found that the HSR network affected some air routes in China, but
19 it did not pose a significant threat to the overall airline industry. Since its debut
in 2008, the Chinese HSR network has seen an average annual growth of over
21 30% in passenger traffic. As of October 2013, China’s HSR lines were carrying
twice as many domestic passengers as the country’s airlines (Bradsher, 2013).
23 There were more than 5 billion passengers on the Chinese HSR network from
2008
2015. The total ridership was over 1.1 billion in 2015 alone, making
25 China’s HSR lines the most heavily used in the world (Xing, 2016). Meanwhile,
the Chinese domestic air transport market has also been expanding quickly and
27 the average annual growth rate from 2008 to 2013 was over 12% (CAAC, 2014).
Quite a few scholars found that the HSR is a strong competitor of air trans-
29 port on short- and medium-distance routes (Givoni & Banister, 2006; Hu,
Wang, Jin, & Ding, 2015). For instance, Rothengatter (2011) pointed out the
31 distance which has a fierce competition between civil aviation and HSR is from
400 to 800 km. Jorritsma (2009) concluded that the HSR occupancy rate could
33 reach 50
90% if the travel time of HSR was in 2
3 hours. Not surprisingly, the
difference between airfare and HSR fare plays an important role when passen-
35 gers choose between air transport and HSR (Dobruszkes, 2011). Dobruszkes
(2011) recognized that HSR travel time was a key competitive factor in the
37 Western European market. Behrens and Pels (2012) studied the travelers’ behav-
ior in the London-Paris market and found that HSR’s frequency and travel time
39 were the main determinants of travel behavior. Some studies showed that mar-
ket structure and degree of competition vary dramatically on thick and thin air-
41 line routes (Bhadra & Kee, 2008; Graham, Kaplan, & Sibley, 1983). The
Chinese HSR network provides parallel services to many air routes and has dif-
43 ferent impacts on air routes with different distances and traffic volumes (Zhang,
Yang, & Wang, 2017).
45 This chapter reviews the history, deregulation, policy reforms, and airline
consolidations and mergers of the Chinese airline industry. Since HSR is
 82 HANGJUN YANG ET AL.

1 developing rapidly in China and brings a huge challenge to airlines, the HSR
development and its effects on the airline industry will also be reviewed. The rest
3 of the chapter is organized as follows: Section 2 reviews the history and deregu-
lation process of the Chinese airline industry. Section 3 discusses airline consoli-
5 dations and mergers in China, and reviews the literature on the measurement of
airline competition in China’s domestic market. Section 4 first reviews the HSR
7 development in China and then analyzes the effects of HSR on the Chinese air-
line industry. The last section summarizes and identifies the research gaps and
9 opportunities.

11
2. HISTORY AND DEREGULATION OF CHINA’S AIRLINE
13 INDUSTRY
Zhang and Round (2008) and Shaw, Feng, Chen, and Zhou (2009) reviewed the
15
deregulation process of the Chinese air industry until 2004. Wang, Bonilla, and
Banister (2016) reviewed the deregulation process until 2012. In order to give a
17
complete picture of the deregulation process of China’s airline industry, we will
still review the early periods discussed in previous studies. In particular, we fol-
19
low the structure of Zhang and Round (2008) and update the content by cover-
ing more recent deregulation, policy reforms and airline consolidations in
21
Sections 2 and 3.
23
2.1. Civil Aviation under Central Planning (before 1978)
25 Before the founding of the People’s Republic of China (PRC) in 1949, air trans-
port in China was closely related to military needs, and civil aviation was very
27 limited. Most airlines were controlled by the government. The CAAC was estab-
lished in November 1949. The industry experienced losses from 1949 to 1978,
29 even after taking into account the central government’s subsidies to the industry
(Zhang, 1998). Until 1978, the air transport was fully controlled by the central
31 government under the CAAC, which operated in a military or semi-military
style, collaborating with the Air Force. The CAAC was responsible for plan-
33 ning, building, and operating airports and air routes. All the airlines and the
flights were centrally controlled in a tightly regulated system.
35
2.2. Transition from Central Planning to Market Orientation with Ongoing
37
Reforms (1978
1996)
39 Since China’s economic reform in 1978, the CAAC started to take cautious mea-
sures to change the way it regulates the airline industry. In 1980, the CAAC
41 became independent from the military, and then implemented various reform
measures: separating the management of airlines, airports, and the CAAC cen-
43 tral office; transforming airlines into profit-driven business entities; and allowing
local governments to operate their own airlines and encouraging competition
45 (Jin, Wang, & Liu, 2004). In 1987, six state-owned airlines (Air China, China
Eastern Airlines, China Southern Airlines, China Southwest Airlines, China
 Airlines in China 83

1 Northwest Airlines, and China Northern Airlines) were set up. The CAAC,
however, remained as both the regulator of the air transport industry and the
3 manager of airports, airlines, and other air transport services.
All Chinese airlines were strictly regulated by the CAAC in all aspects with
5 very limited competition among airlines. Until 1996, carriers competed with
each other through standard services and safety record rather than airfares and
7 service quality. Indeed, passengers had no brand loyalty since many carriers had
only been established recently and were quite homogeneous in price and service
9 due to the tight regulation. As a result, although the industry started to transit
from central planning to market orientation, there was little competition
11 between different airlines.
13
2.3. Deregulation of Airfare and Route Operation, and Privatization (after 1997)
15 The third stage of airline industry development in China started in 1997. The
main features of this stage are deregulation of airfare and route operation, and
17 privatization.

19 2.3.1. Deregulation of Airfare

The deregulation of airfare began in November 1997, the CAAC issued the pol-
21 icy of “one class multiple discounts” such that airlines were allowed to use price
discrimination to attract more passengers and to maximize revenue. Extensive
23 price wars followed and the whole airline industry suffered from huge profit
losses. Given that most airlines are owned by either the central government or
25 local governments, the CAAC announced another policy to ban discounts more
than 20% of the normal price in May 1998.
27 In April 2004, along with the NDRC, the CAAC implemented the “Scheme
of Domestic Airfare Reform.” In the Scheme, the benchmark price in the
29 domestic market was set at RMB 0.75 per kilometer. For the first time, Chinese
airlines were allowed to price freely within a range 25% higher (price ceiling)
31
and 45% lower than the benchmark price (price floor). Hence, the administra-
tion on airfares turned from direct control mode to indirect control mode by the
33
in-charge pricing department. Although very few airlines charged prices above
35 the price ceiling, many airlines broke the price floor constraint. Since there were
too many airlines charging prices below the price floor, the CAAC could not do
37 too much about it.
In October 2013, the CAAC and NDRC issued the “Opinion with regard to
39 the Promotion of Civil Aviation Development,” which revoked the price floor
limitation for those 31 lines adopting governmental guidance pricing. The dereg-
41 ulation of airfare continued. In October 2016, the CAAC and NDRC
announced the “Notice on Deepening Domestic Airfare Reform,” which further
43 removed the pricing constraints of airlines. In particular, the Notice states that
for all air routes below 800 km and all air routes above 800 km facing competi-
45 tion from HSR, airlines can charge prices without any restrictions. That is to
say, the majority of domestic air routes in China are allowed to set prices freely.
 84 HANGJUN YANG ET AL.

1 Therefore, we may conclude that the Chinese airline pricing is indeed a market
process.
3
2.3.2. Deregulation of Route Entry and Exit
5 In 1996, the CAAC issued the “Regulation on Operation of Chinese Civil
Aviation Domestic Routes and Flights.” Under the Regulation, for any entry to
7 and exit from a route, and for an increase in the number of flights on any route,
airlines must submit an application to the CAAC for approval in advance. Since
9 2000, the CAAC has gradually loosened the criteria for route entry and exit in
the domestic market.
11 In March 2006, the CAAC implemented the “Regulation on Operation on
Domestic Routes.” With this new regulation, except for some routes with high
13 traffic volume (15 busiest domestic air routes) and routes linking the busy air-
ports (eight busiest airports, i.e., Beijing, Shanghai’s Pudong and Hongqiao,
15 Guangzhou, Shenzhen, Chengdu, Kunming, and Dalian), airlines are allowed to
enter into and exit from a route without prior CAAC approval. That is to say,
17 airlines may begin or stop services in most domestic markets without the CAAC
conducting a case-by-case review of the applications.
19
2.3.3. Privatization
21
In 1994, the CAAC and the Ministry of Foreign Trade and Economic
Cooperation issued the “Notice on Policies Concerning Foreign Investment in
23
Civil Aviation.” This notice allowed foreign investors to invest in Chinese air-
lines, to construct airports with Chinese partners.
25
In 1997, China Eastern Airlines was listed on the New York, Hong Kong,
and Shanghai stock exchanges, which can be considered the first step of privati-
27
zation of Chinese airlines. A few months later, China Southern Airlines was also
29 listed on the New York and Hong Kong stock exchanges and later listed on the
Shanghai stock market as well in 2003. Then, Air China succeeded in listing its
31 shares on Hong Kong and London stock exchanges in 2004. Besides the “Big
Three” carriers, many other airlines had also listed their shares domestically or
33 overseas, such as Hainan Airlines, Shanghai Airlines, and Shenzhen Airlines.
In August 2002, the “New Regulations for Foreign Investment in the Civil
35 Aviation Industry” was implemented. Under the new regulation, foreign inves-
tors were allowed to invest in all domestic airlines and general aviation compa-
37 nies, and air-related projects in refueling, aircraft maintenance, air freight, and
storage. In August 2005, the “Regulation on Domestic Investment on Civil
39 Aviation” was put into place and allowed domestic investors to invest in civil
aviation.
41 The relaxation of regulation on investment in civil aviation encouraged the
establishment of private airlines. The number of private airlines grew rapidly,
43 with new airlines being established for expanding local markets. The very broad
perspective on “opening up” allowed local authorities to establish their own air-
45 lines for attracting investment. Most of those private airlines positioned them-
selves as low-cost carriers (LCCs). The most successful one is Spring Airlines,
 Airlines in China 85

1 which is the largest LCC in China.3 As a response to the rapid growth of airlines
and a particular concern over aviation safety, the CAAC prohibited the estab-
3 lishment of new airlines in 2007. The ban was valid until May 2013 when the
CAAC reopened the door for new airline establishments.
5 Almost all Chinese airports are public-owned, which mirrors airport owner-
ship rates in the United States. Nevertheless, many airports are listed on stock
7 markets or jointly invested by private sectors. For example, the Beijing
International Airport, the second largest airport in the world only behind the
9 Atlanta International Airport, was successfully listed on the Hong Kong Stock
Exchange in 1999. The Airport Authority of Hong Kong took a 35% share of
11 the Hangzhou International Airport, which is China’s tenth largest airport.
Hangzhou Airport is the main hub for flights into the eastern province of
13 Zhejiang. Furthermore, the CAAC completed the transfer of ownership and
management of all airports (except for Beijing and Tibet airports) to local gov-
15 ernments by 2004, in a process called “airport localization.” The program pro-
vided more incentives for local governments and private investment for
17 constructing and improving airports, and it made the airports more financially
accountable and efficient (Yuen & Zhang, 2009).
19

21 3. AIRLINE CONSOLIDATIONS AND COMPETITION IN

CHINA’S DOMESTIC MARKET
23 The development of the Chinese airline industry is a deregulation process, under
which the NDRC and the CAAC have made several airline consolidations in
25 order to enhance the competitiveness of the “Big Three” carriers. A series of air-
line consolidations have dramatically affected the market competition and raised
27 antitrust concerns.

29
3.1. Airline Consolidations in China
31 3.1.1. Elimination of the Regional Airlines
In 1994, the first airline merger happened in China when Fujian Airlines was
33 taken over by Xiamen Airlines. Several other small airlines in severe financial
losses were taken over after 1997 with the onset of the third stage of the deregu-
35 lation process. China Eastern Airlines acquired China Great Wall Airlines and
Wuhan Airlines in 1998 and 2002, respectively. As a result, China Eastern
37 Airlines extended its base from East China to two north provinces (Shanxi and
Hebei) and one central province (Hubei). For similar reasons, China Southern
39 Airlines merged Guizhou Airlines and Zhongyuan Airlines in 1998 and 2000,
respectively. Hainan Airlines also acquired Chang’an Airlines and China
41 Xinhua Airlines in 2000 and 2001, respectively. As a result, Hainan significantly
expanded its network nationwide (Zhang & Round, 2008).
43
3.1.2. Consolidation into the “Big Three” Airline Groups
45 The CAAC advocated airline consolidation to create more cost-efficient airlines
that could achieve economies of scale. The Chinese airline industry has
 86 HANGJUN YANG ET AL.

1 undergone the most profound and thorough transformation since 2002. In

October 2002, the Chinese airline industry witnessed a major consolidation, with
3 the central government merging ten state-owned airlines into three large airline
groups: Air China, China Eastern Airlines, and China Southern Airlines (so-
5 called the Big Three). Note that the state-led consolidation was driven under the
guidelines of the CAAC, and it was very different from the free-market deregu-
7 lation implemented in the United States (Shaw et al., 2009), and it was com-
pleted much faster than that in the United States.
9 The “Big Three” airline groups are not only similar in size and capacity but
are also spatially balanced with respect to geographical space. Headquartered in
11 Beijing (north), the Air China Group also has bases in Chengdu (southeast) and
Hangzhou (east). In the China Eastern Group, its main hub is Shanghai (east)
13
with bases in Xi’an (northeast) and Kunming (southeast). The China Southern
Group has Guangzhou (south) as its main hub with bases in Shenyang (north-
15
east) and Urumqi (northwest). On one hand, the primary bases of the “Big
17 Three” are located in Beijing (north), Shanghai (east), and Guangzhou (south),
respectively. The spatial structure gives the “Big Three” advantages around their
19 own main hubs. On the other hand, the locations of bases enable multimarket
contacts among the “Big Three,” and so they compete in a much broader
21 national market than ever before.

23 3.1.3. Two Large-scale Airline Mergers

In 2010, two large-scale airline mergers took place in China: China Eastern
25 Airlines completed its merger with Shanghai Airlines (the sixth largest domestic
carrier at the time), MU-FM for short; and Air China successfully increased its
27 stake in Shenzhen Airlines (the fifth largest domestic carrier at the time) from
25% to 51%, CA-ZH for short. Both China Eastern and Shanghai Airlines took
29 Shanghai as their primary base and operated overlapping services on many
routes in and out of Shanghai. Both of them suffered severe financial losses
31
before the merger and their financial positions became exacerbated during the
2008 global financial crisis (Zhang, 2015). This merger was supported and
33
guided by the government, with an obvious purpose of eliminating head-to-head
competition between the two, which would undoubtedly strengthen China
35
Eastern’s dominant status at Shanghai’s Hongqiao and Pudong Airports (Ma,
37 Wang, Yang, & Zhang, 2017a)
Before being taken over by Air China, the flag carrier of China, Shenzhen
39 Airlines was China’s largest private airline since 2005. However, China’s air
transport policy had long been hostile to the private carriers (Zhang & Zhang,
41 2016), which in part resulted in Shenzhen Airlines’ poor financial performance.
Although Shenzhen Airlines was reluctant to be taken over by Air China, seek-
43 ing financial support was one of the main motives for the carrier to receive cash
injection from Air China. By taking control of Shenzhen Airlines, Air China
45 was able to extend its network to and exert influence over the South China mar-
ket, which was traditionally China Southern Airlines’ territory.
 Airlines in China 87

1 Unlike the MU-FM merger, Air China and Shenzhen Airlines were based in
separate airports and thus their networks had little overlap. Therefore, the CA-
3 ZH merger was of complementary nature while the MU-FM was regarded as a
parallel merger in terms of their route systems. Another notable difference
5 between these two mergers is that the MU-FM merger is more state-led, while
the CA-ZH merger is more market-driven.
7 At this stage of airline industry development, China’s airline deregulation is
only partial because the Chinese government wants to protect its growing
9 domestic market. A key challenge for China is whether to first open up the air-
lines domestically and then to follow this with international agreements for fur-
11 ther deregulation. Chinese airlines have limited market power internationally,
unlike the more mature airlines in the United States and Europe where the air
13 transportation is more deregulated. The latter two regions have a much more
extensive international network of routes, more market power, financial
15 resources, and the larger fleets (Fu, Oum, & Zhang, 2010). China has not yet fol-
lowed this road because it wishes to create national champions before competing
17 internationally. Therefore, the strategy of the Chinese central government has
been airline consolidation and a further strengthening of the “Big Three”
19 through mergers and acquisitions (Lei & O’Connell, 2011; Ma et al., 2017a).
This institutional dimension differs from the path taken to market-driven con-
21 solidation in the United States and Europe.
In summary, the Chinese airline industry has passed through many changes
23 from a semi-military era of strict regulation to a transitional stage, then an era
of state-led consolidation and privatization, and it is now entering an era of
25 market-led consolidation, new entrants, and deregulated competition with the
full impacts yet to be realized and assessed. This process is foremost highlighted
27 by the transforming role of the CAAC from being a “two-headed” regulator
and operator to a lesser role of supervision. The airline deregulation since the
29 1980s has been partially successful, and this success has been associated with the
rapid increase in air travel demand. Therefore, we may conclude that although
31 the Chinese airline industry is still subject to some regulation, it is entering a
market-driven business and will finally become a fully deregulated industry in
33 the long run.

35 3.2. Measurement of Airline Competition in China’s Domestic Market

There are a few studies that assess airline competition in China’s domestic mar-
37
ket. The early studies mainly use the Herfindahl
Hirschman Index (HHI) to
measure the market competition of China’s airline industry (Chen, Zhang, &
39
Xiao, 2012; Xu, Li, & Gan, 2011; Zheng & Li, 2011).
41 X
N
HHI ¼ Si2 ; ð1Þ
43 i¼1

45 where Si is the market share of airline i, and N is the number of competing

airlines.
 88 HANGJUN YANG ET AL.

1 To the best of our knowledge, Zhang, Yang, and Wang (2013) is the first
effort to estimate market conducts in China’s domestic air transport market
3 using both real demand and fare data of the “Big Three.” The authors focused
on the three busiest airline routes that link Beijing, Shanghai, and Guangzhou.
5 The three megacities have four of the largest hub airports in China, namely
Beijing Capital International Airport, Shanghai Pudong International Airport,
7 Shanghai Hongqiao International Airport, and Guangzhou Baiyun
International Airport. The routes in these three cities are the busiest in China,
9 and the headquarters of the three major airlines are located in these three cities,
namely Air China in Beijing, China Eastern in Shanghai, and China Southern in
11 Guangzhou. According to the Statistical Data on Civil Aviation of China pub-
lished by the General Administration of Civil Aviation of China (CAAC,
13 2001
2011), the total capacity of the four airports has been accounting for
around 35% of all airport capacity in China since 2000. The three routes linking
15 Beijing, Shanghai, and Guangzhou are very profitable, resulting in all airlines
wanting to operate flights on these routes. These routes have now been dubbed
17 as the “golden routes.” To some extent, competition among the airlines on these
routes is a microcosm of the tight competition in the entire Chinese market. The
19 distribution of airline market power in these routes also reflects the market
power in the whole market.
21 Following the methodology proposed in Brander and Zhang (1990, 1993)
and Oum, Zhang, and Zhang (1993), Zhang et al. (2013) estimated the market
23
conduct parameters of the three busiest Chinese airline routes that are domi-
nated by the three major carriers. Specifically, the conduct parameter is
25
defined as
27 dQ p
MCi η
¼ ; ð2Þ
dqi p Si
29

31 where p is the price, qi is the demand of firm i, Q is the total demand, η ¼ dQ p

dp Q is
the (positive) price elasticity of demand, Si ¼ qi =Q is the market share of firm i,
33 and MC i is the marginal cost of firm i. Different values of dQ=dqi represent dif-
ferent types of oligopolistic competition. In the duopoly case, if the two firms
35 have the same costs, then 0, 1, and 2 represent Bertrand competition, Cournot
competition, and cartel case, respectively. A larger value of dQ=dqi indicates a
37 more collusive conduct of firm i.
Their main finding is that the competitive strategies of China’s three largest
39 airlines are distinct from one another. In general, the market behavior of Air
China follows the Cournot model. The competitive behaviors of both China
41 Southern and China Eastern are between Bertrand and Cournot. However,
China Southern behaves closer to Cournot, whereas China Eastern behaves
43 closer to Bertrand. The authors also found that China Eastern adopts a low-
price strategy to compete with its rivals and to expand its market share. By
45 keeping the costs low, Air China is able to achieve the highest profits of the
three airlines.
 Airlines in China 89

1 Zhang et al. (2014) first estimated the Lerner indices and used the indices to
measure the extent of airline market competition in China. Then they investi-
3 gated the explanatory factors of market power so as to determine the sources of
market power. They used the panel data of the “Big Three” carriers and focused
5 on the routes connecting China’s three largest cities
namely Beijing,
Shanghai, and Guangzhou
to all the Chinese provincial capital cities (except
7 Lhasa, the capital city of Tibet) and sub-provincial cities. These three aviation
centers and the other capital cities are important in terms of their dominant
9 share of overall domestic air travel, and these cities are situated throughout the
country. Competition among airlines on these routes reflects the competitive sit-
11 uation of almost the entire Chinese aviation market and thus determines to a
large extent the welfare impact of the industry.
13 In Zhang et al. (2014), the Lerner index is defined as

15 Lijt ¼ ðPijt
MC ijt Þ=Pijt ð3Þ

17 where Lijt is the Lerner index of carrier i on route j in time-period t, Pijt is the
per-passenger price of airline i on route j in period t, and MC ijt is corresponding
19 marginal cost. The index Lijt ranges from 0 to 1. Larger values of Lijt indicate
stronger market power of firm i on route j in period t, whereas 0 represents per-
21 fect competition. Denoting the price elasticity of demand as η, it is straightfor-
ward to show that the Lerner index is given by: (1) L ¼ 1=η for a monopolist;
23 (2) Lijt ¼ sijt =η under Cournot competition, where sijt is the market share of firm
i on route j in period t; and (3) Lijt ¼ 0 under perfect competition.
25 The authors found that there exists a certain degree of market power in the
Chinese airline industry. Among the three largest state-owned carriers, the mar-
27 ket power of Air China is the strongest while the market power of China
Eastern is the weakest, with China Southern positioned in between. From a geo-
29 graphical perspective, China’s northeast region is shown to exhibit the strongest
market power, while the central region the weakest. Furthermore, the existence
31 of HSR and LCCs, income level, population size, seasonality, and a number of
competing airlines are found to be the main determinants of the industry’s mar-
33 ket power.
Wang et al. (2016) developed a market competition index and a market con-
35 centration index to assess the airline competition in China’s domestic market.
Specifically, the market competition index in each airport is defined as the num-
37 ber of operating airlines within the airport.

39 X
N
Ci ¼ aij ; ð4Þ
41 j¼1

43 where aij ¼ 1 when the airline j operates any flight departing or arriving at air-
port i and aij ¼ 0 otherwise. N is the total number of airlines in the market. The
45 market competition index Ci is the sum of aij for airport i and reflects how
many airlines operate there. This means that the higher the index, the more
 90 HANGJUN YANG ET AL.

1 competitive the market. The market competition of the whole aviation industry
C is defined as the average value of Ci in all airports
3
1 XM

5 C¼ Ci ; ð5Þ
M i¼1

7
where M is the total number of airports or air routes in the market.
9 The market concentration index in each airport is defined using the HHI
index. Specifically, the HHI index is normalized in order to compare it in all
11 years with unequal number of airlines.

HHI
1=N
13 HHI ¼ : ð6Þ
1
1=N
15
The adjusted HHI index ranges from 0 to 1, with the market structure vary-
17 ing from one extreme where perfect competition exists to a monopoly. This
means that the lower the index, the more competitive the market.
19 Wang et al. (2016) first reviewed China’s air deregulation process and then
analyzed its impact on airline competition during the period 1994
2012 from a
21 geographical perspective. The authors showed that after the establishment of the
“Big Three” state-owned airline groups in 2002, there has been a trade-off
23 between the extent of deregulation and airline competition in China because the
central government has tended to strengthen the “Big Three” rather than totally
25 open the market to private and local government-owned airlines. There are three
main findings. First, the air market has been more concentrated in the “Big
27 Three” as a result of the air deregulation process. Second, airline competition in
over two-thirds of the airports and one-half of the routes has increased in
29 1994
2012, but the core airports and trunk routes are dominated by the “Big
Three.” The peripheral airports and thin routes have been operated by private
31 and locally owned airlines. Third, airline competition has occurred in most air-
ports of the eastern region, and it is more intense than in the central and western
33 regions. However, even competition in the eastern region has decreased in
1994
2012.
35

37
4. EFFECTS OF HSR ON THE CHINESE AIRLINE
39 INDUSTRY
The impact of HSR on air transport has been well studied both theoretically
41 and empirically. Theoretical studies mainly focus on the short-term and long-
term effects of HSR on airfares, profits, and social welfare (Jiang & Zhang,
43 2014, 2016; Xia & Zhang, 2016; Yang & Zhang, 2012). Yang and Zhang (2012)
showed that the airfare tends to decrease while the rail fare tends to increase if
45 the access time to an airport is longer. Airfare is negatively related to rail speed
if the marginal cost of HSR with respect to rail speed is not too large. Jiang and
 Airlines in China 91

1 Zhang (2014) considered the cooperation between HSR and air transport under
hub airport capacity constraint. Xia and Zhang (2016) investigated the competi-
3 tion and cooperation between HSR and air by adopting a vertical differentiation
approach and found that in the HSR-inaccessible market, HSR-air competition
5 may lead to higher airfares in the connecting market. Jiang and Zhang (2016)
shed light on the long-term shocks to airlines brought about by HSR. They
7 showed that HSR competition can induce airlines to change their network struc-
ture from point-to-point to hub-and-spoke to cover more fringe markets,
9 thereby improving the social welfare.
Empirical studies have been developed to validate the theoretical conclu-
11 sions. Most studies on the European markets such as Clewlow, Sussman, and
Balakrishnan (2014) found that the improvement of rail travel time has a sig-
13
nificant impact in reducing short-haul air traffic. Martín and Nombela (2007)
showed that HSR trains would attract travelers from plane and bus on long-
15
haul routes in Spain, while for short-haul routes, trains would mainly attract
17 car users. Martin, Román, García-Palomares, and Gutiérrez (2014) found
that how access by private car tends to favor the relative competitiveness of
19 air transport. On the other hand, public transport access tends to favor HSR
competitiveness. An EU-wide study by Dobruszkes et al. (2014) reported that
21 air services are affected by HSR travel time, that is, the longer the HSR
travel time, the more air services. Jiménez and Betancor (2012) found that on
23 average, the HSR entry has led to a reduction in the number of air operations
by 17% in Spain. The previous literature has confirmed that HSR frequency
25 and the number of HSR seats are important factors affecting the outcome
of HSR
airline competition (Castillo-Manzano, Pozo-Barajas, & Trapero,
27 2015; Jiménez & Betancor, 2012; Zhang, Yang, & Wang, 2017). Both
Castillo-Manzano et al. (2015) and Jiménez and Betancor (2012) found that
29 air demand is negatively associated with the number of HSR seats. Zhang,
Yang, and Wang (2017) found a negative relationship between airfare and
31 HSR frequency in China. However, the authors argued that the impact of
HSR frequency on airfare is much weaker than the impact of HSR travel
33 time. HSR provides higher frequency and more punctual services than
airlines and such services are less likely to be affected by bad weather
35 conditions.
The spread of HSR network in China has forced Chinese airlines to slash
37
domestic airfare and cancel regional flights. The impact of HSR on air travel is
most acute for intercity trips under 800 km. In China, routes between 400 and
39
800 km accounted for about 30% of the domestic airline network (Fu et al.,
2012). For example, all the flights between Zhengzhou and Xi’an (505 km) were
41
canceled by the airlines in March 2010
48 days after the opening of HSR
43 service
due to very low demand. Even for the Wuhan-Guangzhou route
a
much longer route (1,069 km)
daily airline flights were reduced from 15 to 9,
45 one year after the HSR entry (Fu et al., 2012). However, flights on routes over
1,500 km are generally unaffected.
 92 HANGJUN YANG ET AL.

1 4.1. HSR Development in China

The first modern HSR
the route between Tokyo and Osaka with a maximum
3 speed of 210 km/hour
went into operation in 1964 in Japan. In 1976, British
Railways opened an HSR line between London and Bristol. France commenced
5 the operation of its first HSR between Paris and Lyon in 1981. Since then, many
European countries have built HSR lines, including Spain, Germany, Italy,
7
Belgium, and the Netherlands. In Asia, South Korea started its first HSR line
between Seoul and Daegu in 2004 (which later was extended to Busan), and
9
Taiwan started its HSR service between Taipei and Kaohsiung in 2007.
Since the beginning of the twenty-first century, HSR is developing at a fast
11
pace around the world, especially in China. Although the first HSR in China
started operations in 2008 connecting Beijing and Tianjin, the most ambitious
13
HSR development so far is in China. To modernize the country’s railway trans-
port system and to alleviate rail capacity constraint, the Chinese government
15
announced a “Mid-to-Long-Term Railway Network Plan” in 2004 and laid out
a blueprint of building the four vertical and four horizontal trunk lines
a
17
“4 þ 4” HSR network
with a total length of 12,000 km by 2020.4 The stimulus
19 package launched by China in 2008 to mitigate the impact of the global financial
crisis had more than doubled the investment funds available for railways for the
21 period 2008
2010, enabling its former Ministry of Railways (MOR) to acceler-
ate the HSR construction. In 2010, total railway investment amounted to 842
23 billion RMB (122 billion USD). As a result, the completion dates of several pro-
jects had been brought forward. The plan was revised in October 2008 to accel-
25 erate the HSR construction with a total length of 16,000 km by 2020. However,
by the end of 2015, China had already built a 19,000 km HSR network, which is
27 longer than the combination of all the other countries. Hence, the “4 þ 4”
national HSR grid was completed much ahead of schedule and now serves as
29 the backbone of China’s HSR network.
Meanwhile, additional HSR lines have been planned and built. In July 2016,
31 the state planners reorganized the national HSR network and announced the
new “Mid- and Long-term Railway Network Plan” of building the eight-vertical
33 and eight-horizontal corridors
a much larger “8 þ 8” HSR network
with a
total length of 30,000 km and 38,000 km by 2020 and 2025, respectively. In par-
35 ticular, the “8 þ 8” HSR network is planned to connect all Chinese cities with at
least half a million population by 2025. The HSR network expanded dramati-
37 cally over the past decade thanks to the generous funding from the Chinese gov-
ernment. The accelerated HSR development from 2017
2025 indicates that at
39 least a yearly investment of 800 billion RMB (115 billion USD) with current
HSR construction cost is required to maintain the pace of HSR. As a result, the
41 total HSR investment from 2017
2025 will be about 7.2 trillion RMB (1.04 tril-
lion USD), which is about 10% of the Chinese GDP in 2016 (Wang, Xia, &
43 Zhang, 2017).
HSR in China is officially defined as passenger-dedicated railways designed
45 to carry multiple-unit trains at speeds of 250
350 km/h. Some existing passen-
ger lines, that can be upgraded for train speeds of 250 km/h, with a current
 Airlines in China 93

1 service speed of at least 200 km/h, are also considered HSR, which is consistent
with the definition of HSR by the International Union of Railways. By the end
3 of 2016, the Chinese HSR network extended to 29 of the country’s 33
provincial-level administrative divisions and exceeded 22,000 km in total length,
5 accounted for about two-thirds of the world’s HSR tracks in commercial service.
The world’s largest HSR network is also the most extensively used, with 1.44
7 billion passengers delivered in 2016. According to the latest report by the
International Union of Railways, by September 1, 2017, the total length of HSR
9 tracks in operation in China is 26,783 km, which is 65.6% of the world’s total,
40,832 km (UIC, 2017).
11 Notable HSR lines in China include the Beijing
Guangzhou route and the
Beijing
Shanghai route. The Beijing
Guangzhou HSR with total route dis-
13 tance 2,298 km is the world’s longest HSR line in operation. At the travel speed
of 350 km/h, the fastest HSR trains run 8 hours and 1 minute from Beijing to
15 Guangzhou. Connecting China’s two largest cities, the Beijing
Shanghai HSR
is China’s busiest HSR route with a ridership of more than 160 million in 2016.
17 It started operation on June 30, 2011 and remains China’s most profitable HSR
line, reporting a 6.6 billion RMB net operational profit in 2015.5 Since its open-
19
ing, the HSR trains had traveled at 300 km/h until September 2017, and now
the speed is raised to 350 km/h. At this speed, the fastest HSR trains with one
21
intermediate stop take only 4 hours and 24 minutes to travel from Beijing to
Shanghai (1,318 km), compared to 11 hours and 50 minutes on the fastest trains
23
running on the parallel conventional railway. The Beijing
Shanghai HSR links
China’s two important economic zones, Bohai Delta and Yangtze River Delta,
25
and covers 26.7% of the total population in China and 11 cities over 1 million
27 population each.6
The State Council announced its plan in March 2013 to dismantle the MOR
29 to form administrative and commercial arms. Railway administration functions
are to be supervised by the Ministry of Transport (MOT), while the newly
31 formed China Railway Corporation (CRC) is to be responsible for all commer-
cial activities. It is expected that restructuring will enhance China’s transporta-
33 tion capabilities, as rail, road, water and air transport are managed and
monitored under the same umbrella, the MOT. Integration should remove bar-
35 riers against developing inter-modal transport between rail and other transport
modes.
37 Under the supervision of the former MOR, the China Railways used a single
fare structure across the country. The ticket price was established by the rate-
39 making distance, which usually equals to the actual rail travel distance. After
the CRC took over the commercial functions of the former MOR in March
41 2013, the railway sector continued to implement government-set or government-
guided prices. Since its pricing scheme is concerned with both the sector’s nor-
43 mal operation and development, as well as the daily traveling and vital interests
of the general public, the government is very cautious in making any price
45 adjustment in the railway sector, taking into account various factors including
operation, construction, public acceptance and coordinated development with
 94 HANGJUN YANG ET AL.

1 other transport modes such as air and road transport. By law, hearings must be
held before any adjustments in the passenger train ticket fare can be made.
3 One notable feature of HSR in China is that the ticket price of HSR was
fixed and no dynamic pricing was allowed. Starting from January 2016, the gov-
5 ernment gave the CRC some freedom to set ticket prices of HSR, especially on
the first-class and business-class seats but not so much on second-class seats.
7 There is a complicated formula to calculate the ticket price. Roughly, the unit
fare is about RMB 0.3/km and RMB 0.4
0.5/km on the HSR routes with travel
9 speed 250 km/h and 300
350 km/h, respectively. Compared with similar HSR
systems in other countries or regions, China’s HSR services cost significantly
11 less. The unit fare of China’s HSR is about US$ 0.05
0.08/km, while the aver-
age unit fare is US$ 0.268, 0.318, 0.141 across Europe, Japan, and South Korea,
13
respectively.
The advent of HSR in China has greatly reduced travel time and thus has
15
transformed the Chinese society and economy. A World Bank study (Olivier,
Bullock, Jin, & Zhou, 2014) found that “a broad range of travelers of different
17
income levels choose HSR for its comfort, convenience, safety, and punctual-
ity.” Before the establishment of HSR network in China, air and rail transport
19
modes were much differentiated such that the air mode for medium- to long-
21 distance travel and the rail mode for short distance. As a result of “high-speed”
rail, the two transport modes become effective competition over a much longer
23 range of distance.

25 4.2. Impact of HSR on the Chinese Airline Industry

There are quite a few chapters that study the effects of HSR on the Chinese air-
27 line industry. In general, previous studies find that the introduction of parallel
HSR services has a negative impact on air transport. For example, Zhang et al.
29 (2014) found that HSR imposes a constraint on the degree of market power
enjoyed by the “Big Three” airlines and subsequently the airfare that they can
31
charge. Zhang, Yang, and Wang (2017) showed that the negative effect of HSR
on air traffic is larger in thin markets while in densely traveled aviation markets
33
the effect of HSR is insignificant. The authors showed that compared with HSR
35 frequency, HSR travel time has a stronger influence on air demand. Wan, Ha,
Yoshida, and Zhang (2016) found that the entry of HSR had strong negative
37 impacts on short-haul and medium-haul air routes seat capacity in both China
and Japan. Fu, Lei, Wang, and Yan (2015) found that to incumbent full-service
39 carriers, HSR services impose much more significant competitive pressure than
LCCs. Zhang and Zhang (2016) investigated the determinants of Chinese city-
41 pair air passenger flows using a gravity model approach accounting for the
effects of multilateral resistance. The authors confirmed HSR’s negative effect
43 on air passenger flows in China, claiming that the challenge from HSR will be
greater after the rapidly expanding HSR network has connected most of the
45 major cities and that Chinese airlines will have to consider redeploying part of
their capacities to other markets, including international ones.
 Airlines in China 95

1 However, by employing a unique panel data set from 2007
2016, Ma et al.

(2017a) found that HSR had a significantly negative impact on airfare before
3 early 2014, which is consistent with previous studies using data before 2014
(e.g., Fu et al., 2015, 2012; Zhang, Yang, & Wang, 2017; Zhang et al., 2014). In
5 contrast to the pre-2014 findings, the authors found that after early 2014, the
entry of parallel HSR service was associated with airfare increases. The different
7 pricing behavior could be in part attributable to the fact that in the early years,
the whole air transport industry was very vigilant to the entry of HSR and
9 refrained from charging higher prices as explained previously, while later airlines
were able to adjust their capacity and competitive strategies to accommodate
11 the existence of HSR and thus raised their prices. More in-depth studies are
needed to investigate the positive impact of HSR on airfares revealed in the
13 study by using more recent data.
There are two studies that examined the effects of HSR travel speed on
15 Chinese airlines. Wei, Chen, and Zhang (2017) investigated the HSR substitu-
tion for air travel through the demand shocks triggered by two railway events:
17 the launch of Beijing
Shanghai HSR and the Wenzhou train accident. The two
events are exogenous to the airline industry, alleviating the common endogeneity
19 concern. Using airline ticket prices published on a booking agency website and a
difference-in-difference approach, the authors found some evidence of substitu-
21 tion based on the pattern of airfare adjustments during the sample period.7
Specifically, compared to those in the control group, mean airfares for routes
23 along the Beijing
Shanghai HSR route decline by 30.4% upon the launch, but
rebound by 27.4% following the accident. Furthermore, the two events have a
25 larger impact on LCCs and regional airlines, on tourism routes, and on flights
that depart during evening hours than their counterparts, respectively. They con-
27 cluded that the HSRs mainly serve as a low-end substitution for air travel in
China. Wang, Xia, Zhang, and Zhang (2017) studied the effects of HSR travel
29 speed on airline demand, equilibrium airline traffic, and price both theoretically
and empirically. The authors found that (1) the “travel time” effect due to HSR
31 change dominates the “safety” effect, leading to a negative HSR speed effect on
airlines; (2) the elasticities of the airline demand, and equilibrium airline traffic
33 and price with respect to HSR speed are larger in magnitude on short-haul
routes than on medium-to-long-haul routes; (3) the entry of HSR on short-haul
35 routes has larger negative impacts on airline demand and equilibrium airline
traffic and price than on medium-to-long-haul routes; and (4) there is a positive
37 and statistically significant accident effect with daily data, but this accident
effect is small in magnitude.
39 Instead of conducting a national-wide analysis, a few chapters focus on cer-
tain important HSR routes and examine the effects of HSR of airlines in more
41 details such as differentiating economy and business passengers. Ma, Wang,
Yang, and Zhang (2017b) analyzed the effects of the busiest and most
43 profitable HSR in China
the Beijing
Shanghai HSR
on the airfare and air
traffic of the aviation markets paralleling this HSR line. The authors found that
45 both airfare and air demand decreased significantly after the entry of
Beijing
Shanghai HSR. In particular, economy class airfares dropped more
 96 HANGJUN YANG ET AL.

1 than those of business class, while the decline in the demand for business class
was larger than for economy class. Although HSR frequency and the number of
3 HSR seats appear to have no significant impact on airfare, they are significantly
and negatively associated with air demand, especially the demand for business
5 passengers. Li and Sheng (2016) studied the mode choice behavior of intercity
passengers among airline, HSR, and air-HSR integration services using a stated
7 preference survey on the Beijing
Guangzhou corridor. Modal split models are
proposed and calibrated based on the collected survey data. The proposed mod-
9 els are used to identify the key factors affecting passengers’ mode choices and to
estimate the modal split of passenger travel demand for some intercity transpor-
11 tation markets of China. Sensitivity analyses are also performed to reveal the
market potential of the air-HSR integration service in China. The authors found
13 that the transfer time is essential for Chinese passengers to select the air-HSR
integration service. Chen (2017) investigated the HSR
airline competition on
15 the Wuhan-Guangzhou and Beijing
Shanghai routes and found a significant
drop in air traffic, flight frequency, and seat capacity after the introduction of
17 parallel HSR services. In particular, air travel declined approximately 45% after
the commencement of the Wuhan-Guangzhou HSR, whereas it fell by 34% after
19 the opening of the Beijing
Shanghai HSR.
Rather than examining the impact of HSR on airlines, Wang, Xia, and
21 Zhang (2017) analyzed whether China should further expand its HSR network
considering the LCC’s role as an alternative transport mode. The authors stud-
23 ied China’s large-scale HSR expansion and the associated benefits assessment of
the expansion program from the perspective of HSR-LCC interactions. The
25 authors suggested that in the highly populated and developed corridors the HSR
expansion is likely to leave LCCs with little survival room. On the other hand,
27 in the low-density corridors especially in the central and western China, LCCs
might leave HSR with little survival room in the long run. By conducting a
29 “propensity score matching” to pair HSR-linked city pairs in China to the coun-
terfactual US airline routes, the authors found that most of these Chinese routes
31 would be viable markets for LCCs to operate. The benefits of HSR expansion
may thus be overestimated if not recognizing the LCCs’ role as an alternative
33 mode to serve these markets. In particular, for the routes to the central and
western China with very small travel demand and high HSR construction cost,
35 LCC service could be more cost-efficient and operationally flexible than HSR.
The authors called for a more careful evaluation of the program and, more gen-
37 erally, a balanced and coordinated HSR and LCC development in China.
There are some recent studies that examine the connectivity of intercity pas-
39 senger transportation and airports in China as well as the impact of HSR on the
connectivity. For instance, Zhu, Zhang, and Zhang (2017) considered both qual-
41 ity and quantity of the connections between two transport modes: airline and
railway, where HSR is the main railway mode in China. Among the 23 major
43 cities selected, Shanghai is revealed to have the highest connectivity level, lead-
ing in both air and rail connectivity. Shanghai-Nanjing has been found to be the
45 best-connected city pair, primarily due to the significant contribution from HSR
service. The authors showed that HSR has become a preferred and dominant
 Airlines in China 97

1 option over air on a number of long-distance routes up to 1,300km. This finding

has significant policy implications for transportation infrastructure planning and
3 investment. Zhang, Zhang, Zhu, and Wang (2017) calculated the connectivity of
69 Chinese airports and identified the underlying drivers of the variation in air-
5 port connectivity over a period 2005
2016. The authors found that the presence
of LCCs is conducive for air connectivity, while HSR has the effect of decreas-
7 ing airport connectivity due to its high substitutability for air transport.

9
5. CONCLUDING REMARKS
11 In this chapter, we have reviewed the history, deregulation, policy reforms, and
airline consolidations and mergers of the Chinese airline industry. The measure-
13 ment of airline competition in China’s domestic market has also been discussed.
Although the deregulation process started in 1997, much later than some devel-
15 oped countries such as the United States and the United Kingdom, the Chinese
civil aviation industry is entering a market-driven business. After 20 years of
17 deregulation and privatization, China’s airline industry has been significantly
liberated. Nowadays, Chinese airlines are allowed to set ticket prices freely
19 almost without any restrictions. In terms of route operation rights, carriers are
allowed entry into and exit from an air route without prior approval from the
21 CAAC except for the 15 busiest domestic air routes and routes connecting the
eight busiest airports in China.
23 We have reviewed the development of HSR network in China in Section 4.1,
the Chinese government has invested extensively in the HSR development and
25 will continue to support the massive expansion of the HSR network. In the past
decade, China has built 26,783 km HSR tracks, which are more than the rest of
27 the world together. Furthermore, the length of HSR under construction in
China is 9,967 km, which is more than 70% of the world’s total HSR tracks
29 under construction (UIC, 2017). According to the “Mid- and Long-term
Railway Network Plan,” the total length of China’s HSR tracks will be more
31 than 38,000 km and about 80% of the domestic airline routes will have parallel
HSR services by 2025. Then, we review the literature on analyzing the impact of
33 HSR on the Chinese airline industry. In general, previous studies have found
that HSR has a strong negative impact on both airfare and air travel demand in
35 China. There are some important policy implications for Chinese airlines. First,
as the majority of the domestic aviation markets are facing severe competition
37 from HSR, Chinese carriers must improve operating efficiency and lower costs
in order to offer competitive ticket prices to attract passengers. Second, instead
39 of competing head-to-head with HSR, airlines should seek cooperation with
HSR. Third, regional airlines might want to focus on some niche markets, which
41 cannot be covered by HSR. The “Big Three” airlines should use their resources
to develop more international routes and compete more aggressively in the inter-
43 national markets.
Our review also raises some questions for future research. In this chapter, we
45 focus only on the competition between two transport modes and do not consider
welfare and economic development. It is important to study the following
 98 HANGJUN YANG ET AL.

1 questions: How would HSR
airline competition and cooperation affect both

HSR and airlines? What are the impacts of HSR on consumer surplus and social
3 welfare? What are the effects of HSR network development on the economy
overall? Second, China’s HSR mainly uses the fixed-pricing approach; the sup-
5 ply side of HSR is not well studied. It will be interesting to examine the markets
where HSR adopts dynamic pricing and the supply side of HSR. Third, due to
7 the unavailability of demand data of the Chinese HSR network, previous studies
only analyzed the effects of HSR on airlines. So future research is called for the
9 impact of airlines on HSR.

11
NOTES
13 1. http://www.chinadaily.com.cn/business/2017-02/18/content_28249797.htm
2. Although established in 1993, Hainan Airlines has grown dramatically in the past
15 decade and has become the fourth largest carrier in China. Hence, Air China, China
Eastern, China Southern, and Hainan Airlines are often called the “Big Four.”
3. By June 2017, Spring Airlines owns 73 A320s and operates 162 air routes.
17 4. The four vertical HSR corridors are Beijing-Shanghai, Beijing-Guangzhou-
Shenzhen, Beijing-Harbin, and Hangzhou-Fuzhou-Shenzhen, whereas the four horizontal
19 HSR corridors are Qingdao-Taiyuan, Xuzhou-Lanzhou, Shanghai-Wuhan-Chengdu, and
Shanghai-Kunming.
5. http://news.xinhuanet.com/politics/2016-07/20/c_129160778.html
21 6. http://news.carnoc.com/list/355/355677.html
7. The authors manually collected the announced airline ticket prices from the largest
23 travel agency www.ctrip.com in China.

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