Low cost carrier competition and route entry in an emerging but regulated aviation market – The case of China |
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| Institution: | 1. Institute of Transport and Logistics Studies, The University of Sydney, Australia;2. Centre for Aviation Research, University of Surrey, United Kingdom;3. Sauder School of Business, University of British Columbia, Canada;4. School of Economics Sciences, Washington State University, United States;1. Institute of Transport and Logistics Studies, University of Sydney, Australia;2. Sauder School of Business, University of British Columbia, Canada;3. Shanghai Aircraft Design and Research Institute, COMAC, China;4. Centre for Aviation Research, University of Surrey, UK;1. School of Business Administration, Hebrew University of Jerusalem, Israel;2. Institute of Transport and Logistics Studies, University of Sydney, Australia;3. Sauder School of Business, University of British Columbia, Vancouver, Canada;4. College of Business, Embry-Riddle Aeronautical University, USA;1. Ningbo Supply Chain Innovation Institute of China (NSCIIC) and MIT-Global Scale Network, China;2. Sauder School of Business, University of British Columbia, Canada;1. Virginia Polytechnic Institute and State University, School of Civil and Environmental Engineering, 750 Drillfield Drive, Blacksburg, VA, 24061-0002, USA;2. University of South Carolina, Darla Moore School of Business, 1014 Greene Street, Columbia, SC, 29208, USA |
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| Abstract: | Although China lags behind other liberalized aviation markets in low cost carrier (LCC) development, its largest LCC, Spring Airlines, has achieved rapid growth in traffic volume and revenue, as well as consistent profitability, since its inauguration in 2005. Our empirical study on the Chinese domestic market suggests that Spring adopts a “cream skimming” strategy to enter high-priced routes, allowing the carrier to achieve both a very high load factor and considerable profitability. Spring’s capacity and market share on individual routes are constrained to low levels, likely due to government regulation and/or a “puppy dog” strategy adopted by the carrier. As a result, Spring is able to achieve fast growth without triggering price wars. To incumbent full service carriers, high speed rail (HSR) services impose much more significant competitive pressure than low cost carriers. Similar to LCCs in developed markets, Spring prefers to serve markets with high traffic volumes out of its operational base in Shanghai. Overall, Spring’s entry decision is not significantly affected by competition, either from full service airlines or HSR services. Our investigation suggests that LCCs have potential to introduce more competition but are yet to be a “game changer” in China. Further deregulation of the domestic market is needed. |
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| Keywords: | Chinese aviation industry Low cost carrier Spring Airlines |
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