Welfare implications for air passengers in China in the era of high-speed rail: Fid-Bau Portal

Welfare implications for air passengers in China in the era of high-speed rail

Yang, Hangjun / Ma, Wenliang / Wang, Qiang / Wang, Kun / Zhang, Yahua

Abstract Despite facing the rapid expansion of high-speed rail (HSR) services, China's airline industry has experienced substantial growth in the last decade. Using panel data from 2007 to 2016, this paper assesses the welfare changes for both economy- and business-class air passengers in China due to the HSR entry. We found that the demand for air travel is inelastic and that the HSR entry has led to significant welfare changes for air passengers. Specifically, air passengers in the short-distance markets were worse off, largely driven by a dramatic cut in flight frequency. However, over time, their welfare could improve when flight frequencies were restored. In contrast, in the medium- and long-distance markets, air passengers could be better off immediately after the HSR entry, thanks to the lower airfare and insignificant drop in flight frequency. However, a reduction in welfare was observed in the long run, after airlines gradually reduced the flight frequency.

Highlights • This paper uses a reduced-form BLP type model to estimate the demand functions for Chinese air passengers. • A DID approach is adopted to quantify the impact of HSR competition on airfare and flight frequency. • The welfare changes for both economy- and business-class air passengers after the HSR entry are calculated. • It is found that Chinese passengers have an inelastic demand for air transport services. • The entry of HSR has led to significant welfare changes for air passengers.