Study On The Deregulation Of The Airline Industry In China

This paper mainly does an analysis of the airline industry in China after deregulation. Along with the progress in productivity of China, the industry has experienced four phases of development. The first phase is 1949-1979, the administration of civil aviation is under planned economy, mainly for political and military purposes. The second phase is 1980-1986, the CAAC (General Administration of Civil Aviation of China) separated from the air force and became directly controlled by the State Council. From that time on, Chinese airlines began to be operated as enterprises. The third phase is 1987-1996, the Civil Aviation was reformed by constructing six main airlines. The most profound reform in civil aviation happened in the forth phase, from 1997 till now. The whole industry experienced two waves of deregulation, which has largely influence the further development of the airlines.Then we introduce some theories. The traditional government regulation theory of natural monopolistic industries regards that the market structure which operates monopoly would be more efficient because of its characteristics as economy of scale and economy of scope. So the regulation of government is necessary to avoiding the misuse of monopolistic powers by the monopolistic businesses, and preventing the monopolistic businesses from deciding the highly monopolistic prices. But, the traditional government regulation theory has some flaws. So, some theories of deregulation come out, which include the theory of capture, X-low efficiency theory and the theory of market permitting competitions.The follow section is mainly about economic theories on airline industry characteristics, namely cost, demand, economies of scale,economies of scope and economies of network.In 1997, the CAAC published discount policy that allowed the airlines to adopt airfares with"one standard, various discounts". Since then, airfares have kept on a much lower level than that of before and customers actually have benefited from it. This policy, however, triggered a dramatic fare war through the industry. When the deregulation was proceeding, the competition between the numerous airlines had been driven into chaos. Competition had been narrowed into a simple fare war. As a result, the net social welfare is negative. I use simple game theory to illustrate strategies the airlines used during fare war.In 2002, the State Council formally endorsed the program of consolidation, which was announced by the CAAC. This consolidation is government-directed, and nine main airlines directed controlled by CAAC merged into three dominant groups. The CAAC separated its administrative function from the enterprising function, and all its intervention in management will draw back. Along with the consolidation, the CAAC relax the restriction on barrier to entry, in order to reduce monopoly-pricing behavior of the big airlines. After the consolidation, the industry is developing with the characteristics of oligopoly market structure. I use Bertrand model to depict the oligopolistic price competition.I focus on economy of scale, Low-cost innovation and social welfare to discuss the main merger impact on the industry.The economy of scale is firstly embodied by improving utilization of aircraft. The second important aspect for economy of scale is technology support for ticket sale. The third one is decreasing the average cost of advertising. The challenge of domestic regional airlines and low-fare airlines spurs the major airlines to engage in a low-cost operation innovation.In addition, the consolidation also affects social welfares. In regard to estimating which one is dominant, market power or efficient gains, I used the model from Kim (1993). It is unfortunate that the specific information has not published. Despite of that, Kim's model is meaningful and practical. In the near future, when a comprehensive database is available, then a sensible result will be obtained from the research. Consequently, we can evaluate whether the consolidation launched by the government positively influences social welfare.At last, this paper talks about the main problem of the airline industry and the direction of further deregulation.