Research Of Airline Companies’ Price Collusion:Perspective Of Equity Control

The development of a country’s civil aviation industry reflects its economic growth. In the past10years, as China’s rapid economic growth, the passenger transport volume and freight traffic volume rose at an average rate of10%, which show the prosperity of civil aviation industry and finally promote the government’s regulation reform."Deregulation and competition" has been the main theme of civil aviation industry.In this background, many regional airlines and private airlines has been established and changed the market structure. Although the industry suffered a lot from the2008financial crisis, the enthusiasm to enter the market still remains unabated. This year earlier, CAAC has approved the Qingdao airline and Ruili airline’s establishment applications. Since2004, a total of15airlines established and operated till now.In common sense, if there are more participant in the market, the competition will be more intensive, and the price will be lower. But actually, in recent years, the public have found that the ticket prices did not significantly reduce, moreover, low discount tickets gradually disappeared from people’s vision in many major domestic routes. Thus, a question arises:why the price didn’t go down while there was more and more new entrants? This study answers the question.In this paper, we find that the big four airlines (Air China, China Southern Airlines, China Eastern Airlines, Hainan Airlines) are running price collusion on16major domestic routes, making the ticket prices don’t comply with the normal competition rule, and significantly higher than the competitive price. The basis of price collusion is the equity control relationship, by which four big airlines can exert influence on their subsidiaries, the regional airlines. This changes the market structure:it turns the regional airlines one part of the big four interest groups from their independent competitors. If a route is exclusively operated by the big four airlines, which means the independent airlines unable to enter this route due to various reasons, then chances are that the big four will act in collusion. In further study, we also found that route administrative barriers to entry, a huge conspiracy income, steady growth in the market and the high degree of homogeneity of products contributes to the price collusion by the big four airlines on the specific16routes, and they are also the reasons why the collusion is stable. Therefore, the elimination of administrative barriers to entry and encourage independent airlines access to the main routes are the solution of large airline monopoly problem.To study the collusion issue between the big four airlines, we analyze from every each route. In previous studies on the aviation industry, some national aggregate indicators has been widely used, such as industry-wide passenger traffic volume, the airlines’income and profits from all routes. These aggregates indicators can reflect the development of the whole industry in recent years, however, it becomes pale when it comes to collusion issue between airlines. Thus, we use the ticket discount rate, route HHI index and route property dumb variable which can distinguish "oligarchs routes"--routes big four airlines operate exclusively on--from "participatory routes"--routes independent airlines can participate on. Addition, we also take high-speed rail, flight benchmark price and average aircraft seating which reflect the scale effect of the flight into to consideration. We put all of the above variables into analysis of regression, and finally draw the conclusion that the big four airlines make price collusion on16domestic routes.Innovation of this paper include, but are not limited to:First, the study reveals equity control relationship has a significant impact on aviation industry market structure, corporate behavior and market performance. In accordance with equity control relationship, this article differentiate "oligarchs routes" from "participatory routes", and eventually found the collusion that the big four airlines have taken on the16routes. Second, we introduce discount rate indicators into analysis which makes comparison of different routes meaningful. Previous researchers used the average tickets price, however, due to the different routes of different lengths, comparison of average tickets price doesn’t have a comparative significance. So we make the average price divided by the flight benchmark price to get the discount rate, which kicks distance difference and make comparison more intuitive. Third, the study quantify the impact of high-speed rail, benchmark price on the ticket discount rate. Through the econometric regression, we found that high-speed rail will reduce ticket prices about13%, and flight benchmark price increases every Y100, ticket prices will be reduced by2%.