Liberalization of the Airline Industry on the U.S.-China Route: Effects of the 2007 Amendment to the Aviation Agreement (Job Market Paper)

As a highly regulated industry, the airline industry has been an interest of policy makers and researchers who try to understand the magnitude and impact of airline market restrictions. The aviation agreement between the U.S. and China restricts the routes as well as number of carriers and flights permitted on these routes. An amendment in 2007 was made to this agreement, which opened up additional routes between the two countries, and allowed new carriers to participate in these routes. The introduction of new routes impacts price and quantity through changes in air travel demand and supply. This paper exploits detailed transaction data on passenger aviation over a six-year period, and analyzes the impact of the sequential introduction of nonstop routes. Both countries experienced changes in their airline networks, expansions in air traffic, and reductions in airfares. Cities that became gateway cities, compared with those not directly involved in the Amendment, experienced a 9 percent decrease in average airfare and a 200 percent increase in air travel traffic. Moreover, the opening of these new gateway cities also has an impact on beyond-gateway markets depending on how they are connected to the opened cities. I find a 75 percent increase in average airfare for these beyond markets. In this paper, I also estimate a structural econometric model of demand and supply for air travel, which allows me to decompose the effect of new direct flights into their effect on demand and supply. I find a consumer welfare improvement from the liberalization of the U.S.-China airline industry.


Price and Output Effects of Code-sharing in the U.S.-China Airline Market

As international airlines have expanded in recent decades, increasing demand for international air travel between the U.S. and China has prompted U.S. airlines to forge alliances with their overseas counterparts in China to extend the reach of their networks. An airline alliance is an agreement between two or more airlines to cooperate on a substantial level, including unlimited code-sharing between partners. Code-sharing is usually associated with changes in air fares and traffic volume for related routes. This paper uses a five-year panel data to examine the effects of airline alliances on air fares and traffic in the U.S.-China market. The estimated price and output effects suggest that both code-sharing and online (single carrier) service are associated with significantly lower fares and higher output as compared to non-alliance interline (multi-carrier) service. Code-sharing is found to have 11 percent lower fares and 1 percent higher output than does interline service. Online service is associated with 23 percent lower fares and 1 percent higher output than non-alliance interline service. The fact that online service has roughly twice as big an effect as code-sharing suggests that code-sharing does not entirely eliminate the double-marginalization problem.