Fairfield University DigitalCommons@Fairfield Business Faculty Publications Charles F. Dolan School of Business 2006 The operational impacts of governmental restructuring of the airline industry in China Carl A. Scheraga Fairfield University, [email protected] Follow this and additional works at: https://digitalcommons.fairfield.edu/business-facultypubs Copyright 2006 Transportation Research Forum All rights reserved. http://www.trforum.org/journal/. Peer Reviewed Repository Citation Scheraga, Carl A., "The operational impacts of governmental restructuring of the airline industry in China" (2006). Business Faculty Publications. 140. https://digitalcommons.fairfield.edu/business-facultypubs/140 Published Citation Scheraga, Carl A. "The operational impacts of governmental restructuring of the airline industry in China." In Journal of the Transportation Research Forum, vol. 45, no. 1, pp. 71-86. 2006. 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Transportation Research Forum ¡ ¢ £ ¤ ¥ ¦ ¡ § ¨ © £ ¥ ¤ ¡ £ ¨ ¥ ¨ ¡ ¤ ¥ £ © ¡ £ ¢ The Operational Impacts of Governmental Restructuring of the Airline Industry in China In July 2000, the Civil Aviation Administration of China (CAAC) called for the consolidation of the 10 state-owned air carriers into three groups, headed by Air China, China Eastern, and China Southern. A few months later in November 2000, the State Council of China mandated that this consolidation be accomplished by the third quarter of 2001. As part of this mandate, the CAAC yielded its management control of air carriers with its focus now being on safety and regulatory issues. Furthermore, the CAAC was required to divest itself of assets held in many of the state-owned airlines and its interests in more than 120 airports around China, except Beijing Capital Airport. Utilizing data from the International Civil Aviation Organization for 2003 and 2004, this study investigates the operational impacts of this industry restructuring. The relative operational efficiency of Air China, China Eastern, and China Southern is compared to a sample of Asian, European and United States flag carriers. Data envelopment analysis is utilized to derive efficiency scores for individual airlines. The operational efficiency model used in this study is derived from that utilized by Schefczyk (1993). The underlying structural drivers of efficiency are then investigated via a tobit analysis with implications for managerial policy discussed. by Carl A. Scheraga INTRODUCTION compromised. In addition to being impacted by operational inefficiencies, profits were also Before 2001, the Chinese commercial aviation significantly affected by the increase in fuel industry was overseen and controlled by costs, low load factors, and the inability of many the Civil Aviation Administration of China Chinese airlines to structure routes that allowed (CAAC). The Chinese government implemented for the achievement of economies of scale. An a comprehensive set of regulations and policies exacerbating factor was China’s attempt to that covered all aspects of airline operations. become part of the World Trade Organization This regulatory regime approved domestic, (WTO), which increased the opportunities for regional, and international route allocations. foreign carriers to enter the Chinese market. Controls were put into place that set guidelines In July 2000, the CAAC called for the for published fares and aircraft acquisition, as merging of the 10 large state-owned airlines well as standards for aircraft maintenance, jet into three groups to be headed by Air China, fuel prices, airport operations, and air traffic China Southern Airlines, and China Eastern control. In addition, the CAAC owned some of Airlines. This was formalized in November the country’s largest airlines. 2000 when the State Council of China issued As detailed by Efendioglu and Murray a directive for the merger of these airlines in (2003), by 2001 China had 31 international, a formal restructuring of the Chinese airline regional and domestic carriers. These included industry. Part of this directive decreed that 10 CAAC airlines and 21 Provincial airlines. the CAACP would yield management control The CAAC airlines controlled about an 80.5% of airlines, instead focusing on safety and share of the passenger market and an 84.7% regulatory issues. share of the cargo market. Furthermore, the Air China consolidated with China CAAC had an average 85% ownership share National Aviation Corporation, China Southwest in its airlines. The priority of airlines was to Airlines, and Zhejiang Airlines. China Eastern build market share with profitability often Airlines absorbed Air Great Wall, China 71 Airline Industry in China Yunnan Airlines and China Northwest Airlines. Table 1: Sample Airlines Similarly, China Southern Airlines absorbed NAME ICAO ID China Northern Airlines, China Xinjiang Aerolines Argentinas ARG Airlines and Zhongyuan Airlines (Efendioglu Aeromexico AMX and Murray 2003). Air Canada ACA This study benchmarks the operational Air China CCA efficiency of the consolidated Chinese airlines against a set of global flag carriers with Air France AFR significant international operations for the year Air India AIC 2003. This set is detailed in Table 1. The year All Nippon Airways ANA 2003 is the most recent one available in terms American Airlines AAL of the data utilized. In addition, it is the first Asiana Airlines AAR year for which consolidated operations data Austrian Airline Group AUA was available. Thus the study is preliminary British Airways BAW in nature, representing a starting point for the development of operations strategies for the Cathay Pacific CPA three consolidated Chinese airlines. China Eastern Airlines CES A significant factor which must be kept in China Southern Airlines CSN mind throughout the discussion of this study is Continental Airlines COA the SARS virus epidemic that severely impacted CSA Czech Airlines CSA Chinese airlines. Passenger numbers dropped, Delta Airlines DAL flights were cancelled, and deliveries of new EL AL ELY aircraft were delayed. However, it should also Iberia IBE be noted that other airlines in the region also felt the impact of the viral outbreak. Major KLM KLM carriers affected included Japan Airlines and Korean Air KAL Thai Airways. LOT Polish Airlines LOT Lufthansa DLH MODEL FRAMEWORK AND Malaysia Airlines MAS VARIABLES Mexicana MXA Northwest Airlines NWA The behavioral model utilized to describe Pakistan International Airlines PIA airline operational efficiency is that employed Scandinavian Airlines SAS by Schefczyk (1993). He defines a framework described by two outputs and three inputs. The Singapore Airlines SIA outputs are (1) revenue passenger-kilometers SriLankian Airlines ALK and (2) Non-passenger revenue ton-kilometers. TAP Air Portugal TAP The inputs are (1) available ton-kilometers, Tarom ROT (2) operating cost and (3) non-flight assets. Thai Airways International THA Available ton-kilometers reflect available United Airlines UAL aircraft capacity. The figure for operating cost reflects operating cost excluding capital ton-kilometers for freight and mail for both and aircraft cost captured by available ton- scheduled and non-scheduled services. kilometers. Non-flight assets reflect all assets Available ton-kilometers are a sum of available not included in available ton-kilometers such ton-kilometers for scheduled and charter (non- as facilities, reservation systems and current scheduled) services. Operating cost is computed assets. as total operating expenses minus aircraft rent, Revenue passenger-kilometers are the sum depreciation, and amortization. Non-flight of revenue passenger-kilometers for scheduled assets are computed as total assets minus flight and charter (non-scheduled) services. Non- equipment at cost, purchase deposits for flight passenger revenue ton-kilometers include equipment, and flight equipment under capital 72 Airline Industry in China leases at cost, with accumulated depreciation for expected. Additionally, the aesthetics of the flight equipment and accumulated depreciation aircraft environment are not a concern in the for flight equipment under capital leases added transport of cargo. back in. Scheduled service revenues as a percentage Data envelopment analysis (DEA), discussed of total revenues are anticipated to have a below, is used to assess the relative efficiency of positive impact on operational efficiency. individual airlines described by this behavioral Scheduled flights require different product model. and marketing facilities than unscheduled This study investigates the impact of a charter flights. An increase in the percentage set of operational and environmental variables of regularly scheduled services allows for a which previous studies have shown to affect rationalization of operational routines leading operational efficiency (Caves et al. 1984; to greater overall efficiency if the necessary Banker and Johnston,