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Authors requiring further information regarding Elsevier’s archiving and manuscript policies are encouraged to visit: http://www.elsevier.com/copyright Author's personal copy Journal of Transport Geography 17 (2009) 293–305 Contents lists available at ScienceDirect Journal of Transport Geography journal homepage: www.elsevier.com/locate/jtrangeo China’s airline consolidation and its effects on domestic airline networks and competition Shih-Lung Shaw a,*, Feng Lu b, Jie Chen b, Chenghu Zhou b a Department of Geography, University of Tennessee, 304 Burchfiel Geography Building, Knoxville, TN 37996-0925, USA b Institute of Geographic Sciences and Natural Resources Research, Chinese Academy of Sciences, 11A Datun Road, Chaoyang District, Beijing 100101, People’s Republic of China article info abstract Keywords: Air transportation in China has experienced tremendous growth and major reforms in the past three dec- Airline consolidation ades. While there is a large literature on airline liberalization, publications about China are limited. As Liberalization China transforms from a centrally planned economy to a market economy, how closely has China fol- Network lowed the practice of liberalizing the airline industry seen in other countries around the world? This China paper offers a review of air transportation development in China and compares China’s approach with other countries. In particular, this study examines the impact of the government-led airline consolidation of 2002 upon domestic network structure and competition. Ó 2009 Elsevier Ltd. All rights reserved. 1. Introduction 1993; Shaw and Ivy, 1994; O’Kelly, 1998; Jin et al., 2005), airfare pricing (Oum et al., 1996; Stavins, 2001; Vowles, 2006), and airline Today’s airline industry is in a very different environment than alliances (Youssef and Hansen, 1994; Vowles, 2000; Fan et al., it was a few decades ago. Many economic, technological, and polit- 2001; Oum et al., 2001). Mixed findings regarding the effects of air- ical factors (e.g., economic and population growth, new aircraft line liberalization have been reported. While some positive effects technology, globalization and liberalization) have contributed to like increased air passenger volumes and lower average airfares the unprecedented changes experienced by the airline industry have been observed, many negative effects also have surfaced. This over the past few decades. Among these factors, the Airline Dereg- has led some researchers to conclude that ‘‘deregulation is a fail- ulation Act (ADA) passed by the US Congress in 1978 was undoubt- ure” (Dempsey and Goetz, 1992, p. xvi). edly one of the most significant events that started the When other countries around the world followed the US in lib- transformation of airline industry. The ADA ended 40 years of tight eralizing their airline industry, they adjusted the policies and the regulation under the Civil Aeronautics Board (CAB) and aimed at practices according to the unique characteristics of their own eco- transforming the US airline industry into a freely competitive envi- nomic, political, and physical conditions. For example, European ronment driven by market forces. The passage of Airline Deregula- countries are much smaller than the United States in terms of tion Act was soon followed by the Staggers Rail Act (1980), the the land size and must face the challenge of developing an open Motor Carrier Regulatory Reform and Modernization Act (1980), air transport market across national borders. Canada and Australia and the Bus Regulatory Reform Act (1982) that essentially created are similar to the US on the land size, but their population is far a liberalized inter-state transport market in the US (Button, 1991). smaller than the US. Asian countries, on the other hand, often have This trend of moving towards liberalization was not confined to the different political systems and business cultures from the western United States. Many other countries followed suit and began their countries. They therefore all have to find their own ways of liber- liberalization efforts (e.g., Button, 1991; Kasper, 1988; Williams, alizing the airline industry. A number of studies that examine air- 1994). line liberalization in Europe (Dennis, 1994; Ivy, 1995; Graham, Many scholars, including geographers, have studied various as- 1997, 1998; Thompson, 2002; Goetz and Graham, 2004; Fan, pects of airline liberalization. They include topics such as the spa- 2006), in Canada (Oum, 1991; Williams, 1994), in Australia (For- tial effects of deregulation on connectivity and accessibility (Chou, syth, 1991; Hooper, 1998), and in Asia (Bowen and Leinbach, 1993; Ivy et al., 1995; Bowen, 2000, 2002; O’Connor, 2003), market 1995; Bowen, 2000, 2004) have been published. competition and consolidation (Debbage, 1993; Graham, 1993; Although many important changes have occurred to air trans- Goetz and Sutton, 1998; Goetz, 2002), network structures (Shaw, portation in China due to rapid economic growth and major re- forms over the past three decades, one interesting observation is * Corresponding author. Tel.: +1 865 974 0406; fax: +1 865 974 0625. that relatively few studies of the airline industry in China have E-mail address: [email protected] (S.-L. Shaw). been published in the mainstream geography and transportation 0966-6923/$ - see front matter Ó 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.jtrangeo.2009.02.005 Author's personal copy 294 S.-L. Shaw et al. / Journal of Transport Geography 17 (2009) 293–305 journals. Jin et al. (2004) examine the changes of geographic pat- consolidation of 2002. This airline consolidation plan was designed terns of air passenger transport in China from 1980 to 1998 with and implemented by the Civil Aviation Administration of China respect to its economic growth, regional inequality, and network (CAAC) and represents the most recent major policy that has signif- development. Wang and Jin (2007) investigate the uneven spatial icant and long-lasting impacts on the airline industry in China. A distribution of airports and the hierarchical pattern of air passen- study of the changes caused by this policy can shed light on the ger flows in China. Ma and Timberlake (2008) use longitudinal current status and future prospects of China’s airline industry. air passenger flow data to analyze the leading cities in China at both the national and global levels for the period of 1990–2005. Zhang and his associates (1998, 2003, 2008) have published several 2. Development of air transportation in China since 1978 articles about China’s air transport development and reform in transportation journals. China’s civil aviation went through four major development China is the most populous country in the world with 1.31 bil- phases since the founding of the People’s Republic of China in lion people in 2006 (National Bureau of Statistics of China, 2007). It 1949. The first phase (1949–1978) was characterized by a fully has experienced remarkable changes and growth since the begin- regulated environment under tight military control. In fact, the Ci- ning of economic reforms in 1978. China’s per capita gross domes- vil Aviation Administration of China was initially established as a tic product (GDP) increased from 381 yuan (RMB) in 1978 to unit under the Central Military Commission. It became a branch 16,084 yuan in 2006, a 42-fold increase in 28 years. Accompanying of the Ministry of Transport in 1958 and then was placed under the economic growth, transportation in China gained an impres- the State Council in 1962. Regardless of the changes in the admin- sive eight-fold growth of total passenger volume from 2.54 billion istrative organization, the CAAC was directly managed by the Peo- in 1978 to 20.2 billion in 2006. Measured by the total passenger- ple’s Liberation Army (PLA) Air Force during this phase. Civil kilometers, the growth is 11 times from 1978 to 2006. Among aviation in China was tightly controlled in all aspects such as entry, the different transportation modes, highways accounted for exit, fares, schedules, and routes. The CAAC at this phase served as 58.5% of total passenger flow, followed by railways (32.1%), water- not only an administrative and regulatory agency but also an entity ways (9.1%), and civil aviation (0.1%) in 1978. By 2006, the market that directly managed the operation of airports and airlines. Under shares changed to highways (91.9%), railways (6.2%), waterways the CAAC, there were six regional civil aviation bureaus located at (1.1%), and civil aviation (0.8%). Highways clearly gained the dom- Beijing, Shanghai, Guangzhou, Chengdu, Lanzhou (moved to Xi’an inant role in terms of the number of passengers carried. If we mea- later on), and Shenyang. In addition, 23 provincial bureaus and sure the market shares by passenger-kilometers, a different picture 78 local civil aviation stations were established. Civil aviation in emerges. Railways had a market share of 62.7% in 1978, followed China was under the complete monopoly of the CAAC. There was by highways (29.9%), waterways (5.8%), and civil aviation (1.6%). no competition in the market and efficiency was not a priority dur- By 2006, highways became the dominant mode at 52.8% market ing this period. Air transportation mainly served people who share, while railways’ share dropped to 34.5%. In the meantime, ci- worked for government agencies or state-owned enterprises vil aviation’s market share grew from 1.6% in 1978 to 12.4% in (Zhang, 1998).