Airline Deregulation and Its Impacts on Air Travel Demand and Airline Competition: Evidence from Korea

Abstract

This study presents a structural model of the Korean airline industry and examines the effects of Korea’s Airline Deregulation Act of May 2008. We investigate the route-level impact of low-cost carrier (LCC) entries on air travel demand and incumbents’ strategic responses. We use a panel of airline-level data for each of the three Jeju Island routes, covering the 2006–2010 period, and find evidence for a common sensitivity to price across routes, but a route-specific response to flight characteristics. Air passengers favor frequent flights and larger aircraft. Moreover, departure flight schedules that are more spread out throughout the day provide higher utility for air passengers on high-volume routes. In the post-deregulation period, both legacy carriers lost sales on high-volume routes to emerging independent LCCs, but partly recouped those losses through their own subsidiary LCCs (dependent LCCs), by either replacing their previous services with their own LCCs or flying under a two-brand strategy. We empirically divide the price-cost markups into an own product-specific effect and a multiproduct firm-specific effect. This expansion of independent LCCs accounts for a substantial proportion of the two legacy carriers’ profit reductions, whereas the magnitude of the estimated profit losses varies widely depending on their strategic responses. In summary, the legacy carriers’ post-deregulation competitive behavior is far from collusive.