Benefits Assessment of Large Scale High-Speed Rail Network in China: The Effect on Low-Cost Carriers

Abstract

This paper examines the impact of China’s large-scale high-speed rail (HSR) expansion, announced in June 2016, on low-cost carriers (LCCs) and the associated benefits assessment of the expansion program. Our analysis suggests that HSR imposes a greater threat to LCCs than to full service carriers, and the HSR expansion that is intended to reach a great number of small cities has left Chinese LCCs with little survival room, even with full airline market liberalization and sufficient airport capacity. By conducting a “propensity score matching” to pair HSR-linked city pairs in China to the counterfactual US airline routes, we find that most of these Chinese routes would be viable markets for LCCs to operate. The benefits of HSR expansion may thus be overestimated if not recognizing the LCCs’ role as an alternative mode to serve these markets. In particular, for the routes to the central and western China with very small travel demand and high HSR construction cost, LCC service could be more cost efficient and operationally flexible than HSR. Our analysis calls for a more careful evaluation of the program and, more generally, a balanced and coordinated HSR and LCC development in China.