Abstract
The major challenges of deregulation are lax market entry, sudden surge in new market entrants, and the intense price wars that ensue, thus causing major losses for any industry. This paper investigates whether deregulation can be structured through a controlled Mergers and Acquisitions (M&As) process by means of government intervention, and how this promotes the performance of the players in the industry. We study this in the context of the Chinese aviation industry as an ideal microcosm of our problem statement. This is because China’s civil aviation industry has witnessed many of the above challenges since its deregulation and economic reforms in 1979, which saw the beginning of a transformation from a fully state-owned machinery to a rent-seeking private sector. The post controlled deregulation process through M&As led to three dominant carriers: Air China Limited (AC), China Southern Airlines (CS), and China Eastern Airlines (CE). Using a 3-player non-cooperative perfect information Cournot oligopoly game model, the strategic efficacy of the government intervention to consolidate the industry based on operating expenses, air passenger revenue, and profit data are investigated respectively. All three airlines are better off after the exercise, with the industry facing a more sustainable growth by the intervention.
Highlights
The start of China’s aviation industry was when important gateway cities were connected via air travel in 1930s
In order to speed up the consolidation process, the Civil Aviation Administration of China (CAAC) prohibited airlines from operating between cities where they do not use as hubs
Chinese aviation industry plays a prominent role in the Chinese economy, and is among the most profitable airlines in the world
Summary
The start of China’s aviation industry was when important gateway cities were connected via air travel in 1930s. A joint venture of China National Aviation Corporation (CNAC) was formed after the U.S Curtiss-Wright’s negotiations with the Guomindang party With the exception of Southwest Airlines, which was run independently, the state controlled the other airlines. This is due to the industry’s importance in China’s military (the national defence and security), politics, and economic areas. CMC formed a joint management with the State Council in 1985, and the CAB is known as The Civil Aviation Administration of China (CAAC). CAAC served as both the regulatory and the owner of the aviation authority
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