Effects of train speed on airline demand and price: Theory and empirical evidence from a natural experiment

Abstract

This study investigates, both theoretically and empirically, the effects of high-speed rail (HSR) speed on airline traffic and price, taking into account the degree of substitutability between the two services. Our model incorporates two countervailing effects of HSR speed, namely the “travel time” effect and the “safety” effect: while increasing HSR speed reduces HSR travel time, it may bring about a safety concern especially in emerging HSR markets such as China. Our theoretical analysis suggests that HSR speed impact on airline traffic and price depends on the relative dominance of the travel-time and safety effects, and air-HSR substitutability may reinforce the HSR speed effect. Furthermore, HSR speed has a larger impact on airline traffic than on airline price. Our empirical results from a rare natural experiment of HSR speed reduction in China show that HSR speed reduction raises both airline traffic and price, suggesting the dominance of travel-time effect. More importantly, consistent with the theoretical prediction, the HSR speed effect is empirically stronger on short-haul routes where the airline and HSR services are more substitutable.