Key determinants of airline pricing and air travel demand in China and India: Policy, ownership, and LCC competition

Abstract

As two of the fastest-growing economies, China and India share many similarities. However, the air transport sector of the two countries exhibits substantial differences 30 years after deregulation. Private and low-cost airlines have become dominant players in the Indian airline market while the state-owned airlines still enjoy a dominant status in the Chinese market. The econometric analysis of this research suggests that the presence of a low-cost carrier (LCC) on a route has the effect of reducing the airfare and stimulating the demand for air travel in India, no matter the LCC presence is measured by market shares or dummies. Chinese LCCs have similar competitive effects only when the LCC entry is measured by dummy variables. Airport concentration in India could lead to cost savings and thus lower airfares, but this did not occur in China due largely to the lack of a culture of antitrust compliance. In both countries, airport concentration is positively associated with traffic demand. In India this may imply an increase in consumer welfare as airport concentration increases while in China this could mean that consumers would not be able to explore their welfare benefits to the full potential since concentration is positively associated with airfares. We also find that the absolute value of the price elasticity of the Indian market is much larger than that in the Chinese market, probably due to the high LCC penetration rates in India.