Airline Economics in Asia: Volume 7

This chapter examines the issues of the low-cost carriers (LCCs) in Japan and their impact on the domestic and international aviation markets. “Genuine” LCCs, such as Peach Aviation and Jetstar Japan, began their operations in 2012 to follow the new movement of low-cost and low-fare airlines, which are different from the “new emerging” airlines, such as Skymark and AIRDO that appeared in the late 1990s. We discuss the recent history of LCCs in Japan, the characteristics of each LCC, the competitiveness of the high-speed railway in the domestic market, the impact of open sky policies, and the contribution of inbound foreign visitors to the international passenger volume increase. As LCCs in Japan have recently begun operations, they can continue to play a significant role in the Japanese aviation market.

The rise of Emirates, Etihad, and Qatar Airways in the Middle East (collectively referred to as “ME3”) has been absolutely dramatic. How should other full-service carriers respond? This study takes a look at how one carrier, Singapore Airlines, has responded and may offer clues to how others may choose to respond. Facing ME3’s ascent in service quality and rapid capacity expansion, Singapore Airlines stuck to its niche as a premium carrier and refrained from tit-for-tat type competition. It managed to command a fare premium in select markets even in the presence of ME3, but had to sacrifice growth in its passenger count. This offers valuable lessons for other full-service carriers.

The five countries in Central Asia, namely Uzbekistan, Kazakhstan, Turkmenistan, Tajikistan, and Kyrgyzstan, are landlocked and therefore rely critically on aviation for passenger travel and express cargo logistics. However, despite substantial growth in the past decade, the aviation market in the region is still not realizing its full potential. This chapter reviews the development status of the international air travel market from Central Asia, with an aim of identifying the key barriers for industrial development and growth, and possible remedies to address these challenges. Overall, our study suggests that international market growth from the region is significantly influenced by historical patterns and political ties with Russia. Whereas markets linking selected countries such as Turkey and the UAE have experienced substantial growth, further liberalization is needed for the region to achieve better connectivity with major trade partners and aviation markets.

In this chapter, we will review the history, deregulation, policy reforms, and airline consolidations and mergers of the Chinese airline industry. The measurement of airline competition in China’s domestic market will also be discussed. Although air deregulation is still ongoing, the Chinese airline industry has become a market-driven business subject to some mild regulations. Then, we will review the impressive development of the high-speed rail (HSR) network in China and its effects on the domestic civil aviation market. In general, previous studies have found that the introduction of HSR services has a significant negative impact on airfare and air travel demand in China. The rapidly expanding network of HSR has important policy implications for Chinese airlines.

This chapter reviews three main issues in the interactions between air transport and high-speed rail (HSR) in China, namely the interaction between low-cost carriers (LCCs) and HSR, HSR speed effect on airlines, and airline–HSR integration. Studies on these three aspects of airline–HSR interactions have yet been well reviewed, and our chapter aims to fill in this gap. In this chapter, we comprehensively survey literature on the topics, especially studies on Chinese markets that have recently witnessed major HSR developments (and have planned further large-scale HSR expansion in the coming years). Our review shows that, first, compared to full-service carriers, LCCs face fiercer competition from HSR. However, the expansion of HSR network in China can be better coordinated with LCC development. Second, HSR speed exerts two countervailing effects on airline demand and price (the “travel-time” effect and “safety” effect, respectively). Specifically, an HSR speed reduction can have a positive effect on airlines due to longer HSR travel time, but a negative effect on airlines due to improved perception on HSR safety. Third, airline–HSR integration can be implemented through cooperation between airlines and HSR operators and through co-location of airports and HSR stations and can have important implications for intermodal transport and social welfare.

This chapter reviews the history of regulation and deregulation in international air transport and discusses the positive impacts of deregulation and open skies on the tourism sector in the Asia Pacific region. The Hong Kong–Bangkok market was examined, which shows that the granting of the fifth freedom rights has given the two places sufficient air service provisions to build tourism. Future reforms in air transport such as relaxing ownership restrictions and expanding air freedoms rights are explored.

The chapter aims to examine the interrelationships between aviation and Asian inbound tourism demand to Australia. First, the chapter introduces key factors in the economics of tourism demand and the empirical work in assessing the aviation–tourism demand relations. Based on 2005–2016 annual time series data across 12 of Australia’s main Asian markets, a dynamic panel regression model is applied to empirically examine the factors influencing tourism demand including exchange rates and disposable income. Using a generalized method of moments approach, the study accounts for the endogenous relations between levels of international air services availability (proxied by seat capacity) and tourism demand. The results suggest, on average, the generative effect of aviation exists albeit with small magnitude (0.1–0.5% increase in tourism demand per 100,000 additional seat capacity). The chapter concludes with a discussion on the shifting inbound tourism balance toward Asia and the implications for aviation policy to meet the high Asian tourism growth targets.

Service quality has become an important area for competition among Chinese carriers. This paper focuses on studying the relationship between customer satisfaction measured by customer complaints and their expectation of the on-time performance of Chinese carriers and how the customer complaints affect the financial performance of carriers. By using a quarterly balanced panel data set covering six large listed carriers, the empirical results show that an increase in actual on-time performance reduces customer complaints. However, an increase in expected on-time performance significantly raises customer complaints. An increase in customer complaint reduces the yield measured as revenue per revenue ton kilometer (RTK) of carriers.

This chapter examines the influence of outsourcing on airlines’ performance from countries of the Asia Pacific region. Performance in the context of this study is drawn from productivity growth and technical efficiency scores that are calculated using the standard data envelopment analysis (DEA) approach. We utilize data from airlines over the period 2003–2011 and estimate the impact of outsourcing on productivity and technical efficiency using generalized method of moments (GMM) estimators. The findings from DEA reveal an improvement in the technical efficiency score of airlines from Asia Pacific. Nonetheless, productivity estimates indicate fluctuations in the productivity growth trend of airlines, attributable to global economic recession in 2007/2008. GMM estimation results, however, suggest negative impacts of outsourcing on technical efficiency and productivity of the airlines from Asia Pacific countries. We offer several explanations for these outsourcing findings. Heavy outsourcing of airlines activities particularly maintenance of aircraft may negatively affect aircraft utilization and ultimately erode the service level of airlines. The erosion of the service level of airlines would affect the demand for air travel in a downward manner, thereby lowering the technical efficiency and productivity of airlines. Also, relatively low labor costs enjoyed by airlines in the Asia Pacific region would suggest that having many airline activities in-house would save operating expenses attributable to labor costs.

The Association of Southeast Asian Nations (ASEAN) members want to efficiently promote the flow of commodities and personnel within its service areas under given limited resources. Based on panel data from 2007 to 2014, this study applies the output-oriented data envelopment analysis method and focuses on the disaggregated output efficiencies of 42 ASEAN airports. Results show that the international airports of ASEAN members have significantly better output efficiency for passenger and movement output than regional airports. This work provides a relatively fair perspective in evaluating ASEAN’s airport operating efficiency. It helps policymakers measure the frontier forward or backward shift of an airport over the research period, in order to reveal the characteristics of airport efficiency and to present a new interpretation along with managerial implications.

This chapter has documented the changing roles and dynamics of New Zealand’s airports between 2001 and 2016. New Zealand has well-developed airport systems for both international and domestic air passenger and air freight services. New Zealand airports have experienced marked growth during the study period and growth looks to continue throughout the country. Moreover, New Zealand’s airport system plays a direct role in New Zealand’s air transport and tourism sectors, as well as contributing to other major economic sectors. International and domestic connections to New Zealand airports facilitate the continued growth and importance of tourism, acting as a backbone to the New Zealand economy. In addition to tourism, airports play a crucial role in the facilitation of imports and exports and the development of regional business hubs and supporting activities for New Zealand’s other major industries. Importantly, New Zealand airports are a critical part of its economy and will continue to be so in the decades to come.

The relationship between airline and airport is complex, fascinating, and wide open for new research endeavors. In Volume 6 of the series, we conducted the analyses of risk-sharing contract between airline and airport from numerical risk balance assessment and incomplete contract theory perspectives based on an interesting real example of risk-sharing contracts, the Noto Airport Load Factor Guarantee Mechanism (LFGM) contract in Japan.

In this chapter, we further advance the analyses of risk-sharing contracts, based on the real example of Noto LFGM contract, from the perspectives of game theory and principal-agent theory. The risk-sharing arrangements, such as LFGM contract, are relevant to the rapidly changing business environment in Asia’s aviation industries.

We conduct a two-stage game analysis. The first phase is the contract negotiation phase and the second phase is the effort-making phase after signing the contract. We show that the two parties can attain a Pareto optimal utility level by bargaining a simple linear risk-sharing contract in the contract negotiation phase based on the equilibrium effort levels in the effort-making phase.