A retrospective analysis of the effects of airline mergers on China Eastern's ‘lifeline’ routes: a difference-in-differences approach

Abstract

We have seen a wave of mega airline mergers in the past few years including Air France/KLM, Delta/Northwest (NW) and United/Continental. However, literature examining the post-merger effects remains sparse. Using a difference-in-differences (DD) approach, this study examines the airfares on China Eastern's three ‘lifeline’ routes, Shanghai–Beijing, Shanghai–Guangzhou and Shanghai–Shenzhen, after the 2002 airline mergers that eliminated six state-owned airlines and resulted in three large airline groups. Passengers on these important routes seem to have not been adversely impacted, and even in 2007, the airfares were not significantly higher than that of the 2002 level despite the rise in fuel price, which may provide some evidence to support the 2009 merger between China Eastern and Shanghai Airlines and justify a lenient anti-trust treatment of mergers in China's airline industry. Retrospectively examining the actual effects of consummated mergers in China including this research has significant policy implications for the new Anti-Monopoly Law enforcement agencies that have little experience and knowledge in dealing with airline mergers and alliances at this stage.

Keywords:

• Airline merger
• China eastern
• anti-trust
• business routes
• tourist routes

JEL classifications:

• L11
• L41
• L93

Acknowledgement

Part of the material was presented at the 20th Annual Conference of the Association for Chinese Economic Studies Australia (ACESA) 2008, James Cook University, Townsville, Australia. My thanks go to the conference participants and one anonymous conference reviewer. The author is responsible for any errors.

Notes

1. CAAC (Civil Aviation Administration of China) was an airline operator and a government regulatory body. It now refers to the General Administration of Civil Aviation of China, a government regulatory agency responsible for the oversight and administration of the civil aviation industry.

2. See the DOJ website for the antitrust case filing: US v. Northwest Airlines and Continental Airlines http://www.usdoj.gov/atr/cases.html#c.

3. See http://www.usdoj.gov/atr/public/speeches/217987.htm.

4. Price Control Administrations (otherwise called Price Bureaus) are responsible for implementing and enforcing the Price Law.

5. The monthly average airfares are unbalanced panel data as the data for August 2002 were missing.

6. Bear in mind that the departure day price is usually higher than days before the departure, which means that the 2007 monthly average tends to overstate the actual average.

7. All the coefficients have the same signs and the conclusions do not change if the data before October 2002 and the data from February 2003 onwards are plugged into the DD model.

8. Other model specifications, such as using log form and using yields (fares divided by route distance) instead of using absolute fares for the dependent variable were tried, but there was no obvious model fit improvement. In fact, the signs of all the variables remain the same in different model specifications.