Airline reactions to high-speed rail entry: rail quality and market structure

Airfare reduction is proposed by a theoretical paper to be a possible source of observed air traffic increase in some markets where high-speed rail (HSR) enters and competes with airlines. This paper aims to empirically test whether and to what extent the air traffic impact is channeled by the adjustment in airfares. To understand the varying empirical results found in the literature, we examine heterogeneous airline responses in traffic and airfare in relation to HSR qualities measured by HSR-air travel time difference and pre-entry market structure of airline as well as decompose HSR impacts into competition, feeding and long-term effects. Using a panel dataset of Chinese air routes, we find that airfare adjustment plays crucial roles in channeling HSR’s air traffic impact. Our estimation suggests that HSR introduced over 16.5 million additional passengers to the sampled air routes in our study period, generating 2.17 million tons of extra CO2 emissions from air flights. However, these numbers would increase to 32.2 million additional passengers and 3.4 million tons of extra CO2 emissions after removing the price adjustment.