Demand Shocks, Airline Pricing, and High-Speed Rail Substitution: Evidence from the Chinese Market

Abstract

We study the high-speed rail (HSR) substitution for air travel through the demand shocks triggered by two HSR events: the launch of Beijing-Shanghai high-speed rails (the “Jing-hu” HSRs) and the Wenzhou train accident. One novelty of our data is that the HSR events are exogenous to the airline industry, alleviating the common endogeneity concern. Using a difference-in-difference approach, we find some evidence of substitution based on the pattern of airfare adjustments during the sample period. Specifically, compared to those in the control group, mean airfares for routes along the Jing-hu HSRs decline by 30.4 per cent upon the launch, but rebound by 27.4 per cent following the accident. Furthermore, the two events have a larger impact on low-cost carriers (LCCs) and regional airlines, on tourism routes, and on flights that depart during evening hours than their counterparts, respectively. Thus, we claim that the HSRs mainly serve as a low-end substitution for air travel in China.