Effects of competition and policy changes on Chinese airport productivity: An empirical investigation

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Abstract

This paper investigates the influence of competition and aviation policy reform (for example, the airport localization program and listing airports on stock markets) in China on the efficiency of Chinese airports. By using Data Envelopment Analysis, we estimate both the productivity level and its growth for 25 sample Chinese airports. After controlling for hub status and other airports' characteristics, we find that: (i) publicly listed airports are significantly more efficient than non-listed airports; (ii) airports with more competition are more efficient than their counterparts; (iii) the airports' efficiency and the technical progress are positively correlated with the airport localization program; and (iv) the impacts of open-skies agreements and airline mergers on the airports' efficiency are statistically insignificant.

Introduction

In the past few decades, rapid economic growth has significantly increased the demands for air services in China; between 1980 and 2005, the number of air passengers and cargo tonnage grew at an average rate of 16.8% and 18.2% per annum, respectively. This increasing air demand has placed enormous pressure on China's airport infrastructure. The situation is expected to get worse, as air travel is forecasted to grow at the still fast rate of 7.4% per year for the Chinese market over the next 20 years.1 Thus, in addition to the infrastructure investment, there is an urgent need to improve the productivity of Chinese airports in order to relieve the pressure. Furthermore, as the liberalization of the airline industry continues, more foreign airlines will be allowed to operate in China, and will have increasing freedom to choose where they base their gateways in China. This would also put pressure on Chinese airports to further improve their own productivity, as the airlines want to locate at efficient airports in order both to reduce their operating costs and to improve the quality of their service. Thus an empirical investigation of factors affecting Chinese airport productivity has become important.

Assessment of airport productivity has become the focus of a large number of studies. Different methodologies have been used to measure the productivity of airports in different regions around the world (see Oum et al., 2003, for a comprehensive review). Due to a lack of data, however, it is difficult to assess airport productivity in China. A recent paper by Fung et al. (2008) attempted to calculate the productivities for 25 major Chinese airports between 1995 and 2004. They found that over that period, airport efficiency was improving and the productivity among airports from different regions was converging. Using their data Zhang and Yuen (2008) further investigated whether privatization through public listing improves airport performance. Although they found a positive and statistically significant relationship between Chinese airport productivity and public listing, a large portion of the variance in productivity and its growth are still left unexplained by their regression models. Furthermore, their panel data set does not capture the effects of policy changes on Chinese airport productivity after 2004, during which several important industry reform measures have taken place.

This paper investigates the effects of China's competition and aviation policy reform (for example, the airport localization program and listing airports on stock markets) on the efficiency of Chinese airports. Our sample data consist of a panel of 25 major airports for the period from 1995 to 2006. This new data set may provide a better basis for investigating the effectiveness of recent policy changes on improving the Chinese airport productivity. In particular, we use Data Envelopment Analysis to compute efficiency scores for each airport. We then run regressions to examine the effects of the competition and aviation policy reform on the efficiency scores by controlling a set of airport characteristics and event variables.

Our empirical results reveal that airport localization has a strong impact on airport efficiency; the productivity of the localized airports is significantly higher than that of their counterparts. Furthermore, there is statistically significant evidence suggesting that airports with more competition are more efficient than their counterparts. There is also strong evidence that publicly listed airports are significantly more efficient than non-listed airports. We do not find, however, any statistically significant correlation between Chinese airport productivity and two specific policy changes at the airline level, namely the signing open-skies agreements, and airline mergers arranged by the China's State Council in 2003. Finally, we use the Malmquist index method to investigate the effects of the competition and aviation policy reform on changes in the efficiency of Chinese airports. We find that efficiency growth and its component, technical efficiency, do not have a statistically significant relationship with the airport localization program, competition intensity or stock market listing. However, technical progress – the other component of efficiency growth – is positively and statistically significantly, correlated with the airport localization program dummy.

Section snippets

Recent policy changes and airport productivity

As part of the general economic reform, the reform of the aviation industry in China began in the late 1970s (see Zhang, 1998, Zhang and Chen, 2003, Zhang and Yuen, 2008, for reviews). The Report on Civil Aviation Reform Measures, which was passed by the State Council in January 1987, stated that the long-term goal of the industry reform was to separate the Civil Aviation Administration of China (CAAC) as the regulator from direct involvement in airline and airport operations. This goal would

Methodology

To investigate the effect of competition and policy changes on Chinese airport productivity, we use a two-stage procedure. See, for example, Ali and Flinn (1989) and Kalirajan (1990) for an application of the two-stage analysis. In the first stage, we calculate the productive efficiency from 1995 to 2006 for each airport. In the second stage, we run regressions to examine the effects of competition and policy changes on the productive efficiency of airports, while controlling for a set of

Sample airports

We consider a panel data set for 25 major Chinese airports in the period between 1995 and 2006. Our sample includes airports in China that represents different ownerships, operational characteristics, and regional locations (as shown in Table 1). The data are complied from various sources, including Statistical Data on Civil Aviation of China, Chinese Statistics Yearbooks (various years) and company annual reports of listing airports.

To measure the productive efficiency by DEA (i.e. the

Empirical results

Here we discuss the results for our two-stage analysis. First, we report the DEA efficiency scores for our 25 sample Chinese airports in the period between 1995 and 2006. In addition to this, we will investigate the influence of competition and aviation policy reform in China on the efficiency of Chinese airports through a discussion of the results from different regression models.

Growth in productivity

Having examined levels of productivity for the sample airports, we will now turn to the changes in levels of productivity. This examination is useful in that, if the low level of productivity at some airports is due to their low starting point, a faster growth rate in productivity after the policy changes could reduce and eliminate the gap. For instance, Fung et al. (2008) found that productivity among the airports from different regions was converging. The growth of productive efficiency is

Concluding remarks

The main purpose of this paper is to assess the effects of China's competition and aviation policy reform on both the level and growth of productive efficiency of its airports. In particular, the newly available panel data set enabled us to investigate the effect of recent policy changes, including airport listing and the airport localization program, on airport efficiency. We found that there is strong evidence that publicly listed airports are significantly more efficient than non-listed

Acknowledgement

We would like to thank Waiman Cheung for useful discussions and the Aviation Policy and Research Center at Chinese University of Hong Kong for data assistance. Partial financial support from the Li and Fung Institute for Supply Chain Management and Logistics at Chinese University of Hong Kong is gratefully acknowledged.

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