Low-cost Carriers in China: Spring Airline’s Effect on Market Competition and its Entry Pattern

Although China lags behind other liberalized aviation markets on Low Cost Carrier (LCC) development, its first and only recognized LCC, Spring Airlines, demonstrates rapid growth and great profitability since its inauguration in year 2005. This study finds that Spring Airlines adopts a “cream skimming” strategy to enter high priced routes. In those routes, FSC’s (full service carrier) prices are high. Spring Airlines thus can easily attract enough demand with a slightly lower price instead of triggering a price war. This strategy allows Spring Airlines to distinguish itself from other FSCs at a lower cost and can enjoy high profitability by charging a reasonably high price. But it is also found that Spring Airlines' market entry has forced other FSCs to reduce fares in response. However, different from what is observed in other countries’ markets, Chinese FSCs do not respond that aggressively by reducing too much in prices. This is probably because FSCs do not treat Spring Airlines as a real threat due to its limited market capacity. An entry study is also conducted for Spring Airlines. It is found that Spring Airlines prefers to enter the long-haul route, probably to avoid head-to-head competition with Chinese high speed rail (HSR) in the medium and short haul market. Similar to other LCCs around the world, Spring Airlines puts higher priority on dense routes although permits are difficult to get from the CAAC. Lastly, FSC’s airport hub status in Beijing and Guangzhou deters Spring Airlines' presence in those airports. Instead, Spring Airlines is very likely to extend the network from its own hubs in Shanghai.