China Will Experiment Letting Airlines Set Their Own Prices

People younger than a certain age completely misunderstand the regulated era of US airlines. When they talk about ‘re-regulating’ the airlines they think it means “making sure they offer good quality service at a reasonable price.” But that’s not how it used to work.

The Civil Aeronautics Board was primarily charged with determining what routes airlines were allowed to fly, and what prices they would charge. And they weren’t trying to keep prices low, either, they were trying to ensure that airlines made enough money. The goal was ‘stability’ in the industry, and avoiding ‘ruinous competition’.

Former Civil Aeronautics Board Chairman Alfred Kahn explained that when the Board set prices high, airlines still had to compete, they just spent more on amenities to do it. So the CAB “regulated the size of sandwiches.” Airlines began charging for headsets because the government insisted they not compete to offer better free inflight entertainment.

China heavily regulates its own airline industry, which is odd in a way because the government also exhibits significant influence over individual airlines independent of that regulation. They’re beginning to liberalize in much the same way the US did 40 years ago.

In 1976 – two years prior to deregulation – the Civil Aeronautics Board ‘experimented with price competition’. China is doing that, allowing airlines to set their own prices on about 300 routes: “domestic routes that have at least five carriers competing” however they’re limiting any increases to no more than 10% per travel season. This follows a 2015 move to lift airfare limits on 101 routes.

China Southern Airlines is most likely the biggest beneficiary as it had the largest domestic market share, she said.

China Southern shares surged by more than 6% for a new two-year high, while Air China jumped by more than 8% to a new high level since November 2010. China Eastern Airlines climbed more than 5%.

Beijing has vowed to let market forces to play a more conclusive role in its aviation industry to further enhance service quality and efficiency.

It’s almost funny to say that airlines are allowed to set their own prices only when 5 different airlines are competing on a route given the U.S. context where we have a total of 4 major US players (American, United, Delta, Southwest), 2 large regional players (Alaska/Virgin America and jetBlue) and a few ultra low cost carriers in total.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. “China is beginning to liberalize in much the same way the US did 40 years ago.”

    Wow. Such thought leadership…

  2. You may have misunderstood the meaning of this policy change – China is only lifting the restrictions on the MAXIMUM permitted prices (F/C/Y fare) on certain domestic routes. Chinese airlines have long been able to set their discounted prices (B/M/T/S/Q etc. which are NOT uniform across different airlines) as they want. If you have ever taken one Chinese domestic flight you should have known that you can choose different fare buckets and earn different percentages of the flight mileage accordingly.

  3. “Ruinous Competition” seems like a very good way to describe the race to the bottom that gives us Basic Economy, 27″ seat pitch, and 10 abreast coach.

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