Effects of High-Speed Rail Speed on Airline Demand and Price: Theoretical Analysis and Empirical Evidence from a Natural Experiment

This study investigates, both theoretically and empirically, the effects of high-speed rail (HSR) speed on airline traffic and price, taking into account the degree of substitutability between the two services. Our model incorporates two countervailing effects of HSR speed on airlines, namely the “travel time” effect and the “safety” effect: while increasing HSR speed reduces HSR travel time, it may bring about a safety concern which is especially true in emerging HSR markets such as China. Our theoretical analysis suggests that air-HSR substitutability reinforces the HSR speed effect on airlines, and that the speed effect depends further on the relative dominance of the travel-time and safety effects. Moreover, HSR speed has a larger impact on airline traffic than on airline price. The empirical evidence from a rare natural experiment of HSR speed reduction in China confirms that HSR speed reduction raises both airline traffic and price, suggesting the dominance of travel-time effect. More importantly, consistent with the theoretical prediction, the HSR speed effect is empirically stronger on short-haul routes where the airline and HSR services are more substitutable.