The impact of open skies agreement and the duration of flight on the performance of South Korea’s low-cost carriers : a panel data analysis of 6 international routes from 2008 to 2017

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The impact of open skies agreement and the

duration of flight on the performance of

South Korea’s low-cost carriers

A panel data analysis of 6 international routes

from 2008 to 2017

Hoyoung Shin-10665064

Faculty of Economics and Business

Supervisor: Timo Klein

Bachelor Thesis

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Statement of Originality

This document is written by student Hoyoung Shin who declares to take full responsibility for the

contents of this document.

I declare that the text and the work presented in this document are original and that no sources

other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the

work, not for the contents.

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This paper tests whether Open Skies Agreement and the duration of flight have significant correlations with the performance of low-cost carriers by using a panel data of 6 international routes of South Korea from 2008 to 2017 through the fixed-effects panel data regressions. This paper finds that Open Skies Agreement does not have significant correlations with the market share of low-cost carriers and the market size after the entrance of low-cost carriers. On the other hand, this paper finds that the impact of Open Skies Agreement on

stimulating the market share of low-cost carriers is positively related to the duration of flights by comparing

the routes with Open Skies Agreement. Government regulators who concern stability and growth of the airline industry and consider Open Skies Agreement as one of the tools will get information about the actual impact of Open Skies Agreement on stabilizing and stimulating the market.

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1. Introduction

In the last two decades, the size of the market of international commercial air transport has proliferated. According to the world bank (n.d.), the number of passengers carried by air transport in 2016 was 3.696 billion which is approximately 2.5 times higher than 1.44 billion passengers in 1997. The emergence of low-cost carriers, which was started by ‘Southwest Airlines’ in the United States and spread throughout the world was not only a result of the international air transport growth but also a trigger of the demand growth (Gillen and Morrison, 2013).

Low-cost carriers also emerged in South Korea's air transport industry as both a reason and a result of the growth of South Korea’s air transport industry by 2.46 times bigger in 2016 compared to 1997 (World Bank, n.d.). The emergence of low-cost carriers in South Korea elevated questions about the relations between factors that affect the impact of the entrance of low-cost carriers and the market size of South Korea's air transport with the market share of low-cost carriers. The effects of the two factors: Open Skies Agreement and the duration of flight are analyzed by comparing specific routes of international flights from 2008 to 2017. This analysis tests whether the existence of Open Skies Agreement and the duration of flight have significant correlations with the market share of low-cost carriers and the market size after the emergence of low-cost carriers in South Korea’s air transport industry.

This paper finds that Open Skies Agreement and the duration of flight do not have significant correlations with the market share of low-cost carriers and the market size after low-cost carriers entered South Korea’s airline industry. The comparison among the routes with Open Skies Agreement, on the other hand, shows that the effect of Open Skies Agreement on stimulating the market share of low-cost carriers is positively related to the duration of flight. The findings of this paper have implications for the industrial organization as they show the impacts of a new type of competitor and the regulation (Open Skies Agreement) on the market structure and the performances of players in the market.

Even though around 95 percent of South Korea's international passenger traffic relies on air transportation, no research studies about South Korea's air transport industry with the impacts of Open Skies Agreement and the duration of flight. Studying South Korea's air transport industry, therefore, will help market players to manage their roles in the market for higher total welfare. For instance, the results of the correlations between regulation (Open Skies Agreement) and market structure will help government regulators who consider contracting Open Skies Agreement with more countries to promote airline industry by presenting the actual correlation of Open Skies Agreement with a growth of the airline industry. Both traditional full-service carriers and low-cost carriers that operate in South Korea's air transport industry, besides, will get a chance to consider Open Skies Agreement and the duration of flight for setting the strategies in the future.

The remaining contents of this paper are structured as follows. Section 2 presents previous works of literature that are related to the research question. The methodology that contains the process of the sample construction, description of variables and the estimating equations is described in section 3. Section 4 presents results of the regressions with explaining implications of the results. Section 5 concludes this paper with its limitations and suggestions for further research.

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2. Literature Review

In this section, the facts and the studies previously described by others are presented. The emergence of low-cost carrier in the world is described and followed by the emergence of low-low-cost carrier in South Korea. In the second subsection, previous research about the correlation between the duration of flight and the performance of low-cost carrier is presented. Next, the definition and the history of Open Skies Agreement are explained in the third subsection. The last subsection shows the features of South Korea's air transport industry which motivate this paper to focus on the market of South Korea.

2.1 The emergence of a low-cost carrier

The growth of low-cost carriers is closely associated with market liberalization (Low Cost Carriers, n.d.). As domestic air transport industries have been gradually deregulated in many countries, low-cost carriers have caught the opportunity to operate their businesses by serving innovative air services (Low Cost Carriers, n.d.). This phenomenon which is called “Southwest effect” has generated new passenger demand (Low Cost Carriers, n.d.). Southwest Airlines, which inaugurated flight operations in the United States in 1971, are well-known for their creative and successfully achieving the original low-cost carrier model (Alamdari and Fagan, 2005). A lot of low-cost airlines have taken the strategies of Southwest Airlines when they initiate their businesses (Alamdari and Fagan, 2005). Ryanair, for example, has established their business models solidly on

Southwest's central low-cost principles (Alamdari and Fagan, 2005). The emergence of low-cost carrier in many

regions in the world has led to a higher market share of low-cost carriers. The market share of the low-cost carriers in Europe, for example, was 19 percent in 2007 and it increased to 30 percent in 2016 (“The rapid rise of low-cost carriers”, 2017).

The market for low-cost carriers in South Korea is relatively young compared to the American and the European markets. It started in 2006 by Hansung Airlines which is the first low-cost carrier in South Korea (Chung and Whang, 2011). Yang’s 2005 study (as cited in Chung and Whang, 2011) finds that the criticism pointed at two predominant airlines (Asiana Airlines and Korean air) helped the arrival of low-cost carriers in the air transport industry of South Korea. Also, Kim and Lee (2011) explain that the airline liberalization in South Korea and the efforts to boost the low-cost carrier business for local airports activation by regional

governments accelerated the entry of low-cost carrier in South Korea. According to the Ministry of Land,

Infrastructure and Transport of South Korea (2018), there are 7 South Korean national low-cost carriers in 2018. The research by Chung and Whang (2011) reports that the domestic market share of low-cost carriers rapidly increased to 35.3 percent in 2009 from 3 percent in 2006. This research shows the impact of the emergence of low-cost carriers on stimulating the market share of low-cost carriers in the domestic air

transport industry of South Korea. Since the previous literature focuses on the domestic market, this paper

extends the research by testing the impact of the emergence of low-cost carriers on stimulating the market share of low-cost carriers in the international air transport industry of South Korea.

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2.2 Impact of the duration of flight on the performance of a low-cost carrier

Shaw’s 2007 study (as cited in Kim & Lee, 2011) claims that establishing and sustaining cost management in short-haul industry is more accessible than the one in the long-haul market for low-cost carriers. Francis, Dennis, and Humphreys (2007) explain the reasons by stating that short-haul routes mainly consist operations of low-cost carriers because some features related to low-cost operations such as the need for food, in-flight entertainment, and seat pitch have been regarded as less compatible with long-haul flights. Recently, South Korean low-cost carriers are trying to expand their businesses to long-haul market (Kim & Lee, 2011). Sustainable cost management is the main component that low-cost carriers need to consider when entering the long-haul market (Kim & Lee, 2011). However, low-cost carriers should not undervalue the significance of low-cost passenger's other considerations such as appropriate in-flight service and plenty of seat pitches (Kim & Lee, 2011). Those factors are highly valued by low-cost long-haul passengers (Kim & Lee, 2011).

Much of previous literature has studied low-cost carrier's probability of success in the long-haul market. However, no research studies the relation between the duration of the flight and the performance of low-cost carrier especially for the routes less than 6-7 hours which are considered as short-medium haul routes. Since most of the international routes operated by low-cost carriers in South Korea is less than 7 hours, the three categories 0-2hours, 2-4hours and >4 hours are used to see the correlation of flight duration with the market share of low-cost carriers.

2.3 Impact of Open Skies Agreement

Fu, Oum, and Zhang (2010) explain that deregulation in airline industry made substantial air traffic growth. The higher growth is caused mainly by increased competition in the air transport market, which promoted traffic growth through reduced price (Fu et al., 2010). Low-cost carriers have benefited most from the movement towards deregulated single airline industry (Fu et al., 2010). The European single aviation market after the liberalization, for example, was the great opportunity for low-cost carriers to expand their market shares internationally through the removal of restrictions on entry, frequency and capacity (Fu et al., 2010).

Open Skies Agreement is a mutual air service agreement between two countries to give permissions for

airlines to serve international passenger and cargo services (Open Skies Partnerships: Expanding the Benefits

of Freer Commercial Aviation, 2017). There are the three primary purposes of Open Skies Agreement. First, it is used to stimulate an international aviation system by promoting competition among airlines with least government intervention. Second, it is desired to make individual airlines to be innovative and competitive to benefit the public. The third purpose of Open Skies Agreement is to promote the growth of international air transport opportunities (Air transport agreement between the government of the United States of America and the government of [country], 2012).

Unlike the triumphant entrance and expansion of low-cost carriers in Europe with Open Skies Agreement, Asian low-cost carriers had not been very successful at the same time. Zhang, Hanaoka, Inamura, and Ishikura (2008) claim that the shortage of Open Skies Agreements among Asian Countries is the reason for the low

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expansion of Asian low-cost carriers. A significant disadvantage of Asian low-cost carriers is the small size of their domestic markets except for China that has a relatively big size of the domestic market, and it makes them focus their businesses on international routes (Zhang et al., 2008). The existence of entry barrier (no Open Skies Agreements), however, makes Asian low-cost carriers hard to expand their businesses on international routes (Zhang et al., 2008). Lee (2008) discusses the effect of Open Skies Agreement by presenting the agreements that South Korea signed with the two neighbor countries China and Japan. South Korea contracted with China only for the route between Incheon and Shandong while opened every route with Japan (Lee, 2008).

Table 1 - 11 months before & after Open Sky (June 16, 2006)

Flights Passengers

From To From To

ICN-Shandong Korean Carriers 3,754 5,330 (+42.0%) 495,259 549,836 (+11.0%)

Chinese Carriers 4,276 8,361 (+95.5%) 376,234 653,388 (+73.7%)

ICN-Other Cities Korean Carriers 19,843 26,592 (+34.0%) 3,303,690 3,893,738 (+17.9%)

Chinese Carriers 19,467 29,613 (+52.1%) 2,805,947 3,604,863 (28.5%)

As shown in Table 1, he found that the total air travel passengers between Incheon and Shandong after 11

months of the Open Skies Agreement increased 38.06% compared to the number of 11 months before the agreement. In the meantime, every other route between Incheon and China increased by 22.73% (Lee, 2008). The results show that Open Skies Agreement stimulated the growth of the market size. However, no research studies whether the difference in the duration of flights differs the stimulating effect of Open Skies Agreement on both market size and market share of low-cost carriers. Therefore, this paper set three hypotheses to see the correlations of Open Skies Agreement and the duration of flight with the market share of low-cost carriers and the market size counted by the total number of passengers after the entrance of low-cost carrier in South Korea.

Hypothesis1: Open Skies Agreement does not have a significant impact on stimulating the market share of low-cost carriers

Hypothesis2: Open Skies Agreement does not have a significant impact on stimulating the market size after the entrance of low-cost carriers

Hypothesis3: The effect of Open Skies Agreement on stimulating the market share of low-cost carriers is negatively related to the duration of flight

The first hypothesis is expected to be rejected by the intuition that Open Skies Agreement stimulates the market share of low-cost carriers. The second hypothesis is also expected to be rejected by the intuition that Open Skies Agreement have a positive correlation with the market size after the entrance of low-cost carriers. The third hypothesis is expected not to be rejected by the intuition that air passengers prefer the full-service carriers with the higher level of comfort for the longer duration of flight.

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2.4 Features of South Korea’s international air transport industry

This section describes the structure of South Korea’s air transport industry which motivated this paper to focus on the market of South Korea. According to the Ministry of Land, Infrastructure and Transport of South Korea (2018), approximately 95 percent of the total international passenger from and to Korea traveled by air

transport. Table 2 shows the share ratios of the international passenger traffic from and to South Korea for

each type of transportation. The only two ways to travel outside of South Korea are flight and shipment because Korea is divided into South and North and it is impossible to cross the border between South and North. This situation made the fact that significant share of South Korea's international passenger traffic relies on air transportation. Unlike Europe where land connects the countries and that allows substituting air travel by cars or train, the only substitution of air travel in South Korea is shipment which hardly competes with flight.

As mentioned above, the duration of most of the international routes operated by low-cost carriers in South Korea is less than 7 hours. The main reason for it is a type of aircraft owned by low-cost carriers. Table

3

shows the type of aircraft owned by the South Korean low-cost carriers. Except B777-200ER owned by Jin air, all the other aircraft can only fly approximately less than 6-7 hours. Unlike the European and American continents, many Asian countries are not connected by lands. Also, they are located relatively far from each other compared to the continents. Therefore, this research about the market of South Korea can also be useful for the markets of other Asian countries that have similar geographical characteristics as South Korea.

Table 2 - South Korea's international passenger division ratios by transportation type

2011 2012 2013 2014 2015 Passenger Shipment Volume 2,660 2,881 2,737 2,646 2,617 Share ratio 5.9% 5.7% 5.1% 4.5% 4.1% Flight Volume 42,649 47,703 50,987 56,779 61,434 Share ratio 94.1% 94.3% 94.9% 95.5% 95.9%

Table 3 - Aircraft of South Korean LCCs

South Korean low-cost carriers Type of aircrafts

Air Busan1 A320-200 (6), A321-200 (17)

Air Seoul2 _{A321-200 (6)}

Eastar jet3 B737-700 (3), B737-800 (14), B737-900ER (2)

Jeju air4 _{B737-800 (34)}

Jin air5 B737-800 (22), B777-200ER (2)

T-way6 _{B737-800 (20)}

1_{Retrieved from https://en.airbusan.com/content/common/introduction/aircraft} 2_{Retrieved from https://flyairseoul.com/CW/ko/aircraft.do}

3_{Retrieved from https://www.eastarjet.com/newstar/PGWKH00001}

4_{Retrieved from https://www.jejuair.net/jejuair/en/com/jeju/ibe/company/airplane.do} 5_{Retrieved from https://www.jinair.com/company/aircraft}

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3. Methodology

So far, limited research has studied the impact of Open Skies Agreement on the performance of low-cost carriers. Furthermore, they focused mainly on the markets of Europe and America. The impact of flight duration on the performance of low-cost carrier, also, has rarely been studied. Therefore, this paper extends the research through panel data analysis to assess the correlation of Open Skies Agreement with the market growth after the emergence of low-cost carriers and the market share of low-cost carriers. Moreover, the correlation of the duration of flight with the effect of Open Skies Agreement on the market share of low-cost carriers is also tested by comparing the three routes which have Open Skies Agreement.

3.1 Sample Construction

The first scheduled international route by the low-cost carrier in South Korea commenced in 2008 (Ministry of Land, Infrastructure and Transport of South Korea, 2018). Therefore, the data from 2008 is collected to see the effect after the entrance of low-cost carrier. The two data sources of this analysis are Incheon International Airport Corporation and Korea Airport Corporation. Incheon International Airport Corporation operates Incheon International Airport which is the largest international airport in South Korea. Korea Airport Corporation operates all the other commercial airports in South Korea except Incheon International Airport. The two companies make statistical charts and publish on their websites to provide it to the public. This paper filters the routes from and to the six airports in foreign countries.

Table 4 below shows the annual international passenger share ratios of Incheon International Airport and the other six airports which have international routes. The table shows that Incheon International Airport takes around 80 percent of South Korea’s international air traffic counted by the total number of passengers from 2008 to 2017. It seems a sum of the shares of the six other airports is relatively too small to be neglected.

However, the critical point is presented in Figure 1 which graphically shows the trends by drawing the numbers

from Table 4 is that a sum of the shares of the six other airports increased approximately by four percentage

points in a decade. It describes the fact that low-cost carriers in South Korea have made international routes based not only on Incheon International Airport but also on the other six airports in South Korea. Since the primary purpose of this paper is to find out the impact of low-cost carriers in the market of South Korea, the data from the six other airports are included in the dataset of this paper.

Table 4 - Division ratios of international air traffic of South Korea's Airports

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

INCHEON 83.3% 83.3% 83.6% 82.4% 80.9% 80.5% 80.7% 79.8% 79.5% 78.4% 79.5% OTHERS 16.7% 16.7% 16.4% 17.6% 19.1% 19.5% 19.3% 20.2% 20.5% 21.6% 20.5%

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As shown in Table 5, this research categorizes three groups of international routes: 0-2hours, 2-4hours and >4 hours to test a correlation between the duration of flight and Open Skies Agreement. In the category 0-2hours, the routes from South Korea to Beijing Capital Airport(PEK) with Open Skies Agreement and the two airports Tokyo Haneda International Airport(HND) and Tokyo Narita Airport(NRT) in Tokyo with Open Skies Agreements are included. Since Tokyo operates two large airports, both airports are included in the data. In the category 2-4hours, the routes from and to Hong Kong International Airport(HKG) with Open Skies Agreement and Chengdu Shuangliu International Airport(CTU) without Open Skies Agreement are chosen to compare the effect of Open Skies Agreement. In the last category with more than 4 hours, the routes from and to Bangkok International Airport(BKK) with Open Skies Agreement and Mactan-Cebu International Airport(CEB) without Open Skies Agreement are included.

There are two reasons for choosing only these six routes in this paper. First, most of the low-cost carriers in South Korea focus on the limited number of routes, and they are overlapped with each other. Second, only a few routes including the six routes have exact conditions that this paper set for the data construction. To make a balanced panel data, therefore, the six particular routes are used in this paper.

Table 5 - List of the six routes

With Open Skies Agreement Without Open Skies Agreement

0-2 hours Tokyo Beijing

2-4 hours Hong Kong Chengdu

>4 hours Bangkok Cebu

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 INCHEON OTHERS

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The panel data includes the sum of repeated observations on specific variables for the routes between South Korea and the six airports in foreign countries collected yearly from 2008 to 2017. The data includes the total number of passengers and the total number of passengers flown by low-cost carriers. In this paper, every route from and to a certain city are treated as one integrated route.

3.2 Description of Variables

The establishment of the variables for the model is described in this subsection. The market sizes counted by the number of total passengers is replaced by the GrowthRate to avoid possible omitted variable bias caused by different traffic characteristics of the routes.

MSLCCsRatio: This variable describes the percentage rate of the Market Share of low-cost carriers counted by the number of the passengers which is presented as Market Share of LCCs in the dataset. The equation

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑠𝑠

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀× 100 calculates it for every observation.

GrowthRate: It shows the growth rate of the market size for a route by comparing the number of the total passengers to the previous year. The equation of this calculation is 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑡𝑡−𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑡𝑡−1

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑡𝑡−1 . As the

construction of this variable is based on the dataset, GrowthRates of the year 2008 for every panel are missing. S2, S3: These are dummy variables to categorize the duration of a flight. S2 is 1 if the duration of flight of a route is 2-4 hours and 0 if it is not. S3 is 1 if the flight duration of a route is more than 4 hours and 0 for the other cases.

OSA: This dummy variable is the initials of Open Skies Agreement. The routes with Open Skies Agreement have 1 for this dummy variable and 0 for the routes without Open Skies Agreements. The expected relation between OSA and MSLCCsRatio is positive which implies that low-cost carriers have a higher growth path of the market share on the routes with Open Skies Agreements.

S2OSA: This independent variable is an interaction term between the variables S2 and OSA. It becomes 1 if both dummy variables S2 and OSA become 1. The coefficient of this interaction term shows an effect of Open Skies Agreement on the market share of low-cost carriers for the group of 2-4hours.

S3OSA: This interaction term of the variables S3 and OSA only has a coefficient if both dummy variables S3 and OSA are 1. It means that coefficient of this interaction term describes an effect of Open Skies Agreement on

the market share of low-cost carriers for the group of more than 4 hours.

To avoid multicollinearity, variables S1 and S1OSA are excluded from the estimating equations. The coefficients of the variables constant and OSA describe the effect within the group of 0-2 hours.

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3.3 Estimating equations

This paper uses fixed-effects panel data regression. The fixed-effects model is advantageous for this research because it permits a restricted pattern of endogeneity by allowing random individual-specific effects to be

𝑀𝑀𝑀𝑀

In the first and second equations, the three coefficients 𝛽𝛽3, 𝛽𝛽4, and 𝛽𝛽5 which show the correlations of Open

Skies Agreement with dependent variables are related to the first and second hypotheses. 𝛽𝛽3 in both

equations show differences in the size of dependent variables between the route with Open Skies Agreement

and the route without Open Skies Agreement for less than 2 hours. 𝛽𝛽3+ 𝛽𝛽4 and 𝛽𝛽3+ 𝛽𝛽5 show, respectively,

differences in the size of dependent variables for the routes from 2 to 4 hours; and differences in the size of

dependent variables for the routes more than 4 hours. 𝛽𝛽0+ 𝛽𝛽3, 𝛽𝛽1+ 𝛽𝛽4, and 𝛽𝛽2+ 𝛽𝛽5 which are related to the

third hypothesis show the correlations of Open Skies Agreement with the market share of low-cost carriers on

the routes less than 2 hours, from 2 to 4 hours, and more than 4 hours respectively. The variable 𝑀𝑀𝑀𝑀 in both

equations stand for unobserved time-invariant effect for each route.

4. Results

The results of the models are described in this section. Table 6 shows results of the two panel data regressions

with fixed-effects. The results are analyzed for each category to find out the correlation of Open Skies Agreement with the market share ratio of low-cost carriers and the growth rate of the market. Afterward, the results of the three categories are compared to test whether the duration of flight is related to the impact of Open Skies Agreement.

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Table 6 - Fixed-effects panel data regressions (1) MSLCCsRatio (2) GrowthRate 2-4 hours (S2) -.541 (.32) .2** (.06) >4 hours (S3) 27.473*** (7.00) .161** (.07) OSA 8.941** (3.33) .002 (.07) S2OSA 9.37*** (1.69) -.13** (.05) S3OSA -15.22** (6.02) -.098 (.07) OSA+S2OSA 18.311*** (4.14) -.128 (.09) OSA+S3OSA -6.279* (2.89) -.096* (.05) Constant .619 (3.01) .024 (.03) N 𝑹𝑹𝟐𝟐 60 within = 0.6620 between = 0.0959 overall = 0.4360 54 within = 0.2519 between = 0.1628 overall = 0.1560 S2, S3, and OSA are dummy variables

S.E. in parentheses

***p<0.01, **p<0.05, *p<0.1

Table 6 lists the results of linear panel data regressions with fixed-effects. The first regression which contains the MSLCCsRatio as dependent variable shows the correlation of Open Skies Agreement with the

market share of low-cost carriers. First, the three 𝑀𝑀2_{measures are, respectively, 0.6620 for the within}

variation, which means that 66.2% of the variability in the actual values within each group explained by the model; 0.0959 for the between variation which interprets that 9.59% of the variability in the actual values across groups explained by the model; and 0.4360 for the overall variation.

The second regression with the GrowthRate as dependent variable describes the correlation of Open Skies

Agreement with the market size growth after the entrance of low-cost carriers. The three 𝑀𝑀2_{measures are,}

respectively, 0.2519 for the within variation, which means that 25.19% of the variability in the actual values within each group explained by the model; 0.1628 for the between variation which shows that 16.28% of the variability in the actual values across groups explained by the model; and 0.1560 for the overall variation.

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4.1 0-2 hours

A coefficient of the independent variable OSA is 8.941. It shows that the average market share of low-cost carriers for the route with Open Skies Agreement is 8.94 percentage points higher than the route without Open Skies Agreement within 0-2hours. This independent variable is significantly related to the MSLCCsRatio

under 1% of significance level. Figure 2 describes the time-series market share ratios of both routes from and

to Beijing and Tokyo. It graphically shows the difference between the two routes.

The results of the second regression which tests the correlation of Open Skies Agreement with the

GrowthRate of the routes inside the category 0-2hours are described in Table 6. A coefficient of the

independent variable OSA is 0.002, and it can be interpreted that the existence of Open Skies Agreement has a positive relation with the market growth rate. However, the independent variable OSA is not significantly related to the GrowthRate. The result of the regression, therefore, shows that Open Skies Agreement does not have a significant correlation with the market size growth after the entrance of low-cost carriers in the group

of 0-2 hours. This result is described graphically in Figure 3.

0 1 0 2 0 3 0 M S L C C s R a ti o 2008 2010 2012 2014 2016 2018 year Beijing Tokyo

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4.2 2-4 hours

As shown in Table 6, a sum of the coefficients of the two independent variables OSA and S2OSA is 18.311. The

linear combination function calculates it as the sum of the coefficients of OSA and S2OSA shows the correlation of Open Skies Agreement with the market share of low-cost carriers within 2-4 hours. It shows that the average market share of low-cost carriers for the route with Open Skies Agreement is 18.31 percentage points higher than the route without Open Skies Agreement. The sum of the two independent variables is

significantly related to the MSLCCsRatio under 1% of significance level. Figure 4 graphically describes the

time-series market share ratios of both routes from Chengdu and Hong Kong to show the difference between the two routes caused by the existence of Open Skies Agreement.

-. 4 -. 2 0 .2 .4 G ro w th R a te 2008 2010 2012 2014 2016 2018 year Beijing Tokyo

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The results of the second regression which tests the correlation of Open Skies Agreement with the GrowthRate of the routes inside the category 2-4 hours are described in Table 6. A sum of the coefficients of the two independent variables OSA and S2OSA calculated by the linear combination function is -0.128, and it can be interpreted that the existence of Open Skies Agreement hurts the market growth rate. However, the sum of the independent variables OSA and S2OSA is not significantly related to the GrowthRate. The result of the regression, therefore, shows that Open Skies Agreement does not have a significant correlation with the market size growth after the entrance of low-cost carriers in the group of 2-4 hours. This result is described graphically in Figure 5. 0 1 0 2 0 3 0 4 0 M S L C C s R a ti o 2008 2010 2012 2014 2016 2018 year Chengdu HongKong

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4.3 >4 hours

As shown in Table 6, a sum of the coefficients of the two independent variables OSA and S3OSA by the linear

combination function is -6.279. It explains that the market share of low-cost carriers for the route with Open Skies Agreement is 6.28 percentage points lower than the route without Open Skies Agreement within the group more than 4 hours. The sum of the two independent variables is significantly related to the MSLCCsRatio

under 10% of significance level. Figure 6 graphically describes the time-series market share ratios of both

routes from Bangkok and Cebu to show the difference between the two routes caused by the existence of Open Skies Agreement.

-. 5 0 .5 1 G ro w th R a te 2008 2010 2012 2014 2016 2018 year Chengdu HongKong

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The results of the second regression which tests the correlation of Open Skies Agreement with the

GrowthRate of the routes inside the category more than 4 hours are described in Table 6. A sum of the

coefficients of the two independent variables OSA and S3OSA calculated by the linear combination is -0.096, and it can be interpreted that the average growth rate of the market size with Open Skies Agreement is 9.6 percentage points lower than the growth rate of the route without Open Skies Agreement. The sum of the two independent variables is significantly related to the GrowthRate under 10% significance level. The result of the regression, therefore, describes that Open Skies Agreement has a significant impact on decreasing the market size after the entrance of low-cost carriers in the group of more than 4 hours. This result is described graphically in Figure 7. 0 2 0 4 0 6 0 M S L C C s R a ti o 2008 2010 2012 2014 2016 2018 year Bangkok Cebu

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Table 7 – Hypothesis test for each category

Hypothesis 1

0-2 hours

Open Skies Agreement has a significant impact on stimulating the market share of low-cost carriers

2-4 hours

Open Skies Agreement has a significant impact on stimulating the market share of low-cost carriers

>4 hours Open Skies Agreement has a significant impact on decreasing the market share of

low-cost carriers

As shown in Table 7, Open Skies Agreement does not have consistent effects on every group. The results

in table 6 show that Open Skies Agreement has a positive relation with the market share of low-cost carriers on the routes within 4 hours. However, it has a negative relation with the market share of low-cost carriers on the routes of more than 4 hours. The regression based on the dataset of this paper, therefore, shows that Open Skies Agreement does not have a significant impact on stimulating the market share of low-cost carriers.

It implies that there is no empirical evidence that Open Skies Agreement generally supports both entrance and performance of low-cost carriers, even though it has a positive impact on stimulating the market share of low-cost carriers on the routes less than 4 hours. Government regulators believe that Open Skies Agreement increases the welfare of customers by raising the market power of low-cost carriers causing a decreased market price. According to the result of the regression, however, they should not completely believe that Open Skies Agreement can increase the welfare of customers as there is no significant correlation between Open

-. 2 0 .2 .4 .6 G ro w th R a te 2008 2010 2012 2014 2016 2018 year Bangkok Cebu

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Table 8 – Hypothesis test for each category

Hypothesis 2

0-2 hours

Open Skies Agreement does not have a significant impact on stimulating the market size after the entrance of low-cost carriers

2-4 hours

Open Skies Agreement does not have a significant impact on stimulating the market size after the entrance of low-cost carriers

>4 hours

Open Skies Agreement has a significant impact on decreasing the market size after the entrance of low-cost carriers

Table 8 shows that Open Skies Agreement does not have a significant correlation with the market size growth after the entrance of low-cost carriers for the routes less than 4 hours. However, it has a significant negative relation with the market size growth on routes of more than 4 hours. As Open Skies Agreement does not have consistent effects on every category, it can be interpreted that Open Skies Agreement does not have a significant impact on stimulating the market size after the entrance of low-cost carriers based on the regression of the dataset which is used in this paper. This result implies that the existence of Open Skies Agreement is not related to the market size growth of the airline industry. This result may be useful information for government regulators who believe that Open Skies Agreement with more countries are needed to promote the airline industry because the result shows that there is no significant correlation between Open Skies Agreement and the market size growth.

Table 9 – Fixed-effects panel data regression (Correlation of Open Skies Agreement with the duration of flight) MSLCCsRatio 2-4 hours (S2) 8.829*** (1.47) >4 hours (S3) 12.253*** (2.27) Constant 9.56*** (3.52) N 30 𝑹𝑹𝟐𝟐 _0.1564

S2 and S3 are dummy variables S.E. in parentheses

***p<0.01

Table 9 shows the results of the regression which tests the correlation between the duration of flight and the impact of Open Skies Agreement on stimulating the market share of low-cost carriers. The value of 𝑀𝑀2 0.1564 means that 15.64 % of the variability in the actual values explained by the model. A coefficient of the independent variable S2 shows a difference in the impact sizes of Open Skies Agreement between the category 1 and the category 2. The coefficient value of 8.829 means that the average impact of Open Skies Agreement

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on the route with the duration between 2 to 4 hours is 8.83 percentage points bigger than the one on the route less than 2 hours. This variable is significantly related to the market share ratio of low-cost carriers under 1% significance level. A coefficient of the other independent variable S3 shows a difference in the impact sizes of Open Skies Agreement between the category 1 and the category 3. The coefficient size of 12.253 explains that the average impact of Open Skies Agreement on the route more than 4 hours is 12.25 percentage points higher than the one on the route less than 2 hours. It is significantly related to the market share ratio of low-cost carriers under 1% significance level.

The size of the average impact of Open Skies Agreement on the market share of low-cost carriers are 9.56 on the route less than 2 hours; 18.39 on the route between 2 to 4 hours; and 21.814 on the route more than 4 hours. They show that the impact of Open Skies Agreement on stimulating the market share of low-cost carriers is positively related to the duration of flight. After low-cost carriers entered the routes with Open Skies

Agreement, in other words, they have taken larger market share on the route with longer duration. Figure 8

graphically describes the trend that Open Skies Agreement stimulates the market share of low-cost carriers more on the routes with longer duration. This result implies that the low-cost carriers in South Korea were benefited from Open Skies Agreement more in the routes with longer duration. It can be a useful fact for prospective airline company which is preparing to start its operation on the route with Open Skies Agreement to target a route with a longer duration for its early business. It will increase a market share of the company in short period.

Figure 8 - Time series effect of Open Skies Agreement on stimulating the MSLCCsRatio

0 1 0 2 0 3 0 4 0 M S L C C s R a ti o 2008 2010 2012 2014 2016 2018 year Bangkok HongKong Tokyo

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5. Conclusion

The airline industry is one of the fastest growing industries in the world. A low-cost carrier which is a new type of market player in the airline industry is becoming a huge competitor of legacy airlines. As low-cost carriers are becoming more influential, the impact of a low-cost carrier on airline industry is documented a lot by previous research. This paper extends the previous research to test the effect of Open Skies Agreement and the duration of flight on the performance of low-cost carrier. This research focused on the market of South Korea as limited research has studied this market, even though the unique structure of the international transport market of South Korea which relies around 95 percent on air transportation. In this section, a conclusion of the findings of this paper is described. Limitations of this paper and suggestion for further research are given in the end.

This paper tests the three hypotheses by using fixed-effects panel data regressions. The first hypothesis "Open Skies Agreement does not have a significant impact on stimulating the market share of low-cost carriers" and the second hypothesis “Open Skies Agreement does not have a significant impact on stimulating the market size after the entrance of low-cost carriers” are not rejected. It means that Open Skies Agreement does not have significant correlations with the market share of low-cost carriers and the market size growth after the emergence of low-cost carriers in the market of South Korea. The last hypothesis "The effect of Open Skies Agreement on stimulating the market share of low-cost carriers is negatively related to the duration of flight” is rejected. The result of the regression shows that the impact of Open Skies Agreement is positively related to the duration of flight. This counter-intuitive result shows that the impact of Open Skies Agreement on stimulating the market share of low-cost carriers is stronger on the routes with longer durations in the market of South Korea.

The findings of this paper have implications for the policy of airline industry. Government regulators who consider Open Skies Agreement as one of the tools to promote the airline industry need to be careful with contracting it with more countries because there is no significant correlation between Open Skies Agreement and the market size growth. Opening a national sky to other countries without having a market stimulating

effect can make competitive foreign carriers conquer the national airline industry. No significant correlation

between Open Skies Agreement and the market share of low-cost carriers, also, implies that government regulators who believe that Open Skies Agreement can increase the consumer welfare by lowering market price as a result of the emergence of low-cost carriers followed by higher competition need to be careful. The results of this paper also have implications for the companies which are preparing to enter the airline industry of South Korea. They need to focus on a longer route with Open Skies Agreements because the third hypothesis which is rejected by the counter-intuitive result shows that the effect of Open Skies agreement on stimulating the market share of low-cost carriers is positively related to the duration of flight.

This paper shows that there are no significant correlations of Open Skies Agreement with the market share of low-cost carriers and the market size growth after the emergence of low-cost carriers. However, a recent trend of South Korea’s airline industry clearly shows that the market share of low-cost carriers and the market size of the routes with Open Skies Agreement have grown much more than the routes without Open Skies Agreement after the emergence of low-cost carriers. It means that this paper does not adequately

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explain the real situation. The limited number of observations used in this paper is a possible reason for this problem. The research could be able to find significant correlations of Open Skies Agreement with the market share of low-cost carriers and the market size growth with complete dataset. At the beginning of this research, this paper hypothesizes the effect of Open Skies Agreement would be negatively related to the duration of flight. The counter-intuitive regression result, however, shows that the effect size of Open Skies Agreement is positively related to the duration of flight. The result might be changed if the dataset contains many routes, and the expected result is that the effect size of Open Skies Agreement is more significant on the routes with shorter duration.

Ticket price is a critical factor for companies to take a competitive market position by affecting the choice of customers. Price of any product is one of the most influential factors in the decision of customers. It might be possible to explain the inconsistent effects of Open Skies Agreement found in this paper with the data of ticket prices set by each airline. However, it was impossible to find all the traditional ticket fares set by each airline as a bachelor student with economic and time constraints. Further research with a complete dataset, therefore, are expected to show significant correlations of Open Skies Agreement on the market share of low-cost carriers and the market size growth after the emergence of low-low-cost carriers. A complete dataset which also includes the data before the entrance of low-cost carrier and Open Skies Agreement will make the research to be able to use the difference in differences (DID) method. This method evaluates the impacts of public interventions and treatments by comparing treatment groups and control groups at different time periods (Abadie, 2005). It will facilitate further research to compare the effects of Open Skies Agreement before and after the emergence of low-cost carriers.

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The impact of open skies agreement and the duration of flight on the performance of South Korea’s low-cost carriers : a panel data analysis of 6 international routes from 2008 to 2017