On-time performance policy in the Chinese aviation market - An innovation or disruption?

Congestion and delay have become a critical challenge to the aviation industry, particularly in markets with sustained traffic growth. Despite significant investments in aviation infrastructures, congestion and delay in China have placed mounting pressure on the industry and its regulator to sustain good on-time performance (OTP). In 2017, CAAC introduced a new policy that in the case of poor OTP, reduces the allowable capacity of congested airports and forces airlines to cancel flight services. This study measures the policy's effects on congestion and delays, and quantifies the change in welfare. Empirical findings suggest that the new policy reduced flight delays considerably, bringing substantial welfare gains to the passengers even under conservative estimates. However, the new policy is inconsistent with international industry practices of slot allocation and airline service operations, and may cause operational disruptions to the aviation industry. We recommend continuation of such a policy with more detailed analysis, so that regulatory innovation can be encouraged and meanwhile extensively studied. We further argue a revised policy may be implemented in growth markets, which balances welfare gains and operation disruptions.