Why are regional jets less used in emerging economies? A real options valuation approach and policy implications

Qiwei Hu, Anming Zhang and Yahua Zhang

Transport Policy, 2019, vol. 79, issue C, 125-136

Abstract: In this paper we offer an explanation for why regional jets are less used in emerging economies by using a real options valuation (ROV) approach. Our ROV analysis is based on the observation that airlines are operating under different development and regulatory environments between emerging economies and developed economies. We quantify the values of the options using a case study of aircraft acquisition by airlines in the US, Brazil and China. It is found that although a theoretical value gap (a negative ROV) exists between narrow-body aircraft and regional jets (e.g., between A320 and E190) for the US carrier that operates in the condition of a low initial passenger volume per trip and a low passenger growth rate, the gap weakens and a positive ROV is possible for the Brazilian and Chinese carriers facing a high growth rate. Furthermore, regulatory restrictions faced by Chinese carriers have a positive influence on the ROV that is biased towards narrow-body aircraft over regional jets, although this influence is less than the positive ROV impact from the high growth rate. The managerial and policy implications are also discussed.

Keywords: Aircraft acquisition; Regional jet; Real options; Growth; Regulation; Monte Carlo simulation (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

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DOI: 10.1016/j.tranpol.2019.04.012

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