Final Term Paper

<Theory of Policy Implementation>

Prof. Bae, Su Ho

Department of Public Administration

Park, Jie Yong

Introduction

About 10 years ago, Korean people who wished to visit Japan had only

two options on which national airline to take; Korean Air or Asiana

Airlines. The price of the ticket between Seoul to Tokyo would be around

KRW 330,000 which is similar to other foreign carriers like ANA at KRW

360,000. However, these days, things have changed a lot. Passengers now

have wider range of selection thanks to low cost carriers (LCC). By using

LCC, people can travel between Korea and Japan at the cost of less than KRW

200,000.1

This expanded range of selection for customers is not confined to

routes from Korea to Japan. Now, passengers can take LCCs to travel China,

Hong Kong, Southeast Asia, and even to Guam. A huge, groundbreaking change

has occurred in Korean airline industry. The introduction of low cost

carriers has transformed the way Korean travel and even more.

This paper will briefly go over the 'Korean government's policy to

introduce low cost carriers in the air transport market' to see how the

policy has been initiated, implemented, and took effect. In order to

examine the policy, this report will go through theoretical approach to

policy implementation stage and assess the policy results in terms of

input/ output, outcome, and the impact.

Theories and Concepts

In this report, the ambiguity-conflict model of policy

implementation is used to analyze the Korean government's policy on low

cost carriers. To apply this model, the understanding of "conflict" and

"ambiguity" should be preceded.

Conflict exists "when more than one organization sees a policy as

directly relevant to its interests and when the organizations have

incongruous views (Matland 1995)." The higher the conflict, the harder it

will be to implement the policy. Therefore, conflicts lead to either

1 To enhance readers understanding, the price of tickets on the very day has been calculated to compare airlines.

bargaining or coercive action by the authority.

Ambiguity "arises from a number of sources but can be characterized

broadly as falling into two categories: ambiguity of goals and ambiguity of

means (Matland 1995)." The higher the degree of goal ambiguity is, the

lower the degree of conflict will be. On the other hand, when it comes to

the mean ambiguity, various organizations fail to act properly if the means

of implementation is uncertain.

Chart 1 Richard E. Matland (1995), <Synthesizing the Implementation Literature:The Ambiguity-Conflict Model of Policy Implementation>, Journal of Public AdministrationResearch and Theory: J-PART, Vol.5, No.2, p160

Matland categorized policies into four types based on the intensity

of conflict and ambiguity. In the latter part of this report, "Political

Implementation" and "Experimental Implementation" will be applied to the

case. For political implementation, high conflict occurs due to the clear

goal which is incompatible for actors. The notable point in this model is

that "implementation outcomes are decided by power (Matland 1995)." In the

case of experimental implementation, the outcome varies depending on how

actively actors engage in the policy. It is important to note that

"contextual conditions dominate the process (Matland 1995)."

Lastly, to go through the policy regarding low cost carriers, it is

necessary to understand what low cost carriers are. Conventionally, legacy

carriers or full service carriers (FSC) provide wide range of service to

its passengers including free baggage and meals with drinks, etc. Since

many additional services are included in the ticket price, the fee is

relative high. However, with the expansion of demand for air transport, the

need for cheaper tickets arose. Low cost carrier aims target these need.

They minimize the service to passengers to cut to cost of flights. As there

is less service, passengers may suffer some level inconvenience but in

return, they enjoy price competitive flights.

Brief Explanation of Policy or Case

Korea's airline industry began in 1946 when government run Korea

National Airlines began its operation. The government was still in control

of ticket price even after the market was joined by private company, Asiana

Airlines, in 1988. It was in 1992 when the government finally let the

companies to set their own ticket price. After then, airline industry had

been protected by the government because airlines were essential part of

aiding the economy. The two carriers had raised the ticket price stating

that it was inevitable due to the rising fuel price. For people in the

mainland, trains and buses were good alternative in terms of travelling

within the nation. With the introduction of bullet train made it even

faster and easier travel around the cities. However, this was not the case

for people living in the island. Especially, for people in Jeju, aircraft

was the only transportation that could take them to the mainland quickly.

That is why resident in Jeju had been asking the airlines not to raise the

ticket price which was ignored. As the fee went up and up, people in Jeju

decided to make a local airline that would take them outside the island at

a competitive

Safety issues and oppositions from the existing airlines surrounding

low cost carriers deterred the government from handing out operation

license to new companies. However, the need to vitalize local airports was

an important agenda since maintaining unvisited airport worsen the profit

of Korean Airport Corporation. Another thrust that pushed the authority was

the soaring demand for cheaper ticket from customers. People were beginning

to feel unfair about the fact that two big airlines are keep raising price

on their own. These factors eventually led to the introduction of low cost

carriers in the Korean market.

Company Sales (KRW) Operating Profit(KRW)

BusinessProfitRate

Korean Air 11,848,707,841,058

-19,562,089,055 0%

AsianaAirlines 5,723,506,384,082 -

11,235,041,890 0%

Jeju Air 432,338,786,323 15,185,391,146 4%

Eastar Jet 254,314,649,675

2,280,421,736 1%

T'wayAirlines

166,833,245,119

3,661,327,590 2%

Jin Air 283,330,353,820

7,100,392,127 3%

Air Busan 277,931,956,241

5,048,904,745 2%

Chart 2 Financial statements on Korean carriers

LCCs have drastically changed the structure of air transport

industry which was previously dominated by two major airlines. LCCs have

expanded their business areas from domestic routes to international routes

including Japan and Southeast Asia. Along with the widening range of

flights, LCCs have also achieved noteworthy operating profits. While legacy

carriers are suffering deteriorated results due to the shrunken global

economy, low cost carriers quickly snatched passengers by cheap price. Now,

it seems that LCCs are settling down to a stable condition compared to late

2000s when they were first introduced.

Analytic Outcomes

Theory Application: Political Implementation (Low Ambiguity, High①

Conflicts)

The goal of the policy could be seen as "the introduction of new

LCCs to the airline industry to enhance the competition among companies" to

benefit passengers and to vitalize local airports. The basic assumption

here is that once LCCs are introduced, they will operate normally without

any troubles. The means in this case would be "handing out operation

license for companies willing and eligible to run an airline". Therefore,

in terms of goal and mean, they are quite clear.

However, since the anticipated process is the entry of new players

to the air transport market, full service carriers take negative stance on

the policy. Ever since the announcement by the government's plan to review

LCC, two major carriers actually made press release stating that "LCC

cannot guarantee safety as it will be obsessed with cutting down the

price". Also, they were reluctant to share slots in the airport and pilot's

simulation devices with LCCs.

After Jeju Air joined the market, FSCs deployed subsidiaries to

compete low cost market with the new players. Although Jeju Air and some

other LCCs survived the worsen competitions, Hansung Airlines and several

candidate companies went bankrupted.

Theory Application: Experimental Implementation (High Ambiguity, Low②

Conflicts)

Viewing the policy as an experimental implementation, the ambiguity

of means could be seen as rather high. Although it is clear that the

government intended to let LCCs join the market, it was unclear whether

these new companies will safely adapt to the market. Also, the government

was unsure of their roles in putting a new type of business. The authority

failed to foresee and cope with the increasing demand for pilots, lack of

facilities customized for LCCs.2 This was all because the policy itself

has a "experimental aspect" which make it hard to expect what would really

happen.

On the conflict perspective, there might have been no severe

conflict at all as FSCs viewed LCC model rarely effective. There had been

no guarantee that the new companies would successfully take market share.

In fact, at the beginning stage of LCC, there had been some controversy

over the safety of propeller-powered aircraft and complaints about lack of

service. Despite the fact that airplane with propellers are as safe as

jets, all low cost carriers had to adopt Boeing 737 series to minimize

ungrounded fears of passengers in Korea. As can be seen from the past

event, LCC had to fight against its own problems, which might make full

service carriers less threatened.

Analysis of Policy Results③

With the approval on operation of LCCs, the number of airlines rose

steadily. Following Jeju Air which entered service in 2006, Korean Air and

Asiana Airlines started their own subsidiary LCCs, Jin Air and Air Busan in

2008. Easter Jets and T'way Airlines later joined the market in 2009 and

2010 respectively.

2 In foreign countries, LCC terminals equipped with minimized facilities to handle passengers are constructed so that LCCs could use them at relative lower fee comparable to when using normal airport terminals.

Year 2005 2006 2007 2008 2009 2010 2011 2012

Numbers of

Airlines2 3 3 5 6 7 7 7

Chart 3 The number of airlines operating regular flights from Jeju internationalairport

Due to the increase in the number of LCC in the air transport

sector, more flights became available for passengers to take. To measure

the output, number of international flights in Incheon airport (ICN)

provided by carriers with Korean nationality and domestic flights in Jeju

airport (CJU) is used.3

2005 2006 2007 2008 2009 2010 2011 2012 20130

100020003000400050006000700080009000

- 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

JJA JNA ESR TWB KALAAR

Number of Flights

Graph 1 The number of international flights in ICN flown by Korean carriersincluding LCCs. The left Y axis is for LCCs and the right axis is for FSCs. (Data: IncheonInternational Airport Corporation (IIAC))

3 Since most of international flight provided by LCCs departs from Incheon airport,its related statistics are chosen. Also, as route between Gimpo and Jeju is the most popular and Jeju Island is mainly accessed via air, Jeju was selected as analysis target.ICAO code for airlines are used in the chartsKAL(Korean Air), AAR(Asiana Airlines), JJA(Jeju Air), JNA(Jin Air), ABL(Air Busan),ESR(Eastar Jet), TWB(T'way Airlines)

LCC

FSC

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

-

20,000

40,000

60,000

80,000

100,000

120,000

AAR KAL JJA JNA ABL ESRTWB Total

Number of Flights

Graph 2 The number of domestic flights in CJU.The left Y axis is for airlines while the right axis is for the total number (Data:Korea Airport Corporation (KAC))

From both graph 1 and graph 2, increase in the number of flights as

an outcome of new carriers can be seen. Although there has been slight

decrease between 2012 and 2031, airlines are expanding their overall

numbers of flights.

2005 2006 2007 2008 2009 2010 2011 2012 20130

200000400000600000800000100000012000001400000

- 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000

JJA JNA ESR TWB KAL AAR

Number of Passengers

Graph 3 The number of international passengers using Korean carriers in ICN.(Data: IIAC)

Total

LCC FSC

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

- 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 18,000,000 20,000,000

KAL AAR JJA JNA ABL ESRTWB Total

Number of Passengers

Graph 4 The number of domestic passengers in CJU (Data: KAC)

The increased number of flights naturally leads to more people

flying. In order to measure the outcome, fluctuation in the number of

passengers is used. When comparing the graph 4 with graph 3, it can be

inferred that domestic routes from CJU are significantly influenced in

terms of both the numbers of flights and passengers.

Further analysis on impacts of the policy is going to focus on the results

from CJU since it shows relatively bigger change.

Total

The composition ratio of each carrier for passengers in CJU proves

that LCC has successfully dominated more than half of domestic market from

CJU. Until 2005 before the entry of LCCs, Korean Air and Asiana Airlines

took up entire supply of flights. However, in 2013, two FSCs only accounts

for 47% of passengers transported to/ from CJU. This means that many people

prefer LCC as much as FSC.2005

2013

Graph 5 The proportion of passengers in domestic routes in CJU in 2005 and 2013(Data: KAC)

AAR35%

KAL65%

KAL27%

AAR21%JJA

15%

JNA10%

ESR10%

TWB10%

ABL8%

2008 2009 2010 2011 2012 2013 -

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

Korean tourists to Jeju Domestic passengers in CJU

Graph 6 Comparison of numbers of Korean tourists to Jeju island and domesticroutes passengers at CJU (Data: KAC and Jeju Tourism Organization)

Lastly, to assess the impact of the LCC, the number of domestic

tourists is examined to see if outcomes (passenger volume) have something

to do with it.4 According to graph 4, the number of domestic passengers

visiting CJU began to show rapid increase since 2008 with active engagement

of LCCs to domestic routes. Combination of this graph with that of the

number of Korean tourists to Jeju Island, a meaningful correlation can be

inferred. The fluctuation of both passengers and domestic tourists show

very close and positive association. This confirms that the government's

intention to enhance tourism and enhance the volume of domestic flights

have been satisfied by the policy.

Conclusions with Policy Recommendations

To summarize, the implementation process for the "Governmental

policy on introducing Low Cost Carriers" was eligible for both 'political

implementation' and 'experimental implementation', depending on the

perspective. From optimistic view on LCCs, political implementation type

was suitable as legacy carriers showed high conflict level. On the other

hand, from skeptical view on LCCs, the possibility of new business model

4 As measuring the impact from the international flights was complex due to the existence of numerous foreign carriers, for this final term paper, only the case for domestic impact on Jeju Island is examined.

being implemented raised question whether the policy would be successful or

not. Regardless of the view points, however, low cost carriers in Korea

turned out to have made impressive progress so far, specifically, in terms

of domestic markets. Related statistics have shown that introduction of LCC

has grown the volume of Korean air transport industry in both numbers of

flights and passengers flown. Also, Jeju Island showed soaring rate of

domestic tourists thanks to the additional flights provided by LCC.

Until now, it seems that the government's intention on implemnting

LCC has worked out. However, it is too early to think that the policy has

been successfully implemented. There are still couple of things that

requires governmental intervention. LCCs are adding more flights to

accomodate additional passengers, the capacity of local airports are being

saturated. This is especially true to airports in Jeju5 and Busan6 as there

are international flights flown and limited space for expansion. For major

local airports, remodeling existing facilities to increase maximum capacity

can be an good solution.

More fundametal support to aid LCCs are also required. As previously

mentioned at the analysis, Korean government failed to provide basic

infrastructure that are crucial for LCCs' cost cutting. Exclusive passneger

terminals for LCC should be taken into consideration. By using these

buildings, carriers can minimize the airport service charge which leads to

discounted ticket price. However, as there are no such terminals in Korea,

Korean LCCs are lagging behind in price competetiveness against foreign

LCCs7. The authorities has to pay constant attention to see what can be

done to provide affordable tickets to passengers in Korea and to reinforce

LCCs competitiveness. With the government's consistent interst and

monitoring as a lasting part of policy implementation, I believe there are

5 Park (2012),'제제제 제제제 제제... 제제제 제제 제제제제', Dong-a Daily, 4 Jan. http://news.donga.com/3/all/20120104/43064034/16 Cho (2013), '제제 제제제 제제제제 제제제제', Dong-a Daily, 13 Aug. http://news.donga.com/3/all/20130813/56989068/17 Park (2013), '[LCC 제 제제②] 제제 제제제제제 제제 제제제제제제제 제제제제제 '제제'', Newsis, 2 Dec.http://www.newsis.com/ar_detail/view.html?ar_id=NISX20131202_0012558260&cID=10201&pID=10200

far more possibility of maximizing the policy impact.