A productivity comparison of the world's major airlines

Abstract

This paper measures and compares productivity and unit cost of the world's 23 major airlines using yearly panel data (1986–1993). An extensive effort was expended to put together a reliable database. These data are then used to accomplish the following: first, unit cost per unit of aggregate output is measured and compared. The effect of input price changes on the unit costs are also examined. Second, the ‘gross’ Total Factor Productivity (TFP) is measured and compared. In order to compare true productive efficiency across airlines and over time, a ‘residual’ TFP index is computed after removing effects of the variables beyond managerial control such as average stage length and composition of outputs. Log-linear TFP level, and TFP growth rate regressions are used to accomplish this task. Our results show that: 1. (a) during the sample period (1986–1993), the major European carriers and the carriers in newly industrialized countries in Asia have achieved significantly higher productivity growth than their North American counterparts; 2. (b) as a result, the productivity gap between North American and other carriers have diminished significantly; 3. (c) however, on average, the North American carriers still enjoy higher productive efficiency than the carriers in Asian NICs and European carriers, but the gap is closing very rapidly; and 4. (d) it is observed that, over time, the productive efficiency of carriers competing in the same markets tends to converge. Finally, Asian NIC carriers clearly enjoy unit cost advantages over other major carriers. Our results show that European aviation liberalization which began in 1987 appears to have produced substantial productivity gains.