Assessment of airline industry using a new double-frontier cross-efficiency method based on prospect theory.

Abstract

Cross-efficiency method (CEM) is a well-known technique based on data envelopment analysis that provides policymakers with a powerful tool to measure the efficiency of decision-making units. However, there are two main gaps in the traditional CEM. First, it neglects the subjective preferences of decision-makers (DMs), and therefore, cannot reflect the importance of self-evaluation compared to peer-evaluations. Second, it ignores the importance of anti-efficient frontier in the overall evaluation. The present study aims to incorporate the prospect theory into the double-frontier CEM to deal with these drawbacks while considering the preferences of DMs towards gains and losses. To address these drawbacks, this paper utilizes an aggregation method based on the prospect theory and consensus degree (APC) to reflect the subjective preferences of DMs. The second issue is also addressed by incorporating APC into the optimistic and pessimistic CEMs. Finally, the double-frontier CEM aggregated using APC (DAPC) is obtained by aggregating two viewpoints. As a real case study, DAPC is applied to evaluate the performance of 17 Iranian airlines based on three inputs and four outputs. The findings demonstrate that both viewpoints are influenced by DMs' preferences. The ranking results achieved for more than half of the airlines based on the two viewpoints are significantly different. The findings confirm that DAPC deals with these differences and leads to more comprehensive ranking results by considering both subjective viewpoints simultaneously. The results also show that to what extent DAPC efficiency for each airline is influenced by each viewpoint. In this regard, the efficiency of is most influenced by the optimistic point of view (80.92%), and on the other hand, the efficiency of is most influenced by the pessimistic viewpoint (73.45%). KIS is the most efficient airline, followed by PYA. On the other hand, IRA is the least efficient airline, followed by IRC.