Competition, Privatisation and Productive Efficiency: Evidence From the Airline Industry

Abstract

We use data from the airline industry to examine the extent to which the costs of airline operations are affected by rents accruing to workers, and the extent to which these rents depend inter alia upon the degree of competition in the industry. Our empirical results based on a panel of twelve European and seven major United States airlines confirm that state ownership substantially increases rents to labour, while the effects of competition are more subtle and ambiguous; airline profits tend to be associated with higher rents to employees. The gains from further privatisation and liberalisation may be quite large. Does competition have significant effects on productive as well as allocative efficiency? Convincing empirical answers to this question have been hard to find, for two reasons. First, data of the quality required for robust estimation of productive efficiency are only rarely available. Secondly, there is frequently no convincing standard against which the efficiency of an industry or a firm may be compared, since when the degree of competition varies many other things (such as technology, network structures and firm sizes) typically vary as well. These problems do not automatically make comparison impossible, but they compound the need for high quality data. One industry which is likely to be well suited to investigating questions of this kind is the international airline industry. The industry contains a large number of firms - thus ensuring at least enough potential competition to make questions about the effects of competition interesting - but the scope for these firms to compete with one another has been influenced to varying degrees over the years by different national and international regulatory regimes. In particular, deregulation of the United States industry in 1978 provided a kind of natural experiment that has led not only to comparisons of the 'before and after' variety, but also to comparisons between the United States industry and that of other global regions (notably Europe). Such comparisons are far from straightforward, but they are facilitated by the fact that the technology of civil aviation is more or less internationally standardised, and by the relatively high quality of available data in the industry.'