Decomposing airline profit inefficiency in NDEA through the non-competitive Nerlovian profit inefficiency model

Abstract

With airlines operating in an imperfectly competitive market environment, this study focuses on the important role of price variables. A network data envelopment analysis (NDEA)-based Nerlovian profit inefficiency model for a group of international airlines was proposed, in which the property of unstorable intermediate outputs in the air transport industry is considered. The profit inefficiency of airlines is then decomposed into two stages: cost inefficiency in the production stage and revenue inefficiency in the consumption stage. Both cost inefficiency and revenue inefficiency are further decomposed into three sub-inefficiencies: technical inefficiency, price inefficiency, and allocation inefficiency. The empirical results show that all airlines are profit inefficient and their profit inefficiency is due to different sub-inefficiency components. In terms of overall profit inefficiency, the revenue inefficiency at the consumption stage is the main cause, and price inefficiency is a major component of revenue inefficiency on average.