Development of a Production Model of the Airline Firm

Abstract

In this chapter a model of the airline firm is developed which takes account of the joint-product nature of airline production over a system of routes. In Chapter 2, the airline’s schedule construction problem was briefly outlined and the view of the network as both the production plan and the product was explained. Using this view of the network, it will be shown how characteristics of the routes may be included in the firm’s production function in a logical and formal manner. This analysis is detailed in section 4.1. The multi-product production model is then developed in section 4.2. In section 4.3, an alternative view of the airline production problem is put forward. This involves an examination of the problem at the airport level rather than at the route level. The disadvantages and difficulties of this approach are highlighted and it is recommended that the route approach be used instead, despite the fact that data at the airport level is more easily available. The empirical production model is then explained in section 4.4 and the dependence between routes in the network is catered for by use of a spatial autoregressive structure in the estimating procedure. In section 4.5, the ‘frontier’ or ‘best practice’ production model is set out and the estimation procedure explained.KeywordsProduction FunctionGeneralize Little SquareNetwork VariableFrontier FunctionConnection RateThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.