Flexible Cost Function Estimate on Japanese Aviation in Transition state

Abstract

This paper provides a review and empirically tests of the available evidence concerning the question of economies of scale on Japanese aviation industry. Japanese aviation industry has been deregulated on December 1985. Japan Airline (JAL) for mainly the international lines, All Nippon Airways (ANA) and Japan Air System (JAS) for the domestic regular airlines have been able to extend airlines into the other lines. Of course its not a free competition yet. Minimum price control and entry regulation have been done, and potential entrants will not achieve their intentions.By the way, it has been pointed that the Japanese aviation industry has the economies of scale. This paper examines how it has changed after deregulation on December 1985, from the view of the cost structure of the three airlines (JAL, ANA, JAS).It can be said that the three major air carriers in Japan have the scale economies in their trans-log type cost function. The degree of it becomes decreasing after deregulation from the empirical results of “tonne-kilometre performed” as a single output so far. Moreover, the abbreviated type of trans-log cost functions are tested (homothetic and homogeneous types). It is proved that the full type of trans-log cost function is better than the other abbreviated types by the estimation of the data of Japanese air carriers.