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The operational performance of UK airlines: 2002-2007

A. George Assaf
University of Massachusetts-Amherst, Amherst, Massachusetts, USA, and

Operational performance of UK airlines 5

Received 13 January 2009 Accepted 2 November 2009

Alexander Josiassen
The Centre for Tourism and Services Research (CTSR), Victoria University, Melbourne, Australia
Abstract
Purpose The purpose of this paper is to measure the efciency of UK airlines in light of all the recent industry challenges. Design/methodology/approach The study measured the technical efciency of airlines through the innovative data envelopment analysis (DEA) bootstrap methodology. Findings Results based on a sample of recent input/output data indicated that the efciency of UK airlines has continuously declined since 2004 to reach a value of 73.39 per cent in 2007. Factors which were found to be signicantly and positively related to technical efciency variations include airline size and load factor. The paper also highlights that factors such as increase in oil price and erce market competition were also potential inefciency determinants. Practical implications The ndings of this paper provide a fresh link between airline performance and the current industry characteristics. UK airlines also have a major role in the European and international aviation sector, and thus a reection on their efciency could be of interest to private and public policy makers. Originality/value The paper focuses on a recent period and thus provide a fresh efciency assessment of the airline industry. The study also extends the limited literature available on UK airlines. Keywords Airlines, Performance management, Data analysis, United Kingdom Paper type Research paper

1. Introduction Recent industry reports from the UK and international airline associations have warned that airlines currently face a threatening period of major nancial losses following the last four years increase in oil prices. The predicted global loss in 2008 was around $2.3 billion and latest gures from the International Air Transport Association (IATA) also indicated that the nancial losses could even exceed the $6 billion dollars in the near future if oil prices stay high (Robertson, 2008a). The president of IATA described the global situation as desperate and indicated that in early 2008 around 24 airlines have gone out business. Figures from the US, for example, indicated that in the rst quarter of 2008, United Airlines lost around $537 million, American lost $328 million, and Northwest lost $191 million (Wilber, 2008; Robertson, 2008b). Other airlines such as Continental and JetBlue have also suffered major losses. In the UK, airline analysts expected that airlines might face considerable challenges in the near future. British Airways for example predicted a prot reduction of 250 million in 2008 (Robertson, 2008b).

Journal of Economic Studies Vol. 38 No. 1, 2011 pp. 5-16 q Emerald Group Publishing Limited 0144-3585 DOI 10.1108/01443581111096114

JES 38,1

In the literature, the link between performance and prot was well established. It is hypothesised that with a sharp drop in prots only the high performing airlines will survive. Airlines are currently adopting cost-reduction strategies and IATA predicted that airlines will be forced to increase their prices in the near future (Fleming, 2008). Thus, the need for high performance takes an additional importance within the current market challenges. In this study, we were driven by all the above-mentioned factors and the major aim was to reect the efciency standing of UK airlines in light of all the recent market challenges. Another aim of this study was to determine those factors that explain the sources of efciency variations between airlines. We focused on UK airlines because of their international market power; however the ndings could also be generalised to reect the link between performance and current industry characteristics. The methodology used in this study also aimed to improve the accuracy in modeling the performance of airlines. We introduced the innovative data envelopment analysis (DEA) bootstrap methodology. Traditional methods used in the airline and airport efciency research were the traditional DEA or stochastic frontier analysis (SFA). One of the major limitations of DEA is that it is a deterministic technique and thus does not account for measurement error in deriving the efciency measures. SFA was again subject to criticism, as it requires a pre-specication of the functional form in the estimation of cost or production frontier technologies. SFA also requires larger sample size than DEA. On the other hand, it is possible with the DEA bootstrap to keep the exibility of DEA and also obtain statistical properties of the efciency scores. Data used in the analysis range from 2002 to 2007 and covered 15 airlines. More details on the literature, methodology, variable used, results and discussions are provided in the next four sections of the paper. 2. Literature review Studies on airline frontier models are generally limited and outdated and clearly indicate the need for additional evidences and implications on the efciency characteristics of the airline industry. None of the available studies has focused purely on UK airlines, but many studies have analysed the performance North American airlines and in some cases compared the performance of European, and Asia Pacic airlines. North American airlines usually appeared to be the most efcient (Oum and Yu, 1995). In a recent study, it was also conrmed that US and European airlines were more efcient than Asia Pacic airlines (Barbott et al., 2008). In general, most studies have also followed traditional approaches in the analysis of efciency. However, in most cases these studies have addressed the limitations of simple partial productivity measurements by incorporating multiple inputs/output as well as environmental variables in the analysis of efciency. Some of the most common input/output variables are illustrated in Table I. The more common environmental variables are the average load factor and airline size, which in most cases have been found to play a positive role in improving airlines performance (Caves et al., 1984; Coelli et al., 1999). Other variables in the same category are oat characteristics like the average speed and size of aircraft. Some of the methodologies used in these studies include the traditional SFA model (e.g. Caves et al., 1984; Baltagi et al., 1995), the DEA-based Malmquist approach (Barbott et al., 2008), and the traditional DEA models (Good et al., 1995). As mentioned

Study Coelli et al. (1999) Ahn et al. (1997) Good et al. (1995) Baltagi et al. (1995) Cornwell et al. (1990) Schmidt and Sickles (1984)

Inputs Labour, capital Labour, materials, fuel Labour, materials, planes Capital, labour Labour index, materials, energy, capital expenses Labour index, materials, energy, capital expenses

Outputs TKA Revenue Revenue TKA TKA TKA

Other variables Load factor, aircraft capacity Load factor, aircraft size Load factor, network size Load factor, aircraft size, hubs, mergers Stage length, service quality, seasonality Size, load factor

Operational performance of UK airlines 7

Table I. Overview of existing studies

before, all these methodologies suffer from common limitations. The main limitation of DEA is that it is a non-statistical technique and thus treats all measurement error as sources of inefciency, while the main limitation of SFA is that it requires a pre-specication of the functional form in the estimation of cost or production frontier technologies. In this context, the use of the bootstrap approach in this study is therefore considered an innovation as it takes into account the limitations of both the DEA and SFA methods. The ndings are consequently expected to be more accurate and as a result provide a more solid ground for policy implications. More details about the advantages of the bootstrap approach are provided in later sections. 3. Data The data selection process started with a detailed review of the existing studies in the literature. Guidance from experts in the area was also helpful in conrming the list of variables selected. Data were collected directly from the Civil Aviation Authority and consisted of 15 major UK airline companies during the period 2002-2007 (90 observations). The authority collects data using the same criteria of the International Civil Aviation Organisation (ICAO). On the output side, two variables are used namely, TKA or tonne kilometres available and total operational revenues. TKA is a reection on two airline outputs: passenger service and cargo operation and is calculated by multiplying the number of tonnes available for the carriage of revenue load (passengers, freight and mail) on each ight by the ight distance. The total operational revenues (sum of aeronautical and non-aeronautical revenues) was also used in previous studies (Ahn et al., 1997; Good et al., 1995), and is strong indicator of overall performance. On the inputs side three inputs were selected namely labour expenses (total expenditure for the salaries and allowances of all employees), aircraft fuel and oil expenses (includes fuel, de-mineralised water and water methanol consumed), and aircraft value[1] (total nancial value of aircraft minus depreciation). In order to account for the sources of efciency changes, we have also regressed DEA on two environmental variables, namely load factor and airline size. Load factor (dened as the ratio of performed tonne-kilometres to available tonne kilometres) was used to account for the environment in which the airlines operate. As mentioned in the literature review, this variable was used in several related studies (Coelli et al., 1999; Ahn et al., 1997), and it is considered as a measure of market demand. Airlines operating with a high load factor coefcient would expect to have a stronger demand,

JES 38,1

and thus consequently a higher production/efciency. The identication of airline size was based on the percentage share of each airline in the total kilometres performed by all UK airlines[2]. It is hypothesised that larger are more productive, as these airlines usually possess stronger economies of scale and more exible access to technology and innovation. The descriptive statistics of all variables are listed in Table II. In the next section we describe in detail the methodology used in the paper. 4. DEA and the bootstrap 4.1 Data envelopment analysis DEA is one of the most popular methods to estimate technical efciency (for some applications refer to Barros, 2004; and Goncharuk, 2007). It aims to dene a frontier envelopment surface for all sample observations. The frontier is a representation of all the efcient rms. Firms that do not lie on that surface can be considered as inefcient and an individual efciency score will be calculated for each one of them. The output ^i can be simply derived by solving the following oriented DEA efciency estimator d linear programming:  )  n n n X X X ^ ^ di max d . 0 di yi # yi l; xi $ xi l; l 1; l $ 0 ;  d^i ;l i 1 i1 i 1 ( i 1 . . . n airlines where yi is vector of airline outputs, xi is s vector of airline inputs, l is a I 1 vector of ^i obtained is the technical efciency score for the i-th rm. A constants. The value of d ^ 1 indicates that the airline is technically efcient, and inefcient if measure of d i ^ . 1. This linear programming problem must be solved n times, once for each airline d i in the sample. Note that the DEA model can also be estimated using either the constant return to scale (CRS)[3] or variable return to scale (VRS) assumptions and the shape of the frontier will differ depending on the scale assumptions that underline the model. In this paper we mainly rely on the VRS assumption, as the CRS[4] is only correct as long as it is appropriate to assume that airlines are operating at an optimal level of scale. However, given the recent market condition and the high level of competition in the sector, it is safer to expect that airlines might not be operating at an optimal level of scale. Note that the VRS model has also the advantage of ensuring that an inefcient airline is only compared against those airlines of similar size. This is achieved through P l the convexity constraint n i1 1, which is not imposed in the CRS case.
Variable n Mean SD Min Max

Table II. Descriptive statistics of the data

TKA 90 2809542867 5197060693 19946000 12516000000 Total operational revenues () 90 914045511 166422193 16538000 7609755000 Labour cost () 90 72574533 136431496 1384000 722509000 Fuel cost () 90 155359444 301960425 353000 1856853000 Aircraft value () 90 667228033 205300722 492000 1004300000 Load factor (%) 90 60.89 16.95 33.40 90.90

4.2 The bootstrap While the above DEA model is relatively simple to estimate, it has long been criticised for being a non-statistical or deterministic technique, given that it does not allow for random error in the estimation of efciency. Some researchers try to avoid this problem by using parametric techniques that have the advantage of allowing for random error; however, these techniques impose a particular functional form that predetermines the shape of the efcient technology or frontier. DEA, on the other hand, tends to envelop the data more closely. Simar and Wilson (1998, 1999, 2000) have recently discussed that it is possible to maintain the interesting features of DEA, and also obtain statistical properties via the use of the bootstrap approach. When applied to DEA, the bootstrap allows the construction of condences intervals, thus making it possible to obtain statistical properties of the efciency estimates and also perform some hypotheses testing. The basic idea of bootstrapping is to approximate the distribution of the estimator via re-sampling and recalculation of the parameter of interest, which in our case is the DEA efciency score. The bootstrap procedure can also be extended to account for the impact of environmental variables[5] on efciency. For example, if we take the following model: ^i zi b 1i d 2

Operational performance of UK airlines 9

where zi is a vector of management related variables which is expected to affect the efciency of rms under consideration and b refers to a vector of parameters with some statistical noise 1i . A popular procedure in the literature is to use the ordinarily least square (OLS) regression to estimate this relationship. However, as described in Simar and Wilson (2007), this might lead to two main problems. First, the of efciency scores estimated by DEA are expected to be correlated with each other, as the calculation of efciency of one rm incorporates observation of all other rms in the same data set. Therefore, direct regression analysis is invalid because of the dependency of the efciency scores. Similarly, in small samples, a strong correlation is expected between the input/output variables and environmental variables, therefore, violating the regression assumption that 1i are independent of zi . To overcome these problems we use in this paper the double bootstrapping procedure, proposed by Simar and Wilson (2007), in which the bootstrap estimators are substituted from the estimators in the regression stage to calculate the standard error ^i valid of the estimates. The procedure produces, with bias corrected estimates of d estimates for the parameters in the second stage regression. For more details on the bootstrap procedure used in this stage refer to Simar and Wilson (2007). 5. Results and discussions The VRS technical efciency estimates of the different UK airlines, obtained from 2000[6] bootstrap iterations are reported in Table III. As the results indicate, the average technical efciency follows two different patterns. From 2002 to 2004 there was a strong increase in the average technical efciency from 78.36 to 85.20 per cent, while from 2005, the average technical efciency started to decline to reach its lowest level of 73.39 per cent in 2007. Some of the lowest performing airlines in that year include First Choice, Monarch, and Jet 2, while some of the highest performing airlines include British Airways, Thomas Cook, and Thomson y. The last two columns of

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British Airways Virgin Atlantic EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.com GB Airways Flybe Ltd Titan Flightline European Average British Airways Virgin Atlantic EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.com GB Airways Flybe Ltd Titan Flightline European Average British Airways Virgin Atlantic EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.com GB Airways Flybe Ltd Titan Flightline European Average Table III. Bootstrapped efciency results British Airways Virgin Atlantic

Year 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2002 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2003 2004 2004 2004 2004 2004 2004 2004 2004 2004 2004 2004 2004 2004 2004 2004 2005 2005

Bootstrapped DEA 0.8806 0.8785 0.7490 0.8880 0.8890 0.5624 0.9204 0.8831 0.7772 0.7769 0.7110 0.8725 0.6348 0.7799 0.5514 0.7836 0.8918 0.9232 0.8843 0.9499 0.8890 0.6801 0.9060 0.9022 0.9157 0.8263 0.7346 0.7814 0.6927 0.7863 0.6055 0.8246 0.9093 0.9104 0.9323 0.9375 0.9537 0.6801 0.8787 0.9333 0.9289 0.8255 0.7551 0.9061 0.6340 0.7734 0.8214 0.8520 0.8410 0.9174

RTS DRS DRS DRS DRS DRS IRS DRS DRS DRS IRS IRS DRS IRS IRS IRS DRS DRS DRS DRS DRS DRS DRS DRS DRS DRS IRS DRS IRS IRS IRS DRS DRS DRS DRS DRS IRS DRS DRS DRS DRS IRS DRS IRS IRS IRS DRS DRS

^ BIAS 0.1203 0.0455 0.0267 0.0307 0.0396 0.0247 0.0522 0.1177 0.2235 0.2289 0.0234 0.0318 0.0363 0.2315 0.0362 0.1098 0.0767 0.0470 0.0447 0.0396 0.0236 0.0638 0.0531 0.0472 0.0885 0.0238 0.2173 0.0552 0.2219 0.0566 0.0943 0.0907 0.0285 0.0606 0.0463 0.0236 0.1259 0.0658 0.0713 0.1710 0.0256 0.0285 0.0330 0.2200 0.1804 0.1583 0.0836

^ s 0.0135 0.0009 0.0001 0.0003 0.0010 0.0002 0.0013 0.0078 0.0688 0.0704 0.0001 0.0002 0.0007 0.0753 0.0008 0.0080 0.0026 0.0010 0.0007 0.0010 0.0002 0.0027 0.0012 0.0016 0.0070 0.0002 0.0651 0.0029 0.0671 0.0049 0.0055 0.0043 0.0001 0.0024 0.0009 0.0002 0.0100 0.0013 0.0022 0.0329 0.0001 0.0002 0.0004 0.0707 0.0332 0.0218 0.0030

LB 0.7610 0.8214 0.7264 0.8558 0.8319 0.5362 0.8638 0.8087 0.6740 0.6802 0.6888 0.8428 0.5880 0.6629 0.5071 0.8074 0.8542 0.8325 0.9087 0.8319 0.6536 0.8240 0.8451 0.8511 0.7196 0.7084 0.6833 0.6108 0.6803 0.5120 0.8246 0.8315 0.9089 0.8718 0.9008 0.6536 0.7970 0.8896 0.8744 0.7137 0.7298 0.8771 0.6002 0.6695 0.7149

UB 0.9968 0.9193 0.7728 0.9163 0.9256 0.5840 0.9690 0.9960 0.9963 0.9963 0.7319 0.9003 0.6694 0.9965 0.5869 0.9965 0.9955 0.9263 0.9918 0.9256 0.7024 0.9635 0.9514 0.9588 0.9093 0.7561 0.9965 0.7444 0.9953 0.6609 0.9963 0.9962 0.9569 0.9981 0.9964 0.7024 0.9973 0.9966 0.9963 0.9954 0.7772 0.9311 0.6640 0.9968 0.9958

10

0.7516 0.9962 0.8442 0.9950 (continued )

Year EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.com GB Airways Flybe Ltd Titan Flightline European Average British Airways Virgin Atlantic EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.com GB Airways Flybe Ltd Titan Flightline European Average British Airways Virgin Atlantic EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.com GB Airways Flybe Ltd Titan Flightline European Average 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007

Bootstrapped DEA 0.9520 0.9104 0.8520 0.6229 0.9193 0.9371 0.9439 0.8012 0.6295 0.8916 0.6616 0.7789 0.6791 0.8225 0.9192 0.9172 0.9409 0.8203 0.8054 0.5334 0.9305 0.8724 0.6258 0.7274 0.4554 0.6333 0.5670 0.9305 0.5631 0.7495 0.8911 0.8186 0.8659 0.9439 0.6613 0.5253 0.9013 0.8487 0.5296 0.5509 0.4329 0.7073 0.7776 0.7803 0.7734 0.7339

RTS DRS DRS DRS IRS DRS DRS DRS DRS IRS DRS IRS IRS IRS DRS DRS DRS DRS DRS IRS DRS DRS IRS IRS IRS DRS IRS IRS IRS DRS DRS DRS DRS IRS IRS DRS DRS IRS IRS IRS IRS IRS IRS IRS

^ BIAS 0.0480 0.0889 0.0352 0.0354 0.0835 0.0394 0.0374 0.1995 0.0245 0.0285 0.0430 0.2217 0.0606 0.0791 0.0735 0.0312 0.0518 0.0421 0.0224 0.0539 0.0352 0.0349 0.0345 0.0209 0.0209 0.0328 0.0664 0.0381 0.1050 0.1784 0.0396 0.0564 0.0462 0.0225 0.0971 0.0420 0.0350 0.0478 0.0236 0.0256 0.2262 0.2265 0.2183

^ s 0.0004 0.0029 0.0005 0.0007 0.0034 0.0003 0.0008 0.0466 0.0001 0.0002 0.0008 0.0687 0.0033 0.0045 0.0061 0.0002 0.0016 0.0006 0.0001 0.0013 0.0003 0.0006 0.0005 0.0001 0.0001 0.0005 0.0024 0.0007 0.0082 0.0325 0.0008 0.0009 0.0012 0.0001 0.0044 0.0005 0.0009 0.0015 0.0001 0.0001 0.0678 0.0689 0.0693

LB 0.9260 0.8656 0.8131 0.5744 0.8446 0.9069 0.8926 0.7072 0.6079 0.8659 0.6209 0.6843 0.5965 0.8247 0.8015 0.9085 0.7574 0.7634 0.5142 0.8754 0.8410 0.5888 0.6885 0.4376 0.6130 0.5306 0.8553 0.5218 0.7927 0.7233 0.8127 0.9031 0.6083 0.5097 0.8424 0.8137 0.4839 0.4919 0.4145 0.6837 0.6827 0.6786 0.6640

UB 0.9962 0.9971 0.8836 0.6545 0.9961 0.9717 0.9797 0.9956 0.6515 0.9162 0.7024 0.9959 0.7369 0.9971 0.9882 0.9685 0.8684 0.8431 0.5534 0.9810 0.9034 0.6587 0.7584 0.4740 0.6511 0.5977 0.9926 0.5985 0.9968 0.9954 0.9016 0.9958 0.7022 0.5456 0.9953 0.8871 0.5615 0.5935 0.4537 0.7293 0.9962 0.9959 0.9959

Operational performance of UK airlines 11

Notes: LB and UB represent the lower and upper bound for the 95 per cent condence intervals of DEA efciency scores; RTS: Returns to Scale; DRS: Decreasing Returns to Scale; IRS: Increasing Returns to Scale; Note that in this table we took the inverse of DEA efciency scores to simplify the interpretation of the results; The scores are now between 0 and 1; An airline which has an efciency score of 1 is considered to be fully efcient

Table III.

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12

Table III show the 95 per cent condence intervals of the bootstrap estimates. As found before by Simar and Wilson (1998), the bias corrected estimates lied for every observation inside the condence interval. The estimates of returns to scale were also in line with the efciency results. As it was shown, most airlines in 2007 were operating under increasing returns to scale that is an indicator that these airlines were motivated to increase the scale of their operations, but there were certain external factors that have stopped these airlines from achieving an optimum level of scale. Some of these airlines include Flybe, Titan, Flightline, and GB Airways, which are mainly described as small airlines. As mentioned before, we also employed in this paper a second stage estimation to determine those factors that explain the variations in technical efciency scores between the different airlines. The two variables included in the truncated regression model are the load factor and airline size. Specically, the model can be expressed as follows: ^it b0 b1 LF it b4 Sizeit 1it d 3

^it is the technical efciency scores; LF it is the load factor; Sizeit is a dummy where d variable reecting the size of different airlines, with 1 representing large UK airlines; and 1it is random error representing statistical noise. The model in equation (3) was also bootstrapped along with the double bootstrap procedure presented in section 4.2. The results are presented in Table IV. We veried that both variables have the expected signs with each of load factor and airline size had a signicant positive impact on technical efciency. These ndings are also in line with previous studies in the literature (Coelli et al., 1999; Cornwell et al., 1990). Thus, what do all the results indicate? It is possible to relate the results from the rst and second stage estimation to the recent and current industry trends in the international aviation industry. The results, from the rst stage, for example, clearly indicated that there was a decreasing trend in the efciency of UK airlines post 2004, while before 2004 the efciency was strongly improving. Several external factors might have contributed to this nding. The sharp increase in oil price[7] post 2004, for example, was an important factor. The oil price started to rise from 2004 to reach its highest value on June 16, 2008 with a record price of $139.89 per gallon (Goldman, 2008). Prior to 2004, the ination adjusted the oil price and it was generally under $25/barrel. Following the increase in oil price, many UK airlines have recorded a sharp decline in prot and high increase in costs, with some examples include British airways and Virgin. The trend was also international. In the US, American Airlines has expressed intention to stop 75 of its planes and cut the number of seats. Fuel costs have also contributed to several airlines going bankrupt. Some recent examples include
Variable Constant LF Size Coefcient 1.358 * * 0.340 * 0.014 * Standard Error 0.200 0.115 0.003 T-ratio 6.781 * 2.956 * 0.666 *

Table IV. Bootstrapped truncated regression of technical efciency

Notes: Log-Likelihood 25.066; *Signicant at the 5 per cent condence level; * *signicant at the 1 per cent condence level

business carries MaxJet, Eos, Hawaiis Aloha Airlines and the US carrier ATA (Clark, 2008). A European example is Alitalia Airline which has been funded from the Italian government to keep ying (Clark, 2008). The increase in oil price had also a direct impact of the load factor of certain airlines. Some examples of airlines which recorded drop in the load factor include British airways (Davies, 2007) and Easy Jet (fall by 3 per cent in 2007). Those operating in regional areas were also directly affected. In this study, it was shown that the load factor has a signicant positive impact on technical efciency, so it is possible that by affecting the load factor, oil price has also indirectly affected technical efciency. One more factor worth mentioning is the link between oil price and increase in competition. This is because for some airlines the number of international passengers and the domestic market share was decreasing. For example British Airways, together with Virgin have in the past two years announced capacity cut. Recently, Continental Airlines also announced cut by 11 percent and Air Canada by 7 percent. Small airlines were also directly affected as they generally y short and domestic routes that are less protable than international long routes. Several recent reports have also discussed that small airlines might not be able to sustain the future competitive environment, and as a result might consider merging with larger airlines. To sum up, all the above factors might have had a direct or indirect impact on the efciency variations of UK airlines. It is also worth noting that sometimes technical inefciency could also be attributed to many internal factors, such as management mistakes or staff training. These factors are not part of the analysis, but future studies might consider investigating the impact of these factors through detailed case studies on some airlines. Future studies might collect data on future years of observations to assess the impact of the current economic situation or the drop in oil price, on the performance of UK airlines. The inclusion of other international airlines might also add new dimensions to the study and provide more validations to the results. 6. Conclusions The study has introduced the DEA double bootstrap methodology to measure the technical efciency of UK airlines. The results could generate a starting point for policy makers at the different airlines by providing them with a comprehensive gure on their level of scale and efciency standings. The results can be used as an incentive to target operational deciencies and seek new areas of efciency improvements. However, the management of different airlines is also strongly encouraged to adopt a benchmarking management procedure in order to perform a continuous evaluation of their performance against operational strategies and to make the necessarily corrective actions. It is also possible to validate the results of this study with some qualitative case investigations of the major airlines involved, so future strategies taken by these airlines in response to the current industry trends can be identied. The results can also be used for international benchmarking purpose. For example, several studies have looked at the efciency of US and other European airlines, and each of studies provides an efciency score on key airlines in these countries. Thus, it is possible for UK airlines to compare their average efciency score with those international airlines that share similar characteristics. The efciency estimates indicated that the performance of UK airlines experienced strong increase between 2002 and 2004, while from 2005, the average technical

Operational performance of UK airlines 13

JES 38,1

14

efciency started to decline to reach its lowest level in 2007. In this paper we have also employed a second stage estimation to explain the variation in technical efciency scores. Factors such as load factor and airline size were found to be signicantly and positively related to technical efciency. The paper discussed that the decrease in efciency of UK airlines might be due to factors such as increase in oil price, intense market competition and drop in load factor. For small airlines the impact of these factors might have also been stronger as they usually suffer from weak economies of scale.
Notes 1. Some other studies have also used the number of planes as a proxy for capital input. In this study we the aircraft value as data on the number of planes are not consistently available for all airlines. Ahn et al. (1997) have previously used aircraft value in assessing the efciency of US airlines. 2. Note that we followed the Federal Aviation Administration, and we dened large airlines as those having 1 per cent or more of national enplaned passengers. 3. A production function is said to exhibit constant return to scale (CRS) if a proportionate increase in inputs results in the same proportionate increase in outputs. The variable return to scale (VRS), on the other hand, does not assume full proportionality between the inputs and outputs. 4. The results reported in this paper are the VRS results; however we have also estimated the CRS model in order to determine the return to scale (RTS) properties of the different airlines. Fore more details on how to calculate RTS refer to Coelli et al. (1998). An airline is said to be operating either at decreasing returns to scale (DRS) if a proportional increase of all input levels produces a less-than-proportional increase in output levels or increasing return to scale (IRS) at the converse case. 5. These are variables that are neither inputs nor outputs but are used to mainly explain the variation in the efciency scores. 6. Simar and Wilson (1998) recommended the use of 2,000 bootstrap iterations to obtain reliable bootstrap estimates. 7. It is possible to include oil price in equation (3) as a potential determinant on technical efciency. However, it is theoretically known that an increase in oil price affect the cost structure of airlines and this is more related to the concept of allovative or cost efciency. The relationship between technical, cost, and allovative efciency is expressed as follows: cost efciency technical efciency allocative efciency. So, it possible that oil price affected indirectly technical efciency through its direct impact on cost and allocative efciency. For more details on each type of efciency refer to Coelli et al. (1998). References Ahn, S.C., Good, D. and Sickles, R.C. (1997), A dynamic frontier approach to assessing the relative efciency of Asian and North American airline rms, paper presented at the Taipei International Conference on Efciency and Productivity Growth. Baltagi, B.H., Grifn, J.M. and Rich, D.P. (1995), Airline deregulation: the cost pieces of the puzzle, International Economic Review, Vol. 36, pp. 245-59. Barbott, C., Costa, A. and Sochirca, E. (2008), Airlines performance in the new market context: a comparative productive and efciency analysis, Journal of Air Transport Management, Vol. 14, pp. 270-4.

Barros, C.P. (2004), Measuring performance in defense-sector companies in a small NATO member country, Journal of Economic Studies, Vol. 31 No. 2, pp. 112-28. Caves, D.W., Christensen, L.R. and Tretheway, M.W. (1984), Economies of density versus economies of scale: why trunk and local service airline costs differ, Rand Journal of Economics, Vol. 15, pp. 471-89. Clark, A. (2008), American Airlines to cut planes and jobs, available at: www.guardian.co.uk/ business/2008/may/22/theairlineindustry (accessed May 2008). Coelli, T., Prasada Rao, D.S. and Battese, G.E. (1998), An Introduction to Efciency and Productivity Analysis, Kluwer Academic Publishers, Boston, MA. Coelli, T., Perelman, S. and Romano, E. (1999), Accounting for environmental inuences in stochastic frontier models: with application to international airlines, Journal of Productivity Analysis, Vol. 11, pp. 251-73. Cornwell, C., Schmidt, P. and Sickles, R.C. (1990), Production frontiers with cross-sectional and time-series variation in efciency levels, Journal of Econometrics, Vol. 46 Nos 1/2, pp. 185-200. Davies, P. (2007), BA and Ryanair see load factors decline, available at: www.travelmole.com (accessed October 2008). Fleming, A. (2008), High oil prices mean higher airfares, available at: http://airtravel.about. com/od/traveltools/a/RisingOil.htm (accessed March 2008). Goldman, D. (2008), Oil crosses $110, despite supply rise, available at: http://money.cnn.com/ 2008/03/12/markets/oil_eia/index.htm (accessed March 2008). Goncharuk, A. (2007), Impact of political changes on industrial efciency: a case of Ukraine, Journal of Economic Studies, Vol. 34, pp. 324-40. ller, L.H. and Sickles, R.C. (1995), Airline efciency differences between Europe and Good, D., Ro the US: implications for the pace of EC integration and domestic regulation, European Journal of Operational Research, Vol. 80, pp. 508-18. Oum, T.H. and Yu, C. (1995), A productivity comparison of the worlds major airlines, Journal of Air Transport Management, Vol. 2, pp. 181-95. Robertson, D. (2008a), Worlds airlines say they face $2.3 bn loss this year as oil price stays high, available at: http://business.timesonline.co.uk/tol/business/industry_sectors/ transport/article4053861.ece (accessed June 2008). Robertson, D. (2008b), European airlines face squeeze on prot, available at: http://business. timesonline.co.uk/tol/business/industry_sectors/transport/article3810477.ece Schmidt, P. and Sickles, R. (1984), Production frontiers and panel data, Journal of Business and Economic Statistics, Vol. 2 No. 4, pp. 367-74. Simar, L. and Wilson, P.W. (1998), Sensitivity analysis of efciency scores: how to bootstrap in nonparametric frontier models, Management Science, Vol. 44, pp. 49-61. Simar, L. and Wilson, P.W. (1999), Estimating and bootstrapping Malmquist indices, European Journal of Operational Research, Vol. 115, pp. 459-71. Simar, L. and Wilson, P.W. (2000), A general methodology for bootstrapping in nonparametric frontier models, Journal of Applied Statistics, Vol. 27, pp. 779-802. Simar, L. and Wilson, P.W. (2007), Estimation and inference in two-stage, semi-parametric models of production processes, Journal of Econometrics, Vol. 136, pp. 31-64. Wilber, D. (2008), Fuel costs squeeze US airlines, available at: www.washingtonpost.com/wpdyn/content/article/2008/04/22/AR2008042202638.html (accessed May 2008).

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Further reading (The) Australian (2008), available at: www.theaustralian.news.com.au/story/ (accessed June, 2008). Blake, A. and Sinclair, M. (2003), Tourism crisis management: US response to September 11, Annals of Tourism Research, Vol. 90 No. 4, pp. 813-32. Giokas, D. (2008), Assessing the efciency in operations of a large Greek bank branch network adopting different economic behaviours, Economic Modelling, Vol. 25, pp. 559-74. ller, L.H. and Sickles, R.C. (1996), Efciency and productivity growth Good, D., Nadiri, M., Ro comparisons of European and US air carriers: a rst look at the data, Journal of Productivity Analysis, Vol. 4, pp. 115-25. Lall, S. (1980), Monopolistic advantages and foreign involvement by US manufacturing industry, Oxford Economic Papers, Vol. 32, pp. 102-22. Li, Y. and Hu, J. (2002), Technical efciency and location choice of small and medium sized enterprises, Small Business Economics, Vol. 19, pp. 1-12. Morley, C. (2003), Impact of international airline alliances on tourism, Tourism Economics, Vol. 9 No. 1, pp. 31-51. Wolf, B. (1977), Industrial diversication and internationalization: some empirical evidence, Journal of Industrial Economics, Vol. 26, pp. 177-91. Corresponding author A. George Asaf can be contacted at: assaf@ht.umass.edu

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