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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
The Centre for Tourism and Services Research (CTSR), Victoria University, Melbourne, Australia
Purpose – The purpose of this paper is to measure the efﬁciency of UK airlines in light of all the recent industry challenges. Design/methodology/approach – The study measured the technical efﬁciency 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 efﬁciency 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 signiﬁcantly and positively related to technical efﬁciency variations include airline size and load factor. The paper also highlights that factors such as increase in oil price and ﬁerce market competition were also potential inefﬁciency determinants. Practical implications – The ﬁndings 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 reﬂection on their efﬁciency could be of interest to private and public policy makers. Originality/value – The paper focuses on a recent period and thus provide a fresh efﬁciency 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 ﬁnancial losses following the last four years increase in oil prices. The predicted global loss in 2008 was around $2.3 billion and latest ﬁgures from the International Air Transport Association (IATA) also indicated that the ﬁnancial 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 ﬁrst 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 proﬁt 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
. 1984. Coelli et al. 1999). 1995). We focused on UK airlines because of their international market power. it is possible with the DEA bootstrap to keep the ﬂexibility of DEA and also obtain statistical properties of the efﬁciency scores. which in most cases have been found to play a positive role in improving airlines performance (Caves et al. 2008). North American airlines usually appeared to be the most efﬁcient (Oum and Yu. it was also conﬁrmed that US and European airlines were more efﬁcient than Asia Paciﬁc airlines (Barbott et al. we were driven by all the above-mentioned factors and the major aim was to reﬂect the efﬁciency standing of UK airlines in light of all the recent market challenges. 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 efﬁciency measures. methodology. the DEA-based Malmquist approach (Barbott et al. 1995).JES 38. In a recent study. We introduced the innovative data envelopment analysis (DEA) bootstrap methodology.. results and discussions are provided in the next four sections of the paper.. As mentioned .. 1995). In general. Some of the most common input/output variables are illustrated in Table I. Other variables in the same category are ﬂoat characteristics like the average speed and size of aircraft. 2008).g. Some of the methodologies used in these studies include the traditional SFA model (e. The methodology used in this study also aimed to improve the accuracy in modeling the performance of airlines. the link between performance and proﬁt was well established. None of the available studies has focused purely on UK airlines. Another aim of this study was to determine those factors that explain the sources of efﬁciency variations between airlines. and the traditional DEA models (Good et al. Traditional methods used in the airline and airport efﬁciency research were the traditional DEA or stochastic frontier analysis (SFA). Caves et al. 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 efﬁciency.. 2008). 2..1 6 In the literature. most studies have also followed traditional approaches in the analysis of efﬁciency. On the other hand. variable used. Airlines are currently adopting cost-reduction strategies and IATA predicted that airlines will be forced to increase their prices in the near future (Fleming. the need for high performance takes an additional importance within the current market challenges. More details on the literature. and Asia Paciﬁc airlines. Literature review Studies on airline frontier models are generally limited and outdated and clearly indicate the need for additional evidences and implications on the efﬁciency characteristics of the airline industry. SFA also requires larger sample size than DEA. however the ﬁndings could also be generalised to reﬂect the link between performance and current industry characteristics.. Baltagi et al. but many studies have analysed the performance North American airlines and in some cases compared the performance of European. 1984. It is hypothesised that with a sharp drop in proﬁts only the high performing airlines will survive. In this study. as it requires a pre-speciﬁcation of the functional form in the estimation of cost or production frontier technologies. However. Data used in the analysis range from 2002 to 2007 and covered 15 airlines. SFA was again subject to criticism. Thus. The more common environmental variables are the average load factor and airline size.
planes Capital. while the main limitation of SFA is that it requires a pre-speciﬁcation of the functional form in the estimation of cost or production frontier technologies. Data were collected directly from the “Civil Aviation Authority” and consisted of 15 major UK airline companies during the period 2002-2007 (90 observations). we have also regressed DEA on two environmental variables. (1999) Ahn et al. labour Labour index.. Good et al. materials. “TKA” or tonne kilometres available and total operational revenues. (1995) Baltagi et al. network size Load factor. (1990) Schmidt and Sickles (1984) Inputs Labour. Data The data selection process started with a detailed review of the existing studies in the literature. de-mineralised water and water methanol consumed). energy. 1997). (1995) Cornwell et al. freight and mail) on each ﬂight by the ﬂight distance. More details about the advantages of the bootstrap approach are provided in later sections. energy. aircraft size Load factor. On the output side. TKA is a reﬂection 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.. As mentioned in the literature review. capital expenses Labour index. and it is considered as a measure of market demand.Study Coelli et al. Overview of existing studies before.. Ahn et al. 1997. 3. Airlines operating with a high load factor coefﬁcient would expect to have a stronger demand. The ﬁndings are consequently expected to be more accurate and as a result provide a more solid ground for policy implications. 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 main limitation of DEA is that it is a non-statistical technique and thus treats all measurement error as sources of inefﬁciency. Load factor (deﬁned as the ratio of performed tonne-kilometres to available tonne kilometres) was used to account for the environment in which the airlines operate. capital expenses Outputs TKA Revenue Revenue TKA TKA TKA Other variables Load factor. seasonality Size. 1999. materials. fuel Labour. The authority collects data using the same criteria of the International Civil Aviation Organisation (ICAO). and aircraft value (total ﬁnancial value of aircraft minus depreciation). two variables are used namely. hubs. aircraft capacity Load factor. this variable was used in several related studies (Coelli et al. (1997) Good et al. mergers Stage length. and is strong indicator of overall performance. aircraft fuel and oil expenses (includes fuel. Guidance from experts in the area was also helpful in conﬁrming the list of variables selected. materials. . service quality. aircraft size. The “total operational revenues” (sum of aeronautical and non-aeronautical revenues) was also used in previous studies (Ahn et al. load factor Operational performance of UK airlines 7 Table I. On the inputs side three inputs were selected namely labour expenses (total expenditure for the salaries and allowances of all employees). capital Labour. In this context. namely load factor and airline size. all these methodologies suffer from common limitations. 1995). In order to account for the sources of efﬁciency changes.. materials.
The descriptive statistics of all variables are listed in Table II. Firms that do not lie on that surface can be considered as inefﬁcient and an individual efﬁciency score will be calculated for each one of them.1 Data envelopment analysis DEA is one of the most popular methods to estimate technical efﬁciency (for some applications refer to Barros. The identiﬁcation of airline size was based on the percentage share of each airline in the total kilometres performed by all UK airlines. It aims to deﬁne a frontier envelopment surface for all sample observations. 2007). In the next section we describe in detail the methodology used in the paper. 2004. The frontier is a representation of all the efﬁcient ﬁrms. 4. and Goncharuk. The output ^i can be simply derived by solving the following oriented DEA efﬁciency estimator d linear programming: .1 and thus consequently a higher production/efﬁciency.JES 38. DEA and the bootstrap 4. It is hypothesised that larger are more productive. as these airlines usually possess stronger economies of scale and more ﬂexible access to technology and innovation.
n n n X X X .
^ ^ di ¼ max d . 0.
xi $ xi l. di yi # yi l. . l ¼ 1. l $ 0 .
This is achieved through P l the convexity constraint n i¼1 ¼ 1. In this paper we mainly rely on the VRS assumption. xi is s vector of airline inputs. n airlines where yi is vector of airline outputs. and inefﬁcient if measure of d i ^ . The value of d ^ ¼ 1 indicates that the airline is technically efﬁcient. Note that the DEA model can also be estimated using either the constant return to scale (CRS) or variable return to scale (VRS) assumptions and the shape of the frontier will differ depending on the scale assumptions that underline the model. l is a I £ 1 vector of ^i obtained is the technical efﬁciency score for the i-th ﬁrm.40 90.l i ¼1 i¼1 i ¼1 ( i ¼ 1 . A constants. which is not imposed in the CRS case. once for each airline d i in the sample. This linear programming problem must be solved n times. However.95 33. it is safer to expect that airlines might not be operating at an optimal level of scale.89 16. . Variable n Mean SD Min Max 8 ð1Þ Table II. given the recent market condition and the high level of competition in the sector. 1. d^i . Note that the VRS model has also the advantage of ensuring that an inefﬁcient airline is only compared against those airlines of similar size.90 . 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. as the CRS is only correct as long as it is appropriate to assume that airlines are operating at an optimal level of scale. .
as described in Simar and Wilson (2007). on the other hand. 1999. in which the bootstrap estimators are substituted from the estimators in the regression stage to calculate the standard error ^i valid of the estimates. as the calculation of efﬁciency of one ﬁrm incorporates observation of all other ﬁrms in the same data set. The bootstrap procedure can also be extended to account for the impact of environmental variables on efﬁciency. Some researchers try to avoid this problem by using parametric techniques that have the advantage of allowing for random error. in small samples.20 per cent. Simar and Wilson (1998. obtained from 2000 bootstrap iterations are reported in Table III. As the results indicate. these techniques impose a particular functional form that predetermines the shape of the efﬁcient technology or frontier. Some of the lowest performing airlines in that year include First Choice. and Thomson ﬂy. A popular procedure in the literature is to use the ordinarily least square (OLS) regression to estimate this relationship. while from 2005. The last two columns of . tends to envelop the data more closely. therefore. this might lead to two main problems. The basic idea of bootstrapping is to approximate the distribution of the estimator via re-sampling and recalculation of the parameter of interest. 5. Monarch. Results and discussions The VRS technical efﬁciency estimates of the different UK airlines. the average technical efﬁciency started to decline to reach its lowest level of 73. Therefore. Similarly. First.4.36 to 85. DEA. it has long been criticised for being a non-statistical or deterministic technique. while some of the highest performing airlines include British Airways. From 2002 to 2004 there was a strong increase in the average technical efﬁciency from 78. For example. with bias corrected estimates of d estimates for the parameters in the second stage regression. however. Thomas Cook. The procedure produces. which in our case is the DEA efﬁciency score. violating the regression assumption that 1i are independent of zi . given that it does not allow for random error in the estimation of efﬁciency. if we take the following model: ^i ¼ zi b þ 1i d ð2Þ Operational performance of UK airlines 9 where zi is a vector of management related variables which is expected to affect the efﬁciency of ﬁrms under consideration and b refers to a vector of parameters with some statistical noise 1i .2 The bootstrap While the above DEA model is relatively simple to estimate. direct regression analysis is invalid because of the dependency of the efﬁciency scores. thus making it possible to obtain statistical properties of the efﬁciency estimates and also perform some hypotheses testing. a strong correlation is expected between the input/output variables and environmental variables. the of efﬁciency scores estimated by DEA are expected to be correlated with each other. To overcome these problems we use in this paper the double bootstrapping procedure. and Jet 2. the average technical efﬁciency follows two different patterns. When applied to DEA. 2000) have recently discussed that it is possible to maintain the interesting features of DEA.39 per cent in 2007. For more details on the bootstrap procedure used in this stage refer to Simar and Wilson (2007). proposed by Simar and Wilson (2007). the bootstrap allows the construction of conﬁdences intervals. and also obtain statistical properties via the use of the “bootstrap” approach. However.
2315 0.6055 0.0236 0.0002 0.9163 0.7772 0.9635 0.9311 0.6340 0.0943 0.8511 0.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.8806 0.0049 0.0885 0.8771 0.8087 0.0009 0.8442 0.7814 0.9963 0.7970 0.9950 (continued ) .2200 0.0022 0.9204 0.6833 0.7610 0.6803 0.7196 0.6348 0.7516 0.0007 0.6888 0.9569 0.0836 ^ s 0.0100 0.9093 0.7346 0.9232 0.9003 0.0078 0.0001 0.0606 0.7319 0.0318 0.9157 0.9963 0.8787 0.5071 0.7264 0.0531 0.0472 0.8890 0.9963 0.6640 0.9960 0.5880 0.9963 0.0004 0.0026 0.0329 0.5624 0.6740 0.6694 0.9193 0.9954 0.6609 0.0285 0.7024 0.0256 0.8451 0.9537 0.9955 0.8880 0.1177 0.0016 0.9061 0.0002 0.1203 0.0362 0.0651 0.2219 0.8744 0.0447 0.9256 0.9968 0.0001 0.0267 0.0704 0.9289 0.0522 0.7799 0.7149 UB 0.6801 0.0055 0.0002 0.8319 0.2173 0.9089 0.6695 0.0218 0.6108 0.0713 0.0332 0.0013 0.0012 0.7444 0.7734 0.0238 0.9256 0.0070 0.5362 0.0010 0.8214 0.0043 0.9965 0.9962 0.9375 0.com GB Airways Flybe Ltd Titan Flightline European Average British Airways Virgin Atlantic EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.0007 0.0001 0.5869 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 0.8246 0.7863 0.7728 0.9953 0.9008 0.9499 0.8315 0.9104 0.8843 0.8558 0.0363 0.7836 0.0002 0.0707 0.6002 0.1804 0.0234 0.5120 0.9690 0.0247 0.6536 0.6802 0.0753 0.0009 0.8255 0.9263 0.0001 0.8428 0.9093 0.8718 0.0002 0. Bootstrapped efﬁciency 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 0.0671 0.1583 0.8246 0.8785 0.0658 0.7772 0.1710 0.0030 LB 0.0013 0.8725 0.0907 0.8214 0.8638 0.8890 0.1259 0.2289 0.7084 0.8410 0.0463 0.9962 0.0330 0.9514 0.7551 0.0767 0.0135 0.9087 0.7137 0.0396 0.8918 0.1098 0.0003 0.6927 0.8520 0.5514 0.0688 0.8240 0.6801 0.6629 0.8319 0.9981 0.1 British Airways Virgin Atlantic EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.8074 0.0027 0.8831 0.7024 0.JES 38.0307 0.0010 0.9965 0.0638 0.9323 0.9022 0.0010 0.9588 0.7490 0.8896 0.8325 0.8263 0.2235 0.9964 0.9973 0.9968 0.9918 0.6536 0.0396 0.0080 0.0008 0.9965 0.0455 0.0002 0.7769 0.9333 0.0236 0.0470 0.8542 0.9958 10 0.0552 0.7110 0.0024 0.0566 0.0285 0.7298 0.0029 0.9060 0.9966 0.7561 0.5840 0.
5965 0.6295 0.5615 0.8724 0.9031 0.0024 0.9104 0.9034 0.5744 0.8054 0.6258 0.8684 0.4537 0.0539 0.4740 0.0007 0.0008 0.5306 0.9013 0.0285 0.9016 0.0029 0.7024 0.9958 0.9685 0.Year EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.0236 0.7776 0. The scores are now between 0 and 1.0044 0.0005 0.8656 0.0350 0.9962 0.0045 0.9439 0.4554 0.0001 0.4376 0.0462 0.0971 0.5142 0.0693 LB 0.8553 0.1784 0.9371 0.5509 0.5670 0.0352 0.9959 0.9409 0.9260 0.8659 0.0420 0.0001 0.9962 0.9882 0.0082 0.8926 0.0689 0.8203 0.6791 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 0.7574 0.7072 0.6616 0.0518 0.0002 0.8659 0.0245 0.5218 0.9971 0.0009 0.6130 0.7274 0.8911 0.0735 0.0007 0.0006 0.0835 0.4919 0.0015 0.9717 0.0033 0.6843 0.8015 0.0394 0.9971 0.9069 0.0005 0.1050 0.5456 0.0061 0.4329 0.0209 0.6837 0.7293 0.0003 0.0009 0.6786 0.0001 0.7734 0.6827 0.8225 0.9961 0.7369 0.0001 0.5631 0.9520 0.9192 0.6079 0.9305 0.2262 0.0678 0.7803 0.8247 0.8131 0.7233 0.8916 0.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 0.0687 0.8127 0.0421 0.6229 0.7789 0.0224 0.8431 0.0016 0.0013 0.7927 0.5253 0.8871 0.4145 0.9954 0.0349 0.6587 0.5534 0.6083 0.7073 0.9968 0.8446 0.8424 0.0012 0. An airline which has an efﬁciency score of 1 is considered to be fully efﬁcient Table III.8410 0. RTS: Returns to Scale.0606 0.0004 0.0430 0.6613 0.6511 0.9959 0.0001 0.0381 0.0001 0.0664 0.0480 0.8487 0.0008 0.8754 0.6333 0.9439 0.9797 0.0354 0.8186 0.0478 0.6640 UB 0.7584 0.9956 0.5985 0. .com GB Airways Flybe Ltd Titan Flightline European Average British Airways Virgin Atlantic EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.5977 0.9193 0.0256 0.7495 0.8520 0.0001 0.0312 0.9172 0.8836 0.0034 0. Note that in this table we took the inverse of DEA efﬁciency scores to simplify the interpretation of the results.0396 0.0008 0.0791 0.0005 0.5097 0.7634 0.9959 Operational performance of UK airlines 11 Notes: LB and UB represent the lower and upper bound for the 95 per cent conﬁdence intervals of DEA efﬁciency scores.0345 0.0225 0.0005 0.5296 0.0002 0.6545 0.9162 0.0006 0.9953 0.9810 0.0003 0.1995 0. DRS: Decreasing Returns to Scale.0352 0.4839 0.com GB Airways Flybe Ltd Titan Flightline European Average British Airways Virgin Atlantic EasyJet ThomsonFly First Choice Monarch Thomas Cook BMI Group MyTravel Jet2.9305 0.8137 0.0466 0.5334 0.9085 0.8012 0.2183 ^ s 0.0209 0.0328 0.6209 0.5888 0. IRS: Increasing Returns to Scale.0564 0.2265 0.6885 0.5935 0.7022 0.0889 0.0374 0.9926 0.2217 0.0325 0.6515 0.
many UK airlines have recorded a sharp decline in proﬁt and high increase in costs.066.115 0. Titan. In the US. and GB Airways. Several external factors might have contributed to this ﬁnding. was an important factor. These ﬁndings are also in line with previous studies in the literature (Coelli et al. Bootstrapped truncated regression of technical efﬁciency Notes: Log-Likelihood ¼ 25.340 * 0. The results.89 per gallon (Goldman. As mentioned before. 1999. Fuel costs have also contributed to several airlines going bankrupt. 2008 with a record price of $139. Flightline. while before 2004 the efﬁciency was strongly improving.1 12 Table III show the 95 per cent conﬁdence intervals of the bootstrap estimates. The two variables included in the truncated regression model are the load factor and airline size. The estimates of returns to scale were also in line with the efﬁciency results. clearly indicated that there was a decreasing trend in the efﬁciency of UK airlines post 2004. The oil price started to rise from 2004 to reach its highest value on June 16. The model in equation (3) was also bootstrapped along with the double bootstrap procedure presented in section 4. LF it is the load factor. “American Airlines” has expressed intention to stop 75 of its planes and cut the number of seats. with some examples include British airways and Virgin.014 * Standard Error 0. The trend was also international. which are mainly described as small airlines. what do all the results indicate? It is possible to relate the results from the ﬁrst and second stage estimation to the recent and current industry trends in the international aviation industry. and 1it is random error representing statistical noise. As it was shown. As found before by Simar and Wilson (1998). The results are presented in Table IV. the bias corrected estimates lied for every observation inside the conﬁdence interval. for example. Cornwell et al. for example. but there were certain external factors that have stopped these airlines from achieving an optimum level of scale..358 * * 0. the model can be expressed as follows: ^it ¼ b0 þ b1 LF it þ b4 Sizeit þ 1it d ð3Þ ^it is the technical efﬁciency scores. 2008). Following the increase in oil price.956 * 0. We veriﬁed that both variables have the expected signs with each of load factor and airline size had a signiﬁcant positive impact on technical efﬁciency. * *signiﬁcant at the 1 per cent conﬁdence level . 1990).003 T-ratio 6. Prior to 2004.JES 38. Some recent examples include Variable Constant LF Size Coefﬁcient 1. Sizeit is a dummy where d variable reﬂecting the size of different airlines. we also employed in this paper a second stage estimation to determine those factors that explain the variations in technical efﬁciency scores between the different airlines.200 0. Speciﬁcally. from the ﬁrst stage. 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. with 1 representing large UK airlines. the inﬂation adjusted the oil price and it was generally under $25/barrel. Thus.666 * Table IV..781 * 2. *Signiﬁcant at the 5 per cent conﬁdence level.2. Some of these airlines include Flybe. The sharp increase in oil price post 2004.
such as management mistakes or staff training. it was shown that the load factor has a signiﬁcant positive impact on technical efﬁciency. Recently. Eos. A European example is “Alitalia Airline” which has been funded from the Italian government to keep ﬂying (Clark. Those operating in regional areas were also directly affected. together with Virgin have in the past two years announced capacity cut. 2008). it is possible for UK airlines to compare their average efﬁciency score with those international airlines that share similar characteristics. The results can be used as an incentive to target operational deﬁciencies and seek new areas of efﬁciency improvements. In this study. For example. Conclusions The study has introduced the DEA double bootstrap methodology to measure the technical efﬁciency of UK airlines. Hawaii’s Aloha Airlines and the US carrier ATA (Clark. while from 2005. but future studies might consider investigating the impact of these factors through detailed case studies on some airlines. It is also possible to validate the results of this study with some qualitative case investigations of the major airlines involved. so it is possible that by affecting the load factor. all the above factors might have had a direct or indirect impact on the efﬁciency variations of UK airlines. so future strategies taken by these airlines in response to the current industry trends can be identiﬁed.business carries MaxJet. Small airlines were also directly affected as they generally ﬂy short and domestic routes that are less proﬁtable than international long routes. To sum up. 2007) and Easy Jet (fall by 3 per cent in 2007). This is because for some airlines the number of international passengers and the domestic market share was decreasing. Some examples of airlines which recorded drop in the load factor include British airways (Davies. The results could generate a starting point for policy makers at the different airlines by providing them with a comprehensive ﬁgure on their level of scale and efﬁciency standings. These factors are not part of the analysis. Thus. The increase in oil price had also a direct impact of the load factor of certain airlines. It is also worth noting that sometimes technical inefﬁciency could also be attributed to many internal factors. The efﬁciency estimates indicated that the performance of UK airlines experienced strong increase between 2002 and 2004. 6. 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. Continental Airlines also announced cut by 11 percent and Air Canada by 7 percent. One more factor worth mentioning is the link between oil price and increase in competition. Several recent reports have also discussed that small airlines might not be able to sustain the future competitive environment. For example British Airways. The results can also be used for international benchmarking purpose. and each of studies provides an efﬁciency score on key airlines in these countries. the average technical Operational performance of UK airlines 13 . oil price has also indirectly affected technical efﬁciency. However. 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. 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. and as a result might consider merging with larger airlines. several studies have looked at the efﬁciency of US and other European airlines. 2008).
paper presented at the Taipei International Conference on Efﬁciency and Productivity Growth.. on the other hand.000 bootstrap iterations to obtain reliable bootstrap estimates. Grifﬁn. 7. cost. and we deﬁned large airlines as those having 1 per cent or more of national enplaned passengers. does not assume full proportionality between the inputs and outputs. however we have also estimated the CRS model in order to determine the return to scale (RTS) properties of the different airlines. and allovative efﬁciency is expressed as follows: cost efﬁciency ¼ technical efﬁciency £ allocative efﬁciency. 245-59. Notes 1. These are variables that are neither inputs nor outputs but are used to mainly explain the variation in the efﬁciency scores. 270-4. Costa.1 14 efﬁciency started to decline to reach its lowest level in 2007.C. D.P. 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. 14.H..C. (1998). For more details on each type of efﬁciency refer to Coelli et al. The results reported in this paper are the VRS results. and Sochirca. S. So. R. In this paper we have also employed a second stage estimation to explain the variation in technical efﬁciency scores. (2008). References Ahn. International Economic Review. J. E. In this study we the aircraft value as data on the number of planes are not consistently available for all airlines. 4. Barbott. pp. Vol. and Sickles. 3. Baltagi. Fore more details on how to calculate RTS refer to Coelli et al. Ahn et al. A. (1997). . pp. “Airlines performance in the new market context: a comparative productive and efﬁciency analysis”. 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. “A dynamic frontier approach to assessing the relative efﬁciency of Asian and North American airline ﬁrms”. and Rich. it possible that oil price affected indirectly technical efﬁciency through its direct impact on cost and allocative efﬁciency. 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 efﬁciency. “Airline deregulation: the cost pieces of the puzzle”. Journal of Air Transport Management. C.. Factors such as load factor and airline size were found to be signiﬁcantly and positively related to technical efﬁciency.JES 38. Simar and Wilson (1998) recommended the use of 2. Vol. 6. (1995). The variable return to scale (VRS). 5. Good.M. 2. The relationship between technical. However. intense market competition and drop in load factor. D. 36. Some other studies have also used the number of planes as a proxy for capital input. It is possible to include oil price in equation (3) as a potential determinant on technical efﬁciency. (1998). (1997) have previously used aircraft value in assessing the efﬁciency of US airlines. B. Note that we followed the “Federal Aviation Administration”. For small airlines the impact of these factors might have also been stronger as they usually suffer from weak economies of scale. The paper discussed that the decrease in efﬁciency of UK airlines might be due to factors such as increase in oil price.
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