CHAPTER – 1

INTRODUCTION OF THE STUDY

1.0. Introduction

The airport sector has grown considerably in recent years due to the creation of

new air routes and the intensification of the existing ones. Tourism is a growing trend

worldwide, and airports are becoming increasingly necessary. The number of passengers

is growing every year and airports must be prepared to manage passenger traffic and carry

out their functions efficiently. Airports have to be able to meet the new challenges and

demands of their customers and stakeholders. The aim is to improve connectivity between

destinations and offer a quality service, avoiding problems of congestion and delays.

Furthermore, there is no doubt about the economic impact that the presence of an airport

has both at a local and national level and the need to evaluate this impact according to the

characteristics of each airport. In addition, one of the problems currently faced is the need

to reduce pollutant gas emissions and use alternative energy sources to fossil fuels. These

are just some of the many issues related to air transport that can be discussed by

researchers

1.1. Airport Efficiency

Airside business is enlarged by increasing commercial activities, which involves

not only air passengers and air transportation employees, but also local-community

residents and industries. An efficient airport provides important economic catalysts that

enable the local and regional economy to thrive and improve the quality of life in the

region (Oum et al., 2008). Governments around the world have taken policy measures in

order to improve the efficiency and the productivity of airport operations. In Italy

Page | 1
government intervention started during the 90’s and is still not completed. The reforms,

which have completely reshaped the industry boundaries, concern the concession

agreement, the privatization, the liberalization of the ground handling services, the

development of a second hub and the introduction of a dual till regulation scheme.

To compete economically with other nations, a country should have advanced

transport networks and infrastructures. Roads, ports, railways, and airports represent a

vital part of the development process of nations as well as a key component of the

commercial relations and the well-being of people. Air transport is the most efficient

long-distance mode of transport in the world. According to research carried out by the

International Civil Aviation Organization, if global aviation was a country, it would

generate a total contribution equal to 1.4 trillion rupees to the gross domestic product

(GDP) together with 45.5 million jobs, comparable to the economy of the India. Air

transport in India, on the other hand, supports a total of 12.2 million jobs and generates

520.2 billion rupees of contribution to the India’s GDP, representing 6.4% of the global

market. The economic debate on the sector is developing around the results obtained by

the deregulation policies. The air transport sector is characterized by a competition

market, which began in India at the end of the 1980s, based on the results and experiences

in USA. The government of India deregulation has abolished the limits on both capacity

and tariffs applied in favor of the free market, in which all the decisions are taken as a

consequence of the meeting between supply and demand. Under the effects of these

deregulation pressures, the air transport sector market has moved towards more

competitive contexts, characterized by high competition between multiple carriers, with a

constant growth in transport demand which has consequently brought about the need for

better infrastructures supporting the system. The interest in performance measurement has

increased in recent decades, with the recognition of its importance for private and public

Page | 2
organizations in a constantly changing business environment. Several scholars have

questioned the performance dimensions, since the multi-faceted nature of airports has led

to claim specific dimensions (i.e., efficiency/productivity, service quality, security,

commercial, economic/financial, environmental, social, competitiveness). In reality,

airports, at the worldwide level, are no longer considered as huge facilities and public

utilities, but as complex service organizations. As a consequence, a wider perspective of

airport performance is needed. More precisely, what matters is to understand how the

airport industry has evolved and addressed the different aspects of performance

measurement. In the light of the previous considerations, the perception of airports as

complex service organizations leads one to take into consideration the interests of the

different stakeholders, such as customers, local governments, regulators, etc.

Consequently, the focus of airport performance is not just related to the measurement of

the operational and financial indexes, but it counts on a more holistic and

multidimensional approach. Performance measurement has evolved into a crucial activity

for assisting decision makers in the airport investment cycle. Furthermore, passenger

pleasure has emerged as a critical component of airport performance. The reference

literature reveals a clear discrepancy in that efficiency is measured in terms of

productivity as well as operational and financial indicators. Passenger satisfaction is

measured separately for performance purposes, typically through qualitative analysis

rather than quantitative measures. This shows that there is still room for advancement. In

this work, a methodology for assessing airport efficiency through collaborative analysis

of operational efficiency for the airport manager is offered, taking into account the

perceived quality of airport services by the user. This paper adopts an overlapping

perspective between productivity and passenger satisfaction, offering a wider view on

airport efficiency.

Page | 3
1.2. Approaches in Airport Efficiency

The research on airport performance can be classified into two main types:

efficiency evaluations and productivity evaluations. The main difference between

efficiency and productivity evaluations lies in the concept of maximum attainable outputs

(Oum and Yu 2004). Efficiency takes the maximum potential output that can be

produced, and it takes the available inputs into account, while productivity considers the

actual outputs. Therefore, efficiency often relies on comparisons with other Decision

Making Units (DMUs). However, the terms efficiency and productivity are often used

interchangeably even though the underlying meanings of these two terms are not

identical. The fact that changes in productivity are due to changes in efficiency, among

other factors, may have had an influence in considering both terms as equivalent (Zhu

2009). In order to evaluate efficiency and productivity, previous studies usually have

adopted quantitative methods, relying on numerical and secondary data. They also have

formulated production functions using econometric techniques and advanced efficiency

analysis tools, such as those applied in studies by Sarkis (2000) and Martin et al. (2009).

(i). Partial Measures:

This method uses partial ratio data to carry out performance comparisons of a

target sample in a single dimension, such as financial or cost performance. It deals with

the ratio of one output to the ratio of one input in order to assess efficiency or

productivity with respect to a specific dimension. It does not give any conclusions on the

overall efficiency (Forsyth 2000). Since the partial measures method only focuses on

certain fields of airport performance, it is relatively easy to calculate and interpret.

However, the evaluation results from this method are not able to provide a more

comprehensive evaluation of an airport’s performance unless they are a part of a broad

Page | 4
performance measurement system. This approach also has other weakness. As discussed

by Forsyth (2000), partial measurement should only be used if no data for overall

measures are available.

(ii). Multi-Criteria Decision Making (MCDM):

The Multi-Criteria Decision Making (MCDM) method establishes preferences

between options by reference to an explicit set of objectives that have been identified by

the decision making body and for which it has established measurable criteria intended to

assess the extent to which the objectives have been achieved. In simple circumstances, the

process of identifying objectives and criteria may provide enough information alone for

decision makers. Historically, employing the MCDM method can be divided into two

main steps: acquiring the relative weights for each criterion and ranking the options. The

first stage often uses expert questionnaires or interviews to evaluate the selected

variables, providing the weights to choose an optimal solution (Roy 2005). The most

commonly used method in the MCDM is AHP, which was developed from a linear

additive model but, in its standard format, uses procedures for deriving the weights and

scores achieved by alternatives, which are based on pair wise comparisons between

criteria and between alternatives. Thus, for example, in assessing weights, the decision

makers are asked a series of questions, each of which asks how important one particular

alternative is relative to another for the object being addressed. The strengths and

weaknesses of AHP have been the subject of substantial debate among specialists in the

MCDM (for example, French 1980; Freeling 1983; Jensen 1984; Legrady et al. 1984;

Belton 1986; Harker and Vargas 1987; Schoner and Wedley 1989; Dyer 1990; Saaty

1990; Salo and Hämäläinen 1993; Pöyhönen et al 1997). It is, however, clear that users

Page | 5
generally find the pair-wise comparison form of data input straightforward and

convenient. The other methods which are used in the MCDM include:

(iii). Preference Ranking Organisation Method for Enrichment Evaluations

(PROMETHEE):

This method was proposed by Brans and Mareschal (2005) and which defines

preference functions based on the differences between criteria among different schemes

(Hu et al. 2010).

(iv). Technique for Order Preference by Similarity to Ideal Solution (TOPSIS):

This method was proposed by Hwang and Yoon (1981). This uses ideal and anti-

ideal solutions to find the best alternative. It assumes that each indicator takes a

monotonic function (increasing or decreasing) utility (Wang et al. 2004 and Hu et al.

2010).

(v). Elimination and Choice Expressing Reality (ELECTRE):

This method was developed by Benayoun et al. (1966) and improved by Roy

(1971; 1991). The ELECTRE methodology has evolved through a number of different

versions (I through IV). ELECTRE I is designed for choosing a single action, while

ELECTRE II, III and IV deal with ranking. The subset containing all the most satisfying

alternatives is obtained by eliminating the greatest number of alternatives (Bojkovic et al.

2010).

(vi). Frontier Analysis:

Page | 6
 Three main methods which have been adopted by scholars to analyse efficiency

are: Stochastic Frontier Analysis (SFA), Total Factor Productivity (TFP), and Data

Envelopment Analysis (DEA). Although these methods are similar in that they determine

a frontier and an inefficiency based upon that frontier, which is the efficient frontier, there

is a significant difference between them. Although SFA estimates inefficiency, it can also

be used as an explanation for inefficiency (Pels et al. 2003). Furthermore, the DEA

approach provides a measurement of inefficiency. A brief description of each method is

given below:

(a). Stochastic Frontier Analysis (SFA):

SFA models were first proposed by Aigner et al. (1977); they have since been

used extensively in scientific literature. In recent years, several alternatives have been

proposed in the literature to relax the restrictive assumption that all DMUs share the same

technological parameters. For example, Kalirajan and Obwona (1994), Tsionas (2002),

Huang (2004) and Greene (2005) developed different versions of random coefficient

models which are based on SFA, in which differences between DMUs (i.e. heterogeneity)

are modelled in the form of continuous parameter variations. More recently, Kumbhakar

et al. (2007) developed a non-parametric stochastic frontier using a local maximum

likelihood approach. In 2005, Greene proposed two alternative panel data estimators that

the author labelled as true random effects and true fixed effects. The main feature of

Greene’s (2005) model is that a time-invariant DMU effect co-exists with inefficiency in

order to avoid the inefficiency term picking up a DMU’s heterogeneity. In addition, the

true random effects model (which assumes that there is a DMU-specific random term to

capture DMU heterogeneity) has been used widely. On the other hand, the true fixed

effects model assumes that the DMU-specific term is a fixed parameter and is allowed to

be correlated with the included variables. Although these parametric approaches take into

Page | 7
account the effect error, they still face challenges with regard to separating random error

from efficiency.

(b). Total Factor Productivity (TFP):

Total Factor Productivity (TFP) is determined by how efficiently and intensely the

inputs are utilised in production. In other words, it is the portion of output not explained

used in production (Comin, 2006). TFP requires an aggregation of all outputs into a

weighted output index. It also requires that all inputs be placed into a weighted input

index using pre-defined weights, which can be biased. The key drawback of the TFP

technique is that it does not allow for random error in the data, assuming that

measurement error and luck are factors that affect outcome. This implies that the

measured inefficiency is likely to be overstated (Berger and Humphrey 1997). Moreover,

it constructs a frontier based on the actual data in the sample, and the relative efficiency

of each DMU in the population is calculated in relation to this frontier. Therefore, the

result may be very sensitive to the chosen sample and the outliers.

(c). Data Envelopment Analysis

DEA requires no assumptions about the functional form and calculates a maximal

performance measure for each DMU relative to all other DMUs. DEA was originally

developed by Charnes et al. (1978) by applying a linear programming technique that

converted multiple inputs and multiple outputs into a scalar measure of relative

productive efficiency to construct a frontier based on the sample. DMUs on the frontier

are efficient, while DMUs inside the frontier are inefficient. With the assumption of no

random errors, all deviations from the estimated frontier are attributed to inefficiencies.

Both non-parametric methods (DEA and TFP) compare a weighted output variable

relative to a weighted input variable. However, the key advantage of DEA is that the

Page | 8
input and output weights result from a linear programming procedure rather than being

pre-determined (Graham 2005). DEA is often a more attractive technique when compared

with the other two methods because of its less demanding data requirements. In general,

the main motivation for choosing DEA is often its flexibility with regard to accounting

for multiple input/output variables in the estimation of efficiency (Banker 1984). This

method can also account for external factors that are related to the environment in which

a particular DMU operates. One of the method’s major weaknesses is that it has no

statistical properties and, hence, does not account for measurement error in the estimation

of efficiency (Charnes et al. 1985). The use of DEA can become even more problematic

in the presence of outliers, which can simply distort the derived efficiency results (Russell

1985). Recently, the bootstrapping method, which is one of the DEA approaches, is a

computer-based method for assigning measures of accuracy to sample estimates (Efron

and Tibshirani 1994) has become popular. This technique allows estimation of the sample

distribution of almost any statistic using only very simple methods (Varian 2005).

Generally, it falls in the broader class of resampling methods. In addition, Network Data

Envelopment Analysis (NDEA) is currently emerging as a way of evaluating the

efficiency of sub-processes within the overall system (Kao 2009).

1.3. Chapterization

 The entire study is presented in five distinct chapters. The introductory chapter

provides a brief background to the study. It dwells upon such aspects as

importance of airport efficiency and approaches of airport efficiency evaluation.

 The second chapter provides a brief survey of relevant studies relating to airport

efficiency in and around the world.

Page | 9
 The third chapter deals with methodological framework of the study which

includes research questions, objectives, hypotheses and tool used in the study.

 The fourth chapter presents an analysis and interpretation of the study undertaken

i.e. airport efficiency of India more specifically south Indian airports.

 The last chapter contains summary of findings and conclusion of the study and

gives suggestions and scope for further research in this selected area.

Page | 10