Efficiency in the air transportation industry 1971-86 : an economic capacity utilization perspective

Abstract

This is an empirical study of efficiency in the domestic airline industry both at the firm level as well as over time. A panel of 23 airlines observed over the period 1971- 1986 is utilized. The performance metric is assumed to be economic capacity utilization. The dissertation identifies the problems involved in the construction of such performance indices in this industry as well as other transportation industries. These problems are identified to be both conceptual as well as technical. A methodology is provided for the construction o f such firm specific capacity utilization indices which are backed by a sound theoretical background of firm optimization. The parametric estimation of these performance measures is carried out using the restricted variable translog cost function. A detailed short run-long run analysis of substitution patterns allows us to link these performance measures to the underlying production technology especially to the nature of substitution relations between capital the fixed factor and fuel, labor and materials. The evidence points to a low but significant substitutable relation between capital and all variable inputs. This facilitates an empirical assessment o f the effects o f fuel price changes on efficiency. To our knowledge this is the first study to attempt this. By linking the econometric measure to costs, it is observed that the inefficiency implications of low capacity utilization levels are greater for local service than for trunk airlines and also greater during the regulated era. These econometric measures are also linked to investment decisions in aircraft. These indices are also compared and contrasted with the corresponding engineering measures o f capacity utilization, as well as the load factor. The comparison reveals the engineering measures to be consistently below the parametrically estimated indices. Both measures however, agree as regards overall trends in industry performance. All capacity utilization measures exhibit a unanimous decline in the growth rate during the deregulated era. A comparison with other popular performance measures such as total factor productivity and technical efficiency indices is also carried out. Both engineering and econometric measures are also regressed on a number of factors which could potentially influence these performance measures.