Efficiency and Competitiveness of International Airlines

206 Pages·2016·2.86 MB·English

by  Almas Heshmati

Almas Heshmati · Jungsuk Kim
Efficiency and
Competitiveness
of International
Airlines
fi
Ef ciency and Competitiveness of International
Airlines
Almas Heshmati Jungsuk Kim
(cid:129)
fi
Ef ciency and
Competitiveness of
International Airlines
123
Almas Heshmati JungsukKim
Jönköping International Business School SogangUniversity
Jönköping Seoul
Sweden Korea,Republic of (SouthKorea)
ISBN978-981-10-1015-6 ISBN978-981-10-1017-0 (eBook)
DOI 10.1007/978-981-10-1017-0
LibraryofCongressControlNumber:2016938667
©SpringerScience+BusinessMediaSingapore2016
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Preface
This manuscript compares efficiency and competitiveness of world’s major 39
airlines over the 1998–2012 period. We analyzed airlines’ production and cost
efficiency using stochastic frontier function methodology and investigated which
factors account for differences in level and variations in technical efficiency of
airlines.Theresultssuggestthatourapproachwhichlookedatcostandproduction
efficiency seems to have an advantage over the commonly used approach of esti-
mating efficiency using only one of the two aspects. An estimation of efficiency
from both perspectivesbettercapturesthe factorsaffecting theefficiency andmore
accurately reflects the reality of the ongoing process of airline mergers and exits
from the market. The mean and the distribution of both production and cost effi-
ciency among airlines differ according to geographical areas of operation, which
may be a result of different market structure and de-regulation processes, and of
specific competitive conditions such as resource availability and strategic cooper-
ation with competitors.
The empirical results from rigorous analysis of the unique and up-to-date data
confirmed that the sample airlines displayed a reasonable level of production effi-
ciency during 1998–2012, but they were much less successful in achieving cost
efficiency. Airlines with a higher market share achieved a relatively better pro-
duction efficiency. Airlines’ operation performance measured in terms of stage,
flying hours, and frequency showed a positive correlation with the production
efficiency and their statistical significance were very robust. The effect of airline
allianceswas,however,notprogressive.Airlinesizeshowedaprogressiveeffecton
thelevelofoutputefficiency,butlargerairlineswerenotmorecompetentthantheir
smaller counterparts with respect to cost efficiency.
OurmainfindingsshowthatcarriersbasedintheAsiaregionareingeneralmore
capableofachievingproductionefficiencythancarriersbasedinEuropeandNorth
America, but as regards cost efficiency, we could not establish the transcendence
oftheAsiancarriers.AirlinesinAsiaregionincludingPeople’sRepublicofChina
attained a remarkable gain in efficiency over time. The high performance and
growth achievers include CA (Air China), CZ (China Southern Airlines), and MU
v
vi Preface
(China Eastern Airlines)—in the case of production efficiency and GA (Garuda
Airlines) and SU (Aeroflot Russian Airlines)—in the case of cost efficiency.
Considering that the quality of human capital and level of education are rela-
tively high among the service staff of the airlines in this region, Asian carriers are
suggested to concentrate on enhancing the software with the maximum utilization
of skilled manpower, which will help airlines to attain premium brand value while
still keeping prices reasonably low. Asia, especially East Asia, now has a
well-developed, globally competitive manufacturing sector, but its service sector
still lags far behind that of the advanced economies. As such, competitiveness
analysis of the airline industry, one of the most important service industries, can
helpAsianpolicymakerstobetterpreparefortheliberalizationoftheservicesector,
which is expected to gain momentum in the coming years.
Acknowledgements
In the process of completing this book manuscript we have benefited from several
individuals support. In particular, the authors express their gratitude to two
anonymous referees and Mr. William Achauer, Editor at Springer for their con-
structive comments and suggestions which have improved the manuscript
significantly.
Dr. Jungsuk Kim’s heart is filled with gratitude for all the support that she has
received in the process of writing her Ph.D. thesis and this book. She offers her
sincerestgratitudetoProfs.Se-YoungAhnandYoonHeofortheirencouragement
and help in completing this book. She wishes to give a very exceptional thanks to
Prof. Insik Min and Dr. Donghyun Park who helped her with their unsurpassed
knowledge of economic theory and econometrics and Prof. Jacob Wood who
shapedthisbookwithhisexcellentandmeticulouscorrectionofthelanguage.She
is also especially grateful for the excellent support from Yangho Cho and Heather
Cho at Korean Air, who have, as always, given Dr. Jungsuk Kim a great deal of
supportthroughout,forwhichhermereexpressionofthankswouldnotbeenough.
Lastbutnotleast,shewouldliketoextendherutmostthanksandgratitudetoher
late sister, Jaehee Kim, for her support and encouragement throughout the process
beforeshedeceasedon2015.Sheisverymuchmissedbythefamily.Thisbookis
dedicated to her and her memory.
Almas Heshmati
Jungsuk Kim
vii
Contents
1 Introduction to Efficiency and Competitiveness of International
Airlines. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Overview of the Airline Industry. . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Background to Airlines’ Competitiveness . . . . . . . . . . . . . . . . . 4
1.3 The Conceptual Framework . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.4 The Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.5 Data and Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Appendix 1.1: US Carrier Exit and Entry Dates . . . . . . . . . . . . . . . . . 10
Appendix 1.2: Airlines and Countries . . . . . . . . . . . . . . . . . . . . . . . . 11
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2 Survey of Studies on Airlines and Their Efficiencies . . . . . . . . . . . . 15
2.1 Efficiency, Productivity, and Factor Use. . . . . . . . . . . . . . . . . . 15
2.1.1 Stochastic Frontier Production and Cost Functions. . . . . 17
2.1.2 Nonparametric Approaches. . . . . . . . . . . . . . . . . . . . . 19
2.1.3 Malmquist Productivity Analysis. . . . . . . . . . . . . . . . . 24
2.1.4 Other Performance Measurement Methods . . . . . . . . . . 25
2.2 Alliance Formation and Market Liberalization. . . . . . . . . . . . . . 28
2.3 Market Concentration, Market Power and Competition. . . . . . . . 30
2.4 Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.5 The Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Appendix 2.1: Summary of Productivity and Efficiency Studies . . . . . . 40
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3 A Review of the Airline Industry . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.1 Terms Related to Air Transportation . . . . . . . . . . . . . . . . . . . . 51
3.2 Industry Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
3.3 Growth of the Airline Industry . . . . . . . . . . . . . . . . . . . . . . . . 53
3.4 Cost Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.5 Airline Industry’s Central Role in Globalization. . . . . . . . . . . . . 55
3.6 Airlines’ Impact on Related Industries . . . . . . . . . . . . . . . . . . . 58
ix
x Contents
3.7 Issues of the Airline Industry . . . . . . . . . . . . . . . . . . . . . . . . . 59
3.8 Airlines’ Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3.8.1 The Factors Influencing Airlines’ Performance. . . . . . . . 60
3.8.2 Improving Performance Despite Difficult Conditions . . . 62
3.8.3 Productivity Enhancement. . . . . . . . . . . . . . . . . . . . . . 63
3.8.4 Liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.9 Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.10 Market Structure, Liberalization and Access . . . . . . . . . . . . . . . 65
3.10.1 Current Restrictions and Barriers. . . . . . . . . . . . . . . . . 65
3.11 Summary of the Airline Industry and Its Evolution . . . . . . . . . . 66
Appendix 3.1: The Chicago Convention. . . . . . . . . . . . . . . . . . . . . . . 66
Appendix 3.2: Freedoms of the Air. . . . . . . . . . . . . . . . . . . . . . . . . . 68
Appendix 3.3: Abbreviations and Their Definitions. . . . . . . . . . . . . . . 69
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
4 Stochastic Frontier Production Function Model Specification
and Estimation Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
4.2 Stochastic Frontier Production Function . . . . . . . . . . . . . . . . . . 76
4.3 Model Specification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.3.1 The Error Components Specification . . . . . . . . . . . . . . 78
4.3.2 The Technical Efficiency Effects Specification. . . . . . . . 79
4.4 Data and Variables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
4.5 Estimation and Analysis of Results . . . . . . . . . . . . . . . . . . . . . 89
4.5.1 Analysis of the Estimation Results. . . . . . . . . . . . . . . . 90
4.5.2 Airline Efficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
4.6 Summary and Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Appendix 4.1: Development of Different International Airline
Production Efficiency, 1998–2012 (EC Model) . . . . . . . . . . . . . . . . . . 114
Appendix 4.2: Development of Different International
Airline Production Efficiency, 1998–2012 (EE Model). . . . . . . . . . . . . 116
Appendix 4.3: Alliance Memberships and Market Data . . . . . . . . . . . . 118
Appendix 4.4: Correlation Matrix of Production Frontier
Model Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
5 Stochastic Frontier Cost Function Model Specification
and Estimation Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
5.2 Model Specification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
5.3 Data and Variables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
5.3.1 Operating Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
5.3.2 Explanatory Variables . . . . . . . . . . . . . . . . . . . . . . . . 129
5.3.3 Airlines’ Characteristics . . . . . . . . . . . . . . . . . . . . . . . 130
Contents xi
5.4 Estimation and Analysis of Results . . . . . . . . . . . . . . . . . . . . . 134
5.4.1 Analysis of the Estimation Results. . . . . . . . . . . . . . . . 134
5.4.2 Airline Efficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
5.5 Summary and Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Appendix 5.1: Development of Airline Cost Efficiency
Over Time Based on the EC Model Specification . . . . . . . . . . . . . . . . 157
Appendix 5.2: Development of Airline Cost Efficiency
Over Time Based on the EE Model Specification . . . . . . . . . . . . . . . . 159
Appendix 5.3: Correlation Matrix of the Determinants
of Cost Efficiency Effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
6 Summary, Conclusion, and Policy Recommendations . . . . . . . . . . . 165
6.1 Summary of Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
6.2 Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
6.2.1 Airlines Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
6.2.2 Market Share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
6.2.3 Airline Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
6.2.4 Domestic Competition . . . . . . . . . . . . . . . . . . . . . . . . 173
6.2.5 Regional Operation Effect. . . . . . . . . . . . . . . . . . . . . . 174
6.3 Limitations and Recommendations for Future Research . . . . . . . 174
6.4 Conclusion and Policy Recommendations. . . . . . . . . . . . . . . . . 175
Appendix 6.1: Mean of Air Liberalization Index (ALI)
by Countries, 1998–2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Appendix 6.2: Types of Air Services Agreements (ASA). . . . . . . . . . . 178
Appendix 6.3: Air Liberalization Index (ALI) Weighting Systems. . . . . 179
Appendix 6.4: Airlines with Within Airline Operating Status . . . . . . . . 180
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
Index of Authors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Index of Subjects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187