Impact of operational performance on air carrier cost structure: Evidence from US airlines

The impact of operational performance on airline cost structure is empirically investigated using an aggregate, statistical cost estimation approach. Two distinct sets of operational performance metrics are developed and incorporated into the airline cost models as arguments. Results from estimating a variety of airline cost models reveal that both delay and schedule buffer are important cost drivers. We also find that flight activity outside schedule windows increases cost, whereas flight inactivity within schedule windows does not. Using the estimated cost models, we predict the cost savings to airlines of “perfect” operational performance, obtaining an estimate in the range of $7.1–13.5 billion for 2007.     

Race to the bottom or swimming upstream: Performance analysis of US airlines

Data envelopment analysis is used to examine inter-temporal and peer group airline efficiency. Results for the US for 1985–2006 indicate that airline performance is converging over time. In particular, airlines inter-temporal inefficiency peaked earlier and then converged. Furthermore, using Tobit specifications it is seen that while demand intensity matters less in determining airlines inter-temporal inefficiency, their influence is stronger in determining peer group inefficiency. Block time, a representative of operational factors, tends to negatively impact airlines efficiency by imposing burdens on airline operations. Among the structural cost and revenue factors, fuel cost tends to affect inter-temporal inefficiency more robustly than it does to peer group efficiency. Labor pay tends to reduce inefficiency in case of inter-temporal while increasing peer group inefficiency. The events of September 11th had little or no impact on inter-temporal inefficiency but tended to reduce peer group inefficiency in a significant way. Finally, airlines efficiency tends to be robustly affected by block hours; reducing them increases efficiency.     

The effects of corporate governance on airline performance: Production and marketing efficiency perspectives

This study explores the relationship between operating performance and corporate governance in 30 airline companies operating in the US. First, this study applies a two-stage Data Envelopment Analysis (DEA) to evaluate the production efficiency and marketing efficiency of the airlines. Our findings indicate that, in general, there is not as much dispersion in the relative productive efficiencies of the airlines as there is in their marketing efficiencies. The low-cost airlines, on average, are more efficient carriers than the full-service ones, but less efficient marketers. Secondly, truncated regression is used to explore whether the characteristics of corporate governance affect airline performance. The results demonstrate that corporate governance influences firm performance significantly. Finally, we address the managerial decision-making matrix and make suggestions to help airline managers improve performance.     

Competitive effects of the airlines-within-airlines strategy – Pricing and route entry patterns

This paper investigates the effects of the airlines-within-airlines strategy adopted by Qantas airline group, which simultaneously runs a full-service airline (Qantas Airways) and a low-cost carrier (Jetstar Airways). Our empirical investigation of airline pricing and route entry patterns in the Australian domestic market suggests that Jetstar has been used as a fighting brand against rival low cost carriers. Such a strategy increases group airlines’ prices at the expenses of rival airlines. There is preliminary evidence that pricing benefits to Qantas Group come from increased market power as well as service quality improvements.     

Performance evaluation for airlines including the consideration of financial ratios

Most previous studies concerning airline performance evaluation focus merely on operational performance. Financial performance, however, which might directly influence the survival of an airline is usually ignored. The absence of financial ratios will directly lead to biased assessment. This paper tries to construct a performance evaluation process for airlines with financial ratios taken into consideration. First, a conceptual framework is redeveloped, based on the one created by Fielding et al. to help form performance indicators involving both transportation and finance aspects. Second, to overcome the problems of small sample size and unknown distribution of samples, the grey relation analysis is used to select the representative indicators and the TOPSIS method is used for the outranking of airlines. Third, the organizational characteristics of an airline are used to divide the total performance into three major departments of an airline: production, marketing, and management. The division of total performance is helpful for operators to recognize the performance of a department of an airline and to identify the responsibility of a department. Finally, a case study is conducted using the example of Taiwan's five major airlines. The empirical result shows that performance evaluation for airlines can be more comprehensive, if financial ratios are considered.     

Multi-period efficiency and productivity changes in US domestic airlines

This study tracked the static efficiency and dynamic productivity changes of 14 US airlines from 2006 to 2015. Moreover, we estimated the principal economic drivers of the environmental variables to increase the US domestic airlines' efficiency using the double bootstrap regression analysis. The major aspects of this study are as follows: First, network legacy carriers have the highest efficiency, whereas low-cost carriers are lowest. Nonetheless, network legacy carriers still have room to improve scale inefficiency. Second, the fluctuations in technical change, rather than in efficiency change, tended to have greater effect on the fluctuation of Malmquist productivity index for US domestic airlines. Third, M&A between US airlines have both positive and negative effects in terms of efficiency and economies of scale. Fourth, cost environmental factors have a negative effect on US airlines' efficiency, while revenue factor is a positive effect. The results of this study may help US airline industry practitioners to understand the US domestic airline environment from an operator's perspective.     

Organizational learning,operating costs and airline consolidation policy in the Chinese airline industry

This study investigated and reviewed organizational learning in the Chinese airline industry, which is dominated by state-owned or state-controlled airlines. This empirical research focused on the extensive scale of airline mergers and acquisitions among 12 Chinese airlines for the period of 1996–2014. This research aims to make a contribution towards addressing the general lack of academic reflection on the impact of organizational learning on airline performance during and after the completion of mergers and acquisitions. The empirical findings of this paper suggested that there was, in general, organizational learning experienced by Chinese airlines from their prior operating experience in improving operating costs. However, airline mergers in 2001/02 increased airlines' average operating costs, as most state-owned airlines are notorious for poor cost management. Significantly, the performance improvement among Chinese airlines was found during the post-merger periods in this study, and the increase in Chinese airlines’ operating costs during the post-acquisition periods due to the limited integration of 2010 acquisition compared with the 2001/02 mergers.     

Airline cost changes: To what extent are they passed through to the passenger?

Since the start of the Millennium airline costs have been highly volatile, mainly due to large fluctuations in jet fuel prices. An important question for airlines and regulators is whether airlines are able to pass through cost changes to their prices. Little empirical evidence on the pass-through of costs exists. In this paper, we investigate which pass-through rates are most likely. According to economic theory, the pass-through of costs depends strongly on the type of cost increase (firm-specific or sector-wide) and market conditions (monopoly, oligopoly, perfect competition). In monopolistic markets, the shape of the demand curve also matters (linear, constant elasticity, log, power function). A pass-through rate of 100% is often assumed based on the reasoning that the aviation sector is highly competitive. We analyse market concentration in all airline markets in the world, and generally find a high level of concentration. Additionally, different airlines offer different products based on a variety of factors, including service, flight frequency, legroom, bags allowed on board, flight time and transfer time. Therefore, most aviation markets can be characterised as differentiated oligopolies. As airlines choose their quantities first (flight schedules) and adapt their prices to demand (yield management), we consider the Cournot model the best choice. In such markets, firmspecific cost changes will be passed through by a rate of less than half while sector-wide cost changes are passed through by a rate of more than half. In specific situations, the pass-through rate may be different. Examples are limited airport capacity (congestion), cross-subsidization, and the extent to which there is a level playing field.     

The European airline industry. A banker''s view

For those institutions which finance the aerospace industries, it is useful to estimate what the consequences will be of the present liberalisation process which has beset the European airline industry. Consequently ABN AMRO Bank is in the process of developing a model which analyses those factors which are crucial to the survival of an airline. These so called critical success factors appeared to be: financial strength, cost structure, domestic market, size of operations, internationalisation and political support. When we applied these factors to the European airline industry, we found that only a limited number of airlines stand a fair chance of surviving the anticipated restructuring process as an independent carrier. Several carriers will either have to merge with stronger partners or they face bankruptcy. Based on the critical success factors, the larger northern carriers enjoy the strongest positions. From amongst the southern airlines, those with a large domestic market and strong political support have a chance to survive, provided they will be able to adjust their cost structure in time.     

Evaluating the multi-period operating efficiency of international airports using data envelopment analysis and the Malmquist productivity index

For the most part, airports are publicly or semi-publicly owned and operated with fixed assets. As such, airports have been often considered little more than infrastructure providers for airlines. However, as airports have begun to offer a variety of ancillary services including passenger transfers, re-fueling, parking, and shopping, they no longer play second fiddle to airlines. To come into their own, a growing number of airports realized their need to develop competitive strategies that can attract more air traffic and generate greater revenue. Such strategies start with the assessment of their competitiveness in terms of operating efficiencies relative to others. To help airport authorities identify major drivers for enhancing the airport operational efficiency and the subsequent competitiveness, this paper evaluates the comparative efficiencies of international airports for a multi-year period (2006–2011) using data envelopment analysis intended for dynamic benchmarking and Malmquist productivity index built on time-series analysis. Our study indicates that the productivity of an airport was influenced by exogenous factors such as shifts in government policies and technological advances rather than endogenous factors driven by improvements in managerial practices.     

Balanced scorecard based performance measurement of European airlines using a hybrid multicriteria decision making approach under the fuzzy environment

The purpose of this study is to evaluate the performance of the European airlines, using a balanced scorecard perspective. Within this scope, a hybrid multi-criteria approach was used by combining the Fuzzy DEMATEL, Fuzzy ANP, and MOORA methods. The results demonstrate that customer dimensions and profit per customer are the most significant key factors in the balanced scorecard perspective. Additionally, the airline companies with the largest profit (per employee) and highest number of passengers and flights (per employee) had the best scores in the multidimensional performance results. Furthermore, the airline companies with the highest profitability and efficiency are more successful than other companies. Therefore, we recommend European airlines to focus on these aspects in order to improve their performance. This study makes an important contribution to literature by helping to solve a significant problem in the market with the proposed methodology.     

Aviation infrastructure performance and airline cost: a statistical cost estimation approach

The relationship between the performance of the US National Airspace System (NAS) and airline costs is examined by estimating airline cost functions that include NAS performance metrics as arguments, using quarterly data for 10 US domestic airlines. Performance metrics that vary by airline and quarter are developed by applying principal component analysis to seven underlying variables, including average delay, delay variance, and the proportion of flights that is cancelled. This analysis reveals that variation in the seven variables can be adequately captured by three or fewer factors, which we term NAS performance factors. If three factors are used, they can be interpretted as “delay”, “variability”, and “disruption”, the latter two of which are merged into a single “irregularity” factor in the two-factor model. Cost function estimation results confirm the anticipated link between NAS performance and airline cost. In the cost models with two and three performance factors, the irregularity and disruption factors are found to have the strongest cost impacts. These results challenge the prevailing assumption that delay reduction is the most important benefit from NAS enhancements. Using the estimated cost models, we predict airline cost savings from substantially improved NAS performance in the range $1–4 billion annually.     

Transformation of India's Domestic Airlines: A case study of Indian Airlines, Jet Airways, Air Sahara and Air Deccan

India, home to one-sixth of the world's population, is becoming one of the world's economic engines. Its bureaucratic and outdated regulatory policies have been reformed resulting in a three-fold increase in the number of scheduled airlines and a five-fold increase in the number of aircraft operated. This paper reviews how the new regulatory roadmap has transformed the supply of domestic air services. A large passenger survey conducted in Mumbai investigated the sensitivity of passengers to a change in fare and which flight products would encourage them to select either a full service airline or a low cost carrier. The study finds that there is a homogenous set of flight products required by leisure passengers, travelling on both full service and low cost airlines, however there is a considerable dissimilarity overall between the requirements of passengers using a full service airline and a low cost carrier.     

Rivalry amongst European low cost airlines: Are shareholders enjoying the game?

We develop a model of quantity and price competition for low cost airlines based on announcements of new routes and their impacts on the announcer and on its rival. We find that both firms’ profits may rise or fall as a result of an announcement of new routes, depending on launching costs for the announcer, and on whether market expansion or market substitution is dominant for the rival. We present an empirical study for two European low cost airlines that shows asymmetric behaviour; while EasyJet announcements have positive effects on Ryanair’s share price, the opposite is does not occur. This suggests that an airline’s reputation for reacting in response to rivals’ announcements may affect the stock market and may thus affect announcement behaviour.     

Impact of e-business on air travel markets: Distribution of airline tickets in Korea

Early e-business activity in the airline industry was limited to the provision of flight schedule information to customers on websites. Recently, however, many airlines have expanded the capability of their web sites for selling tickets to make use of this cheap distribution channel. Here, we explore the impacts of airline e-business on the performance of air ticket distribution channels. Through a conjoint analysis, we suggest a model to estimate the change of market sales for each distribution channel. The impact of e-business on air travel markets and some implications on e-business strategy for both airlines and travel agents are also identified through an empirical survey.     

Cost and revenue synergies in airline mergers – Examining geographical differences

Deregulation, privatization and shifting demand patterns in the airline industry, combined with the emergence of low-cost airlines and rising fuel prices have increased the competitive pressure on legacy airlines. Since alliances do not deliver sufficient benefits to counterbalance these trends, many airlines have engaged in mergers to seek for additional cost and revenue synergies. An extent body of literature investigates the synergy potential in mergers and alliances, but there is no study on how synergies differ among mergers and what potential influence factors cause these differences. This paper aims at explaining differences in synergy estimates and realized synergies in recent airline mergers and places a special focus on geographical influence factors.The research methodology uses a comparative case study comprising six large airline mergers between 2003 and 2012 from Europe, North America and Latin America. After analyzing the cases individually, the pre-merger situation of the merging airlines, the synergy estimates and the realized synergies of the cases were compared.The results show considerable geographical differences in pre-merger cost structures, synergy estimates, and synergy realization. The European mergers present lower synergy estimates but also lower integration costs than mergers in the Americas. Whereas European airlines estimate cost synergies higher than revenue synergies, both North and Latin American airlines expect more revenue synergies than cost synergies from airline mergers. Only one merger showed superior post-merger profitability which indicates that the achieved synergies in the broad majority of the cases are insignificant.     

The evolving landscape of Chinese aviation policies and impact of a deregulating environment on Chinese carriers

This paper examines the recent developments of China’s aviation polices focusing on airline consolidation, the opening up of the domestic aviation market, and the adoption of more liberal international aviation policy. It then goes onto assess the impacts of the above policies on the industry structure, the performance of major airlines, and the competitiveness of Chinese airlines in international markets. The study shows that the industry became more competitive following the opening up of the domestic aviation market. Although major airlines saw an increase in passenger volume and an improvement in load factors, the falling yield and rising costs make them difficult to grow profitably. Moreover, Chinese airlines largely failed to capitalise on building an international network and the majors were weak in international competition. Strategic use of aviation policy to build a strong and profitable airline industry is still a formidable task lying ahead for policymakers.     

Drivers and barriers to online airline ticket purchasing

Although online sales of airline tickets are growing, many travellers are still reluctant to use the web as a purchase channel. Given the cost advantages of online sales for airlines, it is useful for them to know the main drivers and barriers affecting the use of the Internet to purchase tickets. This study analyses the influence of risk, perceived usefulness and perceived ease of use on the airline ticket online purchase intention. The results of a survey show that perceived purchase risk and perceived usefulness exercise a direct influence on airline ticket purchasing intentions, while perceived ease of use has an indirect influence through perceived usefulness. Psychological risk, performance risk and privacy risk are the predominant perceived risk dimensions in airline tickets purchase, whereas social risk and time loss risk are negligible.     

Dynamic carbon emission performance of Chinese airlines: A global Malmquist index analysis

Monitoring the carbon emission performance of Chinese airlines helps inform targeted carbon-reduction policies. This paper proposes a global Malmquist carbon emission performance index (GMCPI), which can measure dynamic changes in total factor carbon emissions performance over time using a production frontier framework. The study then applied the proposed index to evaluate carbon emission performance of 12 Chinese airlines from 2007 to 2013; the study also proposed bootstrapping GMCPI to perform statistical inferences on the GMCPI results. The empirical study generated in three meaningful findings. First, the carbon emission performance of the airlines improved by 11.93%, mainly through technological progress. Second, there were carbon emission performance differences among three different airline types; there was also a convergence of carbon emission performance. Third, the most important factor influencing carbon emission performance was the air routes distribution. Chinese airlines should consider improving carbon emission performance further, by establishing an evaluation system, enhancing communication and coordination among different airlines, adjusting the scale of airline development, and optimizing the air routes distribution.     

Management emphasis and performance in the airline industry: an exploratory multilevel analysis

Carrying through decisions in organisations is inherently micro-level, while the aggregated performance implication of decisions is a macro-level phenomena. This paper determines through exploratory factor analysis, factors associated with airline performance using a two-level bottom–up hierarchical approach. The determinant factors are used to test, through regression analysis, the relationship across lower and higher level factors and between the higher level factors and performance (distress versus non-distress). The results showed that airlines having higher relative score on productivity and brand image were less likely to be under financial distress, while airlines having higher relative emphasis on market power were more likely to be under financial distress.