Productivity change of airlines: A global total factor productivity index with network structure

Airlines require more effective utilization of resources and pursuit of innovation in their operations in order to meet the challenges of rising competition, increased costs of operation, and reduced profit margins. Competitive advantage can be better understood through productivity analysis. The popular technique utilized in airline productivity literature, the geometric mean Malmquist productivity index, is non-circular, sensitive to infeasibility, and for adjacent period components it provides different measurements of change in productivity. Moreover, the network structure of an airline's internal operation arises because of the unstorable nature of airline services. This internal structure should be accounted for while assessing the productivity changes of airlines. To eschew the limitations of the geometric mean Malmquist productivity index and open the black box of an airline's process of operation, this paper develops a novel network data envelopment analysis-based global Malmquist productivity index to evaluate the change in productivity of global airlines based on the individual internal stages. The proposed method further decomposes the productivity change in two ways. One way decomposes the productivity change into efficiency change and technological change assuming constant returns to scale. Another way decomposes the productivity change into the pure technical efficiency change, pure technological change, and the contribution of economies of scale based on the variable returns to scale. The empirical results indicate that improvement in efficiency is the key source of the productivity gains of the overall system, the first stage, as well as the second stage. Furthermore, the productivity improvement of the first and second stages simultaneously drives the overall productivity progress. Most airlines experience productivity growth in the sample period.