Persistent and Transient Efficiency of International Airlines

This paper examines the efficiency of international airlines for the period 1998-2012 by using stochastic frontier panel data models. It estimates a four-component random error cost model for multi-output airline services, separating passenger and goods transportation at the national and international levels. The model distinguishes between firm heterogeneity, time-invariant persistent inefficiency, as well as transient (time-variant) inefficiency and random error components. This model is compared with two other models in which one of the four components is missing. All the models are estimated by using the maximum likelihood method. The models produce persistent, transient and overall efficiency for each airline and time period. The outcomes indicate that the four-component model has an advantage over the traditional panel data approach of separating airline heterogeneity and time-invariant inefficiency effects. The mean and dispersion of cost efficiency amongst airlines differ by model specifications and according to their geographical area of operations. The performance difference may be a consequence of different market structures and deregulation processes, and of specific competitive conditions such as resource availability and strategic alliances with competitors. The results confirm that in general the airlines are not able to achieve full cost efficiency. We find that carriers based in the Asia region are more efficient than carriers based in the European and North American regions. The bigger airlines are unable to take advantage of economies of scale and are not more efficient than their smaller counterparts.