Policy Implications of Airline Performance Indicators

Abstract

This research measured and compared the productivity and cost competitiveness of nine major North American carriers during the period 1990 to 2007. The research resulted in several key findings. First, the airlines' productivity levels, measured either by total factor productivity or residual total factor productivity (RTFP), significantly improved over the study period, especially after 2003. Second, airlines' productivity levels were correlated with the overall economic cycle. The Gulf War and the September 11, 2001, terrorist attacks clearly affected airlines' productivity levels in the early 1990s and in 2001 and 2002, respectively. However, neither level made a significant impact on the overall trend of productivity change. Third, no evidence suggested that the airlines' productivity levels were converging, although they served significantly overlapping markets. Fourth, labor costs were the most important determinant of airlines' cost competitiveness during the study period. Restructuring efforts by these airlines are necessary and helpful, but good control of labor costs will still be important. Fifth, airlines with more aggressive fleet expansion levels than the industry average suffered a decrease in productivity. The airlines should, therefore, consider growth strategy more carefully. Sixth, significant efficiency gains in recent years have largely been offset by the sharp increase in fuel prices. This limits the airlines' ability to stimulate traffic growth via a substantial price reduction. Last, preliminary evidence showed that bankruptcy protection during the sample period allowed the filing airlines to improve their RTFPs more than the industry average.