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Title: Efficiency in the U.S. airline industry
Author: Roberts, Cheryl Mae
Awarding Body: University of Leeds
Current Institution: University of Leeds
Date of Award: 2014
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The first stage of the transformation of the airline industry appeared with the Airline Deregulation Act of 1978. Post-deregulation, new carriers have emerged and new routes have opened up which connected cities never previously linked by a direct flight. The performance of airline carriers is now a subject of central debate. With competition having increased in many airline markets across the world, and now being at an all-time high, demand for premium travel services (particularly first-class seating) has suffered a significant decline. In addition, the rapid expansion of low cost carriers (LCCs) has drastically altered the nature of competition within the traditional airline industry (Brueckner et al., 2013). This is particularly the case on shorter-haul routes and has caused regional airlines to react or (in some cases) to fail. Rising labour costs and fluctuating fuel prices impact all airlines. Fuel is now approximately 30-40% of airlines costs (Zou and Hansen, 2012), compared to 13% in 2001. The significant rise and ongoing volatility in jet fuel costs further complicates the situation where the strategic response can take many forms, but all involve improving cost efficiency. More than at any time in the past, this has made efficiency a top priority for airline management (Merkert and Hensher, 2011). While cost management has always been an important part of airline administration, in recent years it has become a crucial part of the airline survival strategy. In the decade following the September 11th attacks in 2001, U.S. airlines have shown considerable resilience (all of the legacy carriers have received government support and have undergone restructuring); with most having recently been able to improve their financial position and return to profitability as a result of significant consolidation and capacity discipline (IATA, 2014). However, it remains too early to tell if more airlines have yet to face financial difficulties or will be forced into further merger and acquisition activity. While initiatives to reduce costs are not unusual in the course of economic recessions, the efforts carried out by the airline industry have been considered extreme. These efforts have included scaling back workforces, changes to service and wage reductions from employee groups. Furthermore, these airlines have had to restructure themselves considerably, financially as well as operationally, regardless of whether they pursued bankruptcy protection or not. There is a lack of information on cost efficiency over a longer, more recent time scale, and that it is required for a larger number of airlines. This thesis seeks to fill this gap in a number of ways. First, it extends the limited literature available on Stochastic Frontier Analysis of airline efficiency in more recent years. Second, it will be applying SFA to a much larger panel of passenger airlines over a longer time frame than has been previously studied. With a focus on a wider and more recent period, this provides a renewed efficiency valuation of the U.S. airline industry. In each analysis, the inclusion of environmental variables, which are not always included in previous frontier studies, is analysed. As noted by Lee and Worthington (2014), few studies of airline performance currently account for environmental variables. Therefore, findings should offer an updated and clear link between airline performance and industry characteristics during this time. It is also important to understand what operational measures airlines should adopt in order to remain competitive in the market and to perform well under turbulent market conditions. The thesis further seeks to analyse the impact of fleet planning and strategic management decisions on airline efficiency comparing data envelopment analysis (DEA) and stochastic frontier analysis (SFA) results. In this way, both methods can be compared in terms of estimates and also robustness. Finally, to the current day, the literature on cost structure, efficiency and economies of density/returns to scale of the air cargo industry remain sparse. Most of the literature on cargo airlines has been developed following studies that relate to the passenger airline literature. Research dedicated to cost structure analysis of the air cargo industry is limited due to the lack of structured data on cargo carriers, and more specifically, about integrators.
Supervisor: Reilly, Kevin ; Smith, Andrew ; Carter, Martin Sponsor: White Rose DTC
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available