Transportation Research Part E 40 (2004) 439442

www.elsevier.com/locate/tre

Editorial

Eciency and performance measurement

in the air transportation industry

In less than two decades air transportation has seen two deep recessions with record nancial
losses of airlines. The vulnerability of the industry to external shocks is out of the ordinary. The
whole industry is seriously aected when demand for air transport services decline. Yet, despite
some catastrophic events and cyclicality in the economy, some companies in the industry have
achieved good performance and faired better than others, even during economic downturns.
Therefore, it probably is a good time to bring in a special issue covering performance of airlines
and airports, especially after one of the worst periods in the air transport history. In this volume,
we are pleased to introduce ve selected papers dealing with various aspects of airline and airport
performance, which were presented initially at the Air Transport Research Societys World Con-
ference. Before describing each of these ve papers, we would like to give a brief background to
the articles covered in this special issue.
In regulated air transportation markets, nancial sustainability was in many cases guaranteed
through cost-plus pricing mechanisms or government capital injections when needed. European
liberalization has been especially hard pressed on the latter aspect although one can assert now
that the European Community policy of prohibiting such government subsidies is eectively en-
forced. In the United States airlines have been subject to market forces since the 1978 deregulation
of domestic airline markets, and the major trunk (legacy) airlines have lost market share fairly
steadily since then. 1 For Europe, cross-border mergers and acquisitions during troubled times
to fend o competition intensity or economize on scale, scope or density has proven a dicult
tool. Each country has its own distinctive culture and each country is still governing its own
air services agreements (ASAs), which specify national origin of serving airlines; thus, making

1
There were some increase in market shares of the schedule full service (legacy) carriers in the 198688 period
because the Reagan Administration allowed 14 airline mergers which includes a number of mergers between the
scheduled trunk carriers and local and independent carriers during the mid-1980s (see, Kim and Singal (1993). Merger
and Market Power: The Evidence from the Airline Industry, American Economic Review, vol. 82, no. 3 (June), 549
569).

1366-5545/$ - see front matter 2004 Published by Elsevier Ltd.

doi:10.1016/j.tre.2004.08.001
440 Editorial / Transportation Research Part E 40 (2004) 439442

it necessary for cross-border merged airlines to operate as separate entities in order to exercise y-
ing rights according to each countrys respective ASAs. As a result, European carriers have been
more prone in the past to utilize alliances to achieve economies in operations. However, neither
mergers/acquisitions nor alliances on their own have proven adequate as tools to battle the enor-
mous shifts in protability we have observed decade after decade.
Industry downturns have usually been explained by external factors such as economic reces-
sions, conicts of war, terrorism, rising oil prices and interest rates. Following the terrorist events
in September 2001 and the resulting deep recession, the industry has looked for sustainable strat-
egies, questioning its traditional business models. Extraordinary events and economic cyclicality
are certainties, which industry businesses need to plan for more eectively in order to secure
industry protability. There will always be good performers and not so good performers. The rst
question that burns most managers is how to eectively increase margins through productivity
improvement, costs control and better pricing via revenue management. The second question
pressing airline managers could be how to pursue controlled growth and avoid following the eco-
nomic cycles too closely? Due to the sophistication of consumer demand and many other reasons
the same approaches cannot be used for all segment lengths, all customers or all regions of the
world. Although business model simplication will perhaps be the buzz words in airline manage-
ment during this decade, we wonder if this decade also spells the end of the one for all type of
carriers. The low-cost carriers have bounced back after their initial rapid growth and then slow-
down in the mid-1980s. At the same time, we see on the horizon new low cost concepts for net-
work carriers while some of the high service high quality carriers steered eectively through the
recession and low cost carriers attacks. In this special issue, rather than attempting to present re-
search on all facets of the industry performance, we hope to bring up sharper questions concern-
ing the important issue of how to foster sustained protability by reviewing selective papers
presented at the Air Transport Research Societys (ATRS) 2003 Annual Conference held in Tou-
louse, France. 2
We are pleased to include in this special issue the ve articles selected, via a rigorous referring
process, from the list of papers presented at the ATRS Conference. These papers cover one or
more facets of airline and/or airport performance: measurement, management and regulatory
issues.
The airline part contains three articles. The rst paper links management emphasis in airlines
established after deregulation or liberalization of air transport markets with distress and non-dis-
tress. The second article examines regulatory performance pertaining to the regulators reaction to
high proportion of monopoly routes in a liberalized market. The third article focuses on airlines
optimal fare and service oerings. The airport part consists of two articles. The rst one measures
the variable factor productivities (VFP) of 76 major airports in order to compare them on their
operating eciency. The second article takes a focused approach by examining investment per-
formance in the Japanese airport system.
In the rst paper, Gudmundsson presents ndings pertinent to airline performance using a
combination of factor analysis, multiple linear regression and logistics regression. The study uses
cross-sectional longitudinal approach based on two management surveys among new-entrant air-

2
One paper was presented in an earlier ATRS Conference.
 Editorial / Transportation Research Part E 40 (2004) 439442 441

lines, given in 1993 and 1998, where managers were asked to rate the emphasis placed on several
management factors in their airlines. Establishing relationship between management emphasis
and performance using empirical data is an under-researched eld in air transport. Gudmundsson
nds that a signicant positive statistical link between the high-level factors labeled productivity
and brand image orientation and the rms non-distress, while market-power orientation is linked
to distressed airlines.
Villemeur examines in his article regulatory performance in deregulated markets. In spite of lib-
eralization in EU air transportation there is still limited competition in majority of markets, point-
ing to high degree of market-power of key players in the industry. The author, thus, underlines
that evidence supports regulation in order to facilitate competition in certain markets. The author
points out that regulation reducing rent in monopoly markets would reduce cross-subsidies across
markets and correct for unfair competition. Liberalization of markets has usually been assumed
to provide an opportunity for carriers to adjust supply to demand and operate freely in any mar-
ket. It is certainly not given that re-regulation should not be considered in situations where mar-
ket-power is exercised in monopoly markets. To revert back to such discussions can only
strengthen the liberalization process of air transportation around the world.
Tournut examines solutions on the supply-side to deal with air trac growth and congested
airports, such as new routes through secondary airports. However, Tournut asserts, and rightly
so, that such development will increase the proportion of route monopolies. He presents a case
of a non-linear pricing of an airline which operates two routes and faces heterogeneous popula-
tion of buyers who are characterized by their demand of services on each route. The chief con-
tribution of this article is to demonstrate the allocation of surplus and solutions for maximizing
the virtual surplus in the pure and almost pure cases. Tournut shows that the airline optimal lin-
ear pricing mechanism requires three or four allocations of services on two routes for two de-
mand levels.
Oum and Yu introduce the reader the ATRS Global Airport Benchmarking Project and the
highlights of their ndings in the 2003 Annual Benchmarking Report (Air Transport Research
Society, 2003). The project is carried out by a task force of eleven academics with strong expertise
in the eld of airport economics and/or performance measurement. The ATRS Benchmarking
Project measures several important facets of airport management such as productivities, produc-
tive eciency, input prices, unit costs, cost competitiveness and nancial results. In the paper pre-
sented here they use mainly the variable factor productivity (VFP) in order to compare and rank
operating eciency of 76 major airports around the world, after removing the eects of the factors
beyond managerial control such as airport size, percentage of international passengers, etc. The
ATRS Airport Performance Benchmarking Project is the most wide-ranging and comprehensive
performance measurement project for airports in existence. We hope that this article drawn from
the projects extensive scope and methodology development will give the reader an interesting
oversight of airport rankings and performance measurement.
Yoshida and Fujimoto apply two distinctive methods to estimate the non-nancial eciency of
airports in Japan: data envelopment analysis (DEA) and endogenous-weight total factor produc-
tivity (EW-TFP). The chief objective of the paper is to assess the investment eciency in the
Japanese airport system. The article concludes that there has been overinvestment in small regio-
nal airports at the point in time covered by the data. However, the authors do point out that
investment in transportation infrastructure takes long time to attract enough demand to reach
442 Editorial / Transportation Research Part E 40 (2004) 439442

eciency, an observation in line with generally accepted principles of airport design where long-
term forecasts usually guide investment decisions.
This special issue has covered several crucial issues of air transportation performance. We, the
guest editors, hope that readers gain much additional insights to the performance issue in air
transportation. In closing, we call for added research eort into air transportation performance.
With the added complexity of the industry environment and the need to address this issue eec-
tively, academic research with strong industry participation plays a key role.

References

Air Transport Research Society, 2003. Airport Benchmarking Report: Global Standards for Airport Excellence, Parts
I, II, and III, published by the Centre for Transportation Studies, University of British Columbia, Vancouver,
Canada; http://www.atrsworld.org.
Kim, E.H., Singal, V., 1993. Merger and market power: the evidence from the airline industry. American Economic
Review 82 (3), 549569.

Sveinn Gudmundsson
Toulouse Business School, France
E-mail address: s.gudmundsson@esc-toulouse.fr
Tae Hoon Oum
University of British Columbia
Canada