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Operational
The operational performance of performance of
UK airlines: 2002-2007 UK airlines
A. George Assaf
University of Massachusetts-Amherst, Amherst, Massachusetts, USA, and 5
Alexander Josiassen
The Centre for Tourism and Services Research (CTSR), Victoria University, Received 13 January 2009
Accepted 2 November 2009
Melbourne, Australia

Abstract
Purpose – The purpose of this paper is to measure the efficiency of UK airlines in light of all the
recent industry challenges.
Design/methodology/approach – The study measured the technical efficiency of airlines through
the innovative data envelopment analysis (DEA) bootstrap methodology.
Findings – Results based on a sample of recent input/output data indicated that the efficiency of UK
airlines has continuously declined since 2004 to reach a value of 73.39 per cent in 2007. Factors which
were found to be significantly and positively related to technical efficiency variations include airline
size and load factor. The paper also highlights that factors such as increase in oil price and fierce
market competition were also potential inefficiency determinants.
Practical implications – The findings of this paper provide a fresh link between airline
performance and the current industry characteristics. UK airlines also have a major role in the
European and international aviation sector, and thus a reflection on their efficiency could be of interest
to private and public policy makers.
Originality/value – The paper focuses on a recent period and thus provide a fresh efficiency
assessment of the airline industry. The study also extends the limited literature available on UK
airlines.
Keywords Airlines, Performance management, Data analysis, United Kingdom
Paper type Research paper

1. Introduction
Recent industry reports from the UK and international airline associations have
warned that airlines currently face a threatening period of major financial losses
following the last four years increase in oil prices. The predicted global loss in 2008
was around $2.3 billion and latest figures from the International Air Transport
Association (IATA) also indicated that the financial losses could even exceed the $6
billion dollars in the near future if oil prices stay high (Robertson, 2008a). The president
of IATA described the global situation as “desperate” and indicated that in early 2008
around 24 airlines have gone out business. Figures from the US, for example, indicated
that in the first quarter of 2008, United Airlines lost around $537 million, American lost
$328 million, and Northwest lost $191 million (Wilber, 2008; Robertson, 2008b). Other
airlines such as Continental and JetBlue have also suffered major losses. In the UK, Journal of Economic Studies
Vol. 38 No. 1, 2011
airline analysts expected that airlines might face considerable challenges in the near pp. 5-16
future. British Airways for example predicted a profit reduction of £250 million in 2008 q Emerald Group Publishing Limited
0144-3585
(Robertson, 2008b). DOI 10.1108/01443581111096114
JES In the literature, the link between performance and profit was well established. It is
38,1 hypothesised that with a sharp drop in profits only the high performing airlines will
survive. Airlines are currently adopting cost-reduction strategies and IATA predicted
that airlines will be forced to increase their prices in the near future (Fleming, 2008).
Thus, the need for high performance takes an additional importance within the current
market challenges.
6 In this study, we were driven by all the above-mentioned factors and the major aim
was to reflect the efficiency standing of UK airlines in light of all the recent market
challenges. Another aim of this study was to determine those factors that explain the
sources of efficiency variations between airlines. We focused on UK airlines because of
their international market power; however the findings could also be generalised to
reflect the link between performance and current industry characteristics. The
methodology used in this study also aimed to improve the accuracy in modeling the
performance of airlines. We introduced the innovative data envelopment analysis
(DEA) bootstrap methodology. Traditional methods used in the airline and airport
efficiency research were the traditional DEA or stochastic frontier analysis (SFA). One
of the major limitations of DEA is that it is a deterministic technique and thus does not
account for measurement error in deriving the efficiency measures. SFA was again
subject to criticism, as it requires a pre-specification of the functional form in the
estimation of cost or production frontier technologies. SFA also requires larger sample
size than DEA. On the other hand, it is possible with the DEA bootstrap to keep the
flexibility of DEA and also obtain statistical properties of the efficiency scores. Data
used in the analysis range from 2002 to 2007 and covered 15 airlines. More details on
the literature, methodology, variable used, results and discussions are provided in the
next four sections of the paper.

2. Literature review
Studies on airline frontier models are generally limited and outdated and clearly
indicate the need for additional evidences and implications on the efficiency
characteristics of the airline industry. None of the available studies has focused purely
on UK airlines, but many studies have analysed the performance North American
airlines and in some cases compared the performance of European, and Asia Pacific
airlines. North American airlines usually appeared to be the most efficient (Oum and
Yu, 1995). In a recent study, it was also confirmed that US and European airlines were
more efficient than Asia Pacific airlines (Barbott et al., 2008).
In general, most studies have also followed traditional approaches in the analysis of
efficiency. However, in most cases these studies have addressed the limitations of
simple partial productivity measurements by incorporating multiple inputs/output as
well as environmental variables in the analysis of efficiency. Some of the most common
input/output variables are illustrated in Table I. The more common environmental
variables are the average load factor and airline size, which in most cases have been
found to play a positive role in improving airlines performance (Caves et al., 1984;
Coelli et al., 1999). Other variables in the same category are float characteristics like the
average speed and size of aircraft.
Some of the methodologies used in these studies include the traditional SFA model
(e.g. Caves et al., 1984; Baltagi et al., 1995), the DEA-based Malmquist approach
(Barbott et al., 2008), and the traditional DEA models (Good et al., 1995). As mentioned
 Operational
Study Inputs Outputs Other variables
performance of
Coelli et al. (1999) Labour, capital TKA Load factor, aircraft capacity UK airlines
Ahn et al. (1997) Labour, materials, fuel Revenue Load factor, aircraft size
Good et al. (1995) Labour, materials, planes Revenue Load factor, network size
Baltagi et al. (1995) Capital, labour TKA Load factor, aircraft size,
hubs, mergers 7
Cornwell et al. (1990) Labour index, materials, TKA Stage length, service quality,
energy, capital expenses seasonality Table I.
Schmidt and Sickles (1984) Labour index, materials, TKA Size, load factor Overview of existing
energy, capital expenses studies

before, all these methodologies suffer from common limitations. The main limitation of
DEA is that it is a non-statistical technique and thus treats all measurement error as
sources of inefficiency, while the main limitation of SFA is that it requires a
pre-specification of the functional form in the estimation of cost or production frontier
technologies. In this context, the use of the bootstrap approach in this study is therefore
considered an innovation as it takes into account the limitations of both the DEA and
SFA methods. The findings are consequently expected to be more accurate and as a
result provide a more solid ground for policy implications. More details about the
advantages of the bootstrap approach are provided in later sections.

3. Data
The data selection process started with a detailed review of the existing studies in the
literature. Guidance from experts in the area was also helpful in confirming the list of
variables selected. Data were collected directly from the “Civil Aviation Authority” and
consisted of 15 major UK airline companies during the period 2002-2007 (90
observations). The authority collects data using the same criteria of the International
Civil Aviation Organisation (ICAO).
On the output side, two variables are used namely, “TKA” or tonne kilometres
available and total operational revenues. TKA is a reflection on two airline outputs:
passenger service and cargo operation and is calculated by multiplying the number of
tonnes available for the carriage of revenue load (passengers, freight and mail) on each
flight by the flight distance. The “total operational revenues” (sum of aeronautical and
non-aeronautical revenues) was also used in previous studies (Ahn et al., 1997; Good
et al., 1995), and is strong indicator of overall performance. On the inputs side three
inputs were selected namely labour expenses (total expenditure for the salaries and
allowances of all employees), aircraft fuel and oil expenses (includes fuel,
de-mineralised water and water methanol consumed), and aircraft value[1] (total
financial value of aircraft minus depreciation).
In order to account for the sources of efficiency changes, we have also regressed
DEA on two environmental variables, namely load factor and airline size. Load factor
(defined as the ratio of performed tonne-kilometres to available tonne kilometres) was
used to account for the environment in which the airlines operate. As mentioned in the
literature review, this variable was used in several related studies (Coelli et al., 1999;
Ahn et al., 1997), and it is considered as a measure of market demand. Airlines
operating with a high load factor coefficient would expect to have a stronger demand,
JES and thus consequently a higher production/efficiency. The identification of airline size
38,1 was based on the percentage share of each airline in the total kilometres performed by
all UK airlines[2]. It is hypothesised that larger are more productive, as these airlines
usually possess stronger economies of scale and more flexible access to technology and
innovation. The descriptive statistics of all variables are listed in Table II. In the next
section we describe in detail the methodology used in the paper.
8
4. DEA and the bootstrap
4.1 Data envelopment analysis
DEA is one of the most popular methods to estimate technical efficiency (for some
applications refer to Barros, 2004; and Goncharuk, 2007). It aims to define a frontier
envelopment surface for all sample observations. The frontier is a representation of all
the efficient firms. Firms that do not lie on that surface can be considered as inefficient
and an individual efficiency score will be calculated for each one of them. The output
oriented DEA efficiency estimator d^i can be simply derived by solving the following
linear programming:
(
)

Xn Xn Xn
^
^
di ¼ max d . 0
di yi # yi l; xi $ xi l; l ¼ 1; l $ 0 ;
d^i ;l
i¼1 i¼1 i¼1 ð1Þ
i ¼ 1 . . . n airlines

where yi is vector of airline outputs, xi is s vector of airline inputs, l is a I £ 1 vector of

constants. The value of d^i obtained is the technical efficiency score for the i-th firm. A
measure of d^i ¼ 1 indicates that the airline is technically efficient, and inefficient if
d^i . 1. This linear programming problem must be solved n times, once for each airline
in the sample.
Note that the DEA model can also be estimated using either the constant return to
scale (CRS)[3] or variable return to scale (VRS) assumptions and the shape of the
frontier will differ depending on the scale assumptions that underline the model. In this
paper we mainly rely on the VRS assumption, as the CRS[4] is only correct as long as it
is appropriate to assume that airlines are operating at an optimal level of scale.
However, given the recent market condition and the high level of competition in the
sector, it is safer to expect that airlines might not be operating at an optimal level of
scale. Note that the VRS model has also the advantage of ensuring that an inefficient
airline is only compared against
P those airlines of similar size. This is achieved through
the convexity constraint ni¼1 l ¼ 1, which is not imposed in the CRS case.

Variable n Mean SD Min Max

TKA 90 2809542867 5197060693 19946000 12516000000

Total operational revenues (£) 90 914045511 166422193 16538000 7609755000
Labour cost (£) 90 72574533 136431496 1384000 722509000
Table II. Fuel cost (£) 90 155359444 301960425 353000 1856853000
Descriptive statistics of Aircraft value (£) 90 667228033 205300722 492000 1004300000
the data Load factor (%) 90 60.89 16.95 33.40 90.90
4.2 The bootstrap Operational
While the above DEA model is relatively simple to estimate, it has long been criticised performance of
for being a non-statistical or deterministic technique, given that it does not allow for
random error in the estimation of efficiency. Some researchers try to avoid this problem UK airlines
by using parametric techniques that have the advantage of allowing for random error;
however, these techniques impose a particular functional form that predetermines the
shape of the efficient technology or frontier. DEA, on the other hand, tends to envelop 9
the data more closely. Simar and Wilson (1998, 1999, 2000) have recently discussed that
it is possible to maintain the interesting features of DEA, and also obtain statistical
properties via the use of the “bootstrap” approach. When applied to DEA, the bootstrap
allows the construction of confidences intervals, thus making it possible to obtain
statistical properties of the efficiency estimates and also perform some hypotheses
testing.
The basic idea of bootstrapping is to approximate the distribution of the estimator
via re-sampling and recalculation of the parameter of interest, which in our case is the
DEA efficiency score. The bootstrap procedure can also be extended to account for the
impact of environmental variables[5] on efficiency. For example, if we take the
following model:

d^i ¼ zi b þ 1i ð2Þ
where zi is a vector of management related variables which is expected to affect the
efficiency of firms under consideration and b refers to a vector of parameters with
some statistical noise 1i . A popular procedure in the literature is to use the ordinarily
least square (OLS) regression to estimate this relationship. However, as described in
Simar and Wilson (2007), this might lead to two main problems. First, the of efficiency
scores estimated by DEA are expected to be correlated with each other, as the
calculation of efficiency of one firm incorporates observation of all other firms in the
same data set. Therefore, direct regression analysis is invalid because of the
dependency of the efficiency scores. Similarly, in small samples, a strong correlation is
expected between the input/output variables and environmental variables, therefore,
violating the regression assumption that 1i are independent of zi .
To overcome these problems we use in this paper the double bootstrapping
procedure, proposed by Simar and Wilson (2007), in which the bootstrap estimators are
substituted from the estimators in the regression stage to calculate the standard error
of the estimates. The procedure produces, with bias corrected estimates of d^i valid
estimates for the parameters in the second stage regression. For more details on the
bootstrap procedure used in this stage refer to Simar and Wilson (2007).

5. Results and discussions

The VRS technical efficiency estimates of the different UK airlines, obtained from
2000[6] bootstrap iterations are reported in Table III. As the results indicate, the
average technical efficiency follows two different patterns. From 2002 to 2004 there
was a strong increase in the average technical efficiency from 78.36 to 85.20 per cent,
while from 2005, the average technical efficiency started to decline to reach its lowest
level of 73.39 per cent in 2007. Some of the lowest performing airlines in that year
include First Choice, Monarch, and Jet 2, while some of the highest performing airlines
include British Airways, Thomas Cook, and Thomson fly. The last two columns of
JES Year Bootstrapped DEA RTS ^
BIAS s^ LB UB
38,1
British Airways 2002 0.8806 DRS 0.1203 0.0135 0.7610 0.9968
Virgin Atlantic 2002 0.8785 DRS 0.0455 0.0009 0.8214 0.9193
EasyJet 2002 0.7490 DRS 0.0267 0.0001 0.7264 0.7728
ThomsonFly 2002 0.8880 DRS 0.0307 0.0003 0.8558 0.9163
First Choice 2002 0.8890 DRS 0.0396 0.0010 0.8319 0.9256
10 Monarch 2002 0.5624 IRS 0.0247 0.0002 0.5362 0.5840
Thomas Cook 2002 0.9204 DRS 0.0522 0.0013 0.8638 0.9690
BMI Group 2002 0.8831 DRS 0.1177 0.0078 0.8087 0.9960
MyTravel 2002 0.7772 DRS 0.2235 0.0688 0.6740 0.9963
Jet2.com 2002 0.7769 IRS 0.2289 0.0704 0.6802 0.9963
GB Airways 2002 0.7110 IRS 0.0234 0.0001 0.6888 0.7319
Flybe Ltd 2002 0.8725 DRS 0.0318 0.0002 0.8428 0.9003
Titan 2002 0.6348 IRS 0.0363 0.0007 0.5880 0.6694
Flightline 2002 0.7799 IRS 0.2315 0.0753 0.6629 0.9965
European 2002 0.5514 IRS 0.0362 0.0008 0.5071 0.5869
Average 0.7836
British Airways 2003 0.8918 DRS 0.1098 0.0080 0.8074 0.9965
Virgin Atlantic 2003 0.9232 DRS 0.0767 0.0026 0.8542 0.9955
EasyJet 2003 0.8843 DRS 0.0470 0.0010 0.8325 0.9263
ThomsonFly 2003 0.9499 DRS 0.0447 0.0007 0.9087 0.9918
First Choice 2003 0.8890 DRS 0.0396 0.0010 0.8319 0.9256
Monarch 2003 0.6801 DRS 0.0236 0.0002 0.6536 0.7024
Thomas Cook 2003 0.9060 DRS 0.0638 0.0027 0.8240 0.9635
BMI Group 2003 0.9022 DRS 0.0531 0.0012 0.8451 0.9514
MyTravel 2003 0.9157 DRS 0.0472 0.0016 0.8511 0.9588
Jet2.com 2003 0.8263 DRS 0.0885 0.0070 0.7196 0.9093
GB Airways 2003 0.7346 IRS 0.0238 0.0002 0.7084 0.7561
Flybe Ltd 2003 0.7814 DRS 0.2173 0.0651 0.6833 0.9965
Titan 2003 0.6927 IRS 0.0552 0.0029 0.6108 0.7444
Flightline 2003 0.7863 IRS 0.2219 0.0671 0.6803 0.9953
European 2003 0.6055 IRS 0.0566 0.0049 0.5120 0.6609
Average 0.8246
British Airways 2004 0.9093 DRS 0.0943 0.0055 0.8246 0.9963
Virgin Atlantic 2004 0.9104 DRS 0.0907 0.0043 0.8315 0.9962
EasyJet 2004 0.9323 DRS 0.0285 0.0001 0.9089 0.9569
ThomsonFly 2004 0.9375 DRS 0.0606 0.0024 0.8718 0.9981
First Choice 2004 0.9537 DRS 0.0463 0.0009 0.9008 0.9964
Monarch 2004 0.6801 IRS 0.0236 0.0002 0.6536 0.7024
Thomas Cook 2004 0.8787 DRS 0.1259 0.0100 0.7970 0.9973
BMI Group 2004 0.9333 DRS 0.0658 0.0013 0.8896 0.9966
MyTravel 2004 0.9289 DRS 0.0713 0.0022 0.8744 0.9963
Jet2.com 2004 0.8255 DRS 0.1710 0.0329 0.7137 0.9954
GB Airways 2004 0.7551 IRS 0.0256 0.0001 0.7298 0.7772
Flybe Ltd 2004 0.9061 DRS 0.0285 0.0002 0.8771 0.9311
Titan 2004 0.6340 IRS 0.0330 0.0004 0.6002 0.6640
Flightline 2004 0.7734 IRS 0.2200 0.0707 0.6695 0.9968
European 2004 0.8214 IRS 0.1804 0.0332 0.7149 0.9958
Average 0.8520
Table III. British Airways 2005 0.8410 DRS 0.1583 0.0218 0.7516 0.9962
Bootstrapped efficiency Virgin Atlantic 2005 0.9174 DRS 0.0836 0.0030 0.8442 0.9950
results (continued)
 Year Bootstrapped DEA RTS ^
BIAS s^ LB UB
Operational
performance of
EasyJet 2005 0.9520 DRS 0.0480 0.0004 0.9260 0.9962
ThomsonFly 2005 0.9104 DRS 0.0889 0.0029 0.8656 0.9971 UK airlines
First Choice 2005 0.8520 DRS 0.0352 0.0005 0.8131 0.8836
Monarch 2005 0.6229 IRS 0.0354 0.0007 0.5744 0.6545
Thomas Cook 2005 0.9193 DRS 0.0835 0.0034 0.8446 0.9961
BMI Group 2005 0.9371 DRS 0.0394 0.0003 0.9069 0.9717 11
MyTravel 2005 0.9439 DRS 0.0374 0.0008 0.8926 0.9797
Jet2.com 2005 0.8012 DRS 0.1995 0.0466 0.7072 0.9956
GB Airways 2005 0.6295 IRS 0.0245 0.0001 0.6079 0.6515
Flybe Ltd 2005 0.8916 DRS 0.0285 0.0002 0.8659 0.9162
Titan 2005 0.6616 IRS 0.0430 0.0008 0.6209 0.7024
Flightline 2005 0.7789 IRS 0.2217 0.0687 0.6843 0.9959
European 2005 0.6791 IRS 0.0606 0.0033 0.5965 0.7369
Average 0.8225
British Airways 2006 0.9192 DRS 0.0791 0.0045 0.8247 0.9971
Virgin Atlantic 2006 0.9172 DRS 0.0735 0.0061 0.8015 0.9882
EasyJet 2006 0.9409 DRS 0.0312 0.0002 0.9085 0.9685
ThomsonFly 2006 0.8203 DRS 0.0518 0.0016 0.7574 0.8684
First Choice 2006 0.8054 DRS 0.0421 0.0006 0.7634 0.8431
Monarch 2006 0.5334 IRS 0.0224 0.0001 0.5142 0.5534
Thomas Cook 2006 0.9305 DRS 0.0539 0.0013 0.8754 0.9810
BMI Group 2006 0.8724 DRS 0.0352 0.0003 0.8410 0.9034
MyTravel 2006 0.6258 IRS 0.0349 0.0006 0.5888 0.6587
Jet2.com 2006 0.7274 IRS 0.0345 0.0005 0.6885 0.7584
GB Airways 2006 0.4554 IRS 0.0209 0.0001 0.4376 0.4740
Flybe Ltd 2006 0.6333 DRS 0.0209 0.0001 0.6130 0.6511
Titan 2006 0.5670 IRS 0.0328 0.0005 0.5306 0.5977
Flightline 2006 0.9305 IRS 0.0664 0.0024 0.8553 0.9926
European 2006 0.5631 IRS 0.0381 0.0007 0.5218 0.5985
Average 0.7495
British Airways 2007 0.8911 DRS 0.1050 0.0082 0.7927 0.9968
Virgin Atlantic 2007 0.8186 DRS 0.1784 0.0325 0.7233 0.9954
EasyJet 2007 0.8659 DRS 0.0396 0.0008 0.8127 0.9016
ThomsonFly 2007 0.9439 DRS 0.0564 0.0009 0.9031 0.9958
First Choice 2007 0.6613 IRS 0.0462 0.0012 0.6083 0.7022
Monarch 2007 0.5253 IRS 0.0225 0.0001 0.5097 0.5456
Thomas Cook 2007 0.9013 DRS 0.0971 0.0044 0.8424 0.9953
BMI Group 2007 0.8487 DRS 0.0420 0.0005 0.8137 0.8871
MyTravel 2007 0.5296 IRS 0.0350 0.0009 0.4839 0.5615
Jet2.com 2007 0.5509 IRS 0.0478 0.0015 0.4919 0.5935
GB Airways 2007 0.4329 IRS 0.0236 0.0001 0.4145 0.4537
Flybe Ltd 2007 0.7073 IRS 0.0256 0.0001 0.6837 0.7293
Titan 2007 0.7776 IRS 0.2262 0.0678 0.6827 0.9962
Flightline 2007 0.7803 IRS 0.2265 0.0689 0.6786 0.9959
European 2007 0.7734 IRS 0.2183 0.0693 0.6640 0.9959
Average 0.7339
Notes: LB and UB represent the lower and upper bound for the 95 per cent confidence intervals of
DEA efficiency scores; RTS: Returns to Scale; DRS: Decreasing Returns to Scale; IRS: Increasing
Returns to Scale; Note that in this table we took the inverse of DEA efficiency scores to simplify the
interpretation of the results; The scores are now between 0 and 1; An airline which has an efficiency
score of 1 is considered to be fully efficient Table III.
JES Table III show the 95 per cent confidence intervals of the bootstrap estimates. As found
38,1 before by Simar and Wilson (1998), the bias corrected estimates lied for every
observation inside the confidence interval.
The estimates of returns to scale were also in line with the efficiency results. As it
was shown, most airlines in 2007 were operating under increasing returns to scale that
is an indicator that these airlines were motivated to increase the scale of their
12 operations, but there were certain external factors that have stopped these airlines from
achieving an optimum level of scale. Some of these airlines include Flybe, Titan,
Flightline, and GB Airways, which are mainly described as small airlines.
As mentioned before, we also employed in this paper a second stage estimation to
determine those factors that explain the variations in technical efficiency scores
between the different airlines. The two variables included in the truncated regression
model are the load factor and airline size. Specifically, the model can be expressed as
follows:

d^it ¼ b0 þ b1 LF it þ b4 Sizeit þ 1it ð3Þ

where d^it is the technical efficiency scores; LF it is the load factor; Sizeit is a dummy
variable reflecting the size of different airlines, with 1 representing large UK airlines;
and 1it is random error representing statistical noise. The model in equation (3) was
also bootstrapped along with the double bootstrap procedure presented in section 4.2.
The results are presented in Table IV. We verified that both variables have the
expected signs with each of load factor and airline size had a significant positive
impact on technical efficiency. These findings are also in line with previous studies in
the literature (Coelli et al., 1999; Cornwell et al., 1990).
Thus, what do all the results indicate? It is possible to relate the results from the
first and second stage estimation to the recent and current industry trends in the
international aviation industry. The results, from the first stage, for example, clearly
indicated that there was a decreasing trend in the efficiency of UK airlines post 2004,
while before 2004 the efficiency was strongly improving. Several external factors
might have contributed to this finding. The sharp increase in oil price[7] post 2004, for
example, was an important factor. The oil price started to rise from 2004 to reach its
highest value on June 16, 2008 with a record price of $139.89 per gallon (Goldman,
2008). Prior to 2004, the inflation adjusted the oil price and it was generally under
$25/barrel. Following the increase in oil price, many UK airlines have recorded a sharp
decline in profit and high increase in costs, with some examples include British
airways and Virgin. The trend was also international. In the US, “American Airlines”
has expressed intention to stop 75 of its planes and cut the number of seats. Fuel costs
have also contributed to several airlines going bankrupt. Some recent examples include

Variable Coefficient Standard Error T-ratio

Constant 1.358 * * 0.200 6.781 *

LF 0.340 * 0.115 2.956 *
Table IV. Size 0.014 * 0.003 0.666 *
Bootstrapped truncated
regression of technical Notes: Log-Likelihood ¼ 25.066; *Significant at the 5 per cent confidence level; * *significant at the
efficiency 1 per cent confidence level
business carries MaxJet, Eos, Hawaii’s Aloha Airlines and the US carrier ATA (Clark, Operational
2008). A European example is “Alitalia Airline” which has been funded from the Italian performance of
government to keep flying (Clark, 2008).
The increase in oil price had also a direct impact of the load factor of certain airlines. UK airlines
Some examples of airlines which recorded drop in the load factor include British
airways (Davies, 2007) and Easy Jet (fall by 3 per cent in 2007). Those operating in
regional areas were also directly affected. In this study, it was shown that the load 13
factor has a significant positive impact on technical efficiency, so it is possible that by
affecting the load factor, oil price has also indirectly affected technical efficiency. One
more factor worth mentioning is the link between oil price and increase in competition.
This is because for some airlines the number of international passengers and the
domestic market share was decreasing. For example British Airways, together with
Virgin have in the past two years announced capacity cut. Recently, Continental
Airlines also announced cut by 11 percent and Air Canada by 7 percent. Small airlines
were also directly affected as they generally fly short and domestic routes that are less
profitable than international long routes. Several recent reports have also discussed
that small airlines might not be able to sustain the future competitive environment, and
as a result might consider merging with larger airlines.
To sum up, all the above factors might have had a direct or indirect impact on the
efficiency variations of UK airlines. It is also worth noting that sometimes technical
inefficiency could also be attributed to many internal factors, such as management
mistakes or staff training. These factors are not part of the analysis, but future studies
might consider investigating the impact of these factors through detailed case studies
on some airlines. Future studies might collect data on future years of observations to
assess the impact of the current economic situation or the drop in oil price, on the
performance of UK airlines. The inclusion of other international airlines might also add
new dimensions to the study and provide more validations to the results.

6. Conclusions
The study has introduced the DEA double bootstrap methodology to measure the
technical efficiency of UK airlines. The results could generate a starting point for policy
makers at the different airlines by providing them with a comprehensive figure on their
level of scale and efficiency standings. The results can be used as an incentive to target
operational deficiencies and seek new areas of efficiency improvements. However, the
management of different airlines is also strongly encouraged to adopt a benchmarking
management procedure in order to perform a continuous evaluation of their
performance against operational strategies and to make the necessarily corrective
actions. It is also possible to validate the results of this study with some qualitative
case investigations of the major airlines involved, so future strategies taken by these
airlines in response to the current industry trends can be identified. The results can
also be used for international benchmarking purpose. For example, several studies
have looked at the efficiency of US and other European airlines, and each of studies
provides an efficiency score on key airlines in these countries. Thus, it is possible for
UK airlines to compare their average efficiency score with those international airlines
that share similar characteristics.
The efficiency estimates indicated that the performance of UK airlines experienced
strong increase between 2002 and 2004, while from 2005, the average technical
JES efficiency started to decline to reach its lowest level in 2007. In this paper we have also
38,1 employed a second stage estimation to explain the variation in technical efficiency
scores. Factors such as load factor and airline size were found to be significantly and
positively related to technical efficiency. The paper discussed that the decrease in
efficiency of UK airlines might be due to factors such as increase in oil price, intense
market competition and drop in load factor. For small airlines the impact of these
14 factors might have also been stronger as they usually suffer from weak economies of
scale.

Notes
1. Some other studies have also used the number of planes as a proxy for capital input. In this
study we the aircraft value as data on the number of planes are not consistently available for
all airlines. Ahn et al. (1997) have previously used aircraft value in assessing the efficiency of
US airlines.
2. Note that we followed the “Federal Aviation Administration”, and we defined large airlines
as those having 1 per cent or more of national enplaned passengers.
3. A production function is said to exhibit constant return to scale (CRS) if a proportionate
increase in inputs results in the same proportionate increase in outputs. The variable return
to scale (VRS), on the other hand, does not assume full proportionality between the inputs
and outputs.
4. The results reported in this paper are the VRS results; however we have also estimated the
CRS model in order to determine the return to scale (RTS) properties of the different airlines.
Fore more details on how to calculate RTS refer to Coelli et al. (1998). An airline is said to be
operating either at decreasing returns to scale (DRS) if a proportional increase of all input
levels produces a less-than-proportional increase in output levels or increasing return to
scale (IRS) at the converse case.
5. These are variables that are neither inputs nor outputs but are used to mainly explain the
variation in the efficiency scores.
6. Simar and Wilson (1998) recommended the use of 2,000 bootstrap iterations to obtain reliable
bootstrap estimates.
7. It is possible to include oil price in equation (3) as a potential determinant on technical
efficiency. However, it is theoretically known that an increase in oil price affect the cost
structure of airlines and this is more related to the concept of allovative or cost efficiency.
The relationship between technical, cost, and allovative efficiency is expressed as follows:
cost efficiency ¼ technical efficiency £ allocative efficiency. So, it possible that oil price
affected indirectly technical efficiency through its direct impact on cost and allocative
efficiency. For more details on each type of efficiency refer to Coelli et al. (1998).

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Corresponding author
A. George Asaf can be contacted at: assaf@ht.umass.edu

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