Productivity performance of US passenger airlines since deregulation

Abstract

To evaluate US passenger airlines' productivity performance since the airline deregulation in 1978, this research measures and compares productivity at both the US airline industry and individual carrier levels. Productivity is measured at the aggregate airline industry level in terms of multifactor productivity (MFP), the ratio of a single output to a combination of inputs, in order to compare industry productivity over time from 1978 to 2009. In addition, productivity is measured at the disaggregate carrier level in terms of total factor productivity (TFP), the ratio of total outputs to total inputs, to compare productivity growth across airlines and over time from 1995 to 2010. Our key findings indicate US passenger airlines have experienced tremendous MFP improvements since deregulation despite periods of reduced productivity levels that coincide with exogenous factors that include economic recessions, fuel price spikes, and other unforeseen events. Cumulative MFP in terms of airline traffic (RPMs) and network capacity (ASMs) increased 191% and 117%, respectively, between 1978 and 2009. This implies, irrespective of output measure, US passenger airlines have at least doubled their productive abilities over the past three decades. If RPMs are used as the measure of output, productivity has almost tripled. Looking at individual US carriers' productivity, low-cost carriers achieved rapid TFP growth in the early 2000s before leveling off in the latter portion of the decade. The restructuring efforts of legacy carriers enabled them to improve their productivity growth in the latter part of the 2000s, although at a much lower rate than their low-cost counterparts. As of 2010, although low-cost carriers had a slight advantage in TFP levels, evidence of convergence exists, irrespective of carrier type. Regression analyses indicates, on average, low-cost carriers experienced higher TFP growth and network control variables such as average stage length, load factor, and block hours per day were important factors that help explain observed TFP differentials among carriers.