Measuring the energy efficiency for airlines under the pressure of being included into the EU ETS

In 2008, European Union (EU) announced that from 2012, each international flight taking off and landing in EU would be given an emission permit. Therefore, the period of 2008–2012 can be regarded as a buffer period for global airlines. Although EU formally decides to exclude non‐EU airlines from the EU Emission Trading System on March 4, 2014, it is necessary to investigate the impacts of the policy on airline energy efficiency in this period. Airline energy efficiency is divided into three stages—operations stage, service stage, and sales stage—and Greenhouse gas emission is treated as an undesirable output of service stage. Two models, network range‐adjusted measure model with weak disposability and network range‐adjusted measure model with strong disposability, are established to evaluate the efficiencies of 22 international airlines from 2008 to 2012. The results show that (i) most airlines' efficiencies have decreased in the period, and the EU Emission Trading System is not effective for the efficiency improvement; (ii) the average efficiency of European airlines is almost the same as that of non‐European airlines; and (iii) the model with weak disposability is more reasonable in distinguishing efficiency differences, while strong disposability is a more reasonable way in treating undesirable outputs. Copyright © 2016 John Wiley & Sons, Ltd.     

Airline energy efficiency measures using the Virtual Frontier Network RAM with weak disposability

In this paper, airline energy efficiency is divided into three stages: the operations stage, the services stage and the sales stage. Greenhouse gas emissions are treated as an undesirable output of the services stage. This new three-stage strategic operating framework is a modification of existing models. A new model, Virtual Frontier Network Range Adjusted Measure with weak disposability, is proposed to evaluate the efficiencies of 22 international airlines, from 2008 to 2012. The results show that the new model can establish more reasonable rankings and confirm new benchmarking airlines and that inclusion in the European Union’s Emissions Trading Scheme has had little influence on the improvement of airline energy efficiency.     

An empirical assessment of the CO2-sensitive productivity of European airlines from 2000 to 2010

Due to the ongoing increase in the number of commercial flights, greenhouse gas emissions from aviation are expected to rise significantly. Balancing the pursuit of productivity growth with environmental-footprint control policies comprises a long-term regulatory challenge. In this light, the main goals of the present paper are: (i) to measure the CO₂ emissions of European airlines from 2000 to 2010, (ii) to compute airlines’ productivity in developing an environmental-sensitive productivity index, (iii) to compare the obtained results with those resulting from a traditional index, and (iv) to identify the drivers affecting productivity changes. Our results show that on average, airlines’ relative CO₂ emissions have decreased. Although the airlines we studied experienced an average productivity increase—both considering and not considering negative externalities production—environmentally sensible productivity growth is lower than traditional productivity growth. Finally, we find that improvements in load factor as well as a combined increase in stage length and aircraft size affect productivity changes positively, while fuel efficiency is significant only in the case of a CO₂-sensitive measure of productivity.     

Airline productivity redefined: An analysis of U.S. and European carriers

Productivity, in terms of net value added per man-year of labor and capital input, provides a more useful yardstick of airline efficiency than the widely used indices representing average unit costs or labor productivity. Large variations in productivity between airlines, in particular between U.S. and European airlines, can be explained almost entirely by differences in level of service, demand patterns and route characteristics. A regression model calibrated on 1975 data for fourteen U.S. and fourteen European scheduled airlines indicates that productivity could be increased by changes in network shape though a more liberal exchange of traffic rights, greater specialization (in particular the limited involvement of scheduled airlines in the very low yield charter market) and consumer choice — by offering higher frequency, multi-city services.     

Is it the labor unions’ fault? Dissecting the causes of the impaired technical efficiencies of the legacy carriers in the United States

Data envelopment analysis is used to evaluate the technical efficiencies of a number of major passenger airlines in the United States at transforming their inputs (labor, fuel and fleet-wide seating capacity) into available seat-miles. A tobit regression model is then used to identify the underlying drivers of airline efficiency, as measured by the data envelopment analysis efficiency score. The impact of unionization on airline efficiency is found to be statistically insignificant, controlling for the influences of other hypothesized determinants of airline efficiency: the average age of an airline’s fleet, the average size of its aircraft, its average stage length, the extent to which the airline relies of hubbing within its route structure, the percent of its passenger enplanements that are international, and whether the airline is a legacy carrier. The statistically significant drivers of airline efficiency, at a ten percent level of significance, are average aircraft size, average stage length and the extent to which the airline relies on hubbing and connecting flights within its route structure. The stage length variable is not significant at a five percent level of significance, however. An increase in average aircraft size or in average stage length enhances an airline’s efficiency whereas an increase in hubbing reduces it.     

Revenue sharing with multiple airlines and airports

This paper investigates the effects of concession revenue sharing between an airport and its airlines. It is found that the degree of revenue sharing will be affected by how airlines’ services are related to each other (complements, independent, or substitutes). In particular, when carriers provide strongly substitutable services to each other, the airport has incentive to charge airlines, rather than to pay airlines, a share of concession revenue. In these situations, while revenue sharing improves profit, it reduces social welfare. It is further found that airport competition results in a higher degree of revenue sharing than would be had in the case of single airports. The airport–airline chains may nevertheless derive lower profits through the revenue-sharing rivalry, and the situation is similar to a Prisoners’ Dilemma. As the chains move further away from their joint profit maximum, welfare rises beyond the level achievable by single airports. The (equilibrium) revenue-sharing proportion at an airport is also shown to decrease in the number of its carriers, and to increase in the number of carriers at competing airports. Finally, the effects of a ‘pure’ sharing contract are compared to those of the two-part sharing contract. It is found that whether an airport is subject to competition is critical to the welfare consequences of alternative revenue sharing arrangements.     

Have Emission Control Areas (ECAs) harmed port efficiency in Europe?

Ports in the European Union and North America have enforced environmental regulations on controlling SO_x and NOx emissions from ships in their coastal areas known as Emission Control Areas (ECAs). This study uses two-stage approaches to examine whether ECA regulations impact the efficiency of ports operating in such areas. First, port efficiencies are estimated using non-radial slacks-based measure (SBM) Data Envelopment Analysis (DEA) models. The efficiency scores estimated by the SBM DEA models are then regressed on explanatory variables, including the ECA factor, and macroeconomic indicators using bootstrapped truncated regression (BTR) models. Panel data is collected on countries in EU ECAs and non-ECAs regarding such input variables as capital and labor, with cargo as an output variable. The results indicate that ECA regulations can harm port efficiency, reflecting concerns of policy-makers and industrial managers: the average efficiency loss from an ECA designation amounts to 0.058–0.066 on a scale of 0–1, accounting for a 15–18% loss from ECA ports’ average efficiency scores.     

Assessing the impact of tactical airport surface operations on airline schedule block time setting

With the growth of air traffic, airport surfaces are congested and air traffic operations are disrupted by the formation of bottlenecks on the surface. Hence, improving the efficiency and predictability of airport surface operations is not only a key goal of NASA’s initiatives in Integrated Arrival/Departure/Surface (IADS) operations, but also has been recognized as a critical aspect of the FAA NextGEN implementation plan. While a number of tactical initiatives have been shown to be effective in improving airport surface operations from a service provider’s perspective, their impacts on airlines’ scheduled block time (SBT) setting, which has been found to have direct impact on airlines’ on-time performance and operating cost, have received little attention. In this paper, we assess this impact using an econometric model of airline SBT combined with a before/after analysis of the implementation of surface congestion management (SCM) at John F. Kennedy International Airport (JFK) in 2010. Since airlines do not consider gate delay in setting SBT, we find that reduction in taxi-out time variability resulting from SCM leads to more predictable taxi-out times and thus decreases in SBT. The JFK SCM implementation is used as a case study to validate model prediction performance. The observed SBT decrease between 2009 and 2011 at JFK is 4.8 min and our model predicts a 4.2 min decrease. In addition, Charlotte Douglas International Airport (CLT) is used as an example to demonstrate how different surface operations improvements scenarios can be evaluated in terms of SBT reduction.     

The impact of strategic management and fleet planning on airline efficiency - A random effects Tobit model based on DEA efficiency scores

As a result of the liberalisation of airline markets; the strong growth of low cost carriers; the high volatility in fuel prices; and the recent global financial crisis, the cost pressure that airlines face is very substantial. In order to survive in these very competitive environments, information on what factors impact on costs and efficiency of airlines is crucial in guiding strategic change. To evaluate key determinants of 58 passenger airlines’ efficiency, this paper applies a two-stage Data Envelopment Analysis (DEA) approach, with partially bootstrapped random effects Tobit regressions in the second stage. Our results suggest that the effects of route optimisation, in the sense of average stage length of the fleet, are limited to airline technical efficiency. We show that airline size and key fleet mix characteristics, such as aircraft size and number of different aircraft families in the fleet, are more relevant to successful cost management of airlines since they have significant impacts on all three types of airline efficiency: technical, allocative and, ultimately, cost efficiency. Our results also show that despite the fuel saving benefits of younger aircraft, the age of an airline’s fleet has no significant impact on its technical efficiency, but does have a positive impact on its allocative and cost efficiency.     

Airline Jet Fuel Hedging: Theory and Practice

Abstract

Most international airlines hedge fuel costs, but the theoretical justification behind this action is weak. The paper explores the nature and extent of airline fuel hedging and asks why airlines hedge. The availability of hedging instruments is first discussed, with the most liquid markets in crude and exchange traded contracts. Aviation fuel contracts are possible, but with counter‐party risk. Most major passenger airlines with sufficient cash and credit now hedge at least part of their future needs. Hedging does protect profits against a sudden upturn in crude prices caused by political and consumer uncertainty leading to slower economic growth. However, if higher oil prices are induced by strong economic growth and oil supply constraints, hedging increases volatility with hedging gains reinforcing improved profits from higher traffic and improved yields. If hedging does not reduce volatility, it may still have an accounting role in moving profits from one time period to another, insure against bankruptcy, and signal the competence of management to investors and other stakeholders.     

Performance based clustering for benchmarking of US airports

Managing service operations is gaining significant attention in both academic and practitioner circles. In this broad area, performance evaluation and process improvement of airlines and air carriers has been the focus of several studies. Although efficient airport operations are critical for improved performance of airlines and air carriers, few studies have focused on airport performance measurement. This study evaluates the operational efficiencies of 44 major US airports across 5 years using multi-criteria non-parametric models. These efficiency scores are treated by a clustering method in identifying benchmarks for improving poorly performing airports. Efficiency measures are based on four resource input measures including airport operational costs, number of airport employees, gates and runways, and five output measures including operational revenue, passenger flow, commercial and general aviation movement, and total cargo transportation. The methodology presented here can be generalized to other industries and institutions.     

Evaluating airlines with slack‐based measures and meta‐frontiers

This study develops a new performance evaluation model, called the meta dynamic network slack‐based measure (MDN‐SBM). This model incorporates the concept of meta‐frontiers to facilitate comparisons of performance of decision making units, while at the same time it generalizes the slack‐based measure (SBM), network SBM, and dynamic SBM. This MDN‐SBM model is capable of dealing with two important special features of the transportation industry: unfavorable accidents and non‐storable goods, i.e. available seat‐kilometers that are wasting assets that lose value completely if unsold before departure. Hence, this generalized model contains higher differentiable capability than all its SBM‐related submodels in the literature. To demonstrate, 35 international airlines with two divisions (production and consumption) in three terms (one‐year time periods from 2007 to 2009) have been analyzed using meta‐performance efficiency measures (ME) for all decision making units and have also been compared by geographical area (Asia‐Pacific, N. America/Europe). The numerical example and comparison validate the proposed MDN‐SBM model and suggest the airlines should put more focus on input resources reduction for productivity improvement. Copyright © 2016 John Wiley & Sons, Ltd.     

Deregulating European aviation — A case study

European international scheduled aviation has been characterised by bans on market entry, price collusion, and capacity sharing. High fares were charged compared to world standards and the fares charged by European charter airlines.In May 1986 new entrants with pricing freedom were permitted on the London-Dublin route which was then the third largest in European scheduled international aviation. Prior to deregulation the route experienced high fare growth. The unrestricted fare ex-London increased 72.6 per cent compared to a Retail Price Index increase of 41.5 per cent. There was a growth in passenger numbers in the years 1980–85 of 2.8 per cent.Since deregulation passenger numbers have risen to 2.3 million compared to 994,000 before deregulation. Fares have declined by an estimated 37 per cent ex-Dublin and 42 per cent ex-London in real terms. There have been four cases of market entry and one of market exit. The estimated share of the new entrants in the second half of 1989 was 28 per cent. The preregulation earnings data of Aer Lingus, the market leader, indicated that protection allowed staff to earn economic rents. A two-tier structure was introduced in response to competition.Remaining barriers to contestability in UK/Ireland aviation include hub airport dominance, ground handling monopolies, and the ability of airlines with routes in both regulated and deregulated markets to engage in geographical price discrimination against airlines with routes in deregulated markets only. A pro-contestability aviation policy in Europe will require measures to prevent the abuse of dominant positions by established airlines over new market entrants and to prevent collusion between established airlines.     

The effect of code-share agreements on the temporal profile of airline fares

This paper aims at investigating how the pricing strategy of European airlines is affected by code-share agreements on international routes. Our data cover several routes linking the main UK airports to many European destinations and includes posted fares collected at different days before departure. By analyzing the temporal profile of airline fares, we identify three main results. First, code-share increases fares especially for early bookers. Second, the higher prices in code-shared flights are offered by marketing carriers. Finally, in single operator code-shared flights (unilateral code-share), the pricing profile is flatter than under parallel code-share.     

Competition and public service obligations in European aviation markets

This paper analyzes the effect of universal service policies on the airline markets of five European Union countries (France, Germany, Italy, Spain and the United Kingdom) in the period 2002–2010. Results show that airfare discount schemes for island residents raise demand and positively affect competition and the number of flights at the route level. These effects are evident in France and Italy, but are particularly marked in Spain. By contrast, public service obligations (PSOs) reduce competition on the protected routes, while their effect on the number of flights differs depending on national regulations. In Spain, routes protected with PSOs have greater flight frequencies than those on unprotected routes of similar characteristics, but in France, Italy and the UK the opposite result is found. The empirical model also finds that on routes with low-cost airlines market concentration is smaller and there is a larger number of flights. This result is relevant for the design of universal service policy, since in recent years low-cost airlines have entered a number of thin routes and have increased access to air transportation.     

Effects of corruption on efficiency of the European airports

The effect of corruption on airport productive efficiency is analyzed using an unbalanced panel data of major European airports from 2003 to 2009. We first compute the residual (or net) variable factor productivity using the multilateral index number method and then apply robust cluster random effects model in order to evaluate the importance of corruption. We find strong evidence that corruption has negative impacts on airport operating efficiency; and the effects depend on the ownership form of the airport. The results suggest that airports under mixed public–private ownership with private majority achieve lower levels of efficiency when located in more corrupt countries. They even operate less efficiently than fully and/or majority government owned airports in high corruption environment. We control for economic regulation, competition level and other airports’ characteristics. Our empirical results survive several robustness checks including different control variables, three alternative corruption measures: International Country Risk Guide (ICRG) corruption index, Corruption Perception Index (CPI) and Control of Corruption Index (CCI). The empirical findings have important policy implications for management and ownership structuring of airports operating in countries that suffer from higher levels of corruption.     

The evaluation of transportation energy efficiency: An application of three-stage virtual frontier DEA

In this paper, transportation energy efficiency is newly defined and its inputs and outputs are obtained through literature review. Labor input, capital input and energy input are selected as the inputs, passenger turnover volume and freight turnover volume are defined as the outputs. A new model—three-stage virtual frontier DEA (three-stage virtual frontier Data Envelopment Analysis) is proposed to evaluate transportation energy efficiencies. The case of thirty Chinese PARs (provincial administrative regions) from 2003 to 2012 is applied to verify its rationality. In the three-stage virtual frontier DEA, the reference DMU (decision-making unit) set and the evaluated DMU set are two different sets so that it can distinguish the DEA efficient DMUs. And in the evaluating process, the reference DMU set remains unchanged to assure its results more reasonable than Super DEA model. The results show that transport structure and management measures have important impacts on transportation energy efficiency.     

Operational efficiency versus financial mobility in the global airline industry: a data envelopment and Tobit analysis

The events of September 11th, 2001 precipitated an almost unprecedented financial crisis for the world airline industry. However, it is not clear that these events represent a discrete, industry disruption or whether, in fact, airlines were already entering a period of economic challenges that would demand new strategic orientations on their part. This study investigates the structural drivers of operational efficiency as well as the financial posture of airlines on the eve of September 11th.A sample of 38 airlines from North America, Europe, Asia and the Middle East was utilized to investigate whether relative operational efficiency implied superior financial mobility (as defined by Donaldson). Data envelopment analysis was utilized to derive efficiency scores for individual airlines. The underlying structural drivers of efficiency were then investigated. It was found that the traditional framework developed in the literature still provided reasonable explanatory power for realized relative operational efficiency. However, the second stage of the analysis found that relative operational efficiency did not inherently imply superior financial mobility. As such, airlines that had chosen relatively efficient operational strategies found themselves in positions of vulnerability with regard to financial mobility and thus suffered the consequences in the post-September 11th environment.     

Dealing with the efficient allocation of scarce resources at congested airports

The existing slot allocation mechanism, based on the International Air Transport Association (IATA) system and its complementary version of the European Union (EU) regulation, produces rather poor capacity allocation outcomes for congested EU airports since it fails to properly match slots requested with slots allocated to airlines. Inefficiencies during the initial allocation are mainly due to the problem complexity in conjunction to limited decision support available to slot coordinators. On the other hand, substantial inefficiencies give rise to severe slot misuse and unreasonably low utilisation of airport resources running already into scarcity. The objective of this paper is to develop an optimisation-based model implementing the existing EU/IATA rules, operational constraints, and coordination procedures with the ultimate objective to better accommodate airlines’ preferences at coordinated airports through the minimisation of the difference between the requested and the allocated slot times to airlines. The results of the model are assessed and compared vis-à-vis the allocation outcome produced according to current slot coordination practice in three regional Greek airports. The proposed model produces very promising results and demonstrates that there is large room for improvement of the efficiency of the current allocation outcome in a range between 14% and 95%. The discussion of the model results is complemented by a sensitivity analysis highlighting the importance of declared capacity and the magnitude of its influence on slot allocation efficiency.