Cost Competitiveness of Major Airlines: An International Comparison

This paper compares unit cost competitiveness of the world’s 22 major airlines over the 1986–93 period. First, a unit cost index for aggregate output is computed via a multilateral index procedure. A translog variable cost function is estimated and used to decompose the unit cost differentials into potential sources: input prices, network and output attributes, and efficiency. The results of the unit cost decomposition are used to construct a cost competitiveness indicator after removing the effects of network and output attributes. Our results for 1993 are: (a) Asian carriers (except Japan Airlines and All Nippon Airways) were generally more cost competitive than the major U.S. carriers, mostly due to their substantially lower input prices; (b) Japan Airlines and All Nippon Airways were over 50% less cost competitive than American Airlines mainly because of their high input prices; (c) major European carriers were 7% (British Airways)–42% (Scandinavian Airlines Systems) less cost competitive than American Airlines, because of higher input prices and lower efficiency; (d) among the U.S. carriers, American Airlines, United Airlines and Delta were similar in cost competitiveness, while Northwest and Continental enjoyed, respectively, 5 and 12% cost competitiveness over American Airlines; (e) exchange rate fluctuation has had considerable effects on the cost competitive position of Japan Airlines and Lufthansa.