Accounting for Environmental Influences in Stochastic Frontier Models: With Application to International Airlines

The principal aim of this paper is to measure the efficiency of international airlines. We
obtain measures of technical efficiency from stochastic frontier production functions which
have been adjusted to account for environmental influences such as network conditions,
geographical factors, etc. We observe that two alternative approaches to this problem have
been proposed in the efficiency measurement literature. One assumes that the environmental
factors influence the shape of the technology while the other assumes that they directly
influence the degree of technical inefficiency. In this paper we compare the results obtained
when using these two approaches. The two sets of results provide similar rankings
of airlines but suggest differing degrees of technical inefficiency. Both sets of results also
suggest that Asian/Oceanic airlines are technically more efficient than European and North
American airlines but that the differences are essentially due to more favourable environmental
conditions. Nevertheless, it is among Asian companies that the major improvements
in managerial efficiency (technical efficiency with environmental factors netted out) took
place over the sample period (1977–1990).