European Airline Performance: A Data Envelopment Analysis with Extrapolations Based on Model ...

232 Pages·2015·3.31 MB·English

European Airline Performance: A Data
Envelopment Analysis with
Extrapolations Based on Model Outputs

By
Martin Phillips, B.A. (Hons.)

to be submitted for the award of
Master of Business Studies

Dublin City University
Business School

under the supervision of
Prof. P.J. Byrne & Dr. Malcolm Brady

March 2015
Declaration

I hereby certify that this material, which I now submit for assessment on the programme
of study leading to the award of M.B.S. is entirely my own work, that I have exercised
reasonable care to ensure that the work is original, and does not to the best of my
knowledge breach any law of copyright, and has not been taken from the work of others
save and to the extent that such work has been cited and acknowledged within the text of
my work.

Signed: _______________________
Print Name: Martin Phillips
ID No.: 10113746
Date: ________________

II
Acknowledgements

I would like to express my appreciation and gratitude to a number of people who
supported me in the preparation of this dissertation.
Firstly, I would like to thank my supervisors Prof. P.J. Byrne and Dr. Malcolm Brady
for their support, advice and encouragement. They were extremely generous with their
time and I benefited greatly from their experience.
I would also like to thank Rachel Keegan who was extremely helpful and patient when
guiding me through the administrative processes involved with part-time graduate
research.
Finally, I must thank Catherine for her endless patience, love and encouragement. Her
help and support throughout this process was literally invaluable. It was a long road
with late nights and lost weekends but we made it. Thank you!

III
Table of Contents

Contents
LIST OF FIGURES ................................................................................................................ VII
LIST OF TABLES ................................................................................................................. VIII
ACRONYMS ........................................................................................................................ IX
ABSTRACT .......................................................................................................................... XI
CHAPTER ONE INTRODUCTION & RATIONALE ................................................................... 1
1.1 INTRODUCTION ................................................................................................................. 2
1.2 EVOLUTION OF THE AVIATION INDUSTRY ................................................................................. 2
1.3 MOTIVATION FOR THIS STUDY ............................................................................................. 12
1.4 FINANCIAL PERFORMANCE MEASURES .................................................................................. 14
1.5 NON-FINANCIAL PERFORMANCE MEASURES ........................................................................... 15
1.6 AIM OF THIS STUDY .......................................................................................................... 16
1.7 STRUCTURE OF THE THESIS ................................................................................................. 17
CHAPTER TWO LITERATURE REVIEW .............................................................................. 19
2.1 INTRODUCTION ............................................................................................................... 20
2.2 MEASURING PERFORMANCE ............................................................................................... 20
2.3 MEASURING PERFORMANCE IN AVIATION .............................................................................. 22
2.3.1 AIRPORT PERFORMANCE .......................................................................................................... 22
2.3.2 AIRLINE PERFORMANCE ........................................................................................................... 25
2.3.3 PERFORMANCE MEASUREMENT TECHNIQUE REVIEW.................................................................... 26
2.4 ECONOMIC VALUE ADDED (EVA) ........................................................................................ 29
2.4.1 USAGE .................................................................................................................................. 30
2.4.2 BENEFITS ............................................................................................................................... 30
2.4.3 LIMITATIONS .......................................................................................................................... 32
2.4.4 SUMMARY – ECONOMIC VALUE ADDED ..................................................................................... 33
2.5 THE BALANCED SCORECARD ............................................................................................... 35
2.5.1 USAGE .................................................................................................................................. 36
2.5.2 AWARENESS .......................................................................................................................... 36
2.5.3 IMPLEMENTATION ................................................................................................................... 37
2.5.4 BENEFITS ............................................................................................................................... 37
2.5.5 LIMITATIONS .......................................................................................................................... 38
2.5.6 SUMMARY – BALANCED SCORECARD ......................................................................................... 40
2.6 MCDM - MULTI CRITERIA DECISION MAKING ........................................................................ 43
2.6.1USAGE ................................................................................................................................... 45
2.6.2 AWARENESS .......................................................................................................................... 47
2.6.3 IMPLEMENTATION ................................................................................................................... 48
2.6.4 BENEFITS ............................................................................................................................... 48
2.6.5 LIMITATIONS .......................................................................................................................... 50
2.6.6 SUMMARY – MULTI CRITERIA DECISION MAKING ........................................................................ 52
2.7 DATA ENVELOPMENT ANALYSIS ........................................................................................... 54
2.7.1 USAGE .................................................................................................................................. 60
IV
Table of Contents

2.7.2 BENEFITS ............................................................................................................................... 63
2.7.3 LIMITATIONS .......................................................................................................................... 64
2.7.4 SUMMARY – DATA ENVELOPMENT ANALYSIS .............................................................................. 66
2.8 CONCLUSION .................................................................................................................. 68
CHAPTER THREE RESEARCH DESIGN AND METHODOLOGY .............................................. 70
3.1 INTRODUCTION ............................................................................................................... 71
3.2 RESEARCH PROCESS .......................................................................................................... 75
3.2.1 STEP 1 – IDENTIFY RESEARCH QUESTION .................................................................................... 78
3.2.2 STEP 2 – ESTABLISH RESEARCH OBJECTIVES ................................................................................ 78
3.2.3 STEP 3 – LITERATURE REVIEW ................................................................................................... 78
3.2.4 STEP 4 – RESEARCH PLAN ........................................................................................................ 80
3.2.5 STEP 5 – GATHER THE DATA ..................................................................................................... 83
3.2.6 STEP 6 – ANALYSE AND INTERPRET THE DATA .............................................................................. 84
3.2.7 STEP 7 – PREPARE AND PRESENT THE FINDINGS ........................................................................... 86
CHAPTER FOUR RESULTS AND DISCUSSION .................................................................... 88
INTRODUCTION ..................................................................................................................... 89
4.1 MODEL VALIDATION ......................................................................................................... 89
4.2 RESULTS ........................................................................................................................ 94
4.2.1 THE CHARNES, COOPER AND RHODES (CCR) MODEL – OVERALL EFFICIENCY ................................... 94
4.2.2 THE BANKER, CHARNES AND COOPER (BCC) MODEL – TECHNICAL EFFICIENCY ............................... 100
4.2.3 THE PURE SCALE MODEL - PURE SCALE EFFICIENCY .................................................................... 106
4.3 ROBUSTNESS CATEGORIES ................................................................................................ 110
4.3.1 REFERENCE SETS FOR EACH MODEL (CCR, CRS AND PURE SCALE) ............................................... 112
4.3.2 ROBUSTNESS - CHARNES, COOPER AND RHODES (CCR) .............................................................. 112
4.3.3 ROBUSTNESS - BANKER, CHARNES AND COOPER (BCC) .............................................................. 115
4.3.4 ROBUSTNESS - PURE SCALE (CCR/BCC) ................................................................................... 117
4.4 FURTHER ANALYSIS ........................................................................................................ 120
4.4.1 AIRLINES CHOSEN FOR FURTHER ANALYSIS ................................................................................ 121
CHAPTER FIVE SENSITIVITY ANALYSIS ........................................................................... 138
5.1 INTRODUCTION ............................................................................................................. 139
5.2 ONE-AT-A-TIME SENSITIVITY ANALYSIS ................................................................................ 140
5.3 FACTORIAL DESIGN ......................................................................................................... 140
5.4 SUBJECTIVE SENSITIVITY ANALYSIS ...................................................................................... 140
5.5 METHOD ..................................................................................................................... 141
5.5.1 INPUT CHANGES ................................................................................................................... 141
5.5.2 OUTPUT CHANGES ................................................................................................................ 141
5.5.3 SENSITIVITY INDEX ................................................................................................................ 142
5.5.4 CHARNES, COOPER & RHODES MODEL SENSITIVITY INDICES ........................................................ 142
5.5.5 BANKER, CHARNES & COOPER SENSITIVITY INDICES .................................................................... 146
5.5.6 PURE SCALE SENSITIVITY INDICES ............................................................................................. 149
CHAPTER SIX CONCLUSION .......................................................................................... 152
6.1 CONCLUSIONS RELEVANT TO THE AIRLINE INDUSTRY ............................................................... 153
V
Table of Contents

6.2 CONCLUSIONS RELEVANT TO THE RESEARCH APPROACH TAKEN ................................................. 155
6.3 CONCLUSIONS RELEVANT TO THE USE OF DEA AS A RESEARCH TECHNIQUE .................................. 156
6.4 CONCLUSIONS RELATING TO SENSITIVITY, ROBUSTNESS AND FURTHER ANALYSIS ........................... 158
6.5 LIMITATIONS ................................................................................................................. 161
6.6 FURTHER RESEARCH ....................................................................................................... 162
REFERENCES .................................................................................................................... 165
APPENDIX A INPUT AND OUTPUT USAGE ...................................................................... 192
APPENDIX B EUROPEAN IATA MEMBER AIRLINES (2011) ............................................... 196
APPENDIX C SENSITIVITY ANALYSIS .............................................................................. 199
APPENDIX D DATA COLLATION AND NORMALISATION ................................................. 219

VI
List of Figures

List of Figures
Figure 1. MCDM Methods Identified in Order of Frequency of Use (Authors own) __________________ 46
Figure 2. Areas of Application of MCDM in Order of Use (Authors own) __________________________ 47
Figure 3. Graph of the Relationship Between the Three DEA Models ____________________________ 58
Figure 4. Most Frequently Used Inputs ____________________________________________________ 61
Figure 5. Most Frequently Used Outputs ___________________________________________________ 62
Figure 6. de Groot's Empirical Cycle (Heitink, 1999) ________________________________________ 72
Figure 7. What, Why & How Framework (Watson, 1994) _____________________________________ 75
Figure 8. Research Onion (Saunders, Lewis & Thornhill, 2007) __________________________________ 76
Figure 9. PIM - 3.0 Software Screenshot ___________________________________________________ 85
Figure 10. Overall Efficiency Scores and Rankings of Airlines ___________________________________ 96
Figure 11. Technical Efficiency Scores & Rankings of Airlines __________________________________ 101
Figure 12. Pure Scale Efficiency Scores and Rankings of Airlines _______________________________ 106
Figure 13. Pure Scale Efficiency Scores & Output Targets _____________________________________ 111

VII
List of Tables

List of Tables
Table 1. Airlines with Single Input and Single Output Measure ................................................................. 54
Table 2. Airlines with Single Input and Two Output Measures ................................................................... 55
Table 3. Ratios of Input to Outputs for Airlines .......................................................................................... 55
Table 4. Comparison of four key Performance Measurement Methodologies ........................................... 68
Table 5. CCR Model Software Validation Results ....................................................................................... 91
Table 6. BCC Model Software Validation Results ....................................................................................... 92
Table 7. Pure Scale Model Software Validation Results ............................................................................. 93
Table 8. CCR Efficiency Scores & Output Targets ....................................................................................... 99
Table 9. BCC Efficiency Scores & Output Targets ..................................................................................... 104
Table 10. Pure Scale Efficiency Scores & Output Targets ......................................................................... 109
Table 11. Table of CCR Model Reference Sets .......................................................................................... 114
Table 12. 100% Efficiency, Above Average & Below Average Scoring Groups within CCR ....................... 115
Table 13. Table of BCC Model Reference Sets .......................................................................................... 116
Table 14. 100% Efficiency, Above Average & Below Average Scoring Groups within BCC ....................... 117
Table 15. Table of Pure Scale Reference Sets ........................................................................................... 119
Table 16. 100% Efficiency, Above Average & Below Average Scoring Groups within Pure Scale ............. 120
Table 17. 100% Efficiency, Above Average & Below Average Scoring Groups across all DEA Models ..... 121
Table 18. Strategic, Financial and Operational Data ............................................................................... 124
Table 19. Comparison of Strategic, Financial and Operational data for Ryanair, easyJet and KLM ........ 125
Table 20. CCR Model Sensitivity Indices for Ryanair ................................................................................. 143
Table 21. CCR Model Sensitivity Indices for easyJet ................................................................................. 143
Table 22. CCR Model Sensitivity Indices for KLM ...................................................................................... 143
Table 23. BCC Model Sensitivity Indices for Ryanair ................................................................................. 146
Table 24. BCC Model Sensitivity Indices for easyJet ................................................................................. 146
Table 25. BCC Model Sensitivity Indices for KLM ...................................................................................... 146
Table 26. Pure Scale Model Sensitivity Indices for Ryanair ...................................................................... 149
Table 27. Pure Scale Model Sensitivity Indices for easyJet ....................................................................... 149
Table 28. Pure Scale Model Sensitivity Indices for KLM............................................................................ 149
Table 29. Table of IATA Member Airlines (2011) ...................................................................................... 198
Table 30. Ryanair CCR Sensitivity Analysis for Input Parameters ............................................................. 200
Table 31. Ryanair BCC Sensitivity Analysis for Input Parameters ............................................................. 201
Table 32. Ryanair Pure Scale Sensitivity Analysis for Input Parameters ................................................... 202
Table 33. Ryanair CCR Sensitivity Analysis for Output Parameters .......................................................... 203
Table 34. Ryanair BCC Sensitivity Analysis for Output Parameters .......................................................... 204
Table 35. Ryanair Pure Scale Sensitivity Analysis for Output Parameters ................................................ 205
Table 36. easyJet CCR Sensitivity Analysis for Input Parameters ............................................................. 206
Table 37. easyJet BCC Sensitivity Analysis for Input Parameters ............................................................. 207
Table 38. easyJet Pure Scale Sensitivity Analysis for Input Parameters ................................................... 208
Table 39. easyJet CCR Sensitivity Analysis for Output Parameters........................................................... 209
Table 40. easyJet BCC Sensitivity Analysis for Output Parameters........................................................... 210
Table 41. easyJet Pure Scale Sensitivity Analysis for Output Parameters ................................................ 211
Table 42. KLM CCR Sensitivity Analysis for Input Parameters .................................................................. 212
Table 43. KLM BCC Sensitivity Analysis for Input Parameters .................................................................. 213
Table 44. Pure Scale Sensitivity Analysis for Input Parameters ................................................................ 214
Table 45. CCR Sensitivity Analysis for Output Parameters ....................................................................... 215
Table 46. KLM BCC Sensitivity Analysis for Output Parameters ............................................................... 216
Table 47. KLM Pure Scale Sensitivity Analysis for Output Parameters ..................................................... 217
Table 48. Collated and Normalised Data from Airline Annual Reports .................................................... 220

VIII
Acronyms

Acronyms
AHP Analytical Hierarchy Process
AT & T Aircraft Transport and Travel
BCC Banker, Charnes & Cooper (Model of DEA)
BEA British European Airways
BSC Balanced Score Card
CCR Charnes, Cooper & Rhodes (Model of DEA)
CKI Cost of Capital Invested
CRS Constant Returns to Scale
DEA Data Envelopment Analysis
DM Decision Maker
DMU Decision Making Unit
EASA European Aviation Safety Agency
ENAC Ente Nazionale Per L’Aviazione Civile
EVA Economic Value Added
IAA Irish Aviation Authority
IATA International Air Transport Association
ICAO International Civil Aviation Organisation
KLM Koninklijke Luchtvaart Maatschappij N.V. (Royal Dutch Airlines)
KPI Key Performance Indicator
MADM Multi Attribute Decision Making
MCDM Multi Criteria Decision Making
MODM Multi Objective Decision Making
NOPAT Net Operating Profit After Tax
OCF Operating Cash Flow
PIM Performance Improvement Management
IX
Acronyms

RA Ratio Analysis
RPK Revenue Passenger Kilometres
SFA Stochastic Frontier Analysis
TFP Total Factor Productivity
VRS Variable Returns to Scale

X