The Operational Impacts of Government Restructuring of the Airline Industry

Abstract

In July 2000, the Civil Aviation Administration of China (CAAC) called for the consolidation of the 10 state-owned air carriers into three groups, headed by Air China, China Eastern, and China Southern. A few months later in November 2000, the State Council of China mandated that this consolidation be accomplished by the third quarter of 2001. As part of this mandate, the CAAC yielded its management control of air carriers with its focus now being on safety and regulatory issues. Furthermore, the CAAC was required to divest itself of assets held in many of the state-owned airlines and its interests in more than 120 airports around China, except Beijing Capital Airport.

Utilizing data from the International Civil Aviation Organization for 2003 and 2004, this study investigates the operational impacts of this industry restructuring. The relative operational efficiency of Air China, China Eastern, and China Southern is compared to a sample of Asian, European and United States flag carriers. Data envelopment analysis is utilized to derive efficiency scores for individual airlines. The operational efficiency model used in this study is derived from that utilized by Schefczyk (1993). The underlying structural drivers of efficiency are then investigated via a tobit analysis with implications for managerial policy discussed.