This thesis continues and expands several themes from previous studies of
commercial airline cost functions. A well specified industrial cost function reveals
characteristics about the market players, such as economies of scale and the cost
elasticities with respect to operational styles. These parameters are updated, the
experimental design reworked and new analysis is given to describe the spectrum of
choices facing airline firms in recent times.
I first construct a cost function for recent data using methods similar to Caves,
Christensen and Tretheway (1984). As an energy intensive business, the US airline
industry has seen its energy cost share rise and fall over time with potentially
destabilizing effects. The model in this paper allows the energy cost share to interact
with other variables and illuminate what factors may exacerbate cost sensitivity to energy
prices. It was found that fuel cost shares tend to be higher with older equipment, smaller
fleet sizes, and to be increasing in aircraft size and seating density.
The translog results include a positive cost of older aircraft designs, suggesting that
airlines with poorer access to capital may suffer a cost disadvantage, particularly during a
fuel spike. The model does not reject constant returns to scale (CRS) for fleet expansion,
or IRS in aircraft size.
University of Minnesota Master of Science thesis. January 2011. Major: Applied Economics. Advisor: Gerald McCullough. 1 computer file (PDF); iv, 48 pages.
Meland, William J..
Measurment of a Cost Function for US Airlines: Restricted and Unrestricted Translog Models with Energy Cost Perturbations.
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