A Comparative analysis of productivity and cost in Indian Airlines, 1964-99

Financial performance of the state-owned Indian Airlines has been far from satisfactory since 1989-90. The main reason for poor performance has been the high growth in its unit cost. But so far no attempt has been made to study whether this was the result of decline in productivity or increase in prices of inputs, or both. The present study thus attempts to relate unit cost with productivity for the period 1964-99. To explain the relative roles of each determinant of productivity and factors' prices in the growth of unit cost, a decomposition analysis has also been undertaken by utilizing a translog variable cost function. The results reveal that during 1989-99, when many A-320 aircraft were inducted in the fleet, productivity of Indian Airlines turned negative and the unit cost increased at a much higher rate. It is also found that the productivity decline was the main reason for a rapid rise in unit cost. Hence, it is suggested that Indian Airlines needs to improve its productivity, and weigh more carefully the impact of inductions of new aircraft on its overall performance.