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Input Efficiency Profiling: An Application to Airlines

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Document pages: 15 pages

Abstract: An obvious measure of efficiency or productivity is the ratio of output to input. When there are multiple outputs and or inputs one approach is to take weighted combinations before calculating the ratio. How should these weights be chosen? In comparing the efficiency of organizational units data envelopment analysis (DEA) allows each unit to employ its own weights so as to maximise its score subject to the condition that these weights do not cause any unit to attain a score exceeding 100 . One difficulty that arises with DEA is that when the number of units being compared is small there is poor discrimination and a large proportion of them are rated as 100 efficient. Secondly the DEA assumption that all inputs at a given (‘naturally enveloped’ or dominated) firm will be inefficient to the same degree seems to be unrealistic and unnecessary. This paper presents a more searching and discriminating way of showing managers the source and extent of inefficiencies by simply applying DEA to each input resource separately in the case when inputs cannot be substituted for each other. If two or more inputs are substitutes then these are analysed together. By way of illustration the approach is used to compare major passenger airlines.

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