Examining trade-offs in the airline industry

Abstract

Firms develop and manage their operational capabilities to improve efficiency and competitive positioning. However, as the theory of performance frontiers (TPF) suggests, there are limits to these gains. As firms become more efficient, they are likely to be trading off capabilities rather than pursuing them simultaneously. A key question that arises is whether these trade-offs are beneficial for firms. In this paper, we apply the TPF to firms in the airline industry. Specifically, we address whether a firm's efficiency levels are associated with trade-offs and if level of efficiency subsequently affects the firm's market success. We employed the data envelopment analysis (DEA) methodology to analyse operational capabilities and determine the efficiency of all airlines operating domestically in Australia over a ten-year period. The results show broad support for TPF. Firms that demonstrated efficiencies were trading off capabilities with associated market success.