European airlines: a stochastic DEA study of efficiency with market liberalisation

Stochastic DEA constructs production frontiers that incorporate both inefficiency and stochastic error. This results in a closer envelopment of the mean performance of the companies in the sample and diminishes the effect of extreme outliers. We use the Land, Lovell and Thore (1993) model incorporating information on the covariance structure of inputs and outputs to study efficiency across a panel of 17 European airlines in the 1990s during the early phase of liberalisation. After allowing for stochastic error in computing the relative efficiencies we conclude that the airlines that were efficient in 1995 resembled those that were efficient in 1993 but not those in 1991. The airlines that were efficient in 1995 were the larger companies.