Indian Airlines
1
CAPACITY UTILIZATION IN INDIAN AIRLINES
Danish A. Hashim*
Sir Ratan Tata Fellow
Institute of Economic Growth
Delhi. 110 007. INDIA.
E-mail: danish_hashim@yahoo.com
April 2003
Abstract
The financial performance of the state -owned Indian Airlines has deteriorated since 1989-
90. The main reasons cited for the poor financial performance of Indian Airlines include: rising fuel prices, excess staff, serving uneconomic routes and increasing expenses on insurance. However, low capacity utilization has rarely been cited as one of the main reasons for the poor performance. The present study thus makes an attempt to measure the extent of capacity utilization in Indian Airlines and its impact on the unit cost of production.
Using data from 1964-65 to 1999-00 and applying a translog variable cost function, the capacity utilization has been estimated with respect to two alternative measures of potential output: (i) where short-run average cost is minimum, and (ii) whe re short-run and long-run average cost curves are tangent. The results reveal that the capacity utilization in Indian
Airlines has been poor in general and also declining over the last decade. Therefore, the study suggests a need to improve the capacity utilization, which in turn would improve the financial performance of Indian Airlines by reducing its cost per unit of output.
* The present study is a part of my work as a Sir Ratan Tata Postdoctoral Fellow at the Institute of Economic
Growth, Delhi, India. I am grateful to Prof. B. N. Goldar and Prof. Arup Mitra for their valuable comments and suggestions. I would also like to thank Dr. D. N. Nayak, M. S. University of Baroda, Dr. Vinish Kathuria,
Madras School of Economics, and Mr. Pravakar Sahoo, IEG, for their helpful comments. An earlier version of this paper was presented at the Institute of Economic Growth, Delhi, on 27 December 2002. Comments from seminar participants were helpful in fine-tuning the paper. The usual disclaimer
CAPACITY UTILIZATION IN INDIAN AIRLINES
Danish A. Hashim*
Sir Ratan Tata Fellow
Institute of Economic Growth
Delhi. 110 007. INDIA.
E-mail: danish_hashim@yahoo.com
April 2003
Abstract
The financial performance of the state -owned Indian Airlines has deteriorated since 1989-
90. The main reasons cited for the poor financial performance of Indian Airlines include: rising fuel prices, excess staff, serving uneconomic routes and increasing expenses on insurance. However, low capacity utilization has rarely been cited as one of the main reasons for the poor performance. The present study thus makes an attempt to measure the extent of capacity utilization in Indian Airlines and its impact on the unit cost of production.
Using data from 1964-65 to 1999-00 and applying a translog variable cost function, the capacity utilization has been estimated with respect to two alternative measures of potential output: (i) where short-run average cost is minimum, and (ii) whe re short-run and long-run average cost curves are tangent. The results reveal that the capacity utilization in Indian
Airlines has been poor in general and also declining over the last decade. Therefore, the study suggests a need to improve the capacity utilization, which in turn would improve the financial performance of Indian Airlines by reducing its cost per unit of output.
* The present study is a part of my work as a Sir Ratan Tata Postdoctoral Fellow at the Institute of Economic
Growth, Delhi, India. I am grateful to Prof. B. N. Goldar and Prof. Arup Mitra for their valuable comments and suggestions. I would also like to thank Dr. D. N. Nayak, M. S. University of Baroda, Dr. Vinish Kathuria,
Madras School of Economics, and Mr. Pravakar Sahoo, IEG, for their helpful comments. An earlier version of this paper was presented at the Institute of Economic Growth, Delhi, on 27 December 2002. Comments from seminar participants were helpful in fine-tuning the paper. The usual disclaimer
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