Multifactor productivity change in the air transportation industry: productivity increases in the U.S. airline industry—the Nation's primary intercity mass transportation system—have played a significant role in the industry's cost-containment efforts and its ability to accelerate growth

Monthly Labor Review, March, 2005 by John Duke, Victor Torres

The U.S. air transportation industry is a key component of the U.S. economy. About 42 percent of all passenger trips with roundtrip distances of between 1,000 and 1,999 miles are taken by plane. This percentage increases dramatically to 75 percent if the roundtrip distance is at least 2,000 miles. (1) Advances in technology that led to the development of modern jets, along with the Airline Deregulation Act enacted by Congress in 1978, have allowed the U.S. airline industry to become the primary intercity mass transportation system in this country. The air transportation industry is important to our national economy, but it faces unprecedented challenges. (2) The economic downturn that began in early 2001 and the terrorist attacks of September 11, 2001, led to reduced demand for air travel thereby resulting in decreased profitability or losses for many companies. (3) These trends highlight the importance of controlling costs in the industry, and over the last three decades, productivity has played a significant role in the industry's ability to control costs and to accelerate growth.

For many years, the Bureau of Labor Statistics (BLS) has published a measure of labor productivity for air transportation. This article discusses and analyzes a new BLS measure of multifactor productivity for the air transportation industry, coded 481 in the North American Industry Classification System (NAICS), covering the period 1972 to 2001. This measure is consistent with the new definition of the air transportation industry under NAICS in which air couriers are no longer included in air transportation, but classified in NAICS 4921, couriers, instead.

Labor productivity relates output to the labor resources used in its production. It is an indicator of the efficiency with which labor is being utilized, an important indicator of economic progress. Despite its widespread use, a labor productivity measure should not be interpreted as representing only the contribution of labor to production. Changes in output per hour (or productivity) reflect a wide range of influences, including changes in technology, skill and effort of the workforce, organization of production, economies of scale, and the amount of capital per hour and intermediate purchases per hour. Labor productivity is a frequently used measure of economic performance. It is recognized by researchers as an important tool for monitoring the health of the economy. Over time, growth in real per capita income and increases in living standards tend to follow growth in labor productivity. Higher productivity growth increases the competitiveness of a business, industry, or nation. Moreover, labor productivity serves as a buffer against higher labor costs by offsetting part or all of the growth in compensation per hour.

Whereas labor productivity relates the change in output to the change in one input--labor--multifactor productivity relates the change in output to the change in a combination of inputs. Growth in multifactor productivity can be seen as a measure of economic progress; it measures the increase in output over and above the gain due to increases in a combination of inputs. The combined inputs measure is a weighted average of labor hours, capital services, and intermediate purchases. (4) The weights represent each input's share in the total cost of output. Although the amount and complexity of the data required to calculate a measure of multifactor productivity are much greater than those for a labor productivity series, a multifactor productivity measure yields valuable insights into efficiency beyond those derived from a labor productivity measure. For example, in air transportation, the expansion in the stock of widebody fleet in the mid- 1970s seems to be behind the productivity increase that is unrelated to load factors. (5) Similarly, because energy costs comprise a large part of intermediate purchases, "... the omission of this input component would seriously degrade the true measure of productivity trends." (6) Multifactor productivity reflects many of the same influences as the labor productivity measure, but by explicitly accounting for inputs of capital and intermediate purchases, the multifactor productivity residual reflects only changes in overall efficiency that are due to other unmeasured influences.

This article describes the patterns of multifactor productivity and labor productivity change in air transportation since 1972 and the sources of labor productivity change--namely, changes in multifactor productivity, capital intensity, and intermediate purchases intensity. It looks behind the aggregate data to describe output and the use of the productive factors--labor, capital, and intermediates--in this industry and how they have changed over time. The current situation in the industry is briefly discussed.

Overview of productivity change

Productivity trends in air transportation and the private business sector. Multifactor productivity in the air transportation industry increased at an average annual rate of 2.0 percent over the 1972-2001 period, almost triple the 0.7-percent rate for the private business sector as a whole (see chart 1). The labor productivity growth rates were not nearly as different, at 2.4 percent per year for air transportation and 1.7 percent for the private business sector. Multifactor productivity in air transportation decelerated from a very high average annual gain of 5.1 percent during the 1973-79 period to a 0.8-percent gain from 1979 to 1990, and it rebounded back to a 2.1-percent growth rate during the first half of the 1990s. The growth rate in labor productivity followed a similar pattern, dropping from an average of 5.6 percent during the first period to 1.6 percent during the second period, and increasing to a 4.2-percent average annual growth rate during the early 1990s. This was a very different pattern of productivity growth than that of the private business sector. Multifactor productivity in the private business sector showed almost identical growth rates in the 1973-79, 1979-90, and 1990-95 periods (0.6 percent, 0.5 percent, and 0.6 percent respectively). It then accelerated to 1.3 percent from 1995 to 2000. The 1990-2000 period, which represents a complete business cycle, is broken into two sub-periods to highlight the widely-noted business sector productivity speedup in the last half of the 1990s. The airline industry, however, did not experience a productivity speedup in either labor productivity or multifactor productivity from the first half of the 1990s to the second half.