An Analysis of the Cost Structure of Air Transport Industry (Deriving Economies of Density, Scale and Scope)

This paper annually estimates the economies of density, scale and scope with the data of cost and output of 27 leading air carriers to suggest the political findings and strategies of raising the cost efficiency of our air transport industry. The estimation results and their implications are as follows. First, KAL and Aha would reduce their cost if they could increase international route density. Second, KAL and AAR would reduce their cost if they could expand the network but save their cost more effectively if they could increase international route density rather than expand the network. Third, the minimum efficient scale that minimize average cost of two national flag carriers which operate by the present output ratio among domestic passenger, international passenger and freight appears to be larger than each present output level of KAL and AAR. Meanwhile, it appears that minimum efficient scale of small size low cost carriers which operate domestic-oriented route is much smaller than minimum efficient scale of national flag carriers. Finally, it appears that there exists the diseconomies of scope between domestic passenger and the other outputs, that is, international passenger and freight and therefore save their cost if freight output ratio is higher and domestic passenger output ratio is lower than the Present level.