Airline Costs and Managerial Efficien cy

The drastic decline in profits of domestic trunk airlines after the introduction of jet service in 1959 brought many complaints from the airlines and financial columnists. In the winter of 196 1—62, when the clamor was loudest, one analyst said that the airlines "as a whole are seriously sick, perhaps almost as much as their rivals, the railroads. " 1 Most explanations of low profits centered on "CAB-induced over-competition " 2 and "an abrupt slowdown in the growth of passenger traffic. " In other words, it was assumed that lower profits were caused by a decline in revenues relative to costs, and not much attention was given to the possibility that costs were higher than necessary. But some of the airlines were making substantial profits, and at the same time there was considerable intercarrier variation in the level of average cost. A curious observer would notice, for example, that in 1960 the average cost of the operations of Continental Airlines was 74 per cent of that at United Air Lines. Was this inevitable? Were all intercarrie