This study proposes a by-production Luenberger-Hicks-Moorsteen indicator that includes undesirable outputs, here CO2 emissions, in airline performance analysis. We use capital and staff as inputs and tonne-kilometres available as a desirable output to evaluate operation stage efficiency and productivity of the world's major airlines between 2007 and 2013. Our results demonstrate European airlines are relatively stronger performers in terms of both pollution-adjusted operational efficiency and productivity. Middle-Eastern airlines have made gains in terms of output growth but perform poorly in terms of pollution-adjusted productivity, evidence that ETSs may produce greener airlines.
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