Efficiency measurement using Data Envelopment Analysis combined with Principal Component Analysis

Frontier analysis methods, such as Data Envelopment Analysis (DEA), seek to investigate the technical efficiency of productive systems which employ input factors to deliver outcomes. In economic literature one can find extreme opinions about the role of input/output systems in assessing performance. For instance, it has been argued that if all inputs and outputs are included in assessing the efficiency of units under analysis, then they will all be fully efficient. Discrimination can be increased, therefore, by being parsimonious in the number of factors. To deal with this drawback, we suggest to employ Principal Component Analysis (PCA) in order to aggregate input and output data. In this context, the aim of the present paper is to evaluate the performance of an Italian airline for 2004 by developing a model based upon PCA and DEA techniques.