Have Asian airlines caught up with European Airlines? A by-production efficiency analysis

•We propose an extension of the by-production approach to account for group heterogeneity.•Meta-frontiers are established using good-output, bad-output and by-production efficiencies.•CO2-e as a bad output, along with TKA, is used to compare European and Asian airlines.•European airlines have shown better by-production efficiencies over time.•European airlines’ inclusion in the ETS has set incentives to optimise their operations. This paper extends previous approaches to meta-efficiency measures by incorporating meta-frontiers using good-output, bad-output and by-production efficiencies to compare European and Asian airlines. We also examine whether the heterogeneity in environmental regulatory standards between these regions has emboldened Asian airlines to be less eco-friendly and/or more market-share seeking. We find that the environmental performance of European airlines improved continuously between 2007 and 2013, unlike their competitors in Asia. We argue that this improvement in the environmental performance of the European airlines could be an outcome of the European Emission Trading Scheme (ETS), which set incentives for European airlines to renew their fleets and optimise their operations. Our technological gap ratio estimates also point to some Asian airlines outperforming all other airlines on technological measures, indicating they operate in a more favourable business environment. Overall, our method contributes to the methodological enhancement of data envelopment analysis (DEA) and allows deeper insights into firm operations in general, and environmental efficiency analysis of European and Asian airlines in particular.