Abstract
A problem of distinguishing between frontier heterogeneity and inefficiency is widely acknowledged in benchmarking. A special type of heterogeneity, based on the spatial structure, can significantly affect performance estimates in the airport industry. In this research we presented a general specification of the spatial stochastic frontier model, which includes spatial lags, spatial autoregressive disturbances and spatial autoregressive inefficiencies. Maximum likelihood estimator has been derived for this model. Applying the suggested model specification to the European airports dataset, we discovered presence of significant spatial heterogeneity, which leads to biased estimates of efficiency, received using classical models.