Academic journal article Journal of Management Information and Decision Sciences

Airline Quality, Load Factors and Performance

Academic journal article Journal of Management Information and Decision Sciences

Airline Quality, Load Factors and Performance

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Prior research has produced mixed results regarding the relationship between quality and its effect on performance in the airline industry. This divergence may be a result of different approaches used to measure both elements. One measure of quality is the Airline Quality Rating (AQR). AQR is commonly used to assess quality in the airline industry and has been a published statistic for over two decades. It utilizes objective elements purported to be important to airline travelers, and combines them into a composite score. However, the AQR score has been criticized in academic research for not having the proper informational content. In fact, prior research often replaces it with the source data used to calculate the composite score.

Furthermore, using AQR as a measure of quality can produce seemingly contradictory results. A recent study by researchers at Wichita State and Embry-Riddle Universities showed that while passenger complaints related to the annual airline quality rating system were down last year, lost baggage and late arrivals increased (Airline Quality Rating, 2014). Customer satisfaction with U.S. carriers is lower than either hotels or online travel agencies. The American Customer Satisfaction Index, also conducted annually, results in ratings based on a 100-point scale (About the Airline, n.d.). Given that grades fall into traditional 10-point breaks (90 and above = A, 80 to89 = B, etc.), hotels and online travel agencies earned solid C's, respectively.

The domestic airlinelndustry, however, earned a D. The interesting paradox is that hile the 2013 airline quality Rating (AQR) is up, other measures of customer satisfaction are down. Measuring performance in the airline industry has also been problematic. Traditional operational measures, such as the ratio of operating income to operating costs, are commonly used in prior research. This traditional approach has been criticized owing to lack of variability within the industry, and the fact that extraneous variation, such as fuel hedging policies, cloud performance. Perhaps a non-financial measure is better used. We suggest a statistically significant explanation of the complex relationship between airline quality, as measured by the AQR, and customer choice of airline, as measured by a form of load factors. We also compare results of the relationship using AQR and its underlying components. We begin with a review of relevant literature, move to data and methodology, present results, and end with discussion.

LITERATURE REVIEW

There are many articles exploring the relationship between quality and performance. In this research we draw upon the following. Anderson and Mittal (2000) discuss the linkages among measureable attributes, customer satisfaction, customer retention, and profitability. They present a theoretical argument that the linkages are asymmetric and non-linear. They show that a decrease in an attribute such as mishandled baggage, may have a larger effect on customer satisfaction than a corresponding increase in the same attribute. In other words, the slope of the loss function is much steeper than the slope of the gain function. They posit the same type of relationship exists for the linkage between customer satisfaction and customer retention. As a result, they believe for each firm an optimal point exists for customer satisfaction attributes. Spending to increase customer satisfaction beyond that point yields diminishing returns. On the other hand, allowing that attribute to decline immediately results in decreased profits.

Banker, Potter, and Srinivasan (2000) found that non-financial measures of performance such as quality and customer satisfaction are leading indicators of future performance. This result contrasts with Ittner and Larker (1998), who found limited support for customer satisfaction being a leading indicator of customer behavior, growth in the number of customers or performance as measured by financial accounting results. …

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