Service quality, service recovery, and financial performance: An analysis of the US airline industry

Abstract

This study on the airline industry covers the period from 1990 to 2006 and finds that “complaints” is a leading indicator of future financial performance as measured by return on sales (ROS) one-quarter ahead. Results also indicate that this effect persists into longer-term future performance (i.e., the average of one-quarter and two-quarter-ahead) as measured by return on assets (ROA) and ROS. Findings also indicate that service recovery effort in reducing mishandled baggage, is associated with higher future financial performance as measured by one-quarter-ahead ROA. Similarly, service recovery efforts, in reducing mishandled baggage and complaints, are found to be associated with both short-term and longer-term future financial performance as measured by ROA or ROS. Nevertheless, this relationship diminishes when flights have a higher “load factor” (or higher enplanements). Literature on service operations states that although service failure (such as flight cancellations, delays, misconnections, mishandled baggage, or over boarding) can negatively affect customer repurchase intentions, employees' ability to diagnose and respond to problems at the critical moment can overcome negative effects of a service failure. This suggests that management should consider having trained frontline employees and flight attendants provide comfort, assurance, empathy, support, and assistance to customers following service failures. This should help to enhance repurchase behavior and brand loyalty thereby improving future financial performance.