Linking business strategy to service failures and financial performance: Empirical evidence from the U.S. domestic airline industry

• DOI: http://doi.org/10.1016/j.jom.2015.06.003
• Author: Kathleen L. McFadden,Jason W. Miller,Davood Golmohammadi,Mahour Mellat‐Parast
• Published date: 01 September 2015
• Date: 01 September 2015

Journal

of

Operations

Management

38

(2015)

14–24

Contents

lists

available

at

ScienceDirect

Journal

of

Operations

Management

jo

ur

nal

ho

me

pa

ge:

www.elsevier.com/locate/jom

Linking

business

strategy

to

service

failures

and

financial

performance:

Empirical

evidence

from

the

U.S.

domestic

airline

industry

Mahour

Mellat-Parasta,

Davood

Golmohammadib,

Kathleen

L.

McFaddenc,∗,

Jason

W.

Millerd

aNC

A&T

State

University,

Greensboro,

NC,

United

States

bUniversity

of

Massachusetts-Boston,

Boston,

MA,

United

States

cNorthern

Illinois

University,

DeKalb,

IL

60115-2854,

United

States

dColorado

State

University,

Fort

Collins,

CO,

United

States

a

r

t

i

c

l

e

i

n

f

o

Article

history:

Received

20

May

2014

Received

in

revised

form

23

June

2015

Accepted

25

June

2015

Available

online

26

July

2015

Accepted

by

Daniel

R.

Guide

Keywords:

Quality

management

Service

failures

Service

quality

Business

strategy

Firm

performance

Airline

operations

a

b

s

t

r

a

c

t

Developing

an

understanding

of

the

relationship

between

service

quality

and

profitability

is

of

cen-

tral

importance

to

operations

management

scholars.

In

this

study

we

seek

to

reconcile

inconsistencies

between

extant

theory

and

empirical

findings

regarding

the

relationship

between

service

quality

and

profitability

in

the

airline

industry.

More

specifically,

we

draw

on

theories

from

strategic

management,

operations

strategy,

and

economics

to

explain

why

the

relationship

between

measures

of

service

qual-

ity

and

profitability

will

be

moderated

by

an

airline’s

competitive

strategy.

We

test

our

hypotheses

by

fitting

mixed-effects

models

to

longitudinal

data

obtained

from

several

governmental

databases

in

the

context

of

the

U.S.

domestic

airline

industry.

We

find

that

airline

strategy

moderates

the

relationship

between

some

service

failures

and

profitability.

Specifically,

we

find

that

mishandled

baggage

and

cus-

tomer

complaints

more

negatively

affect

the

profitability

of

focused

than

non-focused

airlines.

We

also

find

the

relationship

between

arrival

delays

on

profitability

is

universally

negative

for

focused

airlines,

but

displays

an

inverted

U-shaped

relationship

for

non-focused

airlines.

Our

findings

provide

significant

contributions

to

the

existing

body

of

knowledge

in

service

quality

and

operations

strategy.

We

further

outline

the

implications

of

these

findings

for

practice

and

future

research.

©

2015

Elsevier

B.V.

All

rights

reserved.

1.

Introduction

The

relationship

between

service

failures

(the

inverse

of

service

quality)

and

firm

profitability

is

of

central

importance

to

operations

management

scholars

(Davis-Sramek

et

al.,

2008;

Voss

et

al.,

2005;

Yee

et

al.,

2008).

One

context

in

which

this

relationship

has

been

fre-

quently

examined

is

the

U.S.

domestic

airline

industry

(Dresner

and

Xu,

1995;

Steven

et

al.,

2012;

Tsikriktsis,

2007).

A

review

of

these

studies

reveals

several

findings

that

are

inconsistent

with

the

dom-

inant

perspective

embodied

by

the

service

profit

chain

(Heskett

and

Schlesinger,

1994)

which

implies

that

service

failures

should

negatively

affect

firm

profitability.

For

example,

Dresner

and

Xu

(1995)

find

that

[1]

an

increase

in

on-time

arrival

rate

negatively

predicts

profitability,

[2]

an

increase

in

the

rate

of

mishandled

bag-

gage

positively

predicts

profitability,

and

[3]

an

increase

in

the

rate

∗Corresponding

author.

Tel.:

+1

815

753

6374;

fax:

+1

815

753

7460.

of

involuntary

denied

boardings

(ticket

over-sales)

positively

pre-

dicts

profitability.

As

another

example,

Steven

et

al.

(2012)

find

an

inverted

U-shaped

relationship

between

on-time

arrival

rate

and

profitability

such

that

profits

are

maximized

when

approximately

17%

of

an

airline’s

flights

did

not

arrive

on

time.

As

such,

there

is

the

need

for

a

more

nuanced

examination

of

the

link

between

service

failures

and

profitability

to

reconcile

these

findings

with

extant

theory.

In

this

study,

we

provide

this

more

nuanced

examination

by

proposing

that

the

relationship

between

service

failures

and

air-

line

financial

performance

is

contingent

on

an

airline’s

competitive

strategy.

Airlines

serving

the

domestic

U.S.

market

adopt

one

of

two

strategies.

The

first

strategy,

which

has

been

labeled

by

vari-

ous

authors

as

“geographic

specialist”

(Lapré

and

Scudder,

2004),

“focused”

(Lapré

and

Tsikriktsis,

2006;

Tsikriktsis,

2007),

and

“low-

cost”

(Wittman,

2014),

is

characterized

by

[1]

flying

point-to-point,

[2]

serving

a

limited

number

of

geographic

regions

and/or

city

pairs,

[3]

operating

fleets

consisting

of

a

few

aircraft

types,

[4]

http://dx.doi.org/10.1016/j.jom.2015.06.003

0272-6963/©

2015

Elsevier

B.V.

All

rights

reserved.