AN UNDERSTANDING OF FACTORS THAT INFLUENCE THE PERFORMANCE OF AIRLINES

Author: Iloka Benneth  Chiemelie

Published: 21-September- 2014

INTRODUCTION

The airline industry has fast changed the way people move from one place to another, or transport goods and services. This is because it is the fastest means of travel in modern time. Adoption also mean that investors have found it to be a profitable investment system. Thus, the emergence of numerous airlines across the world is not a surprise as the battle for supremacy continues in the aviation industry. However, just like every other business, the success or failure of airline industry depends on consumers’ desire and decision to accept airlines as a reliable means of transport. Without a doubt, this will be influenced by both the cost of using the service and the level of reliability in terms of service delivery. Additionally, sustainability is key because it will ensure continuity in operations and returns on investment.

On the ground of the above discussion, this paper is designed to understand factors that influences the performance of airlines. As such, this paper is basically divided into three sections. The first section is the introduction, which is designed to highlight what will be done and how it will be done. The second section is the review of literatures, which presents a clear understanding of factors that influences performance of airline industry. The final section is conclusion and recommendations on airlines on ways to improve overall performance in order to ensure sustainability in operations delivery.

2.      DISCUSSION AND ANALYSIS OF FACTORS THAT INFLUENCE PERFORMANCE OF AIRLINES

2.1. Customer service and customers’ satisfaction

In the scholarly world, the relationship between customer service and customer satisfaction has received a great deal of attention. Dresner and Xu (1995) are amongst the researchers that have extended such attention in the transportation and logistics field by examining the link between customers services and customers satisfaction by making use of data from the airline industry. The researchers discovered three attributes of customer service in the industry to include mishandled luggage, ticket over-sale, and on-time performance, and these attributes were all found to be positively related to customer complaints and the way they measure satisfaction. With particular reference to the U.S. Department of Transportation, it has been noted that the reduction of mishandled baggage and ticket-over sales coupled with on-time flight performance will contribute to reduced level of complaints from customers as well as increase their overall level of satisfaction with the quality of services offered by airlines. As noted by Park & Zhang (2000), data from the Korean airline industry also shows similar relationship with hat of the U.S. Department of Transportation in term of how quality airlines services increases the level of customer satisfaction. Findings from other industries across the world have also shown comparable results. For instance, the use of subjective data established in the retail industry were found to view quality of services as having direct positive impact on customers satisfaction (Babakus et al., 2004). Yee et al. (2008 and 2010) also produced similar results from the survey of 206 service shops in the Hong Kong.

Majority of the empirical research that have been done in the transportation and logistics field have presented an assumed linear relationship between customer service and customer satisfaction (e.g., Sim et al. 2010; Yee et al. 2010 and 2008; Behn and Riley 1999). In any case, there is a possibility of the relationship likely being nonlinear due to dishing margin returns that can come from customer service. This stands as a major reason why it is important to increase customer services as such will lead to increased level of customer satisfaction, but the diminishing marginal return will eventually set in. A number of studies have also come strong to support such nonlinear views (e.g., Anderson and Mittal 2000).

2.2. Customer satisfaction and performance of firms

While few researchers have found no significant level of relationship (Arthur Andersen, 1994), or even negative relationship between customer satisfaction and the financial performance of firms (Ittner and Larcker 1998), greater amount of literatures have been successful in suggesting quality customer service will influence the performance of the company positively as such will reduce marketing cost and effectively increase demand elasticity. Anderson et al. (1994) followed this part of understanding in their study of Swedish firms by making use of company-level market share data gathered between 1989 to 1990 and found that companies providing higher quality customer services performed better than other companies. The main reason for linking customers’ satisfaction to increased productivity of a firm comes from the understanding that it influences the repurchase intention of customers positively (e.g., Stank et al. 1999; Verhoef 2003). As such, customers’ satisfaction lead to increased level of customer loyalty, which will in turn help in enhancing the profitability of a firm (Anderson et al. 1994; Mittal and Kamakura 2001). Additionally, satisfied customers are willing to pay for premium price, which will contribute positively to increasing the profitability of the company (Homburg et al. 2005).

The study by Dresner and Xu (1995) and Behn and Riley Jr. (1999) is probably the most important literature in this field. Dresner and Xu (1995), conducted an examination of the impact of customer service on satisfaction level of customers as well as the impact of increased satisfaction on the profitability of the airline industry. Their finding is that increased level of satisfaction will contribute to increased profitability for the company even after the company bears additional costs involved in increasing the level of customer service. In support of the above idea, Behn and Riley Jr. (1999), adopted some operating measure in their own model in order to determine how nonfinancial airline information which include the level of customers’ satisfaction can influence the financial performance of airlines. The researchers made use of instrumental variables approach which are similar to that of Dresner and Xu (1995), and they found that there is a positive relationship between customer satisfaction and operating income of airlines. Addition studies from two airline industry by Yee et al. (2008 and 2010) established positive relationship between the level of customer satisfaction and performance of firms.

2.3. Market competition

Although the studies cited above do have clear evidence that there is positive relationship between customers’ satisfaction and firms’ performance, there are other studies with the view that competitive environment can have influence on the level of relationship between these two variables. Majority of the work in this area have looked into how market structure might be correlated with customer satisfaction, or how customer service of satisfaction can have direct influence on profitability of the firm. As noted by Mazzeo (2003), who conducted an investigation on route-level concentration in the airline industry, there is a relationship between on-time performance and the concentration of route-level in the industry. The researcher then came to a conclusion based finding that delays in the airline industry are more frequent on concentrated routes. Mayer and Sinai (2003) also established a link between airport concentration and the length of airline delays. Dominant carriers in an airport hub might schedule s many as possible flights they wish to land or leave at the same time, which will cause delays in schedule. Forbes (2008) also found that on the average, falls in price do increase with delays, and this will have a response to delays in larger competitive market, further leading to reduce performance of airlines.

For this study, the presented argument is that the impact of customer satisfaction on the performance of firms as measured by experienced profitability is influenced by the level of the market competition. In more detailed analysis, markets that are less competitive are linked to weakened profitability because firms operating in these markets won’t be able to measure any profitability even when customers are increasingly satisfied. Based on the above understanding, Banker and Mashruwala (2007) made use of data from grocery industry in order to determine how market conditions influences performance of firms and they discovered that the relationship between the degree of competition in the market and level of customers’ satisfaction does influence the financial performance of firms greatly in this industry. From the ideas of Banker and Mashruwala (2007), Herfindahl- Hirschman Index (HHI) can be used to measure how degree of market concentration in this study instead of just focusing on competitors.

There is also another measure of firms’ competition and it is the market share. If the level of market competition is constant, there are possibilities that a firm’s dominance will have an impact on the existing relationship between customers’ satisfaction and performance of the firm. According to Hofer et al. (2008) who conducted an examination of factors that influence the prices that premium air carrier are able to charge at their hub airports, the impact of concentration and dominance on performance of airlines can be separated. The authors made the discovery that there is a correlation between dominance and concentration, and came to the conclusion that these factors does have negative influence on the price that hub carrier charge. In a more specific analysis, a dominant airlines can achieve higher profitability than a less dominant airlines if it offers lower level of customer satisfaction. How dominant an airlines is in the aviation industry can have customers actually “locked in” to their operations through frequent flier plans. As such, customers can decide to fly with these dominant airlines even when the quality of services offered are lower than other.

2.4. Business model of the airline

Business model is used to make reference to the different cost structures adopted by airlines in the course of their operation. An airline can choose adopt full service model or a low cost carrier model in its operation. The business model adopted by an airline will reflect the degree of independence in decision making and flexibility that an airline can have while facing turbulent period and this can have adverse influence on their overall financial performance. The faster an airline can make critical decisions, the better because the airline can minimize incurred on the performance of the company through bad decisions.

A number of literatures have looked into understanding how business model influences the performance of airlines (Vlaar et al. 2005; Alves & Barbot, 2007; Barbot et al., 2008; Lee & Worthington, 2010; Assaf & Josiassen 2011; Abda et al., 2011). The findings from such studies have similar notion in the understanding that low cost carriers (LCCs) have high degree of technical efficiency when compared with full service carrier and this allows them to perform better with potential positive influence on their overall financial performance. Some of the reasons behind the high level of technical efficiency in LCCs is because their business model allows them to lower their operation cost, which results in lower average fares and a subsequent increase in customer volume (Abda et al., 2011). Still on a similar note, Vlaar et al. (2005) linked increased sustainability of LCC to fast extraction value in terms of the way they adjust easily to changes in the industry. One of the distinctive feature of LCC is their corporate governance structure that allows the airlines to reduce their operation cost while also addressing emergency with faster decisions (Alves & Barbot, 2007). A good example will be cases where the management makes fast decision to slash routes which are viewed as unprofitable or make necessary adjustment in their input costs in cases where the jet oil price skyrockets. Such measures will help them to remain profitability even in the midst of problems.

2.5. Ownership and control

How an airline is owned does signify the level of control that a given individual wield over the percentage of share another person or company has in the company. Thus, it is clear indicator of how fast the decision making process will be in the course of crisis and during periods that call for cost saving. Generally, public ownership of airlines is a clear indicator of large size of its corporate governance and this will likely slow down the decision making process because any decision made must get approved by the board members before it can be made effective. From a different wing, airlines that are privately owned tend to enjoy a higher degree of autonomy in term of how decisions are made and this can make such airlines more successful than the publicly owned ones. Other features that can be noticed in the airline ownership is how foreign ownership are minimize in order to protect the interest of the national shareholders. This is more prevailing in most of the state owned airlines across the world.

In terms of measuring how ownership influences performance of airlines, a number of studies (such as Fethi & Jackson, 2000; Backx et al., 2002; Chang et al., 2004; Scheraga, 2004; Carney &Dostaler, 2006; Cheon, 2007; Barros & Peypoch, 2009; Clement Chow, 2010; Sjogren & Soderberg, 2011; Boyd & Hollensen, 2012). Majority of the studies done on the relationship between ownership types and performance of airlines before 2010 have focused more on uncovering a rather ambiguous finding that established no relationship between ownership of airlines and its performance (Fethi & Jackson, 2000; Scheraga, 2004; Carney &Dostaler, 2006; Barros & Peypoch, 2009; Sjogren & Soderberg, 2011). The authors are of the view that the main element in ownership type is actually not who owns the airline, instead it is all about the operational objectives held by the mangers and the interest as well as identity of the owner that actually determine how sustainable the performance of an airline company can be.

Contrasting with such idea, Backx et al. (2002), Chang et al. (2004) and Boyd & Hollensen (2012) have provided support on the understanding that airlines privately owned do perform better than those publicly owned. These authors conducted more in-depth study in their investigation of the influential factors that drives the performance of privately owned airlines better than that of publicly owned airlines. One of the major factors that was highlighted by these authors is the high level of absorptive capacity that these airlines have as a result of flexibility in their management style and stronger networks coupled with employees’ relationship on the long-term that can lead to higher level of competitiveness of privately owned airlines. Chang et al (2004) also conducted a much aligned study on that ground and pointed out that the relaxed nature of ownership and control measure is private airlines are made very much established in such a way that issues related to safety, security, economics and other social factors are tightened up and not compromised in any way. In summarize, there is no agreed level of understanding on whether the kind of ownership will have any effect on the performance of airlines. Majority of the findings derived from the quantitative analysis don’t provide nay support on the hypothesis that publicly owned airlines are inefficient, but qualitative approach does provide the support in any case.

2.6. Liberalization / deregulation of the airline industry

On a general sense, there is a consensus that at market liberalization does increase the efficiency and performance of airlines at least by the proponents of free market economy. Liberalization eliminated the entry barriers wading off new and potential carriers, thus increase the level of competition in the market. In order to attract more passengers, airlines in highly competitive market have to cut operation cost to lower their air fare or their passengers will switch to competitors with lower price.

From the case of U.S as a reference scenario, the introduction of the 1978 air transport deregulation policy in the U.S., brought about increased attempts to investigate the impacts that loosening airport trade regulation can have on the efficiency and performance of airlines with such studies being captured by researchers such as Good et al. (1993), Mar‟in (1998), Fethi & Jackson (2000), Wong & Chen (2005), Inglada et al. (2006), and Sjogren & Soderberg (2011). Their finding is that there is a direct positive relationship between opening up the air transport market and overall efficiency of airlines. Such liberalization artifacts are measured by the degree

The liberalization process come in the form of open skies policy, partnership with other airlines and union membership. Such factors will provide the airline with higher degree performance through profitable partnership, thus leading to the final hypotheses.

3.      Conclusion and recommendation

From the above analysis, a number of factors have been discovered in the area of variables that influence overall performance of airlines in the industry. Such factors as found from this research are: market competition, liberalization, customer services, customer loyalty, business model, fare price, quality of service, airport congestion and so on. Thus, it is now clear that the performance of airline industry is influenced by a number of factors, which makes it important to align as many of these factors are possible in order to attain desired outcome in profitability and performance. In any case, it is also important to understand that customers’ satisfaction is the main influential factor because customers are the ones returning investments through their procurement of the airline services. Thus, it is very important that airlines align customers’ needs with their business processes in order to ensure that their main objective is keeping customers satisfied. The importance of such is reflected on the level of loyalty it will bring about, which will influence profitability positively.

Besides customers satisfaction, brands in the aviation industry also needs to understand other variables discussed above in order to ensure that they effectively align their corporate views with standards obtainable in the aviation industry. Thus, it is concluded that performance of airlines is very important because just like other businesses, it has a direct influence on sustainability. However, attaining such sustainability is not easy but it is possible if the discussed variable are aligned together as highlighted.

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