Paper Title
Service Quality, Passenger Expectations and Profitability in The Chinese Airline Industry

Correctly perceiving what customers want and expect is a major step for helping the management of carriers for reducing customer complaints and achieving customer satisfaction. Indeed, businesspeople or academics regard customer satisfaction as a major measure of the product or service performance of business corporations. In the literature, Anderson et al. (1994), Fornell et al. (1996), Ittner and Larcker (1998), Rust and Zahorik (1993) showed that there is a positive link between customer satisfaction and the firm performance that an improvement in service quality helps raise revenue and profit. This is accomplished by increasing the customer base through new and repeat purchases from more loyal customers, lower price elasticity and positive word-of-mouth. As a consequence, airlines have been devoting plenty of their resources in improving their service quality and meeting what customers want. Besides the actual service quality delivered by carriers, customers’ expectations of the service quality also plays an important role in customers’ decision to file their complaints against their carriers. This paper focuses on studying the relationship between customer satisfaction measured by customer complaints and their expectation of the on-time performance of Chinese carriers and how the customer complaints affect the financial performance of carriers. We model the number of customer complaints against carrier i in period t received by the CAAC as a function of the actual (observed) service quality performance such as on-time performance of the carrier in that period and its expected performance of service quality in that period, E(sit), allowing for a constant effect α0. In some of the specifications, we also include the carrier fixed effects. Our analysis is conducted in three stages: (1) in the first stage, we estimate the expectation or prediction of service quality such as on-time performance. (2) In the second stage, we put the predicted variable of service quality into the customer complaint equation and generate the predicted variable of customer complaints. (3) The final stage is the analysis of the revenue and profitability of carriers given the fitted or predicted values of customer complaints in the second stage. By using a quarterly balanced panel data set of 248 observations in the data set covering six large listed carriers from 2nd quarter of 2004 to 4th quarter of 2015, the empirical results show that an increase in actual on-time performance reduces customer complaints. However, an increase in expected on-time performance significantly raises customer complaints. If customers have a higher expected on-time performance of carriers, they are also more likely to file complaints against their carriers. Finally, an increase in customer complaint reduces the yield measured as revenue per revenue ton kilometer (RTK) of carriers and operating margin of sampled carriers. The empirical results also provide support for the carriers to put in their resources to improve their service quality in order to yield a higher customer satisfaction as it can actually raise their profitability in the end. The management of carriers should monitor the customer feedback or complaints closely and devote sufficient resources to improve their service quality accordingly in order to achieve a relatively high customer satisfaction.