THE EFFECT OF AIRLINE POSITIONING ON PROFIT

Abstract

Understanding how customer service quality and price (airfare) affect carrier profit is an important issue in the airline industry. Competition among air carriers is growing, and passengers are becoming more selective because of their greater access to up-to-date airfare and other carrier information through the Internet. In this competitive environment, carriers are having difficulty maintaining satisfactory levels of profits. These conditions demonstrate that carriers need to better understand how they can improve profits by manipulating service quality and pricing. In the air transportation literature, however, only a limited number of studies have empirically studied the effect of service quality and pricing on profits. Moreover, these studies provided separate implications of service quality on profit holding the price effect fixed, and the effect of price on profit holding the service quality effect fixed. However, changing the value of one variable while holding the other fixed is difficult because an inverse relationship exists between good service and low price. This article empirically examines the profit implication of service quality and price by giving consideration to the trade-off pattern between these variables. A model that investigates the optimal mix of service quality and price for a given level of per-passenger profit is developed and estimated. Results and implications are presented.

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