Asia Tourism Forum Conference May,2012

CUSTOMER SATISFACTION IN THE AIRLINE

INDUSTRY: THE ROLE OF SERVICE QUALITY AND
PRICE

Dwi Suhartanto*
The Department of Business Administration, Bandung State Polytechnic

Any Ariani Noor

The Department of Business Administration, Bandung State Polytechnic

Abstract
In service industry, service quality and price have an important role in influencing customer
satisfaction. This paper serves to add the knowledge by improving the understanding of how
service quality and price affect customer satisfaction in full service airlines and low cost
airlines. To test the hypothesis, data were collected using cross-sectional approach from
consumers of both full service low cost airlines. Using self-administered questionnaires, 400
respondent data (200 data from each airline) was collected using incidental sampling method
from Jakarta and Bandung. The results of data analysis show that, in overall, full service
airline customers are more satisfied than that of the low cost airline customers. Further,
regression analysis on low cost airline data shows that the promptness and accuracy of
service, employee attitudes, and price significantly influence customer satisfaction. While in
full service airline physical evidence, the attitude of employees, and the price are significant
predictors of customer satisfaction. This study underlines that the service quality especially
the service employees' attitudes and price are factors that should be given more attention for
developing customer satisfaction in both types of airlines, although their competitive strategy
and target market are different.

Key words: Customer satisfaction, service quality, price, airline

INTRODUCTION

In the last 25 years, the aviation industry has been growing rapidly. In addition to its
technological developments, the growing of airline industry due to its role as supporting the
world trade, international investment, and tourism activities. Because of these roles, it is often
said that the aviation industry is the center of globalization for other industries (Hanlon,
2000). The growing of the airline industry provides opportunities as well as challenges to the
business entities in this industry. The opportunities arise due to the increasing demand for the
airline services. While the challenges arise not only because of the high level of competition
between the airlines, but also due to growing consumer demands for better service. The
growing of this industry has led to the governments around the world to deregulate the
industry by enabling companies to form private airlines. Further, the stringent rules on safety
flight is currently applied in almost all countries.

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These conditions cause all players in the airline industry require to continuously
innovate in terms of both services and technology used to deliver services and better safety to
the consumers (Ringle, Sarstedt, & Zimmermann, 2011; Roades & Waguespack Jr., 2008). In
line with the efforts to continuesly innovate service, the airline industry previously dominated
by traditional airlines providing full service is currently enlivened also by the low-cost
airlines (Lawton, 2002). In contrast to full service airlines, low cost airlines offer low fares as
well as provide basic services and does not provide additional services such as those provided
by traditional airlines (full service airlines). The low cost airlines grew up in America and
Europe in the 1990s and the development of low cost airlines now has spreaded throughout
the world including Indonesia. In Indonesia, currently listed no less than nine low-cost
airlines serving short-haul flights, domestic as well as to neighboring countries like Malaysia
and Singapore. With emphasizing on low price strategy and providing efficient service
(commonly called no frills), low cost airline now a serious competitor for traditional airlines
which provide full service. This paper examines how service quality and price as airline’s
competitive strategy influence consumer satisfaction in both low cost and full service airlines.

LITERATURE REVIEW

Customer Satisfaction

Customer satisfaction is one of the objectives of marketing activity linking the process
of purchasing and consumption with post purchase phenomena. Satisfying customers is an
important element in marketing concept (Kotler & Armstrong, 2004) as it affects future
consumer purchase behaviour, profitability and shareholder value. (Chitty, Ward, & Chua,
2007).

There are many definitions given to the term customer satisfaction with one early given
stresses on cognitive process. More recently, consumer satisfaction paradigm research has
gone beyond cognitively toned formulations to recognise the affective nature of satisfaction
with Tse and Wilton (1988, p. 204) defining it as “consumer’s response to the evaluation of
the perceived discrepancy between prior expectation and the actual performance of the
product as perceived after its consumption”. While other variations of the definition of
customer satisfaction have been presented by scholars, most of the definitions agree that
satisfaction is a complex human process, involving cognitive, affective and other
undiscovered psychological and physiological dynamics (Bhattacharya & Singh, 2008).

Theories such as Expectation-Disconfirmation, Equity Theory, and Comparison-Level

Theory attempt to explain customer satisfaction (Skogland & Siguaw, 2004) and Expectancy
Disconfirmation Theory is arguably the most influential and has received the widest
acceptance (Ekinci, Massey, & Dawes, 2008). Expectancy-Disconfirmation Theory examines
the formation of expectations and the disconfirmation of those expectations through
performance comparison. Expectations reflect a pre-consumption perception associated with
goods and services, whereas performance is the basis of the customer’s perception of goods
and services. Disconfirmation arises from the discrepancy between prior expectation and
actual performance of the goods and services. This disconfirmation concept occupies a central
position as a crucial intervening variable in the Expectancy - Disconfirmation paradigm
(Gale, 1994). If an airline customer perceives the quality of service that he or she buys
exceeds their needs, wants, and expectations, his or her satisfaction toward the airline will be
high (positive disconfirmation). Alternatively, if he or she perceives that the quality of service
does not meet his or her needs, wants, and expectations, then, his or her satisfaction toward
airline will be low (negative disconfirmation).

Customer satisfaction research in various services contexts can be classified into two
categories. The first category is research that measures the level of guest satisfaction and
identifies the shortfall of the service delivery, e.g. Gu and Ryan (2008), Ryan and Huimin
(2007), and Barsky and Nash (2003). These tend to be more for managerial purposes as they

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are diagnostic in nature. The second category is research that examines customer satisfaction
in a multivariate model including its antecedent factors such as service quality, perceived
value, brand image, as well as its consequences such as customer loyalty (Li & Petrick, 2008;
Namkung & Jang, 2007). Overall, researchers agree that service quality and perceived value
(including price) are important determinants of customer satisfaction.

Service Quality

Service quality, a consumer's judgment about the overall superiority of a product or

service (Zeithaml, Bitner, & Gremler, 2009), is widely acknowledged as one of the important
determinants of brand loyalty. Service quality is an essential strategy for success and survival
of any business organisation, as it can influence customer purchase behaviour and
organisation performance (Zeithaml, Berry, & Parasuraman, 1996). Considering the
importance of service quality for any business, a great deal of service quality research in
recent decades has been devoted to examine this construct across industries. Despite a number
of service quality studies, there has been little consensus not only in its conceptualisation, but
also its measurement, dimensionality, and consequences.

A review on the service marketing literature indicates that there are mainly two types of
service quality conceptualisations: Nordic and American. The Nordic approach proposes that
a customer’s overall perception of service quality consists of functional and technical quality,
with technical quality being what customers get after the service delivery process in buyer-
seller interactions and functional quality is the interaction between employees and customers
during the service encounter (Lau, Akbar, & Fie, 2005). The American approach proposes
that service quality consists of reliability, responsiveness, empathy, assurances, and tangibles
dimension, known as SERVQUAL (Zeithaml, et al., 1996). This model, based on
Expectancy-Disconfirmation Theory, views that service quality is a gap between customers’
perceptions and expectations of service performance. Although researchers tend to use the
American approach over the Nordic approach, neither approach has been deemed universally
superior.

Acknowledging the shortfall of SERVQUAL in terms of theoretical and empirical

evidence, Cronin and Taylor (1992) recommended the SERVPERF model to assess service
quality. SERVPERF measures service quality by capturing customers’ performance
perceptions in comparison to their expectation of the service encounter. The debate between
SERVQUAL and SERVPERF is widespread with some scholars. Despite the differences in
their opinions, Carrillat et al.’s (2007) meta-analytic study reports that both models are
equally valid predictors of overall service quality. Other scholars conclude that SERVQUAL
is a suitable tool for diagnosing service shortfall and measuring the variance of dependent
constructs, while SERVPERF is commonly acknowledged as a suitable method for predicting
consequences variables such as customer satisfaction and brand loyalty (Cronin, Brady, &
Hult, 2000; Zeithaml, et al., 1996).

Price

Price is defined as what customers actually pay in exchange for the benefits accruing
from a product or service (Lovelock & Wirtz, 2007). Services firms are relatively
undifferentiated from competing offerings need to keep an eye on what competitors are
charging and should to try price accordingly. If there is a little or no difference between the
services offered in the marketplace, customers may just choose the cheapest (Lovelock &
Wirtz, 2007). Thus, price can be an effective way to influence demand. Price carries a
message; lower prices in off peak periods may stimulate demand at that time but put off other
customers.

Pricing is one of the intriguing aspects as buyers tend to use price as an indicator of
both service costs and service quality – price is at once an attraction variable and a repellent.

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Depends on several factors, price is an indicator of quality used by customers, one of which is
the availability of information to them (Zeithaml, et al., 2009). When quality is hard to detect
or price varies great deal within a class of services, these conditions is typify situation face
consumers when purchasing services, customers tend to use price as an indicator of quality.
Customers react to products or services and their prices has implicate by their quality.
Customers often consider purchasing the item only when the products meet minimal quality
standards and rarely purchase with the highest quality. Many observer assume that quality is
directly associated with price. That is, higher price serves as an indicator of higher quality. If
such a relationship exists, it would seem to complicate the ability to determine value.

Customer often see price as an indicator to service quality, so that price has an impact
to the degree of quality (Zeithaml & Bitner, 1996). To airline industry, pricing strategy is used
to maximized profit by targeting different market segment; vacationers, business travellers
and group operators. Segmenting customer lead to price differentiation in an airline industry
(De Pew & Stripling, 2003). Low cost airlines serve basic accomodation and operates single
aircraft types which is totally different strategy adopted by full service airlines. Those factors
indicates that low cost airlines pricing strategy lead to relatively low fare.

Hypothesis

Review of the literature on airline industry as well as in other services industries shows
that customer satisfaction is strongly influenced by how a business providing services as well
as how the price paid by consumers (Suhartanto, 2000; Doganis, 2002; Noor, 2005). Further,
literature also indicates that service quality and price are directly related both to customer
satisfaction. Thus, it is hypothesisd that service quality and price together significantly affect
customer satisfaction in both full service airlines and low cost airlines.

RESEARCH METHODOLOGY

The objective of this study is to understand the customer satisfaction in full service
airlines and low cost flights from the customer perspective. More specifically, this study
attempts to identify how service quality and price affect customer satisfaction in both low cost
airlines and full service airlines.

To achieve this objective, cross-sectional data was collected from consumers in both
types of airlines. The unit of analysis used is at the individual level, that is, airlines customers
who have had airline services (up to 3 months). Respondents in this study amounted to 400
(200 respondents for each airline) were selected based on incidental sampling method in
Jakarta and Bandung. The data was collected by using self-administered questionnaire.

Service quality construct was measured based on instruments developed by

Parasuraman et.al., (1988) consisting of reliability, responsiveness, assurance, empathy, and
tangible dimension. As the nature of this studi is predictive, as suggested by scholars (Cronin
& Taylor, 1992; Zeithaml, et al., 1996) the measurement of service quality is using
SERVPERF rather than SERVQUAL. Customer satisfaction was anchored by satisfaction
with the service and quality and quantity of product such as food and beverage. Price was
operationalised by a single item. All of these variables were measured with five Likert scale:
strongly disagree (1) to strongly agree (5). Prior to data collection, all of the items to measure
the constructs have been consulted to airlines experts and practitioners to ensure their content
validity. In addition, reliability test of service quality and customer satiation variable has
satisfied the reliability requirement as the valuee of Cronbach Alpha is above 0.70.

RESULTS AND DISCUSSION

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Characteristics of Respondents

Of 400 respondents which are proof useable, 27% were students, 24.8% were private
employees, 22.9% were civil servant, and 10.8% were unemployed. In terms of income,
51.6% respondents of low cost airlines earn less than Rp. 2,000,000/month. While the
majority of full service airlines respondents (71.3%) earn over Rp. 2,000,000/month. This
figure indicates difference segment of income, low cost airlines customers tend to be lower-
income segments while the full service airlines tend to be more of middle and upper
segments.

Perception of the airline Service Performance

Customer perception of the service quality, price, and satisfaction on the airline is
presented in Table 1.

Table 1 Respondent Perception on the Research Variables

No Item Low Cost Full Service

1 Tangible 3.42 3.72
2 Emphaty 3.16 3.70
3 Reliability 3.20 3.68
4 Responsibility 3.39 3.75
5 Assurance 3.51 3.86
6 Price 3.73 3.55
7 Customer Satisfaction 3.17 3.54

Table 1 shows that service quality ranges from 3.16 to 3.86 (from scale 5). This
suggests that the quality of service in the airline industry only slightly above average. Further,
it shows that full service airline respondents perceived better than that of low cost airlines
respondent on all service quality dimensions. The biggest difference between low cost and
full service airlines on the service quality dimension is emphaty (3.70 in full service airline
and the 3.16 in low cost airline), while smallest difference is on tangible dimension (3.42 in
low cost airline and 3.72 in full service airline). In terms of price, the respondents perceived
that low cost airline fares is better compared to full service airline fare (3.73 compared to
3,55). In other words, the respondents perceived that the fare of low cost airline is lower than
the price of full service airlines. Nevertheless, in overall, full service airline customers are
more satisfied than customers of low cost airlines. This finding illustrates that low cost
airlines competition strategy emphasizes on price, while the full service airline emphasizes on
service quality.

The effect of Service Quality and Price on Customer Satisfaction

Prior to hypothesis testing, factor analysis were conducted to obtain valid variables and
reduce the variables used. Of the 18 variables used in this study, three variables emerge as the
result of factor analysis, that are promptness and accuracy of service, physical evidence of
service, and employee attitudes. A multiple regression analysis using the three new service
quality variables and price as predictor of customer satisfaction was then conducted to test the
hypothesis. The result of multiple regression analysis is presented in Table 2.

Table 2 shows that the Promptness and accuracy, physical evidence, employee
attitudes, and price variable explain 45.4% (low cost airline) and 46.2% (full service airline)
variance of customer satisfaction.

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Tabel 2 Regression Test of Service Quality and Price on Customer Satisfaction

Low Cost Airline Full Service Airline

2
R 0.454 0.462
F 36.608* 39.028*
Constant 0.301 0.359
 Promptness & Accuracy 0.190* 0.008
 Physical Evidence 0.008 0.292*
 Employee Attitude 0.298* 0.198***
 Price 0.274* 0.285*
*: Significant at p <0.01; ***: significant at p <0.1

This finding indicates that changing in service quality and price will lead to 46.4% changing
in customer satisfaction. Although these four independent variables are important in
influencing customer satisfaction as indicated by their variance explained, the effect of
independent variables on customer satisfaction varies. Employee attitude and price are
significant determinants of customer satisfaction in both airlines, while promptness and
acuracy factor only significant in low cost airline and phyical evident only significant in full
service airlines. These findings indicate that the research hypothesis developed is partially
supported.

Employee Attitude

This study highlights the important of employees attitude including their ability and
willingness to help, attention, and create consumer confidence in the airline industry. The
important of this factor is evidenced by the magnitude of influence ()this factor on customer
satisfaction in both full service airlines and low cost airlines. The importance of this factor
indicates that the human factor is very important in determining both for safety and comfort
of the flight (Babbar & Koufteros, 2008), although the airline industry is a highly technology
industry. Thus, the passagers always expect that the airlines have employess with positive
attitude that will lead customer to be more confidence that the flight is safe (Babbar &
Koufteros, 2008). With this explanation, it is plausible that how well the employees provide
services is an important factor in determining customer satisfaction.

Although employees attitude is important in both airlines, this study reveals that
attitude factor is more important in full service airlines than in low cost airlines. A possible
explanation of this finding is that the customers of full service airlines expect more than just
basic services such as flight safety and timeliness of service as expected by customers of low
cost airlines (Lawton, 2002). Beside basic services, the full service airline customers
(typically middle and high class customers) also expect additional services such as inflight
entertainment, comfort, and food (Roades & Waguespack Jr., 2008). Thus, it is
understandable that the attitude of employees is more important in influencing customer
satisfaction in full service airlines than that of low cost airlines.

The promptness and accuracy of service

The promptness and accuracy of service is significant factors in influencing customer

satisfaction in low cost airline, while in full service airline these factor are insignificant. A
possible explanation of the importance of these factors in low cost airlines is due to service
expectation of low cost airline customer is relatively low (Lawton, 2002). Thus, customers of
low cost airline tend to accept a less accurate and prompt service (Roades & Waguespack Jr.,

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2008). A bit delay of flight, for instance, tend not to be a problem for most of low cost airlines
customers. In full service airlines, these factors are not significant as most of the full service
airlines provide accurate and prompt service. In other words, providing prompt and accurate
service in full service airlines will not affect customer satisfaction although. However,
inaccurate and unprompted service will definitely lead to full service airlines customers
unsatisfied.

Price

Price is the amount of money that consumers paid for services received. The perceived
value of money, that is the amount of money paid by consumers compared to services
received, will determine the level of customer satisfaction (Noor, 2005). The airline which do
not correspond to the expectations of consumers who have been associated with the costs they
incur will cause customer dissatisfaction. In contrast, the airline perceived better service than
the price paid will lead to customer satisfaction. With this explanation, it can be understood
that price is a significant factor in influencing customer satisfaction in both airlines.

Physical Evidence

The importance of physical evidence (such as aircraft and other facilities) in the airline
industry is due to this element is considered as a basic factor that determines the comfort and
safety of the flight (Roades & Waguespack Jr., 2008). Therefore, in order to be able to lead
the market in providing the best service for its customers, many airlines such as Singapore
Airlines will always try to keep rejuvenate its fleets. The similar startegy is also rampant in
other airlines such as Emirates and Qantas where they race to get the latest and more
sophisticated aircraft. Although the physical evidence is an important factor in influencing
customer behavior, this study suggests that these factors were not significant in influencing
customer satisfaction in low cost airlines. This insignificant effect is most likely due to
customer expectations to low cost airline services (including physical factors) is also low
(Noor, 2005). As a consequence, low cost airlines customers do not have a high expection on
physical element of airline. As a result, the use of relatively old aircraft will less likely affect
customer satisfaction in low cost airlines. In contrast, as they have a higher service
expectation, physical conditions such as the modernity and the age of aircraft greatly affect
the level of customer satisfaction in full service airlines (Lawton, 2002).

Conclusion

To conclude, this study shows that the competitive strategies used by low cost airlines
based on price, while full service airlines rely more on the quality of services. The different
strategies used due to the segments targeted by these two types of airlines differ, low cost
airlines tend to target low class customers while full service airlines tend to target middle and
high class customers. Because of the differences in their strategy and target market, full
service airlines are better able to satisfy its consumers compared to low cost airlines. Further,
this study underlines that the service quality, especially the attitude of employees in delivering
the service and price are factors that should be given more attention in building customer
satisfaction in both types of airlines.

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