MANUFACTURING & SERVICE

OPERATIONS MANAGEMENT

informs

Vol. 9, No. 4, Fall 2007, pp. 506517

issn 1523-4614
eissn 1526-5498
07
0904
0506

doi 10.1287/msom.1060.0133
2007 INFORMS

The Effect of Operational Performance and

Focus on Protability: A Longitudinal Study of
the U.S. Airline Industry
Nikos Tsikriktsis

Management Science and Operations Department, London Business School, Regents Park,
London NW1 4SA, United Kingdom, nikos@london.edu

e study the impact of operational performance on protability in the context of the U.S. domestic airline
industry. In addition, we investigate the impact of focus [Skinner, W. 1974. The focused factory. Harvard Bus. Rev. 52(3) 113121] on protability in services. We use quarterly data on all major carriers, available
since the introduction of required reporting of service indicators to the U.S. Department of Transportation. Our
analysis demonstrates two main points. First, the relationship between operational performance and protability is contingent on a companys operating model; focused airlines show a link between late arrivals and
protability while full-service airlines do not. Also, capacity utilization is a stronger driver of protability for
full-service airlines than for focused airlines. Second, focused airlines outperform the rest of the industry in
terms of protability.
Key words: operational performance; protability; quality; operations strategy; focus; airlines
History: Received: April 15, 2005; accepted: July 27, 2006.

1.

Introduction

Swamidass (1991), and Roth and Menor (2003) and

has received limited empirical investigation. Specically, it has been tested by Huete and Roth (1988) in
banks, by McLaughlin et al. (1995) in the health care
sector, and nally by Boyer et al. (2002) through the
case study of Sothebys. However, these three previous studies did not test the link between focus and
nancial performance.
This paper looks at the role of operations in competing in the airline industry. The objective of our
study is to ll a gap in previous empirical research
in the service operations management area by investigating how operational performance (both quality
and productivity) affects protability. This leads to
our rst research question: Does operational performance affect protability in the airline industry? In
addition, the notion of focus is a key concept in
the eld of operations strategy, and we would like to
test its impact on protability in the airline industry.
Thus, our second research question: Does operational
focus lead to higher protability? We investigate these
questions in the context of the domestic U.S. airline industry using objective measures of protability
and operational performance. Our empirical results

How does operational performance affect protability in service operations? The service literature has
primarily focused on either the link between productivity and protability or the link between service quality and protability. The overall impact of
operational performance on protability in service
organizations has been largely neglected. This can be
attributed primarily to the fact that research on the
drivers of protability in services has been conducted
primarily by marketing scholars who have focused
on the relationship between quality and protability
(Nelson et al. 1992, Fornell 1992, Anderson et al. 1994,
Rust et al. 1995, Loveman 1998). On the other hand,
accounting and operations management scholars have
focused on the impact of productivity on protability
(Schefczyk 1993, Smith and Reece 1999).
In addition, we want to examine the potential impact of focus (Skinner 1974) on protability. According to Skinner (1974), a factory that focuses on a
narrow product mix for a particular market niche will
outperform another one, which attempts to achieve a
broader mission. The importance of focus for service
organizations has been discussed by Heskett (1986),
506

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

are based on longitudinal data that cover 43 quarters

from 1987 to 1998.
The rest of the paper is organized as follows. First,
we describe the industry, review the literature on the
link between operational performance and protability, and present our hypotheses. Second, we describe
the sample, the measures, and the model estimation
procedures. Next, we present the results followed by
the discussion of our ndings. The paper concludes
with a summary of the key contributions, limitations,
and future research directions.

2.

Background

2.1. The U.S. Airline Industry

The U.S. domestic airline industry is an interesting
industry to study. When the industry was deregulated in 1978, nobody could predict how ugly it
would look 20 years later. By 1992, the industrys
losses were so huge that they exceeded all the profits earned by the industry in its entire 67-year history. PanAm, the worlds largest air carrier, no longer
existed and most major airlines reported severe losses.
Moreover, due to the deregulation, the industry was
bombarded by more than 100 entrepreneurial startups, mainly small local carriers competing on low
fares. Misguided expansion plans led to overcapacity
and Iraqs invasion into Kuwait caused fuel prices to
double. As a result, the industrys competitive priorities changed dramatically. The old operating model
in which companies were mainly competing on frequency of ights, geographic coverage, and elegant
service gave way to a new operating model. In this
new model, operational excellence became the name
of the game (Treacy and Wiersema 1995).
In addition, there are two distinct groups within the
10 major U.S. domestic airlines (Lapr and Tsikriktsis
2006). Three airlines (Alaska, America West, and
Southwest) y only within North America. We will
refer to these three airlines as focused airlines. They
use only one type of airplane (Boeing 737) and try
to avoid congested airports (although Southwest Airlines operates from some congested airports such
as Philadelphia). They are also characterized by faster
turnaround times and provide frequent, less expensive
service. We call the other seven carriers full-service
airlines (American, Continental, Delta, Northwest,

507

TWA, United, and US Airways). They use the huband-spoke system and operate both U.S. domestic
and international ights. They have different types
of planes within their eet, more than one passenger
class (economy, business, and rst), and more in-ight
service.
2.2.

The Impact of Operational Performance on

Protability in Services
In this section, we briey review studies that examined the impact of quality and productivity, respectively, on protability in service organizations. There
has been a movement, primarily in the marketing literature, toward examining the impact of quality on
nancial performance. Empirical ndings from the
Prot Impact of Marketing Strategies (PIMS) database
suggested that a link between quality and protability might exist for both manufacturing and services
(Buzzell and Gale 1987). This triggered a stream of
research on the relationships between customer satisfaction, customer retention, market share, and profitability (Nelson et al. 1992, Fornell 1992, Anderson
et al. 1994, Rust et al. 1995, Loveman 1998). More
recently, operations management scholars have joined
this stream of research. Voss et al. (2005) have studied
the relationship between service quality and customer
satisfaction, while Zhao et al. (2004) investigated the
relationship between the quality systems used in services and business performance based on case studies
in China.
A common theme is noticeable in previous empirical studies; they neglect the potential impact of productivity on protability. According to Zeithaml et al.
(1996), understanding of the complex relationship
between quality of service and protability requires
simultaneous investigation of other relationships such
as the link between productivity and protability.
Few studies have looked at the relationship between
productivity and protability in services. Schefczyk
(1993) studied the impact of productivity on nancial performance in the airline industry. Using data
envelopment analysis (DEA), he combined multiple
outputs and inputs to develop a measure of total
factor productivity for a cross section of 15 international air carriers, and he found that productivity was
linked to return on equity. Smith and Reece (1999)
examined the relationship between strategy, productivity, and business performance through eld-based

508

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

research in a wholesale distribution service setting.

They found that productivity (measured by average
monthly sales documents over number of employees, average monthly sale line items over number
of employees, and yearly dollar sales per warehouse
square footage) was linked to nancial performance
(measured as an adjusted prot after tax percentage).
A common thread between the two studies is that
they investigated the impact of productivity on profitability without examining the potential role of quality. According to Schefczyk (1993), productivity alone
does not reect overall performance. Specically, productivity does not consider the operational elements
that matter to the customer such as the ight being
on time, luggage not being lost or mishandled, etc.
One of the key frameworks in the area of service management which links (among others) quality,
productivity, and nancial performance is the service prot chain (Heskett et al. 1997). It synthesizes
research from various disciplines (such as human resource management, services marketing, and services
operations) and posits that certain human resource
practices lead to capable and satised employees
who, as a result, achieve higher productivity and
quality of service. This combination of quality and
productivity ultimately results in superior nancial
performance (Loveman 1998, Heskett et al. 1994).
Finally, the service prot-chain framework is related
to the resource-based view, according to which the
resources and capabilities of an organization serve
as a foundation for sustained competitive advantage
(Barney 1991, 1995; Wright et al. 1994).
Important exceptions to the previous studies that
focused on either quality or productivity include
Roth and Jackson (1995) and Anderson et al. (1997).
Roth and Jackson (1995) empirically tested the
operational capabilities-service quality-performance
(C-SQ-P) framework in the banking industry using
exclusively perceptual measures. Anderson et al.
(1997) examined whether the relationship between
customer satisfaction, productivity, and protability
was different between goods and services. Productivity was operationalized as sales per employee and
protability was measured by return on investment
(ROI). Anderson et al. (1997) found that a tradeoff between customer satisfaction and productivity
was more likely when (a) customer satisfaction was

more dependent on customization as opposed to standardization, and (b) when it was costly to provide
high levels of both customization and standardization simultaneously. Their analysis also showed that
for manufacturing goods, only productivity enhanced
protability, whereas for services both customer satisfaction and productivity enhanced protability.
Our study differs from the previous studies in several ways. First, it differs from the studies that examined in isolation either quality (e.g., Nelson et al. 1992,
Fornell 1992, Anderson et al. 1994, Rust et al. 1995,
Loveman 1998, Zhao et al. 2004, Voss et al. 2005) or
productivity (e.g., Schefczyk 1993, Smith and Reece
1999). It also differs from the study by Roth and
Jackson (1995) because they used perceptual measures of productivity, quality, and market performance, whereas we use exclusively objective data that
reduce (but by no means eliminate because there is
always a possibility of random noise in the data)
the threat of common method bias. Also, our study
differs from the Anderson et al. (1997) study in the
way we operationalize productivity. Their productivity measure is marketing oriented (sales productivity)
while our measures are operational because they capture capacity utilization. Finally, a key difference of
our study is that unlike the previous studies mentioned above, ours is based on longitudinal data. One
of the major advantages of a longitudinal study is
that it enables us to incorporate time lags between
variables and to move a step closer toward understanding cause and effect in empirical operations
management research.
According to DAveni (1989), improved utilization
of resources is necessary for increased protability.
Hammesfahr et al. (1993) found that capacity affects
rm protability while Banker et al. (1993) concluded
that capacity utilization is associated with changes in
overall protability. Baltagi et al. (1998) found that
excess capacity is a fundamental reason for losses in
the U.S. airline industry. Based on these studies and
also the studies discussed in the previous paragraphs,
we posit:
Hypothesis 1A. Higher capacity utilization leads to
increased protability in the U.S. airline industry.
There is a lot of evidence on the impact of quality
on protability in services. Bad quality leads to dissatisfaction and dissatised customers tend to defect

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

509

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

and give bad word of mouth to a company, both of

which have a negative impact on prots (Heskett et al.
1997, Anderson et al. 1997). In addition, one would
expect that strong delivery reliability (ights being
on time) would lead to increased protability. The
argument is very similar to that for the link between
quality and protability often argued by quality theorists (Deming 1982, Juran 1988, Garvin 1988). Reliable
deliveries, like good quality, may result in cost reduction (because there is no need for expediting and extra
labor) while, on the other hand, customers may be
willing to pay more to do business with a company
that has a better delivery record.
Based on these studies and also the studies discussed in the previous paragraphs that examined the
impact of quality on nancial performance, we posit:
Hypothesis 1B. Higher quality leads to increased profitability in the U.S. airline industry.
2.3.

The Notion of Focus in Service

Operations Strategy
Skinner (1974) introduced the notion of a focused
factory. He suggested that a factory that focuses
on a narrow product mix for a particular market
niche would outperform a plant, which attempts to
achieve a broader mission. Heskett (1986), Swamidass
(1991), and more recently Roth and Menor (2003)
have discussed the benets of focus in the service
management literature. According to Heskett et al.
(1997), companies with operating focus (in the service
delivery system) achieve high protability.
The notion of focus has received limited empirical testing in services. Huete and Roth (1988) showed
that focused banks (dened as those with a smaller
span, i.e., fewer delivery channels) had less managerial complexity. More recently, Boyer et al. (2002)
examined the role of focus through the case study of
Sothebys. Our research attempts to extend this prior
empirical work; we investigate the role of focus on
nancial performance, which had not been tested by
the previous two studies.
As described in 2.1, carriers in the U.S. airline
industry can be broken down to focused airlines
(such as Southwest, America West, and Alaska airlines) and full-service airlines (such as Continental,
Delta, and United). Focused airlines are known to

y Boeing 737s from point to point in North America only and to have higher levels of coordination
and teamwork exemplied by fast turnaround times
(Gittell 2003). On the other hand, full-service airlines operate several hubs and have many different
types of planes within their eet (Lapr and Scudder
2004). Based on the arguments put forward by Skinner (1974), Heskett et al. (1997), and Roth and Menor
(2003), we posit:
Hypothesis 2. Focused airlines are more protable
than full-service airlines.

3.

Research Methods

3.1. Sample
We use data from the U.S. domestic airline industry to
investigate the relationship between operational performance and protability. Specically, our study is
based on longitudinal data concerning the 10 major
airlines (Alaska Airlines, America West, American
Airlines, Continental, Delta, Northwest, Southwest,
TWA, United, and USAir). The U.S. Department of
Transportation classies an airline as major if the airline has at least 1% of total U.S. domestic passenger
revenues. The only other major airlines operating in
part of 19881998 ceased operations well before 1998:
Eastern in 1990 and Pan Am in 1991. Combined, the
major airlines account for more than 93% of revenue
passenger miles for all U.S. airlines. (One revenue
passenger mile is transporting one passenger over one
mile in revenue service.)
Starting in September 1987, the U.S. Department
of Transportation introduced quarterly quality data
reports. Consequently, all major airlines were required
to collect and report data among others on on-time
performance and lost baggage. Besides these objective
indicators of quality, the data also include objective
measures of capacity utilization and nancial performance. The data cover the period from the fourth
quarter of 1987 through the second quarter of 1998
(43 quarters), resulting in a sample of 430 observations (i.e., there are no missing data for any of the
variables).
Investigating business performance in terms of
both nancial and operational performance with objective data from secondary sources is especially
appropriate for single industry studies (Venkatraman
and Ramanujam 1986). In addition, a single industry

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

510

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

study enables researchers to obtain a deeper understanding of an industry and its processes and practices, and allows for a direct comparison between
rms because


the determinants of superior performance can be precisely identied (Garvin 1988).
Thus, our data seem appropriate for studying our
research questions.
3.2. Measures
We use two different measures of capacity utilization (see Table 1 for denitions). The traditional measure of capacity utilization in the industry is in terms
of passengers (CU_Passengers), which is similar to
passengers over available seats but also controls for
differences in ight length (see Table 1 for a more
detailed explanation). Measuring capacity utilization
in the airline industry is a complex problem. A carrier can have very high capacity utilization in terms
of passengers, but its eet may spend a lot more time
on the ground (compared to being in the air) than the
eet of another carrier. Therefore, we add a new measure: capacity utilization in terms of eet (CU_Fleet).
We use both measures to capture capacity utilization
in the airline industry.
We use two quality indicators in our analysis. Specifically, we use lost baggage as a measure of conformance quality (Garvin 1988). We also use late arrivals
Table 1

Description of Measures and Airline Terminology

Late arrivals: A ight is counted as on-time if it operated less than 15

minutes after the scheduled time shown in the carriers computerized
reservation systems. Cancelled and diverted ights are counted as late.
Lost or mishandled baggage: The rate of mishandled baggage reports per
1,000 passengers. The rate is based on the total number of reports each
carrier receives from passengers concerning lost, damaged, delayed, or
pilfered baggage.
Available seat miles (ASM): The aircraft miles own in each interairport
hop multiplied by the number of seats available on that hop for revenue
passenger use.
Revenue passenger mile (RPM): One revenue passenger transported one
mile in revenue service. Revenue passenger miles are computed by
summation of the products of the revenue aircraft miles own on each
interairport hop multiplied by the number of revenue passengers carried
on that hop.
Capacity utilization for passengers (CU_Passengers): RPM/ASM. It is also
known as load factor.
Capacity utilization for eet (CU_Fleet): Airborne hours/(Airborne hours +
on-ground hours).
Operating prot over operating revenue (OPOR): Operating
prot/Operating revenues.

as a measure of on-time performance. On a theoretical basis, late arrivals have a dual meaning. In the
eld of service operations strategy, on-time performance is considered to be an indicator of delivery
reliability (Fitzsimmons and Fitzsimmons 2000) while
from a service quality standpoint, late arrivals could
be thought of as an internal measure of service quality, similar to lost baggage.
Traditional measures of nancial performance include
ROI, return on sales (ROS), and return on assets
(ROA). In this study, we cannot measure ROI and
ROA because airlines only report their systemwide
balance sheets (including both domestic and international operations), while service quality data are only
reported for domestic operations. However, airlines
report separate income statements for domestic and
international operations. Therefore, we can measure
return on sales (ROS). One of the key methodological
considerations in using nancial data from secondary
sources is to


assess differences in accounting
policies


(Venkatraman and Ramanujam 1986). We
use operating prot as opposed to net prot because
it is not confounded by differences in accounting
practices concerning owning versus leasing airplanes,
interest on loans, etc. Hence, we operationalize profitability as operating prot over operating revenue
(OPOR). Given that our operationalization gives a
percentage rather than an actual amount, OPOR is
a measure of relative rather than absolute protability. Hence, when we use the term protability in the
remaining of the paper, we mean relative protability.
We use two types of control variables in our study.
Dummy variables for each airline control for differences among the 10 carriers not captured by the other
variables. For example, differences in pricing (price
level, yield management techniques, etc.), which are
expected to affect protability, are not captured by our
variables. Airline dummy multiplied by calendar time
variables control for the fact that over time airlines
may change policies/characteristics not accounted for
by the other variables.1
1

For the sample, which includes all carriers, we use nine dummies for the 10 carriers and 10 dummies operationalized as airline
dummy calendar time, where time ranges from 1 (fourth quarter
of 1987) to 43 (second quarter of 1998) for each airline.

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

511

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

Figure 1

Empirical Model Relating Operational Performance to

Protability in the U.S. Domestic Airline Industry

Airline
Airline * Time

Airline type
Focused vs. full service

Profitability
(OPOR)

Productivity
C.U. passengers
C.U. fleet
Control variables
Primary variables

Quality
Late arrivals
Lost baggage

3.3. Model Estimation

Figure 1 shows the model that links operational performance to protability in the U.S. domestic airline
industry. The unit of analysis is a carriers domestic
operating unit.
In addition to testing the model shown in Figure 1,
we perform several analyses to assess the robustness
of our ndings. First, to get a deeper understanding
of which operational performance measures have an
impact on protability, we split our original data (all
10 carriers) into two subgroups: the seven full-service
airlines and the three focused airlines. We rerun our
analysis for the two subgroups. Finally, all analyses
described above will also be conducted by lagging the
independent variables up to four quarters.
Given the structure of our data (time-series cross
section), we will use the time-series cross section
regression (TSCSREG) procedure in SAS (SAS/ETS
1993). In this procedure, we use a method developed
by Parks (1967). Parks method allows for a rstorder autoregressive error structure with contemporaneous correlation between cross sections. Specically,
the random errors uit , i = 1


 N , t = 1


 T have
the structure:
uit = i ui t1 + it
E
it jt  = ij

(autocorrelation)

(contemporaneous correlation)

E
2it  = ii

(heteroscedasticity)

where N is the number of cross sections and T is the

length of the time series for each cross section.

Overall, Parks method is appropriate for timeseries cross section data because it allows for
autocorrelation, contemporaneous correlation, and
heteroscedasticity (SAS/ETS 1993). In addition,
Parkss method has been used in previous studies
analyzing time-series airline data (Tsikriktsis and
Heineke 2004). Autocorrelation is to be expected
because we have time-series data. Contemporaneous
correlation between companies may be expected
because of potential relationships between rms
(alliances, common facilities, etc). Heteroscedasticity
can be expected because observations for airlines
operating at different scales could have different
variances.

4.

Empirical Results

Appendices A and B show descriptive statistics for

all measures. The average protability (OPOR) for the
industry is 3.27% but, as shown in Figure 2, the industry has suffered losses for many quarters. Toward the
end of our study period, though, it is doing better, with an average OPOR of about 10%. The improvement in protability is also witnessed by the
positive correlation between time and OPOR (see
Appendix B). We now turn to the analysis.
Column 1 in Table 2 shows the results of the econometric analysis. Overall, the model explains 41.6% of
the variation in protability. The results provide several interesting insights with regard to the impact of
the independent variables on protability. They show
that both capacity utilization measures are related to
protability. Interestingly, only one of the two quality
measures (late arrivals) has an impact on protability.
By conducting a t-test we found that the focused
airlines were signicantly better than the full-service
airlines at the 0.01 level in terms protability. Hence,
Hypothesis 2 is supported. We also found that the
two groups differed in all measures of utilization
and quality, which supports the logic of analyzing
each subgroup separately (full-service versus focused
airlines).
Column 2 of Table 2 shows the results for each of
the groups. The model explains 45.7% of protability
compared to 41.6% for the entire sample. The results
for full-service airlines are quite similar to those for
the entire industry with one exception: late arrivals

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

512

Table 2

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

Results of Regression Analysis

Model 1

Model 2

Unstandardized
Unstandardized
coefcients
T -statistic
coefcients
T -statistic
American
Alaska
America West
Continental
Delta
Northwest
Southwest
United
USAir

437
691
506
515
153
507
536
352
127

138
188
099
140
045
133
145
111
037

415
6299
4975
583
098
530
6268
456
149

132
067
052
158
029
141
066
141
044

American time
Alaska time
America West time
Continental time
Delta time
Northwest time
Southwest time
TWA time
United time
USAir time

015
025
013
012
006
037
001
011
003
001

182
179
084
122
055
337
021
077
043
008

020
019
025
010
004
035
003
014
005
003

216
122
150
103
038
333
041
101
065
028

CU_Passengers
CU_Fleet
Lost baggage
Late arrivals

063
447
021
010

856
429
176
086

Focused CU_Passengers
Focused CU_Fleet
Focused lost baggage
Focused late arrivals

062
394
025
028

567
254
052
328

Full service CU_Passengers

Full service CU_Fleet
Full service lost baggage
Full service late arrivals

061
519
038
001

720
383
139
010

R2
R2
Sample size

0416
430

0457
0041
430

Notes. Dependent variable: protability (OPOR).

Signies signicance at 0.10 in a two-tail test, at 0.05, at 0.01.

have no impact on protability for full-service airlines.

The results for focused airlines can be summarized
in two key points. First, similar to full-service airlines,
both capacity utilization measures have an impact on
protability. Second, unlike full-service airlines, late
arrivals have a signicant impact on the dependent
variable for focused airlines.
An advantage of having time-series data is the
opportunity to test for potential lagged effects. All
analyses described above were also conducted by lagging the independent variables up to four quarters.
Although the relationships were found to be in the
same direction, their statistical signicance was lower
than the one obtained by conducting the analysis at

time t for all measures. Moreover, the models that

used lagged variables had lower explanatory power
compared to the models shown here.

5.

Discussion

As noted in the literature review, protability studies in services have typically focused on the impact
of either productivity or quality. Our empirical ndings show that both can have explanatory power.
Consequently, neither driver should be ignored a priori. In fact, we found that a companys operating
model can play an important role in this relationship.
In the U.S. domestic airline industry, there are two
distinct operating models: full-service airlines and
focused airlines. In these two operating models, different dimensions of operational performance drive
protability. It would be erroneous to conclude for
the entire industry that either productivity or quality
had no impact on protability. It may be misleading
to lump all rms in a single industry analysis if rms
have different operating models.
To illustrate the importance of operating models,
consider our ndings for late arrivals. Late arrivals
affect protability for focused airlines, whereas they
do not affect protability for full-service carriers (see
Model 2 in Table 2). This nding can be explained by
the zone of tolerance argument used in the service
quality literature (Parasuraman et al. 1990). According to this argument, the zone of tolerance is much
tighter for the service quality dimension that is most
critical to company success. In our case, companies
that have competitive strength on timeliness seem to
have a very narrow zone of tolerance for lateness, and
that is reected in their nancial performance. Specifically, Figure 3 shows that focused airlines have a better on-time performance record than the rest of the
industry. This is certainly true for the rst 28 quarters
of our data. Recently, focused airlines have had more
late arrivals andfor some quarterseven more than
the rest of the industry. As shown in Figure 2, in
the same period (the last 15 quarters) the protability gap between focused airlines and the rest of the
industry has narrowed. Figures 2 and 3 combined
with the results in Table 2 indicate that airlines that
have traditionally been the best on-time performers
are penalized nancially for being late whereas the
others are not.

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

513

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

Figure 2

Protability (Operating Prot Over Operating Revenue) in the U.S. Domestic Airline Industry: Focused Airlines (DOM_3) vs. Full-Service
Airlines (INT_7)
20
15
10

Percent

5
0
5
10
DOM_3
INTL_7

15
20
1

11

13

15

17

19

21

23

25

27

29

31

33

35

37

39

41

43

41

43

Quarter
Figure 3

Average Late Arrivals: Focused (DOM_3) vs. Full-Service Airlines (INT_7)

40
35
30

Percent

25
20
15
10
DOM_3
INTL_7

5
0
1

11

13

15

17

19

21

23

25

27

29

31

33

35

37

39

Quarter

Based on a series of case studies, Gittell (2003)

concluded that one of the key benets of focused
airlines is faster turnaround at the gate. Besides
the obvious reasons for this (focused carriers y
one type of plane and have no or limited food on
board), there are other organizational and humanrelated factors. Specically, Gittell found that crosstrained employees and better coordination among
divisions also helped to quickly turn the airplane.
For example, at Southwest each ight has its own
onsite operating agent who is in charge of communication and coordination across various depart-

ments/functions, while at American Airlines several

ights share the same operations agent who is actually located offsite. Full-service airlines have tried to
compete with the focused airlines but fail mainly
due to organizational differences. For example, fullservice airlines have to face strong unions that inhibit
cross-training and command that employees only
perform work that is strictly dened in their job
specications.
One could attempt to explain these differences between the two operating models through the theoretical lens of the service prot chain (Heskett et al.

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

514

Figure 4

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

(a) Fleet Capacity Utilization (CU_Fleet): Focused (DOM_3) vs. Full-Service Airlines (INT_7); (b) Fleet Capacity Utilization (CU_Fleet) for
Full-Service Airlines: Maximum, Mean, and Minimum Values

(a) 46.5
DOM_3
INTL_7

Percent

46.0

45.5

45.0

44.5
1

11

13

15

17

19

21

23

25

27

29

31

33

35

37

39

41

43

25

27

29

31

33

35

37

39

41

43

Quarter

(b)

47

Percent

46

45

44

43
1

11

13

15

17

19

21

23

Quarter

1997). Specically, the service prot chain proposes

that human resource management practices designed
to both support and enable employees result in capable and satised employees. Consequently, increased
productivity, higher levels of customer service, and
better nancial performance are dependent upon the
contribution of employees of the organization (Hes-

kett et al. 1994). It should come as no surprise, then,

that Southwest is consistently voted as one of the best
employers in the United States (despite the fact that
its employees are paid less than the industry average)
and the company has the best record of on-time performance and protability in the United States for the
last 20 years.

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

Our empirical results also have implications for

managers. Specically, by looking at the coefcient
of capacity utilization for passengers (mean 63.41%,
standard deviation 5.51%), we see that 1% increase
in CU_Passengers would result in 0.63 percentage
points increase in OPOR. Also, 1% increase in eet
capacity utilization (mean 45.25%, standard deviation 0.42%) would result in 4.47 percentage points
increase in OPOR. Given that the average OPOR is
3.27% (standard deviation 8.10%), one can appreciate the magnitude of potential benets for airlines.
The impact of eet capacity utilization on protability is even more signicant for the seven full-service
airlines. Specically, 1% increase in CU_Fleet (mean
45.12%, standard deviation 0.36%) would result in
an increase of 5.19 percentage points in protability.
Given that the average OPOR for these carriers is
2.28% (standard deviation 7.77%), this would actually
mean an increase of more than 200% in their profitability. As shown in Figure 4, the full-service carriers
have reached their limit with regard to CU_Fleet, at
a level of 45%46%. Although the range between the
best and worst performing carrier at any given point
in time is less than two percentage points, surprisingly enough even such a small difference has a huge
impact on protability.
Overall, the managerial implications of our ndings are twofold. First, they show managers where (on
which operational measures) to improve. Second, they
provide guidelines on how to quantify the benets
of those improvements, which in turn enables managers to conduct a cost/benet analysis of potential
improvement programs.

6.

Conclusions

Our analysis shows that operational performance

has a signicant impact on protability. When we
look at the industry as a whole, both productivity and quality affect protability. Interestingly, the
relationship between operational performance and
protability is contingent on a companys operating
model. Focused airlines show a link between late
arrivals and protability, while full-service airlines do
not. Also, capacity utilization is a stronger driver of
protability for full-service airlines than for focused
airlines.

515

Overall, when we look at the entire industry,

we nd support for both Hypothesis 1A (the link
between capacity utilization and protability) and
Hypothesis 1B (the link between quality and profitability). However, when we analyze the two groups
separately, we only nd partial support for Hypothesis 1B (it is only supported for focused airlines and
not for full-service ones).
We also found that focused airlines outperform the
rest of the industry in terms of protability, which
conrms Hypothesis 2 and provides empirical support to the proposition put forward by Skinner (1974)
three decades ago. Finally, our research found empirical support for the zone of tolerance argument
(Parasuraman et al. 1990). Companies with superior
performance on on-time delivery (carriers with only
domestic routes) cannot tolerate lateness as much as the
other carriers, and this is reected in their protability.
The contribution of our study is twofold. First, it
contributes to the operations strategy literature. It is
the rst study to empirically investigate and demonstrate the link between focus (Skinner 1974) and
protability in services, and it also shows that the relationship between operational performance and profitability is contingent upon a companys operating
model. The second contribution of our study to the
eld of empirical operations management research
is that it uses objective, longitudinal data to examine how both productivity and quality affect profitability in a service industry. Empirical operations
management (OM) research could benet from more
longitudinal studies, which would enable us to test
rigorously OM theories and to move closer toward
causality (Flynn et al. 1990).
Finally, the study is subject to a few limitations.
First, we are missing information that could have
helped us understand in more depth the drivers of
nancial performance in the airline industry. Specifically, regarding the rst hypothesis (the impact of
operational performance on protability), one would
expect variables such as ticket price and fuel cost to
affect operational and nancial performance. Also, the
type of airport (hub versus nonhub, etc.) could play
an important role (Sarkis 2000). The impact of these
factors could be addressed in future studies.
Second, regarding our investigation of the impact
of focus on protability, one could also consider

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

516

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

the concept of t (dened as the degree to which a

rms operational elements match its business strategy) (Venkatraman 1989). The concept of t (Skinner
1969) has also received very limited empirical investigation in service operations (Smith and Reece 1999
provide an interesting discussion of the effect of t on
service performance).
Third, future studies could investigate the relationship between quality and productivity in services similar to the work of Krishnan et al. (2000), who based
on a study of new product development in the software industry suggest a conceptual model linking
quality and productivity.
Finally, we realize that our ndings were obtained
in a single industry. Schmenner (1986) classied airlines as service factories because (a) they offer a
standardized service (limited customization), (b) there
is relatively low interaction with the customer, and
(c) they are more equipment intensive as opposed
to labor intensive. This implies that one has to be
careful when attempting to generalize these ndings, especially to professional services, which have
opposite characteristics. Future research should revisit
our study in service settings that allow for more
customization. However, single industry studies are
highly benecial under certain circumstances (Heskett
1990) and this is particularly true in the airline
industry, where it is extremely important to address
context-specic issues such as capacity utilization of
eet versus that of passengers. We hope that answers
to these questions will help rms to better manage
service operational performance.

Variable

Full-service
airlines
(N = 301)

Focused
airlines
(N = 129)

Mean

St. dev.

Mean

St. dev.

Mean

St. dev.

327

8.10

228

7.77

559

8.43

Quality
Late arrivals
Lost baggage

2049
591

5.67
1.83

2143
618

5.07
1.80

1827
528

6.37
1.75

Productivity
CU_Passengers
CU_Fleet

6341
4525

5.51
0.42

6391
4512

5.13
0.36

6227
4556

6.18
0.37

Protability
Operating
prot/revenue

Time
OPOR
Time
Late arrivals
Lost baggage
CU_passengers

0.311

Late
arrivals

Lost
baggage

CU
passengers

CU
eet

0094
0184

0369
0491
0401

0517
0619
0045
0439

0167
0197
0075
0151
0 096

Notes. Bold numbers are signicant at the 0.01 level (two-tailed). Italic numbers are signicant at the 0.05 level (two-tailed).

Appendix B2. Correlation Matrix (Full Service Airlines)

Time
OPOR
Time
Late arrivals
Lost baggage
CU_Passengers

0.332

Late
arrivals

Lost
baggage

CU
passengers

CU
eet

0011
0104

0290
0579
0415

0573
0623
0008
0510

0112
0171
0013
0107
0 147

Notes. Bold numbers are signicant at the 0.01 level (two-tailed). Italic numbers are signicant at the 0.05 level (two-tailed).

Appendix B3. Correlation Matrix (Focused Airlines)

Time
OPOR
Time
Late arrivals
Lost baggage
CU_Passengers

0.286

Late
arrivals

Lost
baggage

CU
passengers

CU
eet

0114
0355

0458
0324
0274

0532
0635
0038
0451

0041
0348
0139
0090
0 260

Notes. Bold numbers are signicant at the 0.01 level (two-tailed). Italic numbers are signicant at the 0.05 level (two-tailed).

References

Appendix A. Descriptive Statistics

All airlines
(N = 430)

Appendix B1. Correlation Matrix (All Airlines)

Anderson, E. W., C. Fornell, D. R. Lehman. 1994. Customer satisfaction, market share and protability: Findings from Sweden.
J. Marketing 58 5366.
Anderson, E. W., C. Fornell, R. T. Rust. 1997. Customer satisfaction,
productivity and protability: Differences between goods and
services. Marketing Sci. 16 129145.
Baltagi, B. H., J. M. Grifn, S. R. Vadali, R. Sharada. 1998. Excess
capacity: A permanent characteristic of US airlines? J. Appl.
Econom. 13(6) 645657.
Banker, R. D., H. Chang, S. K. Majumdar. 1993. Analyzing the
underlying dimensions of protability. Managerial Decision
Econom. 14(1) 2536.
Barney, J. 1991. Firm resources and sustained competitive advantage. J. Management 17(1) 99120.
Barney, J. 1995. Looking inside for competitive advantage. Acad.
Management Executive 9 4961.

Tsikriktsis: The Effect of Operational Performance and Focus on Protability

Manufacturing & Service Operations Management 9(4), pp. 506517, 2007 INFORMS

Boyer, K. K., R. Hallowell, A. V. Roth. 2002. E-services: Operating

strategyA case study and a method for analyzing operational
benets. J. Oper. Management 20 175188.
Buzzell, R., B. Gale. 1987. The PIMS Principle: Linking Strategy to
Performance. Free Press, New York.
DAveni, R. A. 1989. The aftermath of organizational decline: A longitudinal study of the strategic and managerial characteristics
of declining rms. Acad. Management J. 32(3) 577605.
Deming, W. E. 1982. Quality, Productivity and Competitive Position.
Massachusetts Institute of Technology Center for Advanced
Engineering Study, Cambridge, MA.
Fitzsimmons, J. A., M. J. Fitzsimmons. 2000. Service Management:
Operations, Strategy and Information Technology. McGraw-Hill,
New York.
Flynn, B. B., S. Sakakibara, R. G. Schroeder, K. A. Bates, E. J. Flynn.
1990. Empirical research methods in operations management.
J. Oper. Management 9(2) 250284.
Fornell, C. 1992. A national customer satisfaction barometer: The
Swedish experience. J. Marketing 56 621.
Garvin, D. 1988. Managing Quality: The Strategic and Competitive
Edge. Free Press, New York.
Gittell, J. H. 2003. The Southwest Airlines Way: Using the Power of
Relationships to Achieve High Performance. McGraw-Hill, New
York.
Hammesfahr, J. R. D., J. A. Pope, A. Ardalan. 1993. Strategic planning for production capacity. Internat. J. Oper. Production Management 13(5) 4153.
Heskett, J. 1986. Managing in the Service Economy. Harvard Business
School Press, Boston, MA.
Heskett, J. L. 1990. Rethinking strategy for service management.
D. E. Bowen, R. B. Chase, T. G. Cummings, eds. Service Management Effectiveness. Jossey-Bass, San Francisco, CA, 1740.
Heskett, J. L., W. E. Sasser, Jr., L. A. Schlesinger. 1997. The Service
Prot Chain. Free Press, New York.
Heskett, J. L., T. O. Jones, G. W. Loveman, W. E. Sasser, Jr., L. A.
Schlesinger. 1994. Putting the service-prot chain to work. Harvard Bus. Rev. (MarchApril) 164174.
Huete, L., A. V. Roth. 1988. The industrialization and span of retail
banks delivery systems. Internat. J. Oper. Prod. Management 8(3)
4666.
Juran, J. M. 1988. Juran on Planning for Quality. Free Press, New
York.
Krishnan, M. S., C. H. Kriebel, S. Kekre, T. Mukhopadhyay. 2000.
An empirical analysis of productivity and quality in software
products. Management Sci. 46(6) 745759.
Lapr, M. A., G. D. Scudder. 2004. Performance improvement paths
in the US airline industry: Linking trade-offs to asset frontiers.
Production Oper. Management 13(2) 123134.
Lapr, M. A., N. Tsikriktsis. 2006. Organizational learning curves
for customer dissatisfaction: Heterogeneity across airlines.
Management Sci. 52(3) 352366.
Loveman, G. 1998. Employee satisfaction, customer loyalty, and
nancial performance. J. Service Res. 1(1) 1831.
McLaughlin, C. P., S. Yang, R. van Dierdonck. 1995. Professional service organizations and focus. Management Sci. 41(7) 11851193.
Nelson, E., R. T. Rust, A. Zahorik, R. L. Rose, P. Batalden, B. A.
Siemanski. 1992. Do patient perceptions of quality relate to
hospital nancial performance? J. Health Care Marketing 13
113.

517

Parasuraman, A., L. L. Berry, V. A. Zeithaml. 1990. Understanding, measuring, and improving service quality: Findings from
a multiphase research program. Service Breakthroughs: Changing
the Rules of the Game. Free Press, New York.
Parks, R. W. 1967. Efcient estimation of a system of regression
equations when disturbances are both serially and contemporaneously correlated. J. Amer. Statist. Assoc. 62 500509.
Roth, A. V., W. E. Jackson III. 1995. Strategic determinants of service
quality and performance: Evidence from the banking industry.
Management Sci. 41(11) 17201733.
Roth, A. V., L. J. Menor. 2003. Insight into service operations management: A research agenda. Production Oper. Management 12(2)
145164.
Rust, R. T., A. J. Zahorik, T. L. Keiningham. 1995. Return on quality
(ROQ): Making service quality nancially accountable. J. Marketing 59(April) 5870.
Sarkis, J. 2000. An analysis of the operational efciency of major
airports in the United States. J. Oper. Management 18(3) 335351.
SAS/ETS. 1993. Users Guide Version 6, 2nd ed. SAS Institute Inc.,
Cary, NC.
Schefczyk, M. 1993. Operational performance of airlines: An extension of traditional measurement paradigms. Strategic Management J. 14 301317.
Schmenner, R. W. 1986. How can service businesses survive and
prosper? Sloan Management Rev. 27(3) 2132.
Skinner, W. 1969. Manufacturing: Missing link in corporate strategy.
Harvard Bus. Rev. 47(3) 136145.
Skinner, W. 1974. The focused factory. Harvard Bus. Rev. 52(3)
113121.
Smith, T. M., J. S. Reece. 1999. The relationship of strategy, t,
productivity and business performance in a services setting.
J. Oper. Management 17 145161.
Swamidass, P. 1991. Empirical science: New frontier in operations
management research. Acad. Management Rev. 16(4) 793814.
Treacy, M., F. Wiersema. 1995. The Discipline of Market Leaders.
Perseus Books, New York.
Tsikriktsis, N., J. Heineke. 2004. The impact of process variation
on customer dissatisfaction: Evidence from the U.S. domestic
airline industry. Decision Sci. 35(1) 129142.
Venkatraman, N. 1989. The concept of t in strategy research:
Toward verbal and statistical correspondence. Acad. Management Rev. 14(3) 423444.
Venkatraman, N., V. Ramanujam. 1986. Measurement of business
performance in strategy research: A comparison of approaches.
Acad. Management Rev. 11 801814.
Voss, C., N. Tsikriktsis, B. Funk, D. Yarrow, J. Owen. 2005. Managerial choice and performance in service management: A comparison of private sector organizations with further education
colleges. J. Oper. Management 23(2) 179195.
Wright, P. M., G. McMahan, A. McWilliams. 1994. Human resources
and sustained competitive advantage: A resource-based perspective. Internat. J. Human Resource Management 5(2) 301326.
Zeithaml, V. A., L. L. Berry, A. Parasuraman. 1996. The behavioral
consequences of service quality. J. Marketing 60 3146.
Zhao, X., A. C. L. Yeung, T. S. Lee. 2004. Quality management and
organizational context in selected service industries of China.
J. Oper. Management 22(6) 575587.