Linking business strategy to service failures and financial performance: Empirical evidence from the U.S. domestic airline industry

Abstract Developing an understanding of the relationship between service quality and profitability is of central importance to operations management scholars. In this study we seek to reconcile inconsistencies between extant theory and empirical findings regarding the relationship between service quality and profitability in the airline industry. More specifically, we draw on theories from strategic management, operations strategy, and economics to explain why the relationship between measures of service quality and profitability will be moderated by an airline's competitive strategy. We test our hypotheses by fitting mixed‐effects models to longitudinal data obtained from several governmental databases in the context of the U.S. domestic airline industry. We find that airline strategy moderates the relationship between some service failures and profitability. Specifically, we find that mishandled baggage and customer complaints more negatively affect the profitability of focused than non‐focused airlines. We also find the relationship between arrival delays on profitability is universally negative for focused airlines, but displays an inverted U‐shaped relationship for non‐focused airlines. Our findings provide significant contributions to the existing body of knowledge in service quality and operations strategy. We further outline the implications of these findings for practice and future research.