Financial distress and service decisions: Empirical evidence from the US domestic airlines

Abstract

Understanding the firm's service decisions under financial distress is of central importance to service quality regulators and operation management scholars. This study aims to add new evidence to the relationship between financial distress and airline services and reconcile the discrepancies between theory, practical implications, and empirical results. We examine if and how airlines in financial distress may change their service provisions to turn around, with a particular focus on the moderating role of operating unit costs and market share. In the study, four measures of service failure (the inverse of service quality) are constructed and evaluated: airline arrival delay minutes attributable to the carrier, cancelations attributable to the carrier, mishandled baggage, and involuntary denied boardings. In the US domestic airline business context, we estimate the mixed-effects model using panel data from the Department of Transportation and Wharton Research Data Services. We find robust evidence that financial distress plays a vital role in airline service provisions, and the distress-service relationship is contingent upon the operating unit costs of airlines.The findings provide evidence to help explain the different and sometimes contradictory empirical findings. We depend on the aggressive strategy framework to understand the service effect of airline financial distress.