The Impact of Service Failures on Firm Profitability: Integrating Machine Learning and Statistical Modeling

The generally accepted view among managers and researchers is of a direct linear relationship between service quality and profitability. Supported by the strategy-structure-paradigm, we argue that the relationship between service quality and organizational performance is impacted by strategy. Using historical data from the U.S. airline industry, we study the impact of various service failures on financial performance between airlines pursuing different strategies (low cost versus legacy). Using a novel methodological approach that includes neural network modeling and statistical data analysis, we find that the impact of service failures on profitability is not linear but differs between the two groups across all measures (flight delays, involuntary denied boarding, and mishandled baggage). Most interestingly, it is the $pattern$ of the relationship that is distinctly different. These findings reveal the nuanced impact that service failure has on profitability. Although customer complaints are found to have the most significant impact, the pattern of impact is not linear and is distinctly different between the two groups. These findings challenge the conventional belief that reducing customer complaints goes hand in hand with improving financial performance. The results provide significant managerial implications and contribute to the existing body of knowledge on service quality and operations strategy.

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