2007:008
M A S T E R ' S T H E S I S
Satisfaction Formation Process for Iranian Airline Passengers
Case of IranAir
Afsheen Chitnis
Luleå University of Technology Master Thesis, Continuation Courses
Marketing and e-commerce
Department of Business Administration and Social Sciences Division of Industrial marketing and e-commerce
2007:008 - ISSN: 1653-0187 - ISRN: LTU-PB-EX--07/008--SE
1
MASTER'S THESIS
Satisfaction Formation Process for Iranian Airline Passengers
Case of IranAir
Supervisors:
Dr. Mohamed Khalifa Dr. Mohammad Aghdasi
Referee:
Dr. Mehdi Sepehri
Prepared by:
Afsheen Chitnis
Tarbiat Modares University Faculty of Engineering
Department Industrial Engineering Lulea University of Technology Department of Business Administration and Social Sciences
Division of Industrial Marketing and E-Commerce
MSc PROGRAM IN MARKETING AND ELECTRONIC COMMERCE Joint
2006
In the name of God
The compassionate the Merciful
I dedicate this research
To my parents,
To my teachers and professors,
And to all the people of Iran who are involved in the civil aviation
industry.
_________________________________________________________________Abstract
1
Abstract
Customer satisfaction in Iranian airlines has obsessed my mind for a long time, moreover losing market share by Iranian airlines and high competition by foreign airline companies in the airline market in Iran were the major motivation for such research .An important aspect of customer relationship management (CRM), is customer satisfaction. This research has been focused on CRM, customer satisfaction, expectation disconfirmation theory and the SERVQUAL instrument. As far as studied no similar and such comprehensive research has been conducted in the airline industry in Iran. This research is focusing on the customer point of view. Data collection was done on nine IranAir international routes during flight. Both theoretical and managerial implications were obtained from the study. The theoretical implication shows strong relationship between expectation disconfirmation and perceived performance which forms satisfaction. By this research, the expectation disconfirmation theory is confirmed in the airline industry. The most important and crucial managerial implication is that airlines with old aircraft fleet can still achieve customer satisfaction process, hence old aircraft fleet is just one factor of several factors influencing and determining customer satisfaction formation process, the highest priority which Iranian airlines have to focus on is the company’s responsiveness aspects regarding their customers.
Keywords: Airline marketing, CRM, Customer satisfaction, Customer expectation,
Expectation disconfirmation theory
______________________________________________________________________2
Acknowledgments
I would like to kindly thank all those who helped me with their valuable support during my research to accomplish my masters thesis.
At first I would like to thank and appreciate my supervisors’ professor Mohamed Khalifa and Dr. Mohammad Aghdasi for their helpful guidelines, contribution and support throughout my research.
I would like to extend my sincere thanks to Professor Moez Limayem a great teacher who thought me the knowledge I was seeking for years and motivated me to achieve a research in the field of customer relationship management, CRM.
Special thanks to Professor Salehi Sangari and Dr. Amir Albadvi for their great efforts to arrange and organize the e-commerce and marketing course. Thanks to all my other professors who thought and guided me during the course.
I would also thank all the marketing and e-commerce faculty members of Luleå University of Technology especially Ms. Carola Strandberg and Tarbiyat Modares University especially Ms. Zeynab Morsali for their great administrative assistance.
Special thanks to Mr. H. Sabaghi CEO of Aviation Industries of Iran (AII), Dr Noorian Head of Iran Meteorological Organization with his long experience in Iran’s civil aviation and Dr. Malaek professor of aeronautic department of Sharif university who all supported me with their guidelines to perform my research in the aviation industry.
Grateful thanks to Mr. Dariush. Niknam, head of IranAir’s service quality assessment and customer relations department whom if without his support and cooperation, this research would have not come to a fruitful end. Special thanks to Mr. Rabiee senior manager of service quality assessment section who honestly helped me a lot during questionnaire design and preparation for data collection which was really a heavy task. I extend my thanks to all other IranAir’s managers and employees who were involved in the research particularly the flight crew who conducted the survey during their flight.
At last but not least I would like to appreciate my parents which I owe a big debt of gratitude to them for their full support during my entire life.
Afsheen Chitnis
January 2006
_________________________________________________________Table of Contents
______________________________________________________________________3
Table of Contents
TITLE... PAGE
Abstract...1
Acknowledgements ...2
Table of Contents ...3
List of Tables ...7
List of Figures...8
Chapter 1: Introduction ...8
1.1 Background ... 9
1.2 Problem Statement ... 10
1.3 Motivation ... 11
1.4 Objectives... 11
1.5 Research Question... 12
1.6 Thesis Layout and organization...13
Chapter 2: Theoretical Review ...14
2.1 Literature Review ...15
2.1.1 Marketing ... 15
2.1.1.1 Marketing Management... 15
2.1.2 Service Marketing ... 16
2.1.2.1 Service Marketing Extra Ps ... 17
2.1.2.2 Differences in goods and service marketing... 17
2.1.2.3 Service Quality ... 17
2.1.3 Airline marketing... 18
2.1.3.1 Passenger’s Flight Experience... 20
______________________________________________________________________4
2.1.4.1 What is CRM... 21
2.1.4.2 CRM Definitions ... 21
2.1.4.3 Why CRM?... 23
2.1.4.4 CRM and Organizational Design ... 23
2.1.4.5 CRM and Information Technology ... 26
2.1.4.6 CRM Pitfalls... 27
2.1.5 CRM in the airline industry... 27
2.1.6 Service Quality Evaluation Tools... 30
2.1.6.1 Service Quality Tools ...30
2.1.6.2 Conceptual Model of Service Quality ... 33
2.1.6.3 SERVQUAL Instrument ... 34
2.1.6.4External GAPS Model... 34
2.1.6.5 Service Quality Information System ... 35
2.1.7 Customer Expectations... 36
2.1.7.1 Expectations Zone of Tolerance ... 36
2.2 Theoretical Model ...37
2.2.1 Disconfirmation Theory ... 37
2.2.1.1 Describing Satisfaction Formation ... 38
2.2.1.2 Systematically Varying Customer Satisfaction ... 39
2.2.2 Research model ... 40
2.2.2.1 Structural Model... 40
2.2.2.2 Measurement Model... 40
2.2.3 Hypothesis Definition... 42
_________________________________________________________Table of Contents
______________________________________________________________________5
Chapter 3: Research Methodology...44
3.1 Research Designs ... 45
3.1.1 Research Approach... 45
3.1.2 Sample Survey... 45
3.1.3 Types of Sampling... 46
3.2 Measurement Development... 47
3.2.1 Demographic of Respondents... 48
3.3 Sample and Survey Administration... 48
Chapter 4: Result and Discussion...50
4.1 Result and Discussion... 51
4.2 Empirical Results ... 51
4.2.1 Measurement Model... 52
4.2.2 Structural model and Hypothesis testing ... 52
4.3 Demographics data Analysis ... 54
Chapter 5: Implications and Further Research Suggestions...56
5.1 Implications ... 57
5.1.1 Theoretical Implications... 57
5.1.2 Managerial Implications... 57
5.2 Conclusion and Further Research Suggestions ... 58
References...59
Appendix A – PLS Analysis Results ...65
Appendix B – Descriptive Statistics ...68
Appendix C - Questionnaire ...70
______________________________________________________________________6
List of Tables
Table 1: Comparison of methods for service quality evaluation...32
Table 2: SERVQUAL Development ...33
Table 3: Sample response rate statistics ...49
____________________________________________________________List of Figures
______________________________________________________________________7
List of Figures
Figure 1: Passenger Flight Experience ...20
Figure 2: Core CRM concept – 100 percent focus on customer...25
Figure 3: Core CRM concept – 360 degree view of customer ...25
Figure 4: Ubiquitous Organization...26
Figure 5: Methods to identify customer needs ...28
Figure 6: Customer focused airline operations...29
Figure 7: Conceptual model of SQ – Gaps model...33
Figure 8: Extended Gaps model ...35
Figure 9: Zone of tolerance of service expectations...37
Figure 10: Expectation Disconfirmation Theory...38
Figure 11: Research Structural Model...41
Figure 12: Research Structural and Measurement Model ...42
Figure 13: Research Model – Loadings and Path Coefficients ...51
Figure 14: PLS graph output – testing the structural model...53
______________________________________________________________________8
Chapter 1 Introduction
In chapter 1 an introduction to the thesis is provided, the background, problem statement,
motivation and objectives which led to do this research. At the end the thesis layout and
organization is presented.
____________________________________________________________Introduction
________________________________________________________________________ 9
1.1 Background
Customer demands and expectations are altering in today’s world, In the airline industry many of the airline companies have lost track of the true needs and wants of their passengers and are sticking to the outdated views of what airline services are all about (Gustafsson et al,1999), Many airline managers think of passenger needs from their own perspective so their immediate focus is on cost reductions in driving to more efficient operations, keeping customers at a least priority in their strategic planning programs. But the customer should not be ignored (Boland, Morrison and O’Neill, 2002). The airline business must aim at fulfilling the individual customer needs or even reaching beyond these (Gustafsson et al,1999).
The goal of service companies including airlines is to develop services which attract and keep customers who are satisfied, loyal and speak well of the airline (Gustafsson et al, 1999). It should be observed that retention of existing customers is much cheaper to acquire a new customer, therefore companies including airlines are putting more emphasis on Customer Relationship Management (CRM) as a tool for managing customer relationships, hence to increase customer satisfaction and loyalty (Khalifa &
Liu 2003;Kotorov 2002;Park & Kim 2003; Ngai 2005) which consequently will increase steady streams of revenue, customer equity and market share (Wang et al, 2004; Park et al, 2004). Organizations and companies should also notice that they will be more successful if they concentrate on acquiring and sustaining a share of each customer rather than a share of the entire market (Park & Kim 2003)
Airlines should also know their competitors and consider the market competition and how to overcome and win in the competition campaign. CRM is an essential component of the corporate strategy of airline companies to differentiate themselves from competitors in the eyes of the customer (Boland et al, 2002)
This research studies customer satisfaction formation process in the airline industry in Iran, which is the fundamental notion of CRM (Stefanou et al, 2003). Customer Relationship Management is a new evolving management topic which most business firms are focusing on as a competitive advantage strategy and tool (Khalifa & Liu,2003;
Ngai, 2005), and airline industries are not an exception from this business strategy approach.
Research shows many companies worldwide claiming implementing CRM do not have a
full understanding of CRM and mostly only stick to the CRM software systems. Same
case is with Iranian companies, CRM is not well comprehended and applied in its real
manner. Managers mostly are not familiar with the holistic manner and definition of
CRM and its philosophy. They think CRM is just a service design or even worse an after
sales service outline (Kotorov, 2002).
________________________________________________________________________ 10 By observation and interviewing both airline managers and passengers, I realized that there is a severe lack of customer satisfaction in Iran’s airline business. Most Iranian airline managers interviewed were just thinking of their cost management without considering the most significant criteria in business, the customer relationship. though some airline managers were suggesting me to change my research topic from customer satisfaction, identifying their expectations, needs and wants, to study on their airline’s cost management. They were claiming “we know what our passengers expect, need and want, we have the experience”.
As we will see in the literature review of this research not only Iranian airline managers might have such thought but also many other airline managers might think in the same way, particularly in countries were airline deregulation has not yet been seriously considered (IATA 2002).
Airlines are one of the most critical service companies in Iran that customers are mostly facing dissatisfaction. Focusing on IranAir which the research is conducted, the airline is suffering from very intense competition on its international market. The airline is not only enduring from low market share on most routes which other airlines are also having flight operations but also losing the market share on some others
Competitor airlines such as Emirates on Middle East, Far East, North Africa and Australia destinations, while Lufthansa and British airways on Europe and North America routes are strongly competing with IranAir. An overview of the top 150 airlines ranked by their revenue in 2004 (Airline business Magazine, August 2005) shows that the major IranAir competitors Lufthansa, British Airways and Emirates are rated 2, 8, 20 respectively among the 150 airlines while IranAir is rated 105. A glance at the statistics given, shows that IranAir is far behind the airlines competing in its market. The three competitor airlines have implemented CRM and e-CRM solutions in their companies, for example Lufthansa was the first to adopt check-in kiosks in 1995.
A very important fact to notice is that IranAir can not be directly evaluated or compared to its competitors or any airline in the world, especially to the ones mentioned in the previous paragraph. At the following I will discuss this fact.
After the Islamic revolution of Iran in 1979, the airline industries of Iran were strongly
influenced by the political environment in Iran and the world. Iran’s airline industry has
been struggling with the U.S sanctions and suffering from the embargo on purchasing
new aircrafts to renew the old fleet, and supplying critical spare parts. During the
interviews with IranAir managers and experts, they were insisting on that no comparison
could be made with other airlines in any aspect including customer satisfaction which
should be known as the most supreme vision and mission of any service company.
____________________________________________________________Introduction
________________________________________________________________________ 11 The managers argue the most of the problems mentioned above like U.S sanctions and embargos, no governmental deregulation, aged aircraft fleet (which can not be renewed), are the most important barriers for IranAir’s development and though comparing IranAir to its competitors and other Airlines does not make sense. It should be noted that although IranAir is struggling with the difficulties mentioned, but the most important factor for IranAir which is safety, has been achieved by the effort of IranAir’s staff including flight crew, ground staff, engineers and technicians who challenge with problems to have one of the most safest airlines in the world and to sustain and increase their market share.
1.3 Motivation
I believe we are all customers, customers of hundreds and thousands of businesses, but we usually have only one business. We deal with many different kinds of business daily to provide our needs and wants, it could be buying a mineral water bottle from the supermarket to pleasure services which may not be a necessity in our daily life. Facing all those businesses frequently or occasionally we, as a customer, want to be satisfied from the products delivered or services offered, air travel is no exception.
Air transportation is turning from a luxury want to a need in modern life. People need to travel by airlines and surely want to be satisfied with their travel chain experience (including travel decision making, ticket reservation, airport service, in-flight service, and final destinations arrangements).
Customer satisfaction in Iranian airlines has obsessed my mind for a long time, moreover
losing market share by Iranian airlines and high competition by foreign airline companies
in the airline market in Iran were the major motivation for such research As mentioned in
the problem statement passengers flying with Iranian airlines which are mostly Iranian
culture passengers are likely to face dissatisfaction, due to the lack of customer focus
service in Iranian airlines, in their travel chain experience. Therefore the motivation for
me to study on customer satisfaction formation process were two main reasons; first, lack
of customer focus strategy and consequently the likelihood of customer dissatisfaction,
second the threat of losing market share on international routes for Iranian airlines.
________________________________________________________________________ 12 The main objective of this research is to study the customer satisfaction process which is the fundamental notion of CRM (Stefanou et. al, 2003). The research studies the satisfaction formation process from the customer’s point of view.
The aim of this research is to study the satisfaction formation process in Iran’s airline industry, and its focus would be customer satisfaction from the passenger’s point of view.
For this purpose at first all the major Iranian airlines were selected (airlines both operating domestic and international routes). Due to the monopoly of the carriers in the domestic market and the overload of passengers compared to seats offered by airlines, and factors influencing domestic travel beyond the airlines responsibility, the study on the domestic routes were neglected. Satisfaction in domestic routes in Iran can hardly be achieved at present time but should be thought of carefully for future threats such as low cost carriers’ development.
Therefore the focus was considered on airlines operating on international routes, airlines which were first selected for the study were; IranAir the national flag carrier of Iran, Iran Asseman Airlines, Mahan Air, Kish Air and Caspian airlines, but due to the major and significant differences in Kish Air and Caspian airlines organizational management, not fully government supported, very limited fleet and international flight operations in comparison to the three other major airlines, Kish Air and Caspian were ignored from the study. Studies continued in IranAir, Mahan and Asseman Airlines. There were two important barriers to this study, first time limitation and second cooperation of the airline company’s management under study with me (researcher).
Therefore due to the limitations mentioned, IranAir was selected for the field research for two important reasons, first IranAir is the national flag carrier transporting most international passengers from and to Iran with a various types of aircraft fleet and the second and most important, the encouragement and good cooperation of IranAir managers with me (researcher) to conduct this research.
Due to time limitations this study will only focus on the most essential step of CRM implementation, understanding customer expectations, perceptions and satisfaction. This research will propose a satisfaction formation model for airlines based on the passengers expectations and perceived performance. The research studies the satisfaction formation process based on the expectation disconfirmation theory.
1.5 Research Question
To fulfill the objectives, the research question can be expressed as:
“How can satisfaction be explained with airline services?”
____________________________________________________________Introduction
________________________________________________________________________ 13
1.6 Thesis Layout and organization
Chapter 2; Theoretical review consists of literature review and theoretical model definition. This thesis research is contributing to CRM (Customer Relationship Management) in the service marketing domain, therefore in chapter 2, I have given some definitions and explanations related to marketing, service marketing and CRM, then some discussion about service quality and its measurement tools, following a specific discussion on airline marketing and CRM in the airline industry, which comprises the literature review. Discussion on research model and the expectation disconfirmation theory which this research is based on includes the theoretical model review.
Chapter 3; discusses the research methodology including explanation about survey, sampling and instrument development applied in this research.
Chapter 4; explains and discusses about the analysis of the sample data, results, hypothesis testing, and the confirmation of the expectation disconfirmation model.
Finally in chapter 5 a summary of main results and the managerial implications and
further research suggestions are given.
________________________________________________________________________ 14
CHAPTER 2
Theoretical Review
Theoretical review consists of literature review and theoretical model definition. This
thesis research is contributing to CRM (Customer Relationship Management) in the
service marketing domain, therefore in this chapter, some definitions and explanations
related to marketing, service marketing and CRM, service quality and its measurement
tools, following a specific discussion on airline marketing and CRM in the airline
industry, which comprises the literature review are presented. Discussion on research
model and the expectation disconfirmation theory which this research is based on
includes the theoretical model review.
Theoretical Review
________________________________________________________________________ 15
2.1 Literature Review
In this section the literature review related to the research is discussed, which consists of a review of the main basic concepts and definitions such as marketing, service marketing, airline marketing, customer relationship management (CRM), airline industry and CRM service quality evaluation tools and the SERVQUAL model which has been used in this research have been presented.
2.1.1 Marketing
Kotler (2003, p.8) argues that marketing definition can be seen from two perspectives, first social and second managerial viewpoint. From the social point of view marketing is defined as: “A societal process by which individuals and groups obtain what they need and want through creating, offering, and freely exchanging products and services of value with others. The managerial outlook, marketing is defined as “The art of selling products”.
American Marketing Association describes marketing as: “The process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational goals.”
(Kotler 2003, p.9)
2.1.1.1 Marketing management
Kotler (2003, p.9) defines marketing management as: “ The art and science of choosing target markets and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value.”
Marketing activities should be performed under an extensively considered philosophy of efficiency, effectiveness, and social responsibility. There are six competing concepts under which companies manage marketing activities: (Kotler 2003, p.17)
1- Production concept 2- Product concept 3- Selling concept 4- Marketing concept 5- Customer concept
6- Social marketing concept
________________________________________________________________________ 16 2.1.2 Service Marketing
Kotler (2003, p444) defines service as: “service is any act or performance that one party can offer to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical production”.
Services can be defined as “economic activities that produce time, place, form, or psychological utilities. Services are acts, deeds, or performance, they are intangible”.
(Haksever et al. 2000, p.3)
A company usually offers some services with its offerings to the marketplace, the service offered can be a minor or major part of the total offering. Kotler (2003, p.445) proposes five categories of offerings by companies:
1- Pure tangible good: No service is accompanying the product. like, soap, salt, pen 2- Tangible good with accompanying services: A product accompanied by one or
more services, such as car or computer.
3- Hybrid: Equal parts of products and services, for example people go to restaurants both for food and pleasure (service).
4- Major service with accompanying minor goods and services: The offering consists of a major service along with supplemental services or supporting products, for example airline passengers buy transportation service.
5- Pure service: The offerings consists mainly of a service, such as baby sitting, psychotherapy
Services have four major characteristics that products don’t possess:
1- Intangibility: Unlike physical products, services cannot be seen, tasted, felt, heard or smelled before they are bought.
2- Inseparability: Services are produced and consumed simultaneously.
3- Variability: Services are very variable, due to the dependence on who provides them, and when and where they are provided.
4- Perishability: It means that services cannot be stored.
Theoretical Review
________________________________________________________________________ 17 2.1.2.1 Service marketing extra Ps
The traditional product marketing 4Ps approach is not adequate to explain service marketing, though three additional P’s are proposed for service marketing: People, Process, Physical evidence (Kotler 2003, p.450). The three additional Ps are described below:
People: Services are provided by people (staff of the service company).
Physical evidence: Service companies try to demonstrate their service quality through presentation, such as an airline developing a look and style of dealing with customers that understands its intended customer value proposition, like consistently courteous behavior of cabin crew.
Process: The way companies deliver their service, for example fast-food or buffet restaurant are two different ways to deliver food.
2.1.2.2 Differences in goods and services marketing
Goods (products) are first produced, then sold, and consumed. But usually services are first sold, then produced and consumed simultaneously. The differences between goods and services can be observed in terms of:
1- Output tangibility 2- Organizational features
3- Ownership, use, and consumption 4- The scope of marketing activities 5- The consumer’s role
6- (Haksever et al. 2000, p.127)
2.1.2.3 Service quality
American Society for Quality (ASQ) defines quality as “The totality of features and characteristics of a product or service that bears on its ability to satisfy given needs.”
(Haksever et al. 2000, p.331)
Park, Robertson and Wu (2004) define service quality and service value as:
Service quality: can be defined as a customer’s overall impression of the relative efficiency of the organization and its services.
Service value: can be defined as customer’s overall assessment of the utility of a product
based on perceptions of what is received and what is given.
________________________________________________________________________ 18 Wirtz and Johnston (2003) discuss that delivering excellent service is both inconspicuous and elusive. Customers know when they have received it and when they have not.
Service, both poor and excellent, has a strong emotional impact on customers, creating profound feelings about the organization, its employees and its services, and affecting their loyalty to it.
Service excellence requires a total approach. Excellent customer service results from all the appropriate components being situated properly, from the correct strategic focus and service culture, to a clear understanding of service, good people and training, and good systems and processes.
Companies that want to perform service quality excellence should:
1- Have a strategic focus on customers or in other terms be customer centric 2- Value staff and take car of them;
3- Take every opportunity to continually develop staff and systems;
4- Re-create the service offered by predicting potential customer needs;
5- Emphasize the “ surprise” effect;
6- Listen to feedback from all areas of the company, especially from the customers;
7- Consider customer complaints and compliments seriously;
8- Invest in training, particularly for front line staff;
9- Introduce a learning orientation based on continuous improvement;
10-Reward and recognize staff for contributions to service excellence;
11- Focus on cost/profits.
Service quality evaluation tools will be discussed in section 2.1.6
2.1.3 Airline Marketing
As discussed in the previous sections, airline companies are service companies therefore should focus on service marketing which has three additional P’s in its marketing mix.
First, People or airline staff who play a significant role to customer satisfaction and loyalty. Second, Process which is how airlines handle and manage their customers for example having special Desk and lounges for important or loyal customers. Third, Physical evidence which the airline presents its service quality for example in-flight catering or ground and cabin staff courteous behavior.
From the customer point of view or customer focused marketing knowing the needs,
wants and desires and how to meet and satisfy them is essential. In airline marketing
customers (passengers in the airline marketing case) are divided into segments based on
their needs and wants. In this research according to the literature review and interviews,
customers are segmented into business, tourist, visiting friends and relatives, education
and travelers traveling for medical treatment. Each of these travelers (customers) have
Theoretical Review
________________________________________________________________________ 19 their own special need and want. For example a business traveler punctuality and convenience is a very important want, while for a tourist traveler price is important, although some needs are essential and common in airline marketing for all customer segments such as safety.
In airline marketing understanding the decision making process helps to develop effective marketing plans, decision making process steps can be thought as (IATA 2002):
1- Decide time and cost parameters 2- Short list destinations
3- Compare brochures 4- Make booking
Environmental scanning, the first step of marketing process is very important for airlines to start their marketing initiatives. IATA (2002) identifies environmental scanning as “a disciplined process by which a checklist of different areas of the airline’s business environment is assessed or scanned”. Environmental scanning includes total market environment, macro and micro environment, political, socio-cultural and technological factors.
Consumer behavior is one of the most important aspects in airline marketing process (IATA 2002). Customers are changing and shifting their travel behavior which should be understood and considered carefully by airlines.
Airlines should also know their competitors and consider the market competition and how to overcome and win in the competition campaign. For the data collection purpose of the research, this important fact was considered and IranAir routes with low market share and high competition with other airlines were selected for the survey.
A very important aspect in airline marketing is regulations of governments and
organizations (IATA 2002) impacting airline operations. Deregulation in the airline
industry has taken place in many countries but in Iran this fact has not yet been achieved
seriously especially for IranAir the national flag carrier of Iran. Another regulation which
Iran is facing not by its government but by the U.S foreign policies against Iran is the U.S
embargo, which has strongly influenced air transportation in Iran.
________________________________________________________________________ 20 Passengers from the time deciding to travel until the time they reach their final destination go into different service process known as the travel chain of services which consists of (IATA 2002):
• Booking/reservation
• Getting to the airport
• Checking In
• Getting on Board
• Flying to destination
• Baggage delivery
• Final Destination
• Unpacking and settling
10
Passenger’s flight experience
Booking
Getting to the airport
Checking In
Getting on board
Flying to destination
Baggage Delivery
My final destination
Unpacking and settling
IATA/ATDI 2002
Figure 1: Passenger’s flight experience – Chain of services
Source: IATA/ATDI, 2002
Theoretical Review
________________________________________________________________________ 21
2.1.4 CRM
Interest in customer relationship management and the term CRM began to grow in 1990s (Ngai 2005) although the concepts of customer relationship management have been existing ever since the cavemen age, who had a choice of buying an arrowhead if there were more than one seller (Thompson 2002).
In this section CRM definitions are explained and argued from different outlooks.
Although CRM has become a widely known as an important business approach, there is no comprehensively accepted definition of CRM (Ngai 2005).
2.1.4.1 What is CRM?
Customer relationship management means different things to different people, even the three letter abbreviation CRM has not a unique clarification and understanding, most know CRM as the abbreviation for customer relationship management, some as customer relationship marketing, others believe that all customers don’t want a relationship with a supplier, omit the word relationship using the term customer management, while another group might use the term relationship marketing. Based on their opinion whatever the CRM abbreviation is expressed it is a clear customer focus business practice (Buttle 2004; Park & Kim 2003).
2.1.4.2 CRM Definitions
As mentioned above there are different definition, explanations and understanding of Customer Relationship Management, here some of the definitions from the literature review is given and finally most comprehensive definition which will be focused in this research is clarified.
Paul Greenberg (2002) has mentioned some of the viewpoints from CRM experts about CRM as follows:”
• CRM is a disciplined business strategy to create and sustain long-term, profitable customer relationships.
• Customer Relationship Management (CRM) is a business strategy to select and
manage customers to optimize long term value.
________________________________________________________________________ 22 the customer experience at the center of its priorities and to ensure that incentive systems, processes, and information resources leverage the relationship by enhancing the experience.
• CRM is an enterprise-wide mindset, mantra and set of business processes and policies that are designed to acquire, retain, and service customers.
• CRM is about creating a consistent customer history so you can create a consistent customer history so you can create a consistent customer experience.
• It is comprehensive set of processes and technologies for managing the relationships with potential and current customers and business partners across marketing, sales and service regardless of the communication channel.”
Ngai (2005) has brought some other definitions and discussions about the definition of CRM in his paper on customer relationship management research as follows:
“
• An enterprise approach to understanding and influencing customer behavior through meaningful communications in order to improve customer acquisition, customer retention, customer loyalty, and customer profitability.
• The strategic use of information, process, technology, and people to manage the customer’s relationship with your company (Marketing, Sales, Services and Support) across the whole customer life cycle.
• A comprehensive strategy and process of acquiring, retaining, and partnering with selective customers to create superior value for the company and the customer. It involves the integration of marketing, sales, customer service, and the supply chain functions of the organization to achieve greater efficiencies and effectiveness in delivering customer value.”
A comprehensive and a complete definition is given by the CRM experts at the crmguru.com portal a CRM community on the web which is:
“Customer relationship management (CRM) is a business strategy to acquire and retain the most valuable customer relationships. CRM requires a customer centric business philosophy and culture to support effective marketing and sales, and service processes.
CRM applications can enable effective customer relationship management, provided that
an enterprise has the right leadership, strategy and culture” (Thompson 2003; Greenberg
2002).
Theoretical Review
________________________________________________________________________ 23 Kotler (2003) defines CRM as: “The process of managing detailed information about individual customer touch points with the aim of maximizing customer loyalty”. Kotler continues that the aim of CRM is to produce high customer equity which is value, brand and relationship.
Buttle (2004) defines CRM as:” CRM is the core business strategy that integrates internal processes and functions, and external networks, to create and deliver value to targeted customers at a profit. It is grounded on high quality customer data and enabled by information technology.”
2.1.4.3 Why CRM?
Customer Relationship Management has become a strategic necessity for companies in almost every business sector. Companies and organizations are moving closer to their customers, spending more effort in finding new ways to create value for their customers and changing the customer relationship into one of solution finding and partnering rather than one of selling and order taking. Organizations and companies will be more successful if they concentrate on acquiring and sustaining a share of each customer rather than a share of the entire market (Park & Kim 2003).
CRM can be known as a competitive tool to win competitors by customer acquisition, customer retention and creating close relationship with the customer. It should be observed that retention of existing customers is much cheaper to acquire a new customer, therefore companies are putting more emphasis on Customer Relationship Management (CRM) to increase customer satisfaction. (Khalifa & Liu 2003;Kotorov 2002;Park & Kim 2003)
Buttle (2004) argues, to develop and implement a CRM strategy four supportive conditions are required:
1- Leadership (management commitment) and organizational culture.
2- People (internal customers)
3- Process (the way things are done by the company) 4- Information technology
2.1.4.4 CRM and organizational design
What is the best business organization from a customer point of view? This is the
question that managers should ask themselves when thinking of and initiating customer
relationship management (CRM) strategy and implementation in their organizations,
which of course its seldom asked by the executives, because CRM is considered a matter
of service design and sometimes worse after sales service design rather than
organizational design.
________________________________________________________________________ 24 relationship between the customer and the service employee, in reality it is exactly the opposite, which is CRM is about person-to-organization relationship.(Kotorov 2002).
Kotorov (2002) recognizes three stages in the evolution of CRM. The first two stages are based on the person-to-person view point of CRM, and the third stage which is based on the person-to-organization view point is called the ubiquitous organization. A ubiquitous organization has two attributes: first, time and location independence and second, immediacy or being instantaneous.
The emphasis in the first to stages is primarily on service design and more specifically on service customization (personalization) and differential pricing, while in the third stage it is on organizational and process design to offer the customer ubiquitous access and immediacy. Here the CRM evolutions stages are as Kotorov (2002) argues are discussed:
Stage 1: Known as 100 percent focus on customer (figure 1). The core idea is that information and communication technology should be used first to customize (personalize) the relationship with the customer and then expand the organizational response to customer needs. The inadequate result of implementing the first stage of CRM is that it expands the scope of attention to customers, but not the scope or scale of the service offered and delivered to them.
Stage 2: Known as 360 degrees view of customer (figure 3). The core idea behind this model is that superior market performance is the result of superior skills in understanding the customers. This stage is an enhancement of the first stage by including technologies supporting prediction of customer buying patterns and price differentiation.
Differentiation in service allows for differentiation in prices, which consequently increases the profit margin. Stages 1 and 2 emphasize three important facts:
1- Relevance of the service to the customer 2- Responsiveness to customer needs 3- Sensitivity to demand
Stage 3: Is about how companies and organizations ensure that the services are relevant
to the customer, solved in a timely manner, and on demand. The major difference of the
third stage is the integration of the information and processes from the previous two
stages in a ubiquitous demand chain in which scale and scope are increased through time
and location independence and immediacy (figure 4).
Theoretical Review
________________________________________________________________________ 25
Kotorov, 2002
Figure 3: Core CRM concept: 360 degree view of
customer
Source: Kotorov, 2002
Source: Kotorov, 2002 Figure2: Core CRM concept: 100 percent focus on the customer
________________________________________________________________________ 26 2.1.4.5 CRM and Information Technology
Information technology plays an important role in the development of CRM. They can be used to automate and enable some or all CRM processes. Appropriate CRM strategies can be implemented through the help of technology, which can mange the data to understand customers.
By enabling advanced and new CRM technologies such as CRM portals, data warehouse, data mining, predictive and analytical engines facilitate the collection, analysis and distribution of customer data internally (Kotorov 2002; Ngai 2005), it can also help companies to collect unprecedented amount of data to determine the economics of customer acquisition, retention, and life time value (Ngai 2005), and turn them into information for their strategic business purposes (Park & Kim 2003). The result of the analysis is customer segmentation which leads to deliver products and services that better fulfill the customers buying profile (Kotorov 2002) and consequently increasing profitability (Ngai 2005).
As mentioned previously different people have different explanation and definition of CRM. One group of these people are those who believe CRM is just technology and by implementing technology, their CRM initiative is done. Many companies have difficulties in implementing a CRM program because they let software vendors to guide their approach to customer relationship management, or retrofit a customer strategy to match the CRM technology they have purchased. Most of the companies make a mistake and misunderstanding between CRM technology and the core CRM strategy which creates a barrier in implementing successful CRM programs (Kim & Park 2003).
A very important aspect is to know CRM is not technology; technology is an enabler and a tool for CRM implementation (Greenberg 2002).
Figure 4: Ubiquitous organization
Source: Kotorov, 2002
Theoretical Review
________________________________________________________________________ 27 2.1.4.6 CRM pitfalls
All CRM projects and programs do not lead to success, six common pitfalls to CRM implementation can be mentioned as follows retrieved from literature review:
1- CRM viewed as technical (IT) not business problem 2- Lack of senior management involvement
3- CRM driven by IT organization not the business leaders 4- Trying to do too much at once.
5- The lack of organizational readiness to implement CRM
6- CRM driven from the top down (not considering front line employees benefits)
2.1.5 CRM in the airline industry
Boland, Morrison and O’Neill (2002) have a comprehensive discussion on CRM in the airline industry. They argue that Airlines worldwide are trying hard to both recover and improve profitability. Many airlines have focused on operational improvements to reduce costs. Airlines immediate focus is on cost reductions in driving to more efficient operations, keeping customers at a least priority in their strategic planning programs.
Many airlines are turning to customer relationship management (CRM) as a tool for managing customer relationship. Customer relationships must be promoted by airlines to maintain competitive advantage and profitability in the long term.
To manage the customer more effectively and efficiently across all lines of service, airlines must change their approach to CRM as follows:
• Customer segmentation
• CRM initiatives
• Organizational design and management
By implementing a true and real customer centric approach to relationship management an airline will be better positioned to acquire, develop and retain high value customers.
CRM‘s role is to strengthen loyalty, driving increased revenue, with lower acquisition costs and improved operational efficiency. For airlines CRM is an essential component of their corporate strategy which could be an important competitive differentiating tool and advantage.
Airlines are recognizing that CRM is a long term investment, with the true benefits
earned through profitable lifelong customer relationships. In other words airline’s CRM
program becomes a platform for obtaining both near term operational efficiency and long
term relationship management and growth (Boland, Morrison and O’Neill 2002).
________________________________________________________________________ 28 customer through personalization or customization, but in the airline industry, CRM has turned into a commodity with many services indistinct from airline to airline. Airlines can begin to differentiate themselves by focusing on the relationship building aspects of CRM.
Airlines will need to understand the customer in terms of both value and needs. Effective customer segmentation is vital to the success of any CRM strategy. By assessing customers’ value to the company, and their essential needs, the airline can determine which customers’ it should retain and how lower value customers can shift to higher value segments. Many airline companies have based their customer segmentation only on demographic characteristics or frequent flyer program attributes, but both methods due to their limited ability, are not sufficient to provide the airline with a clear view of which customers should be targeted, to improve and get the most profitability. The critical question for the airlines is: “what share of profits does a given group of customers account for?”
Airlines need to clearly understand customer value to focus on the most profitable customer segments and their respective satisfaction drivers, for example some profitable customers might want extra baggage carrying while others might want more Value based customer segmentation allows airlines to manage their customers as an asset.
The airline can set acquisition, development and retention targets for each customer segment, endeavor strategies for lowering the cost of serving low value passengers, and develop marketing and sales budget unique to each segment.
Figure 5: Methods to identify customer needs
Source: Boland, Morrison and O’Neill, 2002
Theoretical Review
________________________________________________________________________ 29 By using value based segmentation to identify the customer needs of different segments, airlines can begin to make operating decisions that help increase the profitability of specific routes. There are two areas where this approach will influence airline operations:
1- Route and schedule planning – One of the important facts to notice in this area is that airlines should build relationship and customer service on routes served by multiple airline with similar schedules to capture customers from the competition and drive incremental profitability.
2- Yield management and pricing – By using value based customer segmentation to help make decisions regarding operational issues, airlines can find opportunities to reduce costs associated with specific routes, while increasing customer revenues.
In the CRM concept the customer is the core to improving key operations. In turn, all operational improvements must support strengthened customer relationships for airlines to achieve long term viability.
Figure 6: Customer focused airline operations
Source: Boland, Morrison and O’Neill, 2002
________________________________________________________________________ 30 capability. At present many airlines encounter three major organizational issues, leading to inconsistent customer service and fine customer relationships:
1- CRM lacks a leader in the organization
2- CRM strategy is not understood by the organization
3- CRM responsibility and definition sits across multiple departments
2.1.6 Service quality evaluation tools
Importance of service is growing, offered as support for products delivered to customers or as an entity in itself. The problem of service quality evaluation exits for two reasons: first, human presence and service intangibility and, second, the dependence on the delivering process.
Several quality evaluation methodologies are provided. Some come as a result of the realization of conceptual models produced to understand the evaluation process and others come from empirical analysis and experimentation.
For comparison between different service quality evaluation tools, some analysis criteria such as data collection, sample size, questionnaire format used to collect data, items number, questionnaire dispensing, data analysis, dimensions number considering for service evaluation, questionnaires reliability, theoretical method baseground, customer-tool interference degree, personal peculiar (idiosyncratic) effect on interviewed customers and data pre-elaboration have been considered (Franceschini and Cinetti, 1998).
2.1.6.1 Service Quality Tools
Most famous tools for service quality evaluation described by Franceschini and Cinetti (1998) are given below:
1- SERVQUAL: Was developed by Parasuraman, Zeithaml and Berry (PZB model inspired by a conceptual model offered in 1985 by them. In this model service quality is assessed by calculating the difference (gap) between what customers expects and what he/she really perceives. SERVQUAL has been revised since 1985.
2- Two-way: Developed by Schvaneveldt at 1991, evaluated service quality from
two viewpoints. First “Objective” included the presence or absence of a particular
quality dimension, and the second “subjective” included the users resulting sense
of satisfaction or dissatisfaction.
Theoretical Review
________________________________________________________________________ 31 3- SERVPERF: Developed by Cronin and Taylor (1992), the main feature of this
method is its focus on customers’ perceptions.
4- NQ: Normed Quality (NQ) wad proposed by Teas (1993), to better define the meaning of expectations. Expectations may be interpreted by customers in two distinct ways, ideal level or feasible level. The NQ method focuses respondents’
attention towards both kinds of expectations, but asks the customer for another set of questions, stimulating potential personal peculiarity (idiosyncratic) effects.
5- QUALITOMETRO: Developed and proposed by Franceschini and Rossetto
(1997), for evaluation and online quality service control and monitoring. It is also
used in situations where there are periodical service users. An important feature of
this method is the possibility of a separate measurement of expected and
perceived quality without the potential for cross influence.
________________________________________________________________________ 32
Table 1: Comparison of methods for service quality evaluation Source: Franceschini and Cignetti, 1998
Theoretical Review
________________________________________________________________________ 33 2.1.6.2 Conceptual model of service quality (SQ)
In this section a detailed explanation will be given about the service quality measurement tool, named “SERVQUAL”, which has been used in this research as formative indicators for the research model.
SERVQUAL was developed by a research team consisting of Parasuraman, Zeithhaml and Berry based on a conceptual framework called the “GAPS model”. The model was first offered at 1985 but several improvements and developments have been made since the initial model introduced. An outline of SERVQUAL development is given in table 2.
Year Development 1983-1985 Conceptual model of SQ – GAPS model
1985-1988 SERVQUAL instrument 1988-1990 Extended Gaps model
1990-1993 Nature and determinants of service expectation 1993-1994 Refined SERVQUAL instrument
1995-1996 Multiple- method listening: a SQ information system 1996-2003 Role of technology in service delivery
2000-2003 Understanding a measuring e-service quality 2001-2003 Network-based customer service systems
Table 2: SERVQUAL development
Source: Parasuraman, 2004
Figure 7 shows the conceptual model of service quality- GAPS model - The main principal of this model is that service quality deficit (the gap between customer’s service expectations and perceptions, GAP 5) is a result of series of shortfalls internally with the service provider’s organization (i.e. GAPS 1-4), Therefore, improving the quality of service experienced by customers (i.e. closing GAP5) requires examining and identifying the causes of and correcting the internal defects (i.e. GAPS 1-4). ( Parasuraman 2004)
Figure 7: Conceptual model of SQ – GAPS model
Source: Parasuraman, 2004
________________________________________________________________________ 34 2.1.6.3 SERVQUAL Instrument
The studies of Parasuraman and his research team to develop, test and refine a scale for measuring service quality as perceived by customers, led to SERVQUAL, a five dimensional, two part measurement instrument. The first and second parts of SERVQUAL measure customers’ expectations and perceptions respectively along different kinds of service attributes grouped into five dimensions; Parasuraman (2004) defines these five dimensions as the following:”
1) “Reliability: ability to perform the promised service dependably and accurately.
2) Responsiveness: willingness to help customers and provide prompt service.
3) Assurance: knowledge and courtesy of employees and their ability to inspire trust and confidence.
4) Empathy: caring, individualized attention the firm provides its customers.
5) Tangibles: appearance of physical facilities, equipments, personnel, and communication materials. “
2.1.6.4 External GAPS model
Parasuraman (2004) mentions he and his research team did an in-depth investigation of
each of the internal gaps to identify potential causes of each gap. This part of their
examination included field studies of organizational units and a literature review in the
domain of organizational behavior. The intuition of this part of the study resulted in an
extended model of service quality which is shown in figure 8 that relates for each gap a
list of specific organizational defects that could cause the gap. The extended GAPs model
is a useful starting point for finding the defection cause and closing the gaps.
Theoretical Review
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Figure 8: Extended GAPS model
Source: Parasuraman, 2004
2.1.6.5 Service quality information system
Parasuraman (2004) argues that the very valuable SERVQUAL instrument is just one approach for assessing service quality. This approach should be enhanced with other approaches, both qualitative and quantitative, to get more complete understanding of an organization’s quality of service. Parasuraman and his research team proposed a multiple method listening -“SQ information system “ - to cover and compensate the weakness of service quality (SQ) assessment approaches, consisting of the following:”
• Transactional surveys
• Mystery shopping
• New, declining, and lost customer surveys
• Focus group interviews
• Customer advisory panels
• Service reviews
• Customer complaint, comment, and inquiry capture
• Total market surveys
• Employee field reporting“
All the methods mentioned above need not to be employed and may not all be
appropriate in every organization. Each organization should select and implement the
most feasible and useful subset of approaches listed.
________________________________________________________________________ 36
2.1.7 Customer Expectations
In this section the term “Expectation” that is one of the main determinants of satisfaction will be defined and explained. Expectations have been found to directly affect satisfaction (Reisig & Chandek 2001).
Gilbert and Wong (2002) express expectation as pre-consumption beliefs that customers draw upon as the probabilities of the occurrence of positive and negative events. As Reisig & Chandek (2001) discuss, Different customers have different expectations, based on the customers knowledge of a product or service, a customer may estimate what the performance will be or in a may think what the performance ought to be.
Parasuraman (2004) identifies personal needs, past experience, word-of-mouth communications, recommendations and perception of the alternative services that are available to customers, as significant determinants of service expectations. Another potential determinant is situational factors which are of course beyond the service provider’s control. The awareness of customers to situational factors will make them more understanding of the factors that are indirectly affecting the service quality and performance and thus will widen their expectations zone of tolerance. This is one of the main aspects that should be considered to study service quality and performance in the airline industry in Iran, which many situational factors like political, social, cultural governmental regulations are affecting the service industry.
McQuitty, Finn and Wiley (2000) discuss an interesting topic that has rarely been studied in the marketing literature. They argue that customer’s expectations may vary. The degree which customers adjust their expectations to meet the perceived performance of a product or service can be influenced by the variability of a product’s or service performance, the degree of involvement with the product or service, the ease of assessment, the perfection and accuracy of information that forms expectations, and the precision with which a product’s level of performance is revoked. Adjustments to expectations are likely to be fast when the product or service is easily assessed, but slow when complicated and with many attributes.
2.1.7.1 Expectations zone of tolerance
Parasuraman (2004) discusses that customers have a range of expectations rather than
having a single ideal level of expectation. Parasuraman names this level the “ zone of
tolerance” (figure 9) which is bounded by the service level that customers believe that
should and can be delivered (Desired service) and the service level which customers are
ready to accept (Adequate service).
Theoretical Review
________________________________________________________________________ 37
Figure 9: Zone of tolerance of service expectations
Source: Parasuraman, 2004
If the perceived performance of the service falls within the zone, customers will be satisfied. If the service is better than their desired service level, customers will perceive the service as excellently good and will be delighted. On the other hand if the service falls below the adequate level of the zone of tolerance, customers will be dissatisfied and consequently repulsed and will look elsewhere for the same service.
As mentioned previously in this section different customers have different expectations, thus the zone of tolerance can vary across customers which means reflecting different priorities in their service expectations, and also across occasions or overall situations which means reflecting different potential drivers of expectations at performance.
Customers’ service expectations can be greatly influenced by what the service company or organization promises to perform. Over promising the service that can be offered to customers can be very dangerous. Also Added value services can make customers much more critical to the existing services and therefore raise their expectations (Parasuraman 2004).
2.2 Theoretical model
In this section the theory which the research is based on, the research model and the research hypotheses are declared and discussed.
2.2.1 Disconfirmation Theory
In marketing literature the process of satisfaction formation has been examined using behavioral theories, initially based on expectation disconfirmation, which focused on customer satisfaction with physical products and services. In recent studies besides expectation disconfirmation, desire disconfirmation was taken into consideration too.
(Khalifa & Liu, 2003)
________________________________________________________________________ 38 perceived performance, expectations and desires which is promising approach to explain satisfaction. As mentioned above earlier studies used expectation as the only determinant of disconfirmation but recent studies also look into desires.
This theory proposes that satisfaction is affected by the intensity (or size) and direction (positive or negative) of the gap (disconfirmation) between expectations and perceived performance (figure 10). (Khalifa & Liu, 2003)
Expectation Disconfirmation
Perceived Performance
Disconfirmation Theory
Expe ctation Disconfirmation
Perceive d Performance
Satisfaction
Figure 10: Expectation disconfirmation theory
