Can Financial Markets Inform Operational Improvement Efforts? Evidence from the Airline Industry

Ramdas, K, Williams, J and Lipson, M (2013) Can Financial Markets Inform Operational Improvement Efforts? Evidence from the Airline Industry. Manufacturing and Service Operations Management, 15 (3). ISSN 1523-4614

Abstract

We investigate whether stock price movements can inform operations managers as to where they should focus improvement efforts. We examine how unexpected performance along several dimensions of service quality—on-time performance, long delays and cancellations, lost bags, and denied boardings—impacts contemporaneous stock returns. Prior research suggests that airlines buffer their flight schedules and engage in expensive employee incentive programs to increase the likelihood of on-time arrival. We find that only long delays are penalized by the market, and we identify a number of carrier-specific factors that alter the financial impact of long delays. We find that the penalty a carrier faces for long delays is significantly higher if it operates a high percentage of short-haul or connecting flights, or if its competitors incur fewer long delays in the same time period. Our findings suggest that developing ways to curtail long delays is a useful future research area.