UNIVERSITY OF GHANA CUSTOMER RETENTION STRATEGIES IN THE AIRLINE INDUSTRY IN GHANA BY ANANI SIMON (10178972) THIS THESIS IS SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF MPHIL MARKETING DEGREE JUNE, 2013 University of Ghana http://ugspace.ug.edu.gh i DECLARATION I do hereby declare that this thesis is the result of my own research towards the award of MPhil degree in Marketing and that, to the best of my knowledge, it contains no material previously published by another person nor material which has been accepted for the award of any other degree of this or any other University, except where due acknowledgement has been made in the text. …………………………. ……………………. SIMON ANANI DATE (10178972) University of Ghana http://ugspace.ug.edu.gh ii CERTIFICATION I hereby certify that this thesis was supervised in accordance with procedures laid down by University of Ghana, Legon. ……………………………………. ……………………. DR. SAMUEL C.K. BUAME DATE (PRINCIPAL SUPERVISOR) ………………………………… …………………….. PROF. ROBERT EBO HINSON DATE (CO- SUPERVISOR) University of Ghana http://ugspace.ug.edu.gh iii DEDICATION I dedicate this work to the glory of God Almighty whose unfailing love and unflinching support have sustained me and have successfully seen me through my studies and for the wisdom he granted me to produce this piece of work. Again, I dedicate this work to my mother Ms. Olivia Gborglah of blessed memory for giving me life but left me rather at a tender age. Mum rest in perfect peace! I also dedicate this work to all airline industry professionals and enthusiasts who continue to contribute their quota to the development and the sustenance of air transport for the generation yet unborn. University of Ghana http://ugspace.ug.edu.gh iv ACKNOWLEDGEMENT Indeed to God be the Glory for great things he has done, his mercies and unending love has kept faith with me throughout my entire education without much rancor. If it is the case that I can see farther, it is because I stood on the shoulders of giants. My sincerest gratitude goes to my academic mentors, Dr. Samuel C. K. Buame and Prof. Robert E. Hinson, their patience, critical comments and constructive criticisms and suggestions on every page, gave meaning to this research. You both are indeed a great source of inspiration for me. In particular I wish to acknowledge my lead supervisor, Dr. Samuel C. K. Buame who despite his heavy schedule did not only provide guidance and encouragement at every stage of this thesis but was also a source of inspiration and the flame which kept my candle of hope burning. Giants like you need special mention. I would also want to extend my noble thanks and appreciation to my dearest sister Ms. Selina Agor for performing a motherly role in my life and for making me who I am today. I am forever indebted to Mrs. Jewel Kudjawu for your love, care and support during my education. You for one have restored my waning confidence in humanity. In no particular order I also wish to acknowledge the love, encouragement and support I received from the following persons; Mr./Mrs. Martin Odum, Mrs. Doreen Annan, Mrs. Doreenda Voado, Mrs. Cynthia Abole, Dr. E. M. Atua, Mr. Maclean Sarbah, Mr. Cartious Enyonyoge Aziedu, Mr. Philip-Neri Jayson Quashigah and Mr. Bright Addo. To you all I say thank you and may God bless you all. If you hear the cock crows the next morning, it is my thanks and appreciation being extended to you in quantities. Last but not the least, I am sincerely grateful to Mr. Edward Forson the Manager of Corporate Planning, Ghana Airport Company Limited, Ms. Sandra Nyarko Koduah Assistant Airport Manager (Terminal Operations), of Ghana Airports Company Limited and Mr. Bright L. Adjokacher, the Corporate Planning Manager of Ghana Civil Aviation Authority for their immeasurable contributions towards the success of this study. University of Ghana http://ugspace.ug.edu.gh v TABLE OF CONTENTS Content Page DECLARATION ................................................................................................................... i CERTIFICATION ................................................................................................................ ii DEDICATION .................................................................................................................... iii ACKNOWLEDGEMENT ................................................................................................... iv TABLE OF CONTENTS ...................................................................................................... v LIST OF TABLES ................................................................................................................ x LIST OF FIGURES ............................................................................................................ xii LIST OF ABBREVIATIONS ........................................................................................... xiii ABSTRACT ....................................................................................................................... xiv CHAPTER ONE: BACKGROUND OF THE STUDY ........................................................ 1 1.0 Introduction ..................................................................................................................... 1 1.1 Scope of the Study .......................................................................................................... 3 1.2 Statement of the Problem ................................................................................................ 4 1.3 Research Gap .................................................................................................................. 5 1.4 Objectives of the Study ................................................................................................... 8 1.5 Research Questions ......................................................................................................... 8 1.6 Research Hypotheses ...................................................................................................... 9 1.7 Significance/Justification of the Study............................................................................ 9 1.8 Organization of the Study ............................................................................................. 11 1.8.1 Chapter One- Research Overview .......................................................................... 11 1.8.2 Chapter Two- Literature Review and Conceptual Framework .............................. 11 1.8.3 Chapter Three- Context of the Study ..................................................................... 12 1.8.4 Chapter Four- Research Methodology ................................................................... 12 1.8.5 Chapter Five- Data Analysis and Discussion ......................................................... 12 University of Ghana http://ugspace.ug.edu.gh vi 1.8.6 Chapter Six- Summary, Conclusion and Recommendation ................................... 13 1.8.7 Operational Definition of Terms and Concepts...................................................... 13 CHAPTER TWO: LITERATURE REVIEW AND CONCEPTUAL FRAMEWORK ..... 15 2.1 Introduction ................................................................................................................... 15 2.2 Background Information ............................................................................................... 15 2.3. Theoretical Perspectives to Customer Retention ......................................................... 18 2.3.1 Theoretical Framework of the Study .................................................................... 20 2.4 The Concept of Customer Retention ............................................................................. 21 2.5 Reasons for Customer Defections ................................................................................. 25 2.6. Relationship Marketing ................................................................................................ 27 2.6.1 Trust and Commitment in Relationship Marketing ................................................ 29 2.6.2 Relationship Commitment ...................................................................................... 30 2.6.3 Customer Trust ....................................................................................................... 31 2.6.4 Complaint Handling ............................................................................................... 32 2.7 Service Quality .............................................................................................................. 34 2.7.1 Airline Service Quality ........................................................................................... 36 2.8 Switching Barriers ......................................................................................................... 38 2.8.1 Switching cost ........................................................................................................ 41 2.8.2 Customer Service and Interpersonal relationship ................................................... 42 2.9 Service Recovery .......................................................................................................... 44 2.9.1 Service Failure and Service Recovery in the Airline Industry ............................... 47 2.9.2 Loyalty Rewards and Frequent Flyer Programs ..................................................... 50 2.10. Conceptual Framework .............................................................................................. 52 2.10.1 Components of the Conceptual Framework ......................................................... 53 2.10.2 Relationship Marketing ........................................................................................ 53 2.10.3 Airline Service Quality ......................................................................................... 54 University of Ghana http://ugspace.ug.edu.gh vii 2.10.4 Switching Barriers ................................................................................................ 56 2.10.5 Frequent Flyer Programs (FFPs) .......................................................................... 57 2.10.6 Global Alliance ..................................................................................................... 57 2.10.7 Service Recovery .................................................................................................. 58 CHAPTER THREE: CONTEXT OF THE STUDY ........................................................... 60 3.0 Introduction ................................................................................................................... 60 3.1 The Physical Setting of Ghana and Kotoka International Airport ................................ 60 3.2 Historical Background of the Airline Industry in Ghana .............................................. 61 3.3 Operations of GCAA..................................................................................................... 62 3.4 Functions of GCAA ...................................................................................................... 63 3.5 Brief History of Ghana Airport Company Limited ....................................................... 63 3.6 Regional Airports .......................................................................................................... 66 3.6.1 Kumasi Airports ..................................................................................................... 66 3.6.2 Tamale Airport ....................................................................................................... 67 3.6.3 Takoradi Airport ..................................................................................................... 68 3.6.4 Sunyani Airport ...................................................................................................... 68 3.7 Developments in the Airline Industry in Ghana ........................................................... 69 3.8 The Domestic Airlines in Ghana ................................................................................... 71 3.8.1 Antrak Air ............................................................................................................... 71 3.8.2 Starbow ................................................................................................................... 72 3.8.3 Fly 540 .................................................................................................................... 73 3.8.4 Africa World Airlines ............................................................................................. 74 3.9 Contribution of the Airline Industry to the Economy of Ghana ................................... 74 University of Ghana http://ugspace.ug.edu.gh viii CHAPTER FOUR: RESEARCH METHODOLOGY ........................................................ 76 4.0 Introduction ................................................................................................................... 76 4.1 Research Purpose .......................................................................................................... 76 4.2 Research Approach ....................................................................................................... 77 4.3 Research Design and Strategy ....................................................................................... 78 4.4 Sample Design and Sample Size Selection Technique ................................................. 79 4.5 Sources of Data and Data Collection Methods ............................................................. 82 4.6 Pre Test ......................................................................................................................... 83 4.7 Analysis of Data ............................................................................................................ 84 4.8 Ethical Consideration .................................................................................................... 85 CHAPTER FIVE: DATA ANALYSIS AND DISCUSSION ............................................ 87 5.0 Introduction ................................................................................................................... 87 5.1 Socio-Demographic and General Background of Respondents .................................... 87 5.1.1 Age and Sex Distribution of Respondents ............................................................. 87 5.1.2 Educational Qualification of Respondents ............................................................. 89 5.1.3 Occupation of Respondents .................................................................................... 89 5.1.4 Place of Origin of Respondents .............................................................................. 90 5.1.5 Travel Frequency of Respondents .......................................................................... 91 5.1.6 Travel Frequency per Year ..................................................................................... 91 5.1.7 Airline Often Patronized ........................................................................................ 92 5.1.8 Most Important Factor in the Choice of an Airline ................................................ 93 5.9 Descriptive statistics of variables of Customer Retention Strategies ............................ 94 5.10 Assessment of Normality of Regression of Variables ................................................ 96 5.11 Assessing the level of correlation between variables .................................................. 97 5.12 Checking Variables for the presence of Multicollinearity .......................................... 97 5.13 Reliability of the Constructs........................................................................................ 98 University of Ghana http://ugspace.ug.edu.gh ix 5.14 Regression Analysis .................................................................................................... 99 5.15 Discussion of Major Findings ................................................................................... 101 CHAPTER SIX: SUMMARY, CONCLUSIONS AND RECOMMNDATIONS ........... 109 6.0 Introduction ................................................................................................................. 109 6.1 Summary ..................................................................................................................... 109 6.2 Major Findings ............................................................................................................ 110 6.3 Conclusion .................................................................................................................. 111 6.4 Recommendations and Suggestion for Further Studies .............................................. 112 6.5 Recommendation to industry for practice and policy making .................................... 113 REFERENCES .................................................................................................................. 114 APPENDICES .................................................................................................................. 133 Appendix 1: Questionnaire ............................................................................................ 133 Appendix 2: Domestic Airline Statistics Actual ........................................................... 138 Appendix 3: International Airline Movement In Ghana ............................................... 139 Appendix 4: Market Share Analysis Of Major International Airlines In Ghana-2012 . 139 University of Ghana http://ugspace.ug.edu.gh x LIST OF TABLES Table 3.1: Total Scheduled Airlines Operating in Ghana………………………… 65 Table 5.1: Sex of Respondents………………………………………………… 88 Table 5.2: Age of Respondents…………………………………………………. 88 Table 5.3: Education background of Respondents………………………………… 89 Table 5.4: Occupation of Respondent……………………………………………. 90 Table 5.5: Place of Origin……………………………………………………….. 90 Table 5.6: Travel Frequency…………………………………………………….. 91 Table 5.7: Travel Frequency per year………………………………………….. 92 Table 5.8: Relationship Marketing as Measured by CRS……………………….. 94 Table 5.9: Airline Service Quality as Measured by CRS……………………… 95 Table 5.10: Airline Switching Barrier as Measured by CRS……………………. 95 Table 5.11: Service Recovery as Measured by CRS……………………………. 96 Table 5.12: Skewness and Kurtosis Test for Normality…………………………… 96 Table 5.13: Pearson Correlation Matrix………………………………………….. 97 Table 5.14: Assessment of Multicollinearity……………………………………… 98 Tables 5:15: Reliability Test with the Cronbach‟s Alpha……………………… 99 Table 5.16: Regression Model for Customer Retention Strategies………………. 100 University of Ghana http://ugspace.ug.edu.gh xi Table 5.17: Association between relationship marketing and customer retention… 105 Table 5.18: Association between Airline Service Quality and Customer Retention. 106 Table 5.19: Association between Airline Switching Barrier and Customer Retention…………………………………………………………………………… 107 Table 5.20: Association between Service Recovery and Customer Retention…………………………………………………………………………… 107 Table 5.21: A Summary of the Tested a priori Hypotheses of the Study…………. 108 University of Ghana http://ugspace.ug.edu.gh xii LIST OF FIGURES Figure 2.1 Conceptual Framework on Customer Retention Strategies in the Airline Industry Ghana……………………………………... 59 Figure 3.1 A Map of Ghana Showing the Airports and Airstrips……… 69 Figure 5.1 Airline Often Patronized………………………..................... 92 Figure 5.2 Most Important Factor when Choosing an Airline………….. 93 University of Ghana http://ugspace.ug.edu.gh xiii LIST OF ABBREVIATIONS AAGR Annual Average Growth Rate ASB Airline Switching Barriers ASQ Airline Service Quality AWA Africa World Airlines CLTV Customer Lifetime Value CR CRS Customer Retention Customer Retention Strategies DME Distance Measurement Equipment FIR Flight Information Region GACL Ghana Airports Company Limited GCAA Ghana Civil Aviation Authority GDP Gross Domestic Product GSS Ghana Statistical Service IATA International Air Transport Association KIA Kotoka International Airport NPV Net Present Value PNDC Provisional National Defense Council PWD Public Works Department RFFS Rescue and Fire Fighting Services RM SET SPSS Relationship Marketing Social Exchange Theory Statistical Package for Social Sciences SR Service Recovery SSNIT Social Security and National Insurance Trust TARP Technical Assistance Research Program US DOT VIF United States Department of Transportation Variance Inflation Factor VOR Very-high Omnidirectional Range University of Ghana http://ugspace.ug.edu.gh xiv ABSTRACT Customer Retention is a cine qua non for the survival and sustainability of firms in today‟s competitive but volatile business environment. Retaining the customer is good for the health and the general wellbeing of firms. The economic benefits of customer retention cannot be over-emphasized as it culminates in the overall profitability of firms. The open skies policy in the air transport industry in Ghana sparked intense competition and has witnessed proliferation of airlines into the industry. This calls for deliberate workable strategies aimed at not only acquiring customers but also keeping them as well so as to prevent customers from defecting to competitors. Several studies have been conducted to identify the importance of customer retention especially in the banking sector. Little is known about the design of workable customer retention strategies in the airline industry in Ghana. The aim of this study was to find out the correlation between constructs of Relationship Marketing (RM), Airline Service Quality (ASQ), Airline Switching Barriers (ASB) and Service Recovery (SR) and Customer Retention in the airline industry in Ghana. A quantitative method and researcher-administered questionnaire was used to investigate the problem. The survey design was a cross-sectional non-experimental study of 337 respondents which was sampled by using a multistage probability and non-probability sampling techniques. Bivariate and standard multiple regression models were used for analysis. The analysis of the study clearly revealed that all the four constructs used in the study namely; RM, ASQ, ASB, and SR are significantly and positively associated with customer retention with the duo constructs of ASQ and ASB being the most significant. Despite limitations such as generalizability, the findings of this study provides evidence that airline industry professionals need to pay close attention to these strategies especially Airline Service Quality and Airline Switching Barriers and fine-tuning them to reflect the exigencies of the time and also to ensure their continued use and adoption for an improved Customer Lifetime Value. University of Ghana http://ugspace.ug.edu.gh 1 CHAPTER ONE BACKGROUND OF THE STUDY 1.0 Introduction The airline industry plays an important role in the global economy. It is a vital component of the travel and tourism industry and remains essential to the conduct of international business (Tiernan et al., 2008). The airline industry is known to be the major catalyst for the socio-economic development of emerging economies such as ours (GACL, 2012). The airline industry is the engine that drives global economic and social progress as it connects people, countries, cultures, and provides access to global markets and generates trade and tourism. It forges links between developed and developing nations. The aviation industry has experienced phenomenal growth since World War II. From an almost zero level, to an approximate of 2,000 airlines operates a total fleet of 23,000 aircrafts around the world. They serve some 3750 airports through a route network of several million kilometers managed by around 160 air navigation service providers. The aviation industry today transports over 2.2 billion passengers annually both for business and leisure (IATA, 2012). In terms of worldwide trade, the total value of goods transported by air represents 35% of all international trade. The industry also caters for 40% of international tourist travel. The aviation industry today has 32 million jobs worldwide and contributes over 8% (US$ 3557 billion) to the world‟s GDP (IATA, 2011). IATA‟s forecast show that this growth in the aviation sector in expected due to trade and air transport deregulation and liberalization, new leisure patterns, high income elasticity of demand and increasing value of goods to be transported. Meanwhile, international passenger growth is expected to slow slightly whilst domestic passenger growth would University of Ghana http://ugspace.ug.edu.gh 2 improve slightly. International passenger numbers are forecasted to grow at an average annual rate (AAGR) of 5.1% and the domestic passenger numbers at an AAGR of 5.3% between 2008 and 2012. However, the airline industry and these forecasts by IATA remain exposed to several risks ranging from temporary negative impacts such as natural disasters, security scares and high fuel prices and the slower than expected growth in the global economy. Despite these, the fundamental factors driving growth remain reasonably positive. The air transport industry in Africa also shows a strong growth of 11.4% which has been sustained since 2007 (GACL, 2012). In like manner, the airline industry in the Ghana has also seen a massive growth in recent times with an average growth rate of over 8% and has also witnessed passenger throughput increased from 293,613 to 543379 in 2012 alone (GACL, 2012). The growth of the sector especially the domestic sub-sector is attributable to increasing confidence in safety and security of domestic air transport coupled with the deregulation and liberalization of the airline sector which culminated into the influx of a lot of airlines into Ghana including the domestic sub-sector. This brought fierce competition into the industry which forced industry professionals to devise workable strategies so as to stay in business. The best strategy is to focus on developing programs aimed at retaining acquired customers in the face of the competition. Traditionally, superior marketing and customer service were viewed as providing the right product in the right place and at the right time. However, a new version of marketing has emerged where the “focus is on the customer and on their needs and preferences” (Christopher et al., 1993). The tremendous rapid growth of the services industry has changed the face of business globally. As the market become more competitive, firms are more likely to attempt to University of Ghana http://ugspace.ug.edu.gh 3 maintain their market share by focusing on retaining the current customer (Lee et al., 2001). Customer retention has been advocated as the most ideal, the more reliable and potent source of superior performance (Reichhled & Sasser, 1990). The sole purpose of business is to create the customer (Drucker, 1964). However, retaining the created customer has been regarded as equally, if not more important. Dawkins & Reichheld, (1990) indicated that a 5% increase in customer retention can generate an increase in customer net present value of between 25% and 85% across a wide range of business environments. This generated growing interest and recognition of the fact that customers like products have a life-cycle that firms can manage. This implies that customers can be acquired, retained and can also be grown to generate value over time. Customers are said to climb a value staircase (Gordon, 1998) or value ladder (Christopher et al., 1991) from suspect, prospect and first-time customer to majority customers and ultimately to partner or advocate status (Ang & Buttle, 2006). 1.1 Scope of the Study Quite a number of studies have established the significance of retaining customers and its impact on overall profitability of firms especially in the financial services sector, but these studies failed to identify workable strategies geared towards retaining the customer. This study is based on the premise that a set of four proximate a priori strategies combine to significantly determine customer retention rate in the airline industry. The study therefore identified four main proximate strategies that can ensure customer retention in an organization especially in the airline industry. Many research works have sought to establish the importance of customer retention, but this study dilates mainly on four constructs of Relationship Marketing, Airline Service Quality, Airline Switching University of Ghana http://ugspace.ug.edu.gh 4 Barriers, and Service Recovery and their correlation and association with Customer Retention. This study again limits itself to reviewing only self identified measuring variables that are related and relevant to the study in order to ensure consistency and make the study more rigorous and robust. 1.2 Statement of the Problem The need to reduce customer attrition and churn rates in the face of fierce competition coupled with technological advancements in a highly volatile business environment like that of the airline industry has become a more arduous task than ever thought. The major preoccupation of modern airlines is to acquire customers but this has not been the case. Airlines all over the world have lost and continue to lose customers to the extent that it has direct impact on their returns on investment and a practical implication for their very existence and survival. Undoubtedly most airlines lose some customers one way or the other, but few ever measure how many of their customers become inactive. Many airlines ironically invest an enormous amount of time, effort and money building that initial customer relationship. They then let that relationship go unattended to and, in some cases losing interest as soon as the sale has been made, or even worse, they abandon the customer as soon as an unavoidable problem occurs, only to have to spend another resource to replace the lost customer. This high degree of customer churn rate in the airline industry is what is referred to as the leaky bucket (Lovelock, 1995). The reality is that customer retention in today‟s airline service environment is very difficult to tackle in a market that is highly volatile and that it takes more than just advertisements and incentives. University of Ghana http://ugspace.ug.edu.gh 5 As intimated earlier the services industry such as that of the airline is fraught with wide array of challenges including fierce and increasing competition (Tiernan et al., 2008), global economic decline that led to decreased demand (Fodness & Murray, 2007), declining profitability in the industry; as net profit margin for global commercial airlines decreased from 2.9% in 2010 to 1.4% in 2011 (IATA, 2011), rising fuel prices (IATA, 2011), airlines are prone to service failures due to the service processes employed in the service delivery (Bejou & Palmer , 1998). Given these encumbrances, airlines continue to struggle to retain their customers in order to reduce customer attrition and churn rates. 1.3 Research Gap A cursory look at extant literature on customer retention revealed that researchers concentrated much of their attention and works on customer acquisition to the neglect of customer retention strategies. Furthermore, quite a number of studies have recounted on the importance of customer retention which was only limited to the banking sector and their studies focus mostly on Europe. Again, previous works also dilated mostly on the significance of customer retention in the banking and the financial sector (Cohen et al 2006; Liu & Wu, 2007; Fisher, 2001; Page et al 1996; Reihheld & Kenny, 1990; Dwakins & Reichheld, 1990; Marple & Zimmerman, 1999; Mirza et al., 2007). Other researchers focus on switching process and customer defection only in the banking sector (Trubik & Smith, 2000; Desouza, 1992). Other studies looked at service quality issues in the banking sector (Petridou et al., 2007; Ganguli & Roy, 2011; Roig et al,. 2006; Ladhari et al., 2011). University of Ghana http://ugspace.ug.edu.gh 6 More works on customer retention strategies has been championed by Ahmad & Buttle, (2001) when they conducted a research to test the extent to which theoretical perspectives relating to strategies for retaining customers reflected practices in industry. After their study, they professed some strategies for retaining customers but failed to demonstrate the relationship between these strategies and their overall contribution to customer retention and firm profitability which this study seeks to do. In the Ghanaian context, quite a number of studies have been conducted in service quality (Arko, 2006; Hinson et al., 2011). There is also work on relationship marketing and its impacts on customer retention (Baah, 2005). A similar study on customer retention was conducted by (Agudze-Tordzro, 2012) where she developed customer retention strategies in the banking sector in Ghana. In the airline industry, most studies focus mainly on service quality issues only (Rhoades, 2006; Tiernan et al., 2008; see Jordan, 1970). Literature is also cited on service failure and service recovery on airline passengers (Mostert et al., 2009), but failed to link it to customer retention. There has been little research into the development of customer retention strategies, per se especially in the airline industry (DeSouza, 1992). Meanwhile there has been research findings showing the relative weights attached to customer retention budgets. According to Weinstein, (2002), “most companies spend a majority of their time, energy and resources chasing new business”. He suggested that “80% or more of marketing budgets are often earmarked for getting new business”. This is in line with Payne et al., (2001) findings which concluded that only 23% of marketing budgets in UK organizations is spent on customer retention. In contrast, Aspinall et al., (2001), found out that 54% of companies reported that customer retention was more important than customer acquisition. University of Ghana http://ugspace.ug.edu.gh 7 Earlier studies concluded on the simple premise that- satisfied customers continue service patronage, resulting in positive financial benefits to the service provider. But it is now common knowledge that mere satisfaction does not ensure continued service patronage. This is because, in addition to satisfaction, other factors combine to influence service patronage. It is these factors that this research seeks to investigate and they are service quality, customer loyalty, switching barriers and service recovery strategies. Few key studies have already established the links between service quality and customer satisfaction, and between satisfaction and firm financial performance. For example, Johnston, (1995) examined the link between service transactions and overall satisfaction, Fornell et al., (1995) linked customer satisfaction and quality initiatives to firm financial performance, Ittner & Larcher, (1996) undertook a similar study where the main focus was the link between quality initiatives (closely linked to customer satisfaction) and firm financial performance, Reichheld & Sasser, (1990); Heskett et al., (1994) and Rucci et al., (1998) established the link between customer satisfaction and improved financial performance. Given this serious gap in the literature, most industry practitioners especially in the airline industry in Ghana depended heavily on the wholesale import and reception of foreign literature on customer retention and recommended for Ghanaian practice which in most cases does not apply in our local context. Therefore, the direction of this research is to focus on developing an integrated but independent constructs that draws on relationship marketing, service quality, switching barriers and service recovery strategies and its relationship on customer retention and overall profitability of firms. To date, no study has been conducted yet that incorporates University of Ghana http://ugspace.ug.edu.gh 8 the concepts of RM, ASQ, ASB and SR in a single study with special focus on customer retention in the airline industry. 1.4 Objectives of the Study On the basis of the background overview and statement of the problem, this study set out to identify the customer retention strategies that can adequately ensure customer retention in the airline industry in Ghana. To this end, the following specific objectives were formulated: 1. To find out whether Relationship Marketing is significantly associated with Customer Retention. 2. To investigate the correlation between Service Quality and Customer Retention. 3. Determine whether Switching Barriers significantly relates to Customer Retention. 4. Explore if Service Recovery significantly correlates with customer retention. 1.5 Research Questions In order to achieve the objectives enumerated above, the following questions were asked: 1. What is the connection that exists between Relationship Marketing and Customer Retention? 2. Is there any significant correlation between Airline Service Quality and Customer Retention? 3. Does Switching Barriers significantly associate with Customer Retention? 4. Does Service Recovery increase the rate of Customer Retention? University of Ghana http://ugspace.ug.edu.gh 9 1.6 Research Hypotheses On the basis of the research objectives and questions as well as review of extant literature on customer retention, I draw the following hypotheses which could either be rejected or accepted and would be tested at 0.01 level of significance.  H1: Relationship Marketing is significantly related to Customer Retention.  H2: There is significant positive relationship between Airline Service Quality and Customer Retention Rate.  H3: The higher the Switching Barrier the lower the Customer Retention Rate.  H4: There will be a significant relationship between service recovery and Customer Retention. 1.7 Significance/Justification of the Study It has long be acknowledged that the fundamental purpose of marketing is the getting and keeping of customers (Levitt, 1986). It is widely accepted that it costs more to generate new customers than it does to keep hold of existing clients. In other words, it is an established fact that it is far more expensive to find new customers than to keep your current ones happy. Customer retention matters in times of tough economic times as we have currently. This is because the consequences of customer retention compounds over time and in some cases in unexpected ways. A minute change in customer retention can cascade through the entire fabrics of all business activities and multiply over time. The resulting effect of adopting customer retention on long-term profit and growth should not be underestimated. The argument for customer retention is not in dispute at all because many researchers and scholars have long recognized the economic value in retaining University of Ghana http://ugspace.ug.edu.gh 10 customers than acquiring new ones (Reichheld & Sasser 1990, Dawkins & Reichheld 1990; Fornell, 1992,; Healy, 1999; Fisher, 2001; Hogan et a.,l 2003; Lee-Kelly et al., 2003). In more specific terms Rust & Zahorik (1993), asserts that the financial implication of acquiring new customers to “replace” those who have been lost may be five times as costly as keeping existing customers. The significance of focusing on customer retention is based on the principle that it is easier and considerably less expensive to retain a customer than to continuously attempt to acquire new customers (Kim & Cha 2002; Magnini & Ford 2004; Murphy 2001; Rosenburg & Czepiel 1983). This is because the cost of acquiring new customers would only have been incurred only in the initial stages of the commercial relationship (Reichheld & Kenny, 1990). A more succinct argument has been made which suggest that a 5% improvement of customer retention would increase a firm‟s profit margins from between 25% to 85% (Reichheld & Sasser, 1990). The high cost of customer acquisition compared to the lower cost of serving repeat customers and the consequent increase in profitability is an important reason why firms are advised to increase levels of customer retention. Drucker, (1963) believed that marketing is much concerned with acquiring as well as retaining customers. This is because the significance of retaining customers in an organization is not a new phenomenon in marketing. The high cost of customer acquisition compared to the lower cost of serving repeat customers, and the consequent increase in profitability, is an important reason why firms are advised to increase levels of customer retention (Colgate & Danaher, 2000). A number of studies have identified the benefits of retention to an organization (Reichheld & Sasser, 1990). Since replacing cost are high, customers defection must be a key University of Ghana http://ugspace.ug.edu.gh 11 performance gauge for practitioners and scholars alike and a fundamental component of incentive programs (Zeithaml et al., 2006). Other researchers also suggest that, customer longevity is not synonymous with customer loyalty. Retained customers do demonstrate immunity to competitive pull to the extent that a customer may however graduate from being a client, to supporter and finally an advocate. 1.8 Organization of the Study The study is organized into six major chapters which include the introduction and background to the study, literature review and conceptual framework, context of the study, research methodology, data analysis and discussions and summary, conclusions and recommendations. These are briefly explained below. 1.8.1 Chapter One- Research Overview This is the first chapter of the study and therefore presents the introduction and background to the study, statement of the problem, research objectives, hypothesis and questions, significance or justification of the study, research gap, scope of the study, definition of terms and the chapter layout of the study. 1.8.2 Chapter Two- Literature Review and Conceptual Framework This second chapter dealt with review of extant literature to elucidate existing theories and concepts that underpin this study. The review involves an in-depth and empirical review of the literature on the subject matter of the study which is customer retention strategies with special emphasis on the customer retention strategies in the airline industry in Ghana, why or the benefits derived from retaining customers, customer defection, relationship marketing, airline service quality, airline switching barriers and service recovery strategies University of Ghana http://ugspace.ug.edu.gh 12 in the airline industry. These retention strategies are encapsulated in the conceptual framework which also forms part of this chapter. 1.8.3 Chapter Three- Context of the Study This chapter focuses more on the issues relating to the airline industry in Ghana. It also discusses the performance of the airline industry in Ghana giving the historical background of the airline industry in Ghana, nature and structure of the airline industry, developments taking place in the industry, the major policies and reforms in the airline sector and the role of the airline industry to the socio-economic development of Ghana. 1.8.4 Chapter Four- Research Methodology This chapter dwells more on the research methodology of study adopted for the study. This chapter talks about the philosophical stance of the researcher. This chapter also deals with the research approach, design, sample size, sources of data, data collection procedures, data analysis and discussion and the limitation of this study. Statistical Package for Social Sciences (SPSS v20) was used to analyze the data gathered. 1.8.5 Chapter Five- Data Analysis and Discussion Chapter five presents the major findings of this research using Statistical Package for Social Sciences (SPSS version 20) as the major tool of analysis. The interpretation of the findings was done using multiple regression method. This allows for further discussion of major findings of the study taking into consideration the hypothesis and extant literature of this research. University of Ghana http://ugspace.ug.edu.gh 13 1.8.6 Chapter Six- Summary, Conclusion and Recommendation This is the final chapter of this study and reports on the previous chapter giving summaries of work done so far, major findings of the study, drawing conclusions and proffering some recommendations for airlines operating in Ghana and the entire academic community to serve as the basis for further studies to be conducted in this area. 1.8.7 Operational Definition of Terms and Concepts This study adopts an operational definition of major terms and concepts used throughout this research. The author uses and offer definitions and explanations that best describe the concepts as used in the main text. By doing so the main terms and concepts used in the study are being put in the right perspective though not limited to these definitions offered. Marketing- An organizational function and set of processes for creating, communicating, exchanging offerings, delivering of value to customers and managing customer relationships in ways that benefits the organization, clients, partners and society at large (AMA, 2004). Firm- A commercial entity that operates on a for-profit basis and participates in the delivery of services to customers. It must be noted that in this study terms such as firm, organization and company are used interchangeably. Service- An activity or series of activities of a more or less intangible nature that normally take place in interactions between the customer and the service employee or systems of the provider, which are provided as solutions to customer needs or problems (Hinson 2004). Zeithaml and Bitner(2000) in a succinct way put it as deeds, processes and performances. Airline or Carrier- An organization providing a regular passenger air service. University of Ghana http://ugspace.ug.edu.gh 14 Customer Retention- Refers to the way in which organizations focus their efforts on existing customers in an effort to continue doing business with particular customers in the future (Murphy et al 2006 and Hoffman et al 2003). Relationship Marketing- Refers to efforts by organizations to retain customers by building and maintaining long-term relationships with them (Christopher et al 2002; Torres & Kline, 2006). Relationship marketing therefore focuses on customer retention by designing, developing and maintaining customer relationships over the lifetime of the customer rather than focusing on attracting new customers (Zineldin & Phiilipson, 2007). Customer Commitment- Defined as “an ongoing relationship with another that is so important as to warrant maximum efforts at maintaining it”. Or an enduring desire to maintain a valued relationship. Customer Trust- (Morgan and Hunt, 1994) conceptualizes trust as “the willingness to rely on an exchange partner in whom one has confidence”. It also means confidence in an exchange partner‟s reliability and integrity. Switching Barriers- these are deliberate structures imposed by a service provider to prevent customer from switching to competitors. Service Failure- a service failure refers to a real or perceived service related problem or a situation in the service delivery process where something went wrong in dealing with the organization (Palmer 2001). That is the customer‟s expectations of the service encounter are therefore not met by the organization. Service Recovery- Refers to those actions taken by an organization in response to a service failure in order to change customer‟s dissatisfaction to satisfaction and ultimately to retain those customers (Miller et al 2000; Gronroos, 1990). University of Ghana http://ugspace.ug.edu.gh 15 CHAPTER TWO LITERATURE REVIEW AND CONCEPTUAL FRAMEWORK 2.1 Introduction In order to better understand and position this research in the right perspective, it is the belief of the researcher that a cursory look is taken at extant works on customer retention and the various theoretical and empirical literature that underpin the topic in order to develop a framework that better explains the various concepts in the literature reviewed. This would give an insight on how far scholarly work has gone on this topic as well as address any gap in knowledge. 2.2 Background Information The fundamental argument that has been continuously made is that the main purpose of marketing is “getting and keeping of customers” (Levitt, 1986). However it appears in practice that more attention is placed on getting customers than keeping them. This makes valid the argument for airlines to deliberately initiate strategic programs aimed at customer retention. This is attributable to the many empirical studies which demonstrate the economic gains arising from customer retention than acquiring new ones (Dawkins & Reichheld, 1990, Reichheld & Sasser, 1990; Fornell, 1992; Healey, 1999; Fisher, 2001). The financial implications of acquiring new customers to “replace” those who have been lost may be five (5) times as costly as keeping existing customers (Rust & Zahorik, 1993) because the financial cost is only incurred at the beginning stages of the relationship (Reichheld & Kenny, 1990). Again a 5% improvement in customer retention can cause increase in profitability between 25% and 90% (Reichheld & Sasser, 1990) and that loyal customers are less likely to change service providers due to price increases as they tend to recommend the business to others (Healey, 1999 and Reichheld & Sasser, 1990). University of Ghana http://ugspace.ug.edu.gh 16 This observation by these scholars offers very useful insights into the importance of the adoption of customer retention as a panacea to the challenges in the airline sector in order to ensure survival and profitability of airlines in Ghana in the face of the fierce competition which has characterized the industry of late as a result of government open skies policy. Some authors were of the opinion that when carriers are able to reduce customer defection by as little as 5%, they would be able to double their profit margins (Healey, 1999). Given the competitive nature of the airline sector in Ghana, airlines that want to keep their businesses afloat needs to develop strategies to satisfy the needs of their customers which would make the customer continue to patronize the services of the airline in order to keep them loyal. In this regard, the focus of this study is to assess the relationship of a priori retention strategies that can be used to retain customers within an increasingly competitive and turbulent airline industry. The support for retaining customers in the marketing literature (Ennew & Binks, 1996; Reichheld 1996; Ahmad & Buttle 2002a; Ahmad & Buttle, 2002b) is very extensive. The arguments which justify the customer retention as a business strategy as opposed to acquiring new customers are rooted in economics and the concept customer lifetime value CLTV (Ahmad & Buttle 2001). CLTV comes as a result of a continuous future purchases, referrals and avoidance of negative word-of-mouth (Zineldin, 2006). For a customer retention strategy to be successful firms must project the value of individual customers over time rather than focusing on customer numbers. It must also be noted that longevity of relationship leads to an increase in retention rates and thus a corresponding increase in profit (Dawkins & Reichheld, 1990; Reichheld & Sasser, 1990; Reichheld, 1996). University of Ghana http://ugspace.ug.edu.gh 17 The support for retaining customers in the marketing literature (Ennew & Binks, 1996; Reichheld 1996; Ahmad & Buttle 2002a; Ahmad & Buttle, 2002b) is very extensive. Sigala, (2005) suggested that service industries are undergoing significant developments so much so that the focus is shifting from customer acquisition to customer retention. It is therefore imperative that organizations not only attract new customers and satisfy their immediate needs, but also do their utmost to retain customers as this will give them a greater chance of survival than organizations that do not actively try to retain customers (Choi & Chu, 2001). The arguments that have been adduced to justify customer retention as a business strategy as opposed to acquiring new customers are rooted in economics and the concept of Customer Lifetime Value CLTV (Ahmad & Buttle, 2001). CLTV comes as a result of a continuous future purchases, referrals and avoidance of negative word-of- mouth (Zineldin, 2006). The economic benefits include the possibility of organizations to forecast customers‟ future purchases, sales, marketing and the acquisition costs of customers can be reduced; satisfied customers may be willing to pay premium prices and often make referrals to others and the per customer income is likely to grow as customers are likely to increase their spending with the organization as the relationship grows through cross-selling (Desouza, 1992; Payne, 1993; Reichheld 1996; Rosenburg & Czepiel 1983). Non-economic benefits include the willingness of customers to work with the organization to improve product and service offerings as well as the formation of relationships with other partners, such as employees and suppliers (Ahmad & Buttle, 2001). For a customer retention strategy to be successful firms must project the value of individual customers over time rather than focusing on customer numbers. It must also be noted that longevity of relationship leads to an increase in retention rates and thus a University of Ghana http://ugspace.ug.edu.gh 18 corresponding increase in profit (Dawkins & Reichheld, 1990; Reichheld & Sasser, 1990; Reichheld, 1996). Six economic benefits have been put forward by Reichheld, (1996) and have been summarized below; a. Savings on customer acquisition or replacement costs, b. A guarantee of base profits as existing customers are likely to have minimum spending per period; c. Growth in per-customer revenue as, over a period of time, existing customers are likely to earn more, have more varied needs and spend more; d. Price premiums as existing customers do not usually wait for promotions or price reductions before deciding to purchase, in particular with new models or versions of existing products or services; e. A reduction in relative operating costs as the firms can spread the cost over many more customers and over a longer period; f. Free of charge referrals of new customers from existing customers which would otherwise be costly in terms of commissions or introductory fees. 2.3. Theoretical Perspectives to Customer Retention Researchers have employed variety of theories and conceptual perspectives to explain the adoption of customer retention as strategy for organizational success and profitability. Prominent among these studies include those highlighted in this study. Theoretical positions relating to customer retention management emerged from three main perspectives (Hinson, 2006). They are services marketing, industrial marketing and general management perspectives. University of Ghana http://ugspace.ug.edu.gh 19 From the service marketing perspective, the way to retain customers is to improve customer service quality and satisfaction (Berry & Parasuraman 1991, Zeithaml & Bitner, 1996). A related study (Ennew & Binks, 1996) examined the links between defection and service quality in the context of relationships. From the industrial marketing perspective, the way to retain customers is by forging multi- level bonds comprising financial, social and structural bonds. Turnbull & Wilson (1989) examined the potential benefits of protecting profitable customer relationships through not just social but also structured bonds in the context of industrial marketing. They refer to social bonds as positive interpersonal relationships between buyers and sellers. From a general management perspective, DeSouza, (1992), Rosenburg & Czepiel, (1984) and Reichheld, 1996) offered theoretical positions from their observation and consulting experience. DeSouza, (1992) advocated retention measurement and the implementation of measures to prevent customers from defecting by learning from former customers, analyzing complaints and service data and identifying and raising barriers to prevent customer switching. Rosenburg & Czepiel (1984) advocated an analysis of a firm‟s customer portfolio with the view of creating specific balance which may include the first time buyers, repeat buyers, switched away then return, and last time buyers and reorganizing the firm‟s strategies for customer retention. Reichheld (1996) advocated the adoption of a three-pronged approach to keeping investors, employees and customers and the adjustment of the firm‟s mission which should be about creating value for its three above mentioned constituencies. His idea rests on the notion that disloyal employees are not likely able to build an inventory of loyal customers and disloyal investors do not support long term relationship program and vice versa. University of Ghana http://ugspace.ug.edu.gh 20 2.3.1 Theoretical Framework of the Study This study however, draws its theoretical underpinnings mainly from the social or economic exchange theory (Homans, 1961). Social and economic exchange theory Social Exchange Theory (SET) arose out of the philosophical traditions of utilitarianism, behaviorism, and neoclassical economics. Social exchange theory proposes that social behavior is the result of an exchange process. The purpose of this exchange is to maximize benefits and minimize cost for partners involved in the exchange relationship. According to this theory, people weigh the potential benefits and risks of social relationships. When the risks outweigh the rewards, people will terminate or abandon that relationship. Cost according to the theory involves things that are seen as negatives to the individual such as having to put money, time and effort into the relationship. The benefits are the things that the individual gets out of a relationship such as increased market share and profitability on the part of the organization whilst on the customer‟s part customized and specialized product and services. SET suggests that we as rational beings will essentially take the benefits and minus the costs in order to determine how much a relationship is worth. Positive relationships are those whose benefits outweighs the costs, whilst negative relationship occur when the cost are greater than benefits. Social exchange theory is a socio-psychological and sociological perspective that explains social change and stability as a process of negotiated exchanges between parties. The theory posits that all human relationships are formed by the use of a subjective cost- benefit analysis and the comparison of alternatives. Both parties in a social exchange take responsibility for one another and depend on each other‟s social interaction. Blau (1964) University of Ghana http://ugspace.ug.edu.gh http://en.wikipedia.org/wiki/Social_psychology_%28psychology%29 http://en.wikipedia.org/wiki/Sociological_perspective http://en.wikipedia.org/wiki/Interpersonal_relationship 21 defined exchange behavior as voluntary actions of individuals that are motivated by the returns they are expected to bring. It is likened to transactions in economic marketplace. In other words, exchange is a theory which attempts to explain interpersonal behavior in terms of the exchange of rewards and costs. Though social exchange and economic exchange are synonymous in their characteristics, according to Stafford (2008), economic exchanges and social exchanges have some differences: Social exchanges involve a connection with another person; social exchanges involve trust, no legal obligations; social exchanges are more flexible; and social exchanges rarely involve explicit bargaining. Economic exchange however is otherwise of the aforementioned. Therefore with regards to customer retention strategies, relationships are established between the customer and a firm with mutually beneficial exchanges. The firm in an attempt to create value for the customer does so at a profit. Therefore both the firm and the customer will conduct an audit to ascertain whether the relationship is worth pursuing. 2.4 The Concept of Customer Retention Blattberg et al (2001) intimated succinctly that customer retention takes place when a customer keeps on buying. Customer retention is seen as a primary goal of firms that practice relationship marketing (Coviello et al, 2002). The precise meaning and measurement of customer retention can vary between industries and firms Aspinall et al (2001) but there appears to be a general consensus that focusing on customer retention can yield several economic benefits (Dawkins & Reichheld 1990; Reichheld, 1996; Buttle, 2004). University of Ghana http://ugspace.ug.edu.gh 22 Put differently, Ahmad & Buttle (2001) observed customer retention as the “mirror image” of customer defection because they assert that a high customer retention rate is equal to low defection and vice versa. They went further to argue that a precise definition of customer retention can be problematic in the sense that any definition that does not incorporate a firm‟s motive for being in business can be misleading because defining the concept of customer retention come with myriads of difficulties since definitions vary based on what the author aims to achieve. They concluded that any definition of customer retention must encompass the percentage share of the customer‟s wealth or what the customer is willing to spend on the organization instead of total aggregate number of customers. This argument is valid because customers exhibit different spending and buying behaviors. It is not unusual for a small proportion of customers to yield the greatest proportion of a company‟s revenue (Storbacka, 1997). Another meaning put forward by Zineldin (2006) encapsulates the idea that firms that adopts customer retention strategies and programs must first of all be responsive to customers‟ needs and concerns through an effective program that addresses customers‟ concerns through a good complaint management system. From relationship marketing viewpoint, Keiningham et al (2007) defines customer retention as customers‟ stated continuation of a business relationship with a firm. This definition suggests that the decision as to whether to stay or not in an exchange relationship is the sole prerogative of the customer rather than organizational efforts. Liu & Wu (2007) also arguing from relationship perspective, viewed customer retention as a measure of relationship concerned with minimizing customer defections. Another University of Ghana http://ugspace.ug.edu.gh 23 authority Ranaweera & Prabhu (2003) sees customer retention as the future propensity of customers to stay with their service providers. Whilst some scholars use the term future behavioral intentions to describe the concept of customer retention (Zeithaml et al, 1996), others like Cronin et al (2000) treat behavioral intention and customer retention as synonymous construcst. For the purposes of this research, which seek to analyze the relationship of retention strategies in the airline industry, the study will adopt the definition put forward by Keningham et al (2007). In my view customer retention implies a long term commitment on the part of the customer and the firm to maintaining a relationship through the development of mutually beneficial exchanges so as to create a long term buyer-seller business relationship. Any attempt in measuring customer retention rate is construed to mean an initial step in improving loyalty to, and the profitability of, a service organization (Payne, 2000). Yet many firms do not understand the importance of improving customer retention rates and the impact of these on profitability (Clark, 1997). DeSouza in 1992 offered some useful lessons on how to measure customer retention when she submitted that customer retention must be measured and managed and can be calculated in two ways; a. A crude customer retention rate and b. Weighted customer retention one. The crude customer retention rate measures the total percentage of customers the organization retains based on the decline or escalation of customers over a specific period of time whereas the weighted retention rate is calculated by weighting customers according to the volume of their purchases. University of Ghana http://ugspace.ug.edu.gh 24 Carroll & Rose (1993) took an economic view of customer retention noting that all customers do not generate the same value and suggest that firms should focus retention strategies on the value producing segments of customers. As researchers try to provide answers to concerns of firms with regards to their customer retention efforts (Ganesh et al, 2000), there arise pertinent questions which continue to engage the attention of researchers, practitioners and non-practitioners alike. Should retention of every customer be the goal or should retention efforts be focused on subsets or even individual? These are the perfectly legitimate questions which demand answers. A research conducted by Price Waterhouse Coopers in (2002) observed that poor management of customer churn is a major value destroyer and that the key to its prevention is to predict and avert attrition of the “right customers”. The right customers in this case are those that contribute most significantly to the company‟s growth and profitability. The implication of there being “right” or “wrong” customers to retain is that companies are advised to segment their customer base for retention efforts in much the same way that they would segment the market for acquisition efforts (Weinstein, 2002). Evans (2002) also suggested that the “right” customers are those with the highest residual lifetime value. This viewpoint rooted in economics affirms the statement which states that firms should only concentrate their retention efforts on only high yielding customers. This argument is further accentuated by the works of Cziepel & Reddy (1992 and 1993) in which they use the concept of relationship strength and relative perceived performance as mediating variables as they attempt to predict the economic value of customers for retention efforts. In their research they concluded that “in business-to-business and business-to-consumer University of Ghana http://ugspace.ug.edu.gh 25 settings, committed long term relationships between buyers and sellers are based on a strong and economically rational foundation”. 2.5 Reasons for Customer Defections Customer defection is defined as „customers forsaking one service provider for another‟ (Garland, 2002). Reichheld (1996) postulated that an increase in the defection rate results in dwindling cash inflow to an organization. Although customer defection has a negative impact on profits, few organizations do anything about it. A reduction in the customer defection rate can increase profits substantially more than growth in market share, improved profit margins, or factors related to competitive advantage (Colgate et al., 1996). Many service organizations turn not to be attentive to customer defections, that is, customers who change service providers or forsake one organization for another. According to Desouza (1992), Matin-Consuegra et al (2007) and Seawright et al. (2008) the following customer defection groups can be demystified; a. Customers which switch to a competitor offering lower prices, b. Customers who switch to a competitor offering a better product, c. Customers who leave because of inadequate service, d. Customers who are lost because they go out of business, e. Customers who switch to a product or service from outside the industry and f. Customers who leave because of internal and external political considerations. Ahmad (2002) asserts that managers have to make extra efforts at instituting control mechanisms that keep track of customer defections. Dove & Robinson (2002) also advocated the developments of systems to alert the organizations when customers threaten to defect so that it can be averted. University of Ghana http://ugspace.ug.edu.gh 26 Owing to the benefits of customer retention, it stands to reason that organizations must hold on to their already acquired customers and pay greater attention to customer defection. This is because in the estimation of Desouza, 1992, organizations can gain valuable information as to the reasons why customers defect by inquiring from customers why they defect. By conducting an audit into why customers defect, organizations are better informed to implement strategies to address any shortcomings in an effort to retain customers. There are a number of reasons why customers defect to competitors. Among them are the following; 1. For product reasons; where customers experience better quality product from a competitor and would therefore perceive the competitor‟s product as being superior. 2. Marketing reasons; the customer could leave the market and are therefore lost to the organization and its competitors 3. Technological reasons; customers may defect due to technological discoveries that can better satisfy their needs 4. Price reasons; customers may defect to competitors offering lower prices and would usually defect as soon as they can obtain better prices elsewhere (Martin- Consuerigra et al, 2007). 5. Service reasons; customers could defect due to poor service from the organization (Seawright et al, 2008). By identifying the reason why customers defect, organizations are in position to draft strategies to combat customer defection in order to attain high levels of customer retention by satisfying their needs through good customer service delivery (Mostert et al., 2009). University of Ghana http://ugspace.ug.edu.gh 27 2.6. Relationship Marketing A major shift is occurring in the way that companies deal with their customers and suppliers in the past two decades (Ellram, 1995; Han et al.1993; Christopher et al, 1991). This change is happening because firms recognized that sustainable competitive advantage in a new turbulent economy requires organizations to become trusted participants in the various business networks. As noted by Story & Hess (2006), relationship marketing is emerging as an exciting area of marketing and it is now the dominant paradigm in marketing. Marketers have now accepted relationship marketing in explaining the realms of customer behavior that lies beyond the bounds of simple loyalty (Hess, 1995). Although a number of authorities have suggested that relationship marketing represents a paradigm shift (Christopher et al, 1991) from a longer established transactional orientation to customer management, Gronroos, (2000) noted that the relational perspective on marketing is in fact “older than the transactional perspective in marketing” and is “probably as old as the history of trade and commerce. He went further to conclude that “management of customer relationships in business is not a new phenomenon” although the term relationship marketing was only recently introduced to marketers by Berry (1983). Relationship marketing involves efforts by organizations to retain customers by building and maintaining long-term relationships with them (Christopher et al., 2002; Torres and Kline 2006). Relationship marketing therefore focuses on customer retention by developing and maintaining customer relationships over the lifetime of the customer rather than focusing on attracting new customers (Zineldin & Philipson 2007). Customer retention has been shown to be a primary goal in firms that practice relationship marketing (Gronroos, 1991, Coviello et al 2002). University of Ghana http://ugspace.ug.edu.gh 28 According to Gronroos (1994), relationship marketing has to do with identifying, establishing, maintaining and enhancing and when necessary, terminating relationships with customers and other partners at a profit so that the objectives of the parties involved are met, and this is achieved by mutual exchange and fulfillment of promises. This means that relationship marketing is a long-term arrangement where both buyers and sellers have an interest in providing a more satisfying exchange. This conceptualization of relationship marketing transcends the simple purchase-exchange process with a customer to make more meaningful and richer contact by providing a more holistic, personalized purchase, customized product and exceptional and deliberate customer relationship management practices that ensures customer supremacy. The term Relationship Marketing has been variously defined. A close look at existing literature revealed that there is no universally acceptable definition for relationship marketing as a field of study. Different scholars and practitioners see relationship marketing from their own perspectives and what they aim to achieve. Relationship marketing was first conceived as a form of marketing developed in direct response to marketing campaigns that emphasizes customer retention as opposed to a sheer focus on sales transactions. According to practitioners relationship marketing differs from other forms of marketing in that it recognizes the long term value of customer relationships and extends communication beyond internal advertising and sales promotional campaigns. Any relationship marketing strategy should have long term sustainability, commitment to the fulfillment of promises, concerned with customer share instead of market share to guarantee customer lifetime value. University of Ghana http://ugspace.ug.edu.gh 29 The importance of RM is explained by the fact that building relationships with customers and retaining them can contribute to the success of the organization (Patterson et al., 2006), since the length of the customer relationship can influence the organization‟s profitability (Buckinx & Van den Poel, 2005). This gives rise to the notion that repeat business can be regarded as the lifeblood of the organization (Zineldin & Philipson, 2007). RM is the foundation on which organizations build and improve relationships with customers. Indeed, the ability to build relationships with and retain customers has become a key factor for many organizations (Nasir & Nasir, 2005), and that offers organizations competitive advantage. In this vein, organizations that successfully retain customers will be able to build a more enduring relationship them (Reichheld & Sasser, 1990; Hoffman, Kelly & Chung, 2003). The importance of building relationships with customers lies in the fact that repeat business not only promotes profitability, it can actually be the lifeblood of the organization (Zineldin & Philipson, 2007). Due to the many challenges they face, airlines in particular must build relationships with their customers and retain them as customer retention leads to lower customer acquisition costs (Steyn et al., 2011). 2.6.1 Trust and Commitment in Relationship Marketing Morgan & Hunt (1994) see relationship marketing as being anchored on the two concepts of trust and commitment. The two variables appears to be among the most important variables for understanding the strength of a marketing relationship, and they are very useful constructs for measuring the likelihood of customer loyalty as well as for predicting future purchase frequency (Morgan & Hunt, 1994). Whilst trust and commitment provide countervailing effects for alliance stability, they do not evolve overnight and seldom come easy; they can be built only over time. Generally trust emerges based on norms of University of Ghana http://ugspace.ug.edu.gh 30 reciprocity and it can be extended to an organization with a reputation of trustworthiness (Ring & Van de Van, 1994). It is a truism that satisfied customers generate that positive word of mouth (Schneider & Bowen, 1999), but customer satisfaction alone does not ensure continuing customer patronage. Whiles satisfaction and loyalty are important drivers, trust, commitment and communication also have potential influence and are central constructs of relationship marketing (Ranaweera & Prubho, 2003). 2.6.2 Relationship Commitment Whilst commitment is the most common dependent variable used in buyer-seller relationship studies (Wilson, 1995), Morgan & Hunt (1994) regard relationship commitment as the “keystone” of relationship marketing. They conceptualized commitment as “an ongoing relationship with another that is so important as to warrant maximum efforts at maintaining it”. This means that commitment to a relationship is a continuous process and from relational exchange perspective, commitment signifies the highest form of relational bonding among firm and contributes to the longevity of relationship (Gundlach et al., 1995). Mooman et al (1997) defines commitment as the attitude that reflects the desire to continue a valued relationship and as the willingness to make short-term sacrifices to maintain that relationship (Anderson & Weitz, 1992). The concept of commitment in relationship marketing has been examined by researchers extensively in consumer contexts (Sharma & Patterson 2000) work-place contexts (Allen & Meyer, 1990), and business-to-business contexts (Morgan & Hunt 1994). They moves the commitment University of Ghana http://ugspace.ug.edu.gh 31 literature further to involve work place commitment to a relationship. He sees commitment to mean a predisposition that comprises the actor‟s willingness to a. Stay long in the relationship b. Accept the norms and values that govern the relationship and c. Contribute maximally for the welfare of the relationship. Whereas scholars such as Morgan & Hunt (1994) viewed relationship commitment as a one-dimensional construct, a vast majority of researchers regarded it as a multi- dimensional construct in a variety of business context including the airline industry (Allen and Meyer, 1990, Geyskens et al, 1996, Kumar et al 1994). Geyskens et al (1996) went further to differentiate between affective commitment and calculative commitment. Allen & Meyer (1990) also revealed three dimensions of commitment to include; a. continuance commitment (cost-based attachment) b. affective commitment (desire-based attachment) and c. normative commitment (obligation-based attachment) It is important to submit that considerable research has established strong support for these three dimensions of commitment irrespective of the industry involved and that these dimensions were appropriate regardless of target of commitment (Bansal et al 2004). 2.6.3 Customer Trust Trust is seen as a multifaceted construct that can be viewed from different perspectives. Trust is defined in one of two ways; as a confident belief or expectation and as the willingness or intention to depend on the trustee. University of Ghana http://ugspace.ug.edu.gh 32 From relationship perspective trust has been seen as the expectation that an actor can be relied on to fulfill obligations (Anderson & Weitz, 1989) and will behave in a predictable manner and also will act and negotiate fairly when the possibility for opportunism is present early in the relationship are keys for the development of trust. Communication and fairness are also crucial but only in the early phase of the relationship they form a key component in the formation and development of trust. In more specific terms trust emerges from mutually beneficial successive collaboration cycles among the participating nodes. Trust is a critical variable in relationships as it is indicated in extant marketing literature (Moorman et al. 1993). Trust in simple terms means the confidence of customers in suppliers‟ products and offerings. Trust is so crucial that Spekman (1988) postulated it to be the “cornerstone of strategic partnership” and that relational trust is a major determinant of relationship commitment, especially in risky situations. Due to the fact that commitment entails vulnerability especially when perceived risk is high as in the case of volatile or turbulent business environments, parties involved in an exchange relationship seek only trustworthy partners (Morgan & Hunt, 1994). Partners in business-to-consumer settings such as the airline industry needs to continuously earn mutual trust so as to fuel the longevity of the relationship. 2.6.4 Complaint Handling The sources of complaints involves mostly of inefficiencies on the part of the service providers to provide solutions to customers complaints on time. It also includes unexplained delays, rudeness, inflexibility on the part of the service provider, ineptitude and incompetent service (Hinson, 2006). University of Ghana http://ugspace.ug.edu.gh 33 The nature of service delivery in the airline industry makes it susceptible to occasional and sometimes unavoidable mistakes. However, a well instituted complaint handling can solve and even avert some of these failures. It is also important that service firms institute proper complaint handling procedures and policies geared towards customer satisfaction hence retention. Moreover, most firms do not accord customer complaint the needed attention despite its strategic importance to firms especially those in the airline industry. Most customers who complain are more often than not dissatisfied with the complaint handling processes (Andreassen, 2001). This should not be the case because complaints itself is a major source of gathering market intelligence. When organizations do not pay much attention to customer complaints, customers will switch service providers to competitors and also engage in negative word-of-mouth which can culminate in the high cost of acquiring new customers (Hart et al., 1990). Stauss & Seidel, (2004) identified four types of complaint handling benefits that firms can derive from a successful management of its customers, complaints; 1. The information benefits; involves the value that is generated by using information from customer complaints to improve products and services provided in order to enhance efficiency and to reduce failure costs. 2. The attitude benefits; involves the attitudinal changes the customer exhibits as a result of achieved complaint satisfaction. 3. The repurchased benefits; this comes as a result of customers who complain are satisfied and for that matter remain with the organization instead of switching to a competitor‟s offerings. University of Ghana http://ugspace.ug.edu.gh 34 4. Communication benefits; this has to do with the effects of complaint management. This comes as a result of complainants whose concerns are properly addressed with the highest level of satisfaction so that the customer engages in positive word- of-mouth campaigns by recommending the organization to others. 2.7 Service Quality Although the definitions of service quality vary, these definitions are all formulated from the customer perspective. That is what customers perceive are important dimensions of quality (Lewis, 1989). Gronroos (1982) and Parasurama et al (1988) were the pioneers in the conceptualization of the service quality construct. These authors maintained that the overall perception of quality was a disconfirmation of a customer‟s expectation and his or her evaluation of a service. Parasuraman et al (1988) developed a disconfirmation measurement, the SERQUAL instrument, to measure service quality and its dimensions. Previously, service quality is measured as a proxy measure of customer satisfaction, implying a perfect correlation between the two constructs. What has been the practice of late is the fact that service quality is perceived as an antecedent of customer satisfaction (Cronin et al., 2000). Service quality is considered a critical determinant of competiveness and when firms pay specific attention to service quality, it can help organizations to differentiate itself from other organizations. The provision of products and services of high quality enhances reputation, improves customer retention, attract new customers through word-of-mouth, and increase financial performance and profitability ( Zeithaml 1996). University of Ghana http://ugspace.ug.edu.gh 35 Service quality was perceived as the difference between customer expectations of service to be received and perceptions of what is actually received (Gronroos 1984, Parasuraman et al 1988, 1991). These researchers posited that measuring service quality as “disconfirmation” (the difference between perceptions and expectations) is valid and that such a model allows service providers to identify certain defined gaps in the service provided. However several subsequent studies have found a poor „fit‟ for the disconfirmation model in certain settings. As a result, the SERVQUAL scale (Parasuraman et al 1988) has been criticized by an increasing number of researchers on several grounds including; the use of gap scores, the measurement of expectations, the generalizability of its dimensions, the defining of a baseline to mean good quality (Cronin & Taylor 1992, Brown et al 1993). As a result of these deficiencies, some researchers have tried to combine expectations and perceptions into a single measure to alleviate these problems, and have found that such a measure actually outperforms the SERVQUAL scale in terms of both reliability and validity (Babakus & Boller 1992, Brown et al 1993). Cronin & Taylor (1992) in their paper adopted a single-measure scale and measures service quality by customer perceptions only through the SERVPERF model. To this end, (Dabholkar et al 2000) went further to propose that, it is better to consider factors associated with service quality (such as reliability and responsiveness) as being antecedents to customer perceptions of service quality rather than as dimensions or components of the construct. University of Ghana http://ugspace.ug.edu.gh 36 2.7.1 Airline Service Quality Research into airline service quality has increased rapidly since its relationship with passenger satisfaction and profitability has been established (Heskett et al, 1994). Much of the literature suggests that airline passengers perceive service quality as a multi- dimensional construct, which is in accordance with the conception of service quality proposed by (Parasuraman et al., 1988) in their well-known service quality measuring instrument called SERVQUAL. This instrument which measures service quality in terms of five dimensions (Reliability, Assurance, Tangibles, Empathy, Responsiveness) is based on the premise that customer‟s assessments of overall service quality are determined by the “gap” between their expectations of service and their perceptions of actual service performance. The SERVQUAL instrument has been used by several researchers to measure airline service quality (Sultan & Simpson, 2000). However, in the context of the airline industry‟s service quality, Zagat, an aviation research firm, rated airline service on the basis of five criteria namely; a. Overall performance, b. Comfort, c. Service, d. Food and e. Web site (Rhoades, 2006) Again, the US Department of Transportation‟s conceptualization of service quality in its regular reports on airline service quality provides data on the following operational measures; University of Ghana http://ugspace.ug.edu.gh 37 i. Flight delays, ii. Mishandled baggage, iii. Oversold flights and iv. Consumer complaints. A number of papers have studied airline service quality using a combination of performance only, disconfirmation, and importance-performance approaches. The leading theme in the airline service quality literature is the evaluation of service performance based on technical and operational measures. Another approach followed in the airline service quality literature is the link between quality and financial performance. Although the theoretical justification of the link between the two has been criticized by many, a number of studies have attempted to connect them. The bulk of the studies connecting the two make use of a diverse set of measures to determine an organization‟s financial performance and ultimately link it to its service quality. While some studies have approached airline service performance from a service quality perspective, others have viewed it through an operations research lens and performance improvement paths (Le et al 1997). Two important bases on which buyers evaluate competing airline offers are schedules and price. However, there are other secondary but important quality of service aspects that a consumer may consider in their ultimate choice of an airline. Such aspects include safety, comfort of the seat, in-flight amenities (e.g. food and beverages), and attitude of the ground and flight crew, financial stability of the airline, on-time performance of the flight, assurance that bags arrive with the passengers, the perceived likelihood of being bumped from a flight, and frequent flyer programs may also be important evaluation criteria (Chan, 2000). University of Ghana http://ugspace.ug.edu.gh 38 Gilbert & Wong, (2002) attempted to identify the service quality dimensions that matter most to airline passengers in terms of reliability, assurance facilities, employees, flight patterns, customization, and responsiveness and reported that passengers consistently ranked assurance as the most important service quality dimension. Furthermore Natalisa & Subroto, (2003) who studied the effects of management commitment to service quality on the customer‟s level of customer‟ satisfaction in domestic airlines, also found that assurance had the strongest effect on the level of customer‟s satisfaction. Furthermore a study conducted in North Cyprus by Johns et al (2004) both concluded that the dimensions of the SERVQUAL scale that is tangibles, reliability, responsiveness, assurance, and empathy were not validating enough in measuring service quality. This led to the development of an AIRQUAL (Ekiz et al., 2006) scale to overcome the problems associated with the application of the existing service quality measuring scales. The scale is made up of five distinct dimensions guided by the works of Churchill (1979) and Parasuraman et al (1985, 1988). The dimensions are airline tangibles, terminal tangibles, personnel, empathy and image. Although, they successfully developed the AIRQUAL scale, they failed to demonstrate the causal relationship between AIRQUAL and customer retention which is the crux of this study. 2.8 Switching Barriers As defined by Jones et al (2000) a switching barrier is any factor that makes it difficult or costly for customers to change service providers. From this definition it can be inferred that the term switching barrier or switching cost can both be used interchangeably though some authorities try to differentiate the two concepts based on what they aim to achieve. University of Ghana http://ugspace.ug.edu.gh 39 Another authority Bansal & Taylor (1999) defined switching barriers as customer‟s assessment of the resources and opportunities needed to perform the switching act, or alternatively defined by Ranaweera & Prabhu, (2003) as the constraints that prevent the switching act. Switching barriers also encompass the customer‟s perception of uncertainty and adverse consequences of buying a product or service according to Dowling & Staelin, 1994. While business goods suppliers primarily strengthen switching costs through “hard assets”, such as installed proprietary equipment that cannot be transferred to other exchange relationships (Wilson et al, 1995), providers of business service often cannot utilize hard assets to lock in current customers (Liu, 2006). Consequently, business service providers explore the establishment of “soft assets”, such as procedural investments and customer-specific expertise which enhance switching cost perceptions (Wilson et al, 1995). Switching barriers are conceptualized as the customer‟s perception of the magnitude of the attitudinal costs required to terminate the current relationship, and secure an alternative (Porter 1980, Jackson 1985, Ping 1993). Gronhaug and Gilly (1991) argue that a dissatisfied customer may remain loyal because of high switching costs. It has been argued again that the costs of switching providers tend to be higher for services than for goods (Gremler & Brown 1996) A number of studies have empirically tested switching costs as a main determinant of customer loyalty in consumer markets (Gremler, 1995) as well as business-to-business service context. Further, the main effect of some switching barriers on customer retention has been empirically validated in consumer settings (Lee et al, 2001) as well as the effect University of Ghana http://ugspace.ug.edu.gh 40 of barriers (such as interpersonal relationships, switching costs, and attractiveness of alternatives) regarding the propensity to stay with service providers (Jones et al 2000, Patterson & Smith 2003). In as much as customer satisfaction and loyalty are viewed as an important component of customer retention strategy, Bendapudi & Berry, (1997) put forward that these two components are not the only strategies to be considered for customer retention but barriers to customer defection such as the development of strong interpersonal relationships or the imposition of switching costs may also represent additional customer retention strategies. In this vein, Jones et al, (2000) also added that a well trained staff can also provide positive switching barriers. I must hasten to add that apart from a well trained staff, it is important for companies to ensure that employee satisfaction should be a major consideration if customer retention is to be realized. As intimated earlier, switching barriers have been deliberately erected by organizations as a marketing strategy to make it difficult and costly for customers to switch to competitors offerings. When switching barriers are high, service firms are more likely to retain even those customers who are less satisfied. Researches by Bansal & Taylor (1999) Jones et al., (2000) Lee et al 2001) Ranaweera & Prabhu (2003) among others have researched and confirmed the positive effect of erecting switching barriers on customer retention. It is therefore important for industry players in the airline sector to work at devising result oriented switching barriers as a strategy towards retaining their customers. In classifying switching barriers, Jones et al., 2000; Vazquez-Carrasco & Foxall, 2006) have attempted to categorize them under the following factors; a. Switching cost b. Interpersonal relationships and University of Ghana http://ugspace.ug.edu.gh 41 c. Attractiveness of competing alternatives. Apart from the factors mentioned above, Daniell in (2000) identified cross-selling as a very important factor to be considered when it comes to customer switching. 2.8.1 Switching cost Switching costs are the buyer‟s perceived costs (both monetary and non-monetary) involved in switching from the existing to a new supplier (Heide & Weiss, 1995). These include the cost of changing services in terms of time, monetary and psychological expenditure (Dick & Basu, 1994). Porter, (1998) defines switching cost as the cost that is involved in changing from one service provider to another. According to Patterson & Smith (2003) switching costs are the perception of the magnitude of the additional costs required in terminating a relationship and securing an alternative one. However, multiple conceptualizations exist for switching cos