South East Asian Journal of Contemporary Business, Economics and Law

South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 1 (June)
ISSN 2289-1560 2013
34
PRICE, SERVICE QUALITY AND CUSTOMER LOYALTY: A CASE OF AIR ASIA
Nadia Hanum Amiruddin
Faculty of Business & Entrepreneurship,
University Malaysia Kelantan, Kelantan
Email : [e-mail] , Tel : [phone]
ABSTRACT
Nowadays, the market is getting competitive in all aspects of survival of the company. Companies especially in the service
industry realize that in order to win the market, they need to explore new ways of approaching customers. Therefore, it is
important for the company to foster customer loyalty. In this study, SERVQUAL or Gap Analysis Study has become an adapted
model for the researcher in measuring the service quality in Air Asia. SERVQUAL measured tangibles, reliability,
responsiveness, assurance and empathy. This research aimed to study the relationship between service quality and price towards
customer loyalty in the Air Asia services. For this study, the survey method was used as instrument for collecting data. A mall
intercept was the method of data collection used by researchers where passengers at the arrival and departure halls of LCCT
were given the questionnaire. Based on this research, the result indicates that there are significant relationship between service
quality towards customer loyalty and price towards customer loyalty. Based on the correlation analysis, it shows that between
service quality and price, price is the most influencing factor that will affect customer loyalty. It can be concluded that, if Air
Asia remains as the low fares to the customers, the likeliness to increase the customer loyalty is high. However, it does not mean
that the service quality is not important, but, price gives slightly higher influence that will lead to customer loyalty.
Keywords: Service Quality, SERVQUAL, Price, Customer Loyalty
INTRODUCTION
The research related to service quality and customer satisfaction in the airline industry has been growing in interest because of
the delivery of high service quality is essential for airlines’ survival and competitiveness. A number of researchers have applied
service quality related theories and methods in the airline industry. Although examining the customer satisfaction of service
attributes has potentially great utility for airline managers, the effects of customer loyalty of airline service quality has not been
fully investigated in previous airline service studies especially in Malaysia. Since investigating the effects of airline service
quality to customer loyalty is an important factor for airline marketers to develop their marketing strategies, it is considered as an
important variable in this paper.
As the nation’s flag-ship carrier, Malaysia Airline System (MAS) enjoyed monopoly status in the domestic air travel industry
since commencing operations in 1947. However, with Air Asia (AA) entry in December 2001 as a low-cost carrier, AA has
changed the face of the Malaysian air travel industry into a more competitive market. The Malaysian airline industry nowadays is
in an oligopoly market structure, where it consists of one full service carrier (FSC) Malaysia Airline System (MAS) and two no-
frills carriers, namely Air Asia and Firefly. The Malaysian airline industry is tightly regulated by the government and was
dominated by the state-controlled MAS before the government’s domestic liberalization exercise opened up the market to allow
Air Asia to join the industry. Following Porter’s (2001) generic competitive strategy, MAS and Air Asia operate on different
business models. As a full service carrier (FSC), MAS follows a differentiation strategy and charges a fare premium. In contrast,
Air Asia uses a cost leadership strategy. Due to their different strategic positioning, Air Asia and MAS differ in their customer
value propositions as well as target market segments.
No matter how excellent the service a company delivers, every company still makes mistakes in meeting the expectations of
today’s customers, who tend to be more demanding and less loyal than ever before. Bitner (1993) argues that due to the unique
nature of services, it is impossible to ensure 100 percent error-free service. Even the most customer-oriented organization with
the strongest quality program is still unable to eliminate all service failures (del Rı´o-Lanza et al., 2009). Therefore, failures in
service delivery represent a significant challenge for every service organization. Previous research findings have confirmed that
product and service failures can lead to many undesirable consequences for organizations. Among these undesirable
consequences are customer anger (Folkes, 1984; Folkes et al., 1987), dissatisfaction (Bitner et al., 1990; Bitner, 1990; Hess et al.,
2003; Tsiros et al., 2004), complaint intentions (Folkes, 1984; Folkes et al. 1987), a desire to hurt the firm’s business (Folkes,
1984), and exit/switching (Keaveney, 1995).
Low price alone is not sufficient to compete in a deregulated airline market. Consumers do make decisions about airlines based
on their experience and perception about an airline’s customer service. Unlike a tangible product, an unsatisfied customer can
neither ask for refund nor exchange a flight, once performed. Therefore, the only option an unsatisfied customer has is not to fly
with that airline in the future. The researcher found that there are lot of customers’ complaint on bad services and experiences
they get when travelling with Air Asia. There is one independent blog which is http://airasiareviews.blogspot.com/ built by
someone who has no association with or endorsed by Air Asia to encourage everybody to give some reviews or complaints with
Air Asia’s services in that blog. From that blog, the researchers found there are a lot of complaints from those who have
experienced flying with Air Asia. Many incidents happened with Air Asia’s services such as flight delays, crash landing accident
and the low quality of services to their customers. Hence, understanding the factors affecting customer loyalty is important so
that Air Asia would know which criteria that they are lagging behind, the criteria that they need to prioritize and the criteria that

South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 1 (June)
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they need to improve. Objectives of this paper are to assess the relationship between service quality and customer loyalty and to
evaluate the relationship between price and customer loyalty.
LITERATURE REVIEW
In the case of Air Asia that is the subject of the present study, there was initial uncertainty among practitioners as to whether the
perceptions of a lower cost structure would alter accepted measures of service quality or whether the conventional measures
continued to apply to the organization. It has subsequently become apparent to Low Cost Carriers (LCCs) that their lower fares
to passengers are perceived to be due to cost reductions through efficiency in their operations, rather than to diminish service
standards. As a result, compliance with service-quality standards continues to be important for the LCCs. Indeed, a comparative
study of LCCs and Full Service Carriers (FSCs) found that service failures (such as flight cancellations, diversions, delays,
strikes, and negative staff attitudes) resulted in more complaints for the LCCs than for the FSCs (Bamford and Xystouri, 2005).
The conceptual definition of service quality developed by Parasuraman et al. (1988) has been largely employed for comparing
excellence in the service encounters by customers. Bitner (1990) defined service quality as the customers’ overall impression of
the relative inferiority/superiority of a service provider and its services and is often considered similar to the customer’s overall
attitude towards the company (Parasuraman et al., 1988). This definition of service quality covers several points. One of them is
an attitude developed over all previous encounters with a service firm (Bitner, 1990; Parasuraman et al., 1985, 1988). The word
‘‘attitude’’ includes outcome quality and process quality. Similarly, other researchers have termed outcome quality as what the
customer actually received and process quality as how the service is delivered (Groonroos, 1990). However, outcome quality is
usually difficult for a customer to evaluate for any service because services tend to have more experience and credence qualities
(Rushton and Carson, 1989). This situation leads customers to include process quality, i.e. the service is evaluated by customers
during its delivery (Swartz and Brown, 1989). Hence, quality of service evaluation does not depend solely on the outcome
quality of the service but it also involves evaluation of the process of service delivery. These components have a strong impact
on future expectations of a service firm but the relative impact of each may vary from one service encounter to the other (Bitner,
1990). This definition briefly describes quality of service as the outcome and process quality of the service from all previous
service encounters.
From the consumer’s perspective, the monetary cost of something is what is given up or sacrificed to obtain a product (Zeithaml,
1988). Thus, in studies on related topics, price has often been conceptualized and defined as a sacrifice (Anderson, Fornell and
Lehmann, 1994; Athanassopoulos, 2000; Chang and Wildt, 1994; Sirohi, McLaughlin, and Wittink, 1998; Sweeney, Soutar, and
Johnson, 1999). There are three components to the concept of price: objective price, perceived non-monetary price, and sacrifice
(Zeithaml, 1988). The objective of monetary price (simply put, the amount of money paid for product) is not equivalent to the
perceived price (that is, the price as understood and recorded in the mind of consumer) since
consumers do not always know or remember the actual price paid for a product. Instead, they encode the price in a way that it is
meaningful to them (Zeithaml, 1988). As to the relationship between price and satisfaction, research has shown that price is one
of the determinants of customer satisfaction (Anderson, Fornell, and Lehmann, 1994; Parasuraman, Zeithaml, and Berry, 1994;
Zeithaml and Bitner, 2000). When customers were asked about the value of services rendered, they consistently considered the
price charged for the service (Anderson, Fornell, and Lehmann, 1994). In those cases in which consumers did not consider price
in forming their judgments about the quality of service, it was generally because they lacked a reference price (Zeithaml and
Bitner 2000). Still, though, this group ranked price as an important factor when it came to their overall satisfaction.
DATA AND METHODOLOGY
In this section the researcher describes the research framework. Figure 1 indicates the relationship between service quality and
price towards customer loyalty.
Figure 1: Theoretical framework – Customer Loyalty Model
Customer Loyalty
Service Quality
Price
Tangibles
Reliability
Responsiveness
Assurance
Empathy

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Based on the framework, what is proposed is that Service Quality and price will influence customer loyalty.
For this study, the survey method (paper based questionnaire) was used as instrument for collecting data. The unit of analysis
was individual and respondents were Air Asia’s customers at Low Cost Carriers Terminal (LCCT) who are waiting for departure
or just arrived from Air Asia’ plane. They were selected based on convenience sampling. The sample size is 110 respondents of
AirAsia customers. The questionnaires were distributed randomly within LCCT area. After distribute the questionnaires, only
100 questionnaires been collected and answered by AirAsia customer. Most of the questionnaires were distributed at departure
and arrival hall of LCCT. Technically speaking, a mall intercept was the method of data collection used by researchers where
passengers at the arrival and departure halls of LCCT were given the questionnaires. The questionnaires were passed directly to
the customer or passengers around the terminal building. The researchers also ask them if they would be willing to participate
and a short brief are given to the customer.
The first section of the questionnaire evaluated service quality. The SERVQUAL model was adapted from Parasuraman et al.
(1988) and used to measure service quality. SERVQUAL measured tangibles, reliability, responsiveness, assurance and
empathy. The questionnaire asked respondents their perception of the three-airline service quality factors that make-up the core
of the research. Respondents were asked to provide, based on their beliefs using 5-point Likert scale, SERVQUAL’s
measurement also used 5-point Likert scale ranging from strongly agree (5) to strongly disagree (1).
The second section of the questionnaire evaluated price. Airlines have struggled with profitability, in recent years, and
paradoxically faced intense competition from both established rivals and new entrants into the industry. Compounding this fight
between the passenger airline carriers is the constant pursuit of cheap prices and travel deals by their customers. For any chosen
travel route, the ticket price continues to vary continuously depending upon the time of departure, season and competition among
many reasons. The fourth section will determine the respondents’ perception towards the price of Air Asia’s and their
willingness to loyal with Air Asia based on their experiences with Air Asia.
The third section of the questionnaire evaluated customer loyalty. In the present study, the customer loyalty scale which
originally developed by Narayandas (1996) was adapted to measure customer loyalty in airline industry (Aydin, Ozer & Omer,
2005). It measured customers’ repurchase intention, resistance to switching to competitors’ products and willingness to
recommend their current using brand to other people.
The last section of the questionnaire evaluated demographic information collected from all respondents regarding age, gender,
marital status, education level, employment status, and income level. In order to create further analysis, researcher have used
SPSS to analyze the data that been obtained from the questionnaires. By using SPSS program, the collected data was processed
and analyzed in order to capture and interpret it. The raw data obtained from the questionnaires was keyed in to the program, and
analyzed using that particular statistical software program.
Descriptive statistics are used to explore the data collected and to summarize and describe those data. Descriptive statistic may
be particularly useful if one just make some general observation about the data collected.
RESULTS AND FINDINGS
This chapter discusses the results of the data analysis. To assess the extent of Service Quality, a gap analysis have been carried
out to determine the difference between the expectation of passengers and what they received from Air Asia. This is explained in
Table 1 below.
Table 1: Overall Gap Analysis
Service Quality Expectation Perception Gap
Tangibility 4.30 3.46 -.84
Reliability 4.53 3.86 -.67
Responsiveness 4.33 3.71 -.62
Assurance 4.37 3.71 -.66
Empathy 4.31 3.49 -.82
TOTAL GAP 4.37 -3.65 -.72
Table 1 shows the analysis of overall gap in service quality. The gaps between all the variables are negative. The highest gap
among the variables is tangibility which is -.84. It can be concluded that customers’ expectation towards the appearance of the
visible facilities and equipment that are serving in good condition to customers did not meet their expectation the most. In the
meantime, the lowest gap is in terms of responsiveness. It shows that there is willingness to provide prompt or favorable services
by the administrative staff to customers. Even though it is negative gap differences, the responsiveness is the lowest compared
with other variables. On the other hand, the total gap indicated is -7.2, which Air Asia need to fulfill in order to meet their
customers’ expectation.
Table 2 & 3 shows Pearson’s correlation analysis was conducted to examine the relationships among the independent and
dependent variables.
As illustrated in Table 2, Service Quality has significant and positive relationship with Customer Loyalty (r = .37, p<.01). It
shows that there is a positive relationship between Service Quality and Customer loyalty. However, the relationship appears to be
rather low at .374. So, with Air Asia, passengers are more likely to set aside service quality in using Air Asia services. Based on

South East Asia Journal of Contemporary Business, Economics and Law, Vol. 2, Issue 1 (June)
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Table 3, Price has significant and positive relationship with Customer Loyalty which is r = .64 and p < .01. It shows that there is
a positive relationship between Price and Customer loyalty. Compared with service quality, the relationship between price and
customer loyalty are higher at .642 than the relationship between service quality and customer loyalty. It shows that price have a
strong relationship to determine customer loyalty compared with service quality. Therefore, it can be concluded that no matter
how low quality of services provided by Air Asia, if the price are low and affordable, customers will always choose Air Asia.
Table 2: The relationship between Service Quality and Customer Loyalty
Correlations
Servqual Loyalty
Servqual Pearson Correlation 1 .374**
Sig. (2-tailed) .000
N 100 100
Loyalty Pearson Correlation .374** 1
Sig. (2-tailed) .000
N 100 100
**. Correlation is significant at the 0.01 level (2-tailed).
Table 3: The relationship between Price and Customer Loyalty
Correlations
Price Loyalty
Price Pearson Correlation 1 .642**
Sig. (2-tailed) .000
N 100 100
Loyalty Pearson Correlation .642** 1
Sig. (2-tailed) .000
N 100 100
**. Correlation is significant at the 0.01 level (2-tailed).
Table 4 illustrates the most effecting factors that will influence customer loyalty between Service Quality and Price. It shows that
the factors influencing the most to the customer loyalty is price or low fares. Therefore, it can be concluded that price give a big
influence to the customers in choosing their travel airline compared with service quality provided by Air Asia. However, it does
not mean that the service quality is not important, but, price gives slightly higher influence that will lead to customer loyalty.
Table 4: The Most Effecting Factor That Will Influence Customer Loyalty
Descriptive Statistics
Mean Std. Deviation N
Loyalty 3.6783 .83527 100
Servqual 3.6500 .71716 100
Price 4.1760 .69763 100
CONCLUSION & RECOMMENDATION
The present study shows the analysis of overall gap in service quality. The highest gap among the variables is tangibility which is
-.84. It can be concluded that customers’ expectation towards the appearance of the visible facilities and equipment are in good
condition did not meet their expectation the most. In the meantime, the lowest gap is in terms of responsiveness. It shows that
there is willingness to provide prompt or favorable services by the administrative staff to customers. Even though it is negative
gap differences, the responsiveness is the lowest compared with other variables. On the other hand, the total gap indicated is -7.2,
which need to be fulfilled by Air Asia in order to meet their customers’ expectation.
In terms of tangibility, it shows that the highest gap is about the plane seats. The respondents put a high expectation before they
travel with Air Asia regarding the plane seats, however, as they experienced themselves, they have a low perception as compared
before. It shows that Air Asia have a slightly low quality of plane seats and not comfortable as customers expected. All the
statements of tangibility have a negative gap and did not meet the customers’ expectation. However, the lowest gap indicated the
acceptable quality of air-conditioning in the planes. It shows, the customers are really comfortable during the flight as the air-
conditioning is in a good condition.

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According to the respondents, in terms of reliability, their expectations are highest regarding the cleanliness of the airport toilet.
However, it ends up in disappointment when their perception changed after they experienced themselves. It shows that the
airport toilets are not as clean as customers expect it would be. The lowest gap indicated is about the safety of the airport
terminal. It illustrates that the customers safety in the area of terminal building is always can be reliable. However, it is still a
negative gap but lower as compared with others.
As regard to responsiveness, the highest gap indicated is about the responsiveness of Air Asia’s staffs in handling delays. The
customers have a high expectation towards the staffs in handling these problems, however, when the problem aroused, the staffs
are not really good to make sure the passengers understand the current situation. However, even though there is the gap , the
differences is still negative, the lowest gap is regarding the staff which have a good knowledge in handling requests or
complaints made by customers.
In terms of assurance, it shows that the highest gap is about the flight schedule. Customers expect that their flight schedule are
assured all the time, however, Air Asia’s service did not meet their customers expectation. The flight schedule problems have a
high gap compared with others in terms of assurance. It shows that the flights are always delayed and not precise in a timely
manner. The lowest gap is on the Air Asia staffs in serving the customers. The staffs have the knowledge to answers customers
inquiries to make them understand. However, it still did not meet the customers’ expectation as it has a negative gap differences.
In terms of empathy, the highest gap is regarding the service personnel. The customers expect that the service personnel will
always find ways to resolve their problems/complaints, however, their perception are low and the service personnel did not meet
their expectation. It shows that service personnel did not resolve the customers’ problem well. In the meantime, the lowest gap
shows that there is always someone at the customer service counter who will look into customers’ problem, however, as regard
to the highest gap, it can be illustrated that, the availability of the service personnel in the counter is meaningless if they cannot
solve the customers’ complaints/problems. Furthermore, their services in terms of empathy did not meet the customers’
expectation.
In terms of responsiveness, the respondents agreed that Air Asia’s staffs are always willing to help the customers. However,
based on this study, Air Asia’s staff is not really good in handling flight delays to make sure the passengers understand the
current situation about their flight status. The respondents also agreed that their safety is always being a priority to Air Asia. The
security and police at the airport are always there in order to control the situation and protect the belonging of the customers.
However, for the time being, the parking space is one of the problems at LCCT (Low Cost Carriers Terminal). The parking space
is not enough and not much available in order for customers to avoid traffic jam.
According to the study, the highest mean in the tangibility dimension is about the quality of air-conditioning in the planes. The
respondents agreed that they are comfortable during the flight because of the quality of air-conditioning in the planes. However,
the lowest mean is regarding the plane seats. The respondents do not feel really comfortable with the plane seats. It is because the
seats are slightly small and uncomfortable. According to respondent’s feedback, it shows that in terms of assurance, they agreed
that Air Asia’s staff have the knowledge to answer the customers’ inquiries to make customers understand. Nevertheless, the
respondents mostly are not assured of their flight scheduled all the time due to the frequent flight delays. Flight delays are the
most common scenario that happened in Air Asia.
In terms of empathy, the highest mean indicated that there’s always someone at the customer service counter who will look into
their problems. It shows that the customer services in the counter are always available and ready to help customers. However, the
lowest mean stated that when the customers make a complaint to service personnel, they give low services in finding ways to
solve the customers’ problems. This is due to the situation where there is not every problem that can be solved by the service
personnel. For example the flight delays problem and so forth.
After doing the correlation test, it shows that service quality has significant and positive relationship with customer loyalty which
is r = .37 and p<.01. It is proven that there is a positive relationship between service quality and customer loyalty.
The second research question to be answered was whether price has positive relationship with customer loyalty in Air Asia.
Based on this study, price indicated the highest mean as responded where flight with low fares influences their travel. It shows
that the customers were influenced by low fares the most when they want to travel. Though, based on the study, the lowest mean
stated that, if someone asked them about the Airlines, they will asked him or her to purchase Air Asia’s ticket because of value
for money. It means the willingness to recommend others to travel with Air Asia are slightly low. It is because they may perceive
that Air Asia’s ticket is not value for their money because of the services provided. Therefore, Air Asia should make a change in
order to overcome this problem. However, after being analyzed, it shows that between service quality and price, price is the most
influencing factor that will affect customer loyalty. It can be concluded that, if Air Asia remains as the low fares to the
customers, the likeliness to increase the customer loyalty is high.
The analysis was carried out so that the research questions and the objectives are answered. The summary of result is as below:
Research Question 1: Is service quality positively related to customer loyalty in Air Asia?
Service quality is positively related to customer loyalty in Air Asia
Research Question 2: Are pricing positively related to customer loyalty in Air Asia?
Price has positive relationship with customer loyalty in Air Asia

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Research Question 3: What is the most affecting factor that influences customer loyalty?
The most effecting factor that influences customer loyalty in Air Asia is price.
RECOMMENDATION
After doing the analysis and finalizing all the finding, the researcher come out with several recommendation in order for Air
Asia to improve the things that they lack behind and fulfilled the gap differences between passengers expectation and perception.
The recommendations are as below.
Increase tangible resources and capabilities
Based on the research, the highest gap that Air Asia needs to fulfil is the tangible aspect. Air Asia’s passengers are mostly not
satisfied with the condition of seats in the planes. They feel a bit uncomfortable with the seat provided in the plane. The seats are
quite small and not comfortable. Furthermore, based on the findings, the passengers did not see the image that Air Asia is trying
to project as appealing. Therefore, Air Asia should do an improvement by increasing their corporate image so that Air Asia will
be the outstanding airline services regardless of the low cost services they offered. Furthermore, the condition and atmosphere of
the airport also have to improve to show the tangibility of Air Asia’s service quality in order to increase customer loyalty.
Besides, it is recommended to Air Asia to increase their corporate image to appeal to the high class travellers even if Air Asia is
just a low cost carrier airline.
Increase local responsiveness and global integration
A localization strategy focuses on increasing profitability by customizing product and service so they can provide the taste and
preferences in different national markets. Product or services' taste may vary with nation. By increasing the local responsiveness,
Air Asia can capture the global market. Furthermore, it is important for Air Asia to increase global integration to widen their
business, at the same time, this will make their customers at ease to travel around the world at a lower cost. It will somehow
increase the loyalty and favorable attitude towards Air Asia.
Increase customer service
According to the findings, the second highest gap need to be fulfilled is empathy. Empathy is defined as the ability of the
organization to provide personal attention and care to customers. It shows that the customer service of Air Asia is still low and
not pleasing. There is lot of problem in the terminal including baggage handling, flight delay, reservation services, online
booking services and so forth. These problem need to solved immediately by the service personnel in order to cater to the need of
customers and to avoid the customers switching to other airline services. Besides, in order to build loyalty of the customers,
customer service is strongly recommended.
This study has proven that service quality and price have significant and positive relationship towards customer loyalty in Air
Asia. Hence it was able to answer the research questions of this study. The findings of this study showed tangibles, reliability,
responsiveness, assurance and empathy were the determinants for service quality. The survival of Air Asia very much depended
on the benefits it brings to their customers. Otherwise, these airline services have to pay the consequences when its customers
begin looking for other alternatives for airline services. Air Asia should pay more attention on the relationship between tangibles,
reliability, responsiveness, assurance, empathy and most importantly price of their fares. This is to ensure that Air Asia provides
the best to its customers in order to compete effectively with other airline. A proper understanding of customer loyalty can thus
be seen to have an extraordinarily high monetary value for Air Asia in a competitive environment. It is hoped that this findings
will benefit Air Asia so that they could come out with better marketing strategies on how they can retain the loyalty of their
customers.
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