Using Nonfinancial Information to Predict Financial Performance: The Case of the U.S. Airline Industry

Abstract

To enhance traditional jinancial reporting, academics and policymakers have suggested that jinancial statement users be provided with nonfinan-cia1 performance information that may enhance users' ability to evaluate and predict jinancial performance. This study tests this proposition by examining whether timely nonjinancial pegormance information is a useful predictor of financial performance in the airline industry. From analysts' written pronouncements and jinancial press articles we identifL a number of fundamental metrics, including customer satisfaction, purportedly used by analysts and investors to assess airline performance. We empirically examine these metrics and find that on-time performance, mishandled baggage, ticket oversales, and in-flight service are significantly associated with our proxy for customer satisfaction. Using an instrumental variable for customer satisfaction, we find that customer satisfaction, load factor, market share, and available ton miles are contemporaneously associated with operating income and revenues and that customer satisfaction and available ton miles are contemporaneously associated with expenses. Finally, using one and two months of nonfinancial data, wejind that nonfinancial performance information appears to be useful in predicting quarterly revenues, expenses, and operating income. expressed concern that corporate financial reporting and disclosure are not keeping pace with a dynamic and constantly changing business world. To enhance traditional financial reporting, one consistent suggestion from this group has been to provide financial statement users with nonfinancial performance information that may enhance users' ability to evaluate and predict financial performance. As Birchard (1994) argues, there is a missing link between companies' progress in operating activities and companies' financial results, and this link will come from research that demonstrates that nonfinancial performance variables are indicative of bottom line results. This study contributes to this debate by providing empirical evidence that timely nonfinancial performance information is contemporaneously associated with, and can be useful in predicting, financial performance in the U.S. airline industry.Using analysts' written pronouncements and financial press articles we identify a number of fundamental metrics purportedly used by analysts and investors to assess airline performance. From this search, it appears that fundamental operating metrics such as load factors, market share, and available ton miles differentiate airline performance. While these measures appear to be important indicators of future earnings, customer satisfaction measures such as on-time arrival, mishandled baggage, ticket oversales (i.e., involuntarily "bumped" passengers), in-flight service levels and customer complaints also differentiate future financial performance. ' We develop hypotheses for these metrics based on analysts' and financial press suppositions. The customer satisfaction hypothesis is tested using an ...

Performance Implications of Strategic Performance Measurement in Financial Services Firms

“…1 Consistent with these claims, a munber of accounting studies provide evidence that non-fmancial measures can be leading indicators of financial performance (e.g., Ittner and Larcker, 1997;Behn and Riley, 1999;Banker et al, 2000;Nagar and Raj an, 200 1;Ittner et al , 2003). However, only Banker et al Other writers have extended these categories by adding additional perspectives focused on employees, partners and suppliers, and the environment (e.g., Edvinsson and Malone, 1997;Schiemann and Lingle, 1999).…”

Complementary Alliances with Endogenous Fleets and Load Factors

“…However, they abstract away from carrier collaboration and complementary networks (among other di¤erences in the modeling). 5 Behn and Riley (1999) empirically found a positive relationship between load factors and operating income and load factors and operating revenue. Graham et al (1983) and Bailey et al (1985) empirically demonstrate that when travel distance or market density increases, the airlines will operate larger aircraft at higher load factors.…”

A Case Study of Service Failure and Recovery in Tourism within China Southern Airline

“…As Zemke and Schaaf (1989) demonstrated, it takes at least 12 positive experiences to moderate the malign influence of one bad experience. This threat of financial loss also exists in the airline industry-for example, the complaints of airway passengers can in turn damage a firm's revenues in the future [3].…”