Study finds unexplored link between airlines' profitability and their accident rates

Dec 28, 2011
An airliner lands at sunset

(PhysOrg.com) -- Airlines' accident risk is highest when they are performing very close to their financial targets, according to a study by a professor in BYU’s Marriott School of Management.

“The accident risk went down as they got further away from their financial goals in either direction,” said Peter Madsen, assistant professor of organizational leadership and strategy. “Speaking generally, airlines are safest when their financial performance is either much better or must worse than it has been in the recent past.”

The study will be published in a forthcoming issue of the Journal of Management, and is available online via the journal’s “OnlineFirst” feature. It looked at 133 U.S. airlines from 1990 to 2007.

Madsen’s complex statistical analysis showed that for every 10 percent deviation in an airline’s actual financial performance from its profitability goal, there is a 7 percent decrease in the likelihood of an accident. 

The results could be useful for airline managers and for regulators, who consider issues that affect millions of flights.

“I don’t think people are saying consciously, ‘We really want to hit this financial target, let’s cut back on our expenditures,’” Madsen said. “But it’s well documented that people will take risks to achieve goals, even if they don’t realize they’re doing it. Just being aware of these findings, and when you are close to hitting your targets, reminding people that safety is your number one concern, could reduce that tendency.”

Additional financial incentives for safety “aren’t a silver bullet,” said Madsen, who has researched that subject. But they can balance the significance of financial or operational goals in employees’ minds.

As for regulators, “this is an incredibly safe industry, so if we want to target the resources we spend on regulating it more effectively, we might want to focus on airlines performing close to their financial goals.”

It’s important to note that the risks Madsen studied are already miniscule.

“First-world airlines are almost incomprehensibly safe,” he said, citing other research that reported a passenger would take a domestic flight every day for 36,000 years, on average, before dying in a crash. “It would be a mistake for anyone to use my findings to try to decide which airline to fly with.”

Previous research into the link between profitability and safety in airlines has been inconsistent and even contradictory, typically seeking to explain the relationship in a“linear”fashion. Some studies found that safety improved as profits went up, others found that safety declined as profits went up. Madsen believes the new study identifies a better model for the effect of profitability on safety that could apply to lots of industries.

Madsen, who studies risk-taking in many industries, chose to focus this study on the airline industry because it’s relatively easy to get lots of data about it. Even privately held are required to disclose financial results, and the National Transportation Safety Board meticulously logs accidents.

During the period studied, the NTSB reported 915 accidents, which include death, serious injury or structural damage to aircraft. These ranged from fatal crashes to a plane being struck by a baggage cart. To double-check his results after his initial findings, Madsen ran his analysis again using airline “incidents,” which are more broadly defined non-accidents that could affect the safety of the aircraft. The FAA reported 5,829 incidents during the period studied. The results held up.

“There was a very strong empirical pattern,” Madsen said. That’s why, although he did not examine data from other industries that have the potential to critically impact people’s safety, he believes the findings apply to them as well – nuclear power, mining, maritime transportation, and more. 

“It’s quite likely you’d see the same pattern in other industries,” Madsen said. “If anything, I think the airline industry is a conservative test because it is so safe and highly regulated.”

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User comments : 18

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Raygunner
4.8 / 5 (4) Dec 28, 2011
That's 13.14 million flights with a fatal crash thrown in near the end - pretty good! I don't think that counts the fender-benders though - if there is such a thing in air travel.
btb101
3 / 5 (3) Dec 28, 2011
The Moral of this story is...

Only fly with expensive, over-charging airlines because they can afford to actually properly maintain their aircraft...
that_guy
2.5 / 5 (2) Dec 28, 2011
There's two ways to do science - either control an experiment to meticulously remove every variable, or consider every variable properly before making conclusions.

This study did an excellent job using the second method.

It's frustrating how many studies overlook sometimes obvious things, like all the safety/profitibility studies before this one.

What a breath of fresh air.
mattytheory
1 / 5 (2) Dec 28, 2011
Reason for correlation:

1) High profit = get there by cutting corners/costs
2) Low profit = get out by cutting corners/costs

Coincidence?
mattytheory
2.8 / 5 (6) Dec 28, 2011
Or maybe the underlying theme is profit. I've said it before and I'll get voted down for saying it again. Not-for-profit is the way of the future. When companies stop letting profit drive their decisions, we'll all be better off.
BillFox
2 / 5 (4) Dec 28, 2011
Sounds too much like socialism to me mattytheory.
kochevnik
3.9 / 5 (7) Dec 29, 2011
Sounds too much like socialism to me mattytheory.
The richest European nations are the most socialist. For example, a German auto worker produces twice as many cars as an American and earns twice the salary. My socialist Moscow Metro gets me anywhere in forty minutes, with trains every three minutes, for 1/36 the time*money cost of Los Angeles. Try again.
mattytheory
2.5 / 5 (2) Dec 29, 2011
I don't think that is socialism because that implies economic equality usually through government (or other institutional) regulation. Not for profit applies to corporations but the people that work for the corporation still earn salaries. Those salaries can be no different from what they would normally earn. The company itself will not earn a profit or otherwise retain earnings either through donation of services / labor or reinvestment / development in the amount of excess revenues.
CHollman82
1.6 / 5 (10) Dec 29, 2011
Or maybe the underlying theme is profit. I've said it before and I'll get voted down for saying it again. Not-for-profit is the way of the future. When companies stop letting profit drive their decisions, we'll all be better off.


Excellent idea, you should start us off by either volunteering for 40 hours a week at an airline or taking out a loan for 10 billion to start an airline company that you will not be able to ever repay because your airline doesn't try to make a profit.
CHollman82
1.6 / 5 (11) Dec 29, 2011
The company itself will not earn a profit or otherwise retain earnings either through donation of services / labor or reinvestment / development in the amount of excess revenues.


Then why the hell would anyone start the company? Someone is going to spend billions to purchase a fleet of jets out of the goodness of their hearts?

You realize your idea is something like a kindergartner would think of right? Or at least someone with zero knowledge about how things work in the real world. People risk lots and lots of money when they start a new business, and the ONLY reason that risk is considered worthwhile is due to the potential reward... you want to remove that potential reward, and in doing so you remove the incentive to take the risk in the first place.

You think like a child, your head is in the clouds.
Dug
5 / 5 (1) Dec 29, 2011
Not knowing how this research was done makes the article minimally interesting, but useless. For example: though perhaps obvious - when airlines have a crash, their stock values decline as do ticket sales. If your research's financial data is based on annual report data inclusive of the period of the crash - then it's going to appear that crashes are a result of financial decline. So, not knowing whether the analysis done - excludes the financial quarter data after a crash, including the quarter of the crash - leaves no way of determining it's actual value. Guess we'll have to read the original Materials and Methods to see if the crash effects are excluded from the the financial data used - because the article leaves us clueless regarding this. It also begs the question that if an airline goes through a period of belt tightening bringing profits in inline - how long does it take safety cut backs (procedural, personnel, or equipment quality) to actually affect flights.
mattytheory
2.8 / 5 (4) Dec 29, 2011
@ CHollaman:

LOL!

I said nothing about volunteering MY time except to say that services in the amount of profits would be paid back to the community. The people that actually perform those services are still compensated otherwise exactly how do you know how much to give back?

Companies can still earn revenue so long as they convert that revenue to something that is used by the company or else they give it back to the community. Revenues are still used to pay bills. Banks will still lend because they earn interest. People will still start companies because they can earn whatever salary the board determines as fair plus bonuses. No changes there.

Your understanding of what I am trying to point out is obviously lacking. If it weren't you would realize that every point you tried to make was rebutted by what I had already posted.

And, for the record, it wasn't me who gave you the 1/5. It looks like someone else agrees that you have no idea what you are talking about =)
CHollman82
1.7 / 5 (12) Dec 30, 2011
Your understanding of what I am trying to point out is obviously lacking. If it weren't you would realize that every point you tried to make was rebutted by what I had already posted.


No, you're an idiot.

Do you have any idea the risks associated with starting a business like an airline? In order to make it worth taking that risk there must be the potential for an equally significant reward. Again, and nothing you have said "rebuts" this point, your inane idea removes those potential rewards and leaves only the very large risk, meaning no sane person would even bother.

You have no idea how the real world works. Let me guess, you're a college student?
CHollman82
1.7 / 5 (10) Dec 30, 2011
I'll clear this up with a very simple example.

Say I'm already very wealthy, I can take my money and invest it and quite easily earn 10% in interest year over year... or I can use it to fund my own company and potentially earn much more. The ONLY reason I can do that is because I have the potential to make profit from that company in excess of what I could reasonably expect to earn with other investments. You are REMOVING THAT POSSIBILITY, and if you do then I would NOT invest my money in starting my own company.

Furthermore, remember when I said I could just invest my money in the stock market and earn a decent ROI? Well with your idea that wouldn't be possible either. In publicly traded companies profit goes to dividends for shareholders. If you limit profit potential you limit the potential ROI on an investment. This also drastically affects the risk/reward ratio for investing in a company, and would make it so no one does.

Your idea would KILL our economy.
CHollman82
1.8 / 5 (12) Dec 30, 2011
Companies can still earn revenue so long as they convert that revenue to something that is used by the company or else they give it back to the community.


This is particularly stupid.

You don't seem to understand that most companies are publicly held and shareholders expect a return on their investment. Without those shareholders the company wouldn't exist. It's as if you have no fucking clue about anything related to economics. Even a reasonably intelligent teenager would understand this, companies profits go to investors in the form of dividends, those investors are the reason the company exists, providing the vast majority of all start-up funding and operating capital. You want to limit the amount they can make on their investment but not the amount they can lose, shifting the risk/reward ratio to levels that only an insane person would consider acceptable.

Don't even bother replying, you are embarrassing yourself.
tigger
3 / 5 (2) Dec 31, 2011
He who cuts the most corners and surfs closest to the legal line without being illegal wins.... that's the game being played, it's not hard to understand is it? Capitalism might be the best thing we have but it most certainly does not produce the best possible products and services.
mattytheory
1 / 5 (1) Dec 31, 2011
If this wasn't like arguing with a child I might actually reply. Instead, I am not going to waste my time.
Au-Pu
5 / 5 (1) Jan 01, 2012
With all due respect to the Brigham Young University, I would like to see these results confirmed by another University and preferably a European University not a US University.

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