BYU scholar finds safety risk highest when airlines are closer to financial targets
A new statistical analysis by a Brigham Young University business scholar has found that the closer an airline comes to meeting its financial targets, the more likely it is to crash a plane. Yet as profitability increases beyond expectations, the accident rate goes down, confounding the notion that airlines trade safety for profits.
"Risk tapers off when airlines move away from their target in either direction," said study author Peter Madsen, assistant professor of organizational leadership and strategy at BYU. "Once you are operating beyond your goals there is less pressure to operate as efficiently as you can."
Madsen studies the association between profits and risk-taking in many industries. Aviation lends itself to this pursuit thanks to a wealth of available data. Even privately held airlines must disclose financial results, and federal agencies track all safety-related incidents.
"The true implication of this work is that organizational profitability impacts safety risks in predictable ways and that this effect occurs even in very safe industries," Madsen writes in the study, to be published in the Journal of Management and available online. "The analysis presented here clearly demonstrates that safety fluctuates with profitability relative to aspirations, such that accidents and incidents are most likely to be experienced by organizations performing near their profitability targets."
Airlines for America, a Washington-based trade group, is reviewing the study.
"Safety is the foundation on which our industry was built and remains our No. 1 priority," spokesman Steve Lott said in an e-mail. "Airlines never compromise on safety and the impressive record speaks for itself. Our skies are the safest they have ever been in modern history."
Madsen examined data generated by 133 U.S. airlines between 1990 and 2007. All were large commercial carriers with more than $20 million in annual revenue. Madsen excluded smaller carriers, such as charters and air taxis, because they are not required to report the data he needed to construct the variables his study required.
During those years, the airlines experienced 915 accidents, 54 of which resulted in fatalities. Accidents were defined as collisions that resulted in injuries or structural damage to the aircraft.
Madsen's study controlled for a number of variables, such as airlines' average flight duration, portion of flights going oversees, portion of revenue derived from passenger fares versus cargo, and level of capitalization expressed as a ratio of assets to departures.
His analysis documented a 7 percent decrease in the likelihood of an accident for every 10 percent deviation in an airline's performance from its profitability goal.
To confirm his results, he applied his methodology to another 5,829 "incidents," episodes that didn't qualify as accidents, but could affect safety. He came up with similar results, but without the symmetry. Firms that were 10 percent below financial targets were 4 percent less likely to log an incident, while those exceeding targets were 10 percent less likely.
Madsen cautioned that his findings in no way impugn the nation's commercial airlines, which have perhaps the best safety record of any mode of mechanical transport in history. He noted that it would take a U.S. passenger, on average, 36,000 years of taking a domestic flight every day to die in a plane crash.
"It would be a mistake for anyone to use my findings to try to decide which airline to fly with," Madsen said.
Prior studies of the relationship between safety and profitability have been inconsistent and plagued with conflicting results, according to Madsen. He believes this relationship is more complex than previously assumed.
"I don't think people are saying consciously, 'We really want to hit this financial target. Let's cut back on our safety 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 No. 1 concern, could reduce that tendency."
He believes his findings have significance beyond air transport because airline safety is so highly regulated. The subtle influences of profitability on safety could be more pronounced in less regulated arenas, and Madsen intends to test his theories on the mining industry.
"It is entirely possible that the risk of industrial accidents in several high-hazard industries, as well as the risk of worker injury, increases in firms performing near their profitability aspirations," his study concludes. "One clear implication of this work, then, for organizational leaders is that conscious efforts may be needed to counteract the subconscious tendency to reduce attention to safety when the attainment of financial objectives is in question."