The economic incentives of a plane crash

Aviation maintenance and flight rules are pretty tightly regulated by the FAA, but what would happen if the FAA disappeared overnight?

Aviation disasters are expensive. Not only does it cost a lot of money to replace a destroyed aircraft, there’s also the disruption to the normal business routine (i.e. that plane was supposed to arrive somewhere to pick up paying passengers), payouts to the estates of dead passengers, and so on. Would this cost be sufficient disincentive against airlines reducing maintenance expenditures, or changing their own flight rules (e.g. allowing airplanes to get closer to each other in the air)? Or would airlines accept more frequent crashes as a relatively minor cost against greatly increased profitability?

Of course, this assumes the aircraft operators act logically. Some may be arrogant, in denial, or take the teenage attitude “it won’t happen to me”.

I know too that Transport Canada, for example, pays attention to the financial health of flight operators, since skimping on maintenance is a risky but common way to save money. An operator with money issues may not be able to afford parts, but they might also not decide to cancel their main source of revenue. There’s a rule of thumb in safety generally that for every serious accident there were probably about a dozen close calls about the same issue.

You see all of those clunker cars on the freeway? The ones billowing smoke, or so rusted you can see through them? Imagine if airplane owners (private, not airlines) no longer had to have their airplanes certified airworthy. :eek:

I think the problem would be when the flight schedule is compromised, and there is a temptation to cut a corner to make sure the plane takes off. Having the FAA means that airlines have to plan for down time, which is expensive but the cost is built into the business for all airlines. If the FAA wasn’t around someone would have to decided whether or not to do a maintenance and corners would be cut leading to accidents. Plus the FAA gives confidence to riders that would disappear if there was no FAA.

Consider this: The mechanics seldom fly on the aircraft, so they aren’t as worried about the plane crashing. The bean counters are all about cutting costs. Upper management makes their money by keeping the stockholders happy. Without some oversight, corners would be cut and maybe cut “too” far at times.

IF accidents were commonplace so any attempt at corner-cutting at Airline XYZ would show up in their *own airline’s *accident costs next week, then in the absence of the regulators there’d be a race to find the most economically efficient mix of accident-preventing maintenance and accident-causing skipping it.

But in the real world, accidents are so rare, and maintenance-caused ones are such a small fraction of that already-small total, that Airline XYZ could drastically cut corners for months, maybe years before the accident chicken came home to roost for the first time. And the day before that single rare accident they’d all be congratulating themselves on their efficiency and the capitalistic wonder powers of simple deregulation: “Doesn’t matter the problem, its The solution”

Or don’t take some simple corporate steps to uncouple the airline and its liabilities from the profit-takers and any other “parent.” Plane crashes, a few billion in claims, airline goes poof and takes a few hundred million in assets with it, owners and parent company left untouched. To basically do it all over again.

In July the FAA fined Southwest Airlines $12 million for poor maintenance. This was after they fined Southwest $7.5 million in 2008.

The article notes that in 2010 American Airlines was fined $24.2 million.

During a six-year period the FAA cited 224 airlines 1,155 times and assessed more than $28 million in fines.

If airlines are already willing to accept that many citations and fines when there are clear policies and a regulatory agency in place, what do you think they’d do without regulations?

Life would, more or less, go on as usual. First, we can observe that the FAA’s regulations have some effect on airliners–in other words, airlines are doing the legally mandated minimum on at least some aspects of safety. We can therefore assume that airliners would cut safety expenses in at least some areas. In areas where airlines are exceeding FAA regulations, then there would be no change.

What we’d also see, then, is that a market for safety would develop, just like how consumers can choose to spend more on safer cars nowadays. You want to get to your destination as safely as possible? Take a national airline or one that charges a higher price and spends more on safety. You want to take a slightly increased risk and save some money? There’d be plenty of companies vying for your business, too. I’ve flown on some dilapidated airplanes in my life, and I’m still around to tell the tale.

One thing to consider is that airlines, like other corporations, have limited liability. This means that in the absence of regulations, airlines will assume an sub-optimally high level of risk, because they will be spared by bankruptcy from bearing the full costs of a catastrophic loss. Now consumers may very well be better off in an unregulated free market than today, but the optimal solution is a certain level of regulation. Again, because this is important: the best solution even from a libertarian, government-be-damned perspective is some level of regulation.

The other big factor, though, is that the FAA does more than impose regulations. Airspace is a perfect example of tragedy of the commons, and needs government regulation to prevent overuse (not to mention that it innately prevents crashes via ATC). So the FAA has benefits beyond regulating the market.

I just realized I made a typo here. That should be 24 airlines, not 224.

One thing no one has mentioned yet is the normalization of deviance. You skimp on maintenance and nothing happens, so you accept it. Then you skimp a little more and that becomes acceptable. Eventually skimping on maintenance catches up with you.

Feynman attributed the Challenger accident to “normalization of deviance” by the way

“The phenomenon of accepting for flight, seals that had shown erosion and blow-by in previous flights, is very clear. The Challenger flight is an excellent example. There are several references to flights that had gone before. The acceptance and success of these flights is taken as evidence of safety. But erosion and blow-by are not what the design expected. They are warnings that something is wrong. The equipment is not operating as expected, and therefore there is a danger that it can operate with even wider deviations in this unexpected and not thoroughly understood way.”

http://science.ksc.nasa.gov/shuttle/missions/51-l/docs/rogers-commission/Appendix-F.txt

Tort law, and its concepts such as piercing the corporate veil and exemplary damages, will go a ways towards ‘re-coupling’ liabilities to directors and officers. Owners too, if the corporation is closely-held. Especially if it’s shown that the company practiced crude cost benefit calculations akin to those in the Ford Pinto cases. (Or even if those calculations didn’t actually exist, according to the 1990 Gary Schwartz law article, The Myth of The Ford Pinto Case, and even if they existed, legal practice at the time encouraged such calculations)

If, OTOH, the corporation is publicly owned, then the ‘owners’ are whoever owns stock. You and me, IOW, along with institutional investors. How do you justify making someone liable for an air crash, simply because they own 50 shares of, e.g., UAL stock? They don’t have any say in United’s governance, or control of United’s corporate operations. FAA regulators have much more of a say in how airlines do their business than shareholders. Why not make them liable when their oversight is faulty?

Just a note on this small point: If I owned stock in an airline, and there was even a rumour, let alone evidence to say that they were skimping on maintenance, I would sell. Others would do the same with the obvious consequences. If higher dividends persuaded me to keep the stock I would haver to accept the associated risk.

In addition, insurance underwriters would likely take up much of the inspection slack and premiums would be matched to safety levels. A company I used to work for had two health and safety inspections of equipment annually - one by the government inspector and one by the insurance company inspector - guess which was seen as more important.

In June of 1956, a TWA Constellation and a UAL DC7 departed Los Angeles a few minutes apart. They were each heading east and both crossed the Grand Canyon at, unfortunately, the same time. The collision that followed claimed 128 lives. This incident led to the modern air traffic control system. In 1956 there were few aircraft in a traffic system that was not at all congested. In 2014 this is not the case.

Even with modern air traffic control, I can think of at least 2 other mid air collisions involving commercial jet liners. One in San Diego in 1978, and one in Cerritos (near LA) in 1986. In both of those instances, the airliners were flying legally in controlled space, yet the system failed and fatalities resulted. There are probably more, but those 2 come to mind.

The short answer is that absent the FAA, I would never fly, nor would I walk under any area that aircraft flew over. Bless the FAA and the great job they do.

Uh, isn’t there the small issue that the FAA (and equivalent agencies) also decides if a particular model of airplane is approved for flight?

Couldn’t the airplane makers also decide to skimp on costs and, say,
[ul]
[li]stop including so many exit doors?[/li][li]use cheaper latches on the overhead bins?[/li][li]omit the “in case of engine flameout” section of the flight manual?[/li][li]make the engines non-replaceable, like the battery in an iPhone?[/li][li]supply simpler, less detailed maintenance instructions for a certain part?[/li][/ul]

There’s another huge problem with the libertarian solution here.

It’s fairly easy for an airline in such a deregulated world to lie about safety. If no unbiased third party is able to inspect the airline’s operations, the logs and paperwork for each and every aircraft and each and every maintenance procedure and so forth, the airlines can just claim they are safe and do the bare minimum to give an appearance of safety.

As pointed out above, a “very unsafe” airline might still go years without a crash even though it might be 100 or more times riskier than flying is today. Or they could cover up the crashes in some cases.

This is the same reason why physicians are licensed. Anyone with enough education in medicine to talk the talk could claim to be a physician, otherwise, and the patients would not be able to immediately tell the difference.

This is sort of like saying “omit the fuel tanks”. Why would any airline be interested in buying such a plane?

For the same reason that consumers buy incandescent light bulbs. You could probably take shortcuts in manufacturing an airplane that the end user (the airlines) would not be able to detect until after the aircraft’s warranty has expired.

The market would have a hard time deciphering data from low risk. Who’s really safer? The airline who does everything right and has one non-catastrophic accident or the one who cuts every corner and just hasn’t had the wings fall off at 20,000 feet yet. How could I tell. Let alone how could I tell based on historical data that new policies haven’t made all of that data invalid.

Keep in mind that while airplane passengers may be able to vote on safety practices with their wallets, their are also affected parties who cannot. No matter how much money I have, I cannot prevent an unsafe airliner from crashing into my house. Even if I insist on researching my airlines and choosing only the safest, I cannot prevent an out-of-control unsafe airliner from crashing into my safe plane.

It’s like saying we shouldn’t have drunk driving laws because the drunk drivers will kill only themselves and their passengers.

The FAA also regulates the supply chain of airplane parts and contractors. You try to choose the safest airline, so you look over how often they replace their parts. You discover that airline A replaces parts most often. But you don’t see that airline A buys replacement parts from a contractor who buys them from a jobber who buys them from a wholesaler who buys them from the same Chinese factory that thought adding poison to dog food was a good idea.