Every legitimate airline claims to value passenger safety above all else. But, realistically, airlines must balance the often-conflicting imperatives of safety and profitability. Inevitably, moments will arise where executives ask not “How safe can we possibly be?” but “How safe must we be?” or “How safe can we afford to be?” These tough, troubling questions are an inescapable fact of doing business in an industry centered on potentially hazardous technology.
In our forthcoming article in Organization Science we describe our research into airlines’ management of these complex trade-offs and, in particular, how financial performance affects an airline’s focus on safety. When we began our research, our assumption was that the most successful airlines (those with secure profitability) would be leading the pack on the safety front — and this overall view is supported by previous research. But in our work, we specifically examined when airlines decided to replace particular aircraft. In this particular context we found instead that airlines with lower profitability were more likely to choose to invest in new aircraft after a crash of a model in their fleet — like that of the Boeing 737 Max 8 recently — even if the flight was not being operated by that airline.
Altering the composition of the fleet — replacing older models of aircraft that have less-than-stellar accident records with models considered to be very safe — is one of the ways top-level airline management can improve safety. As one might expect, these transactions usually involve selling at a discount and buying at a premium. This means the airline loses out financially on the deal.
To track aircraft sales and purchases, we obtained fleet composition statistics via the website airfleets.net, which features full data on passenger aircraft across the entire industry. From the same website, we accessed accident records for all global airlines, which we narrowed down to incidents resulting in an airplane being deemed permanently unfit to fly. This category of mishap (termed “hull loss accidents”) includes tragic crashes, of course, but also serious electrical fires, water landings and any other event rendering repairs either futile or too costly. We also assessed the tenor of media coverage for each aircraft model in the sample, as we assumed that the publicity around the planes would affect fleet management decisions. A high-profile accident that was widely reported would have an outsize impact on airlines’ safety-based calculus.
Then we traced the connections between the changing composition of an airline’s fleet and its commercial fortunes (though before doing so we had to filter out of our sample many smaller airlines in developing countries for which reliable financial performance data could not be obtained).
We found that airlines with above-average safety records responded to increased accident rates of models in their fleet by changing their fleet composition. But, interestingly, this effect was stronger for airlines with a lower level of profitability. Suppose that two airlines start with an equally high above-average safety rating but differing levels of profitability. If they both experience a same-size reduction in the safety rating, the low-profit airline would on average increase its aircraft sales by 55% as compared with the high-profit airline, which would only increase its aircraft sales by 29%. And among airlines with relatively high accident rates, financial performance played an even more decisive role: Underperforming carriers disposed of aircraft in a bid to improve safety, but the prosperous ones did not bother. For airlines equally far below the industry average safety record, an airline with low profitability is 50% more likely to sell aircraft than the one with high profitability.
It shouldn’t come as a surprise, then, that Indonesia’s Lion Air is reportedly planning to drop a $22 billion order for 737 Max aircraft in favor of Airbus planes following both the recent Ethiopia Air crash and its own tragedy in October last year when one of its own Max jets crashed minutes after takeoff, killing all passengers and crew.
It might seem strange that financially struggling airlines are the most willing to spend more on safety, but we believe that it has to do with the way organizations think about survival: Airlines whose profits are riding high can survive a scandal, and their executives know it. Their less successful peers may already be bordering on failure and can ill afford the public outcry that a prominent accident would cause.
It’s also worth noting that the buying and selling of aircraft for safety’s sake was influenced mostly by accident rates, but media tenor was a significant factor too. Take the barrage of negative press coverage surrounding the Boeing 787 Dreamliner following a series of battery fires in 2013 and 2014. Even though the worst initial fires happened while the planes were recharging on the runway without any passengers on board, a cloud of suspicion shadows the Dreamliner to this day. Correspondingly, we found that negative press exerted its own influence on aircraft sales and purchases, independent of actual hull loss rates. Public perception of the safety and actual safety records of aircraft appear to be two separate boxes that carriers feel compelled to check, especially in economically lean times.
So are industry-leading carriers less safe than the underdogs? Not quite. We know from the previous studies mentioned earlier that there is a direct correlation between airlines’ profitability and their safety record. Safety is affected by more than just the makes and models of aircraft in the fleet; what employees do on the ground and in flight arguably matters more. Putting safety first often comes down to questions like: Are best practices being scrupulously followed? Are flight crew given time to perform sufficiently thorough checks before takeoff? And when profits are down and pay raises scarce, the temptation to cut corners can be strong enough to neutralize the prudent plans of the C-suite. No matter how many suspect planes an airline puts out of commission, if managers do not tackle these issues, safety will still be a problem.
Our findings show that their impact notwithstanding, the choices managers make in navigating tough trade-offs like safety versus profitability will change based on context. When the stakes — in both financial and human terms — are high, decision-makers choose pricey survival over low-cost risk.
Henrich R. Greve is a professor of entrepreneurship at INSEAD. Vibha Gaba is an associate professor of entrepreneurship there.
