Case of the Day: Airline Safety Choices
There may be 50 ways to leave your lover, but there are only 4 ways out of this airplane.
-attributed to a Kulula Airline flight attendant
When we think about "economic choices," we most commonly think about such simple alternatives as whether to buy an apple or an orange for lunch, or whether to forgo lunch entirely and buy a magazine instead. Choices about safety are another kind of economic choice. The economic analysis of safety choices demonstrates that the concepts of opportunity cost and optimal decision-making that we study in economics are often applied more broadly--even to decisions where it is difficult to add everything up in dollar-and-cents terms.
Most of us feel a little uncomfortable thinking about decisions that involve balancing an increased probability of personal injury or death against monetary cost. However, in a world of scarcity producers and consumers must make such decisions every day. Whenever you get into a car you must decide whether the cost of fastening your seat belt (a few seconds and, for some people, mild discomfort during the drive) is justified by the enhanced safety (and compliance with laws in Oregon and most other states) that the seat belt affords. Similarly, companies that make cars must decide whether or not to install additional safety features such as side air bags and anti-lock brakes, guided by whether they believe buyers will pay enough extra for a safer vehicle to offset the cost of installing them. However, in the cases of airplanes and cars, the federal government also imposes safety regulations on private providers/producers and contributes to the safety effort directly through such activities as airport screening. This case focuses on decisions about how much airline safety is the right amount.
Given the nature of air travel, it is impossible to eliminate completely the possibility of passenger injury or death. Since total safety cannot be purchased at any price, airlines and governments must choose "how much safety to buy" on behalf of passengers. At one extreme, they could neglect safety issues almost completely and either (1) pocket the savings as added profit or (2) pass it along in lower ticket prices. At the other extreme, they could spend limitless amounts of money reducing accident probabilities—so much so that they could drive the price of an airline ticket higher than anyone would pay! Similarly, the government could return to the old days when passengers could walk from curb to airplane without any security screening, or it could spend vast resources conducting a thorough search of every passenger and every piece of luggage as is done in Israel. Where should they (and we) stop investing in safety? That is the key question explored in this case.
There are three short readings for this case:
- Chapter 2, entitled "Flying the Friendly Skies," in The Economics of Public Issues, 10th ed., by Roger Leroy Miller, Daniel K. Benjamin, and Douglass C. North (New York: HarperCollins, 1996). (This book is on reserve.)
- A short, if somewhat dated, article entitled "How Safe Is Your Airline?" discussing the general issue of airline safety (pre-9/11) from the January 11, 1997 issue of The Economist, which is available (if you are on the Reed network).
- A short article called "Volcanic Fallout" from the April 24, 2010 issue of The Economist discussing details of the shut-down of European airspace following the eruption of the volcano Eyjafjallajokull in Iceland.
After completing the readings, consider and write short answers to the following questions. You may do additional research using printed or online sources if you wish. However, you should document and be prepared to defend the reliability of any sources that you use.
1. Someone contemplating a car purchase can make an individual choice about how much he or she is willing to pay for additional safety. To what extent can air passengers make similar individual choices, rather than simply accepting choices made for them by airlines and the government?
2. If (other things held constant) there were to be a general increase in passengers' desire for safety, what (if any) economic or political mechanisms exist to translate this change in consumer preferences into an increase in safety? How confident are you that these mechanisms would lead to the "right amount" of safety?
3. Consider a world that consists of two kinds of flyers: confident and nervous. The confident flyers attach a low priority to safety and want the lowest fares possible; nervous flyers are willing to pay more to be safer. Could the air travel industry give both kinds of customers what they want or would both be forced to compromise on cost and safety?
4. If the federal government had not increased passenger screening regulations after the terrorist hijackings of September 11, 2001, how (if at all) do you think airlines (individually or collectively) would have changed their airport and gate security procedures? What incentives would they have to make these changes? How would air travel be different today if the government had followed this "laisser-faire" policy?
5. Give a quick assessment of the cost-benefit analysis that British regulators must have been doing following the Eyjafjallajokull eruption under conditions of great uncertainty and urgency. In retrospect, do you think that the British regulators handled the case properly?