Less profitable airlines are more safety conscious than highly profitable ones
Airlines with lower profitability are more concerned with survival and sell airplane models perceived as less safe.
Middle East, Asia, Europe
20 March 2019
Following accidents, low profit airlines change their fleet composition more than higher profitability airlines according to new research from INSEAD, the Business School for the World.
In their recent study Safe or Profitable? The Pursuit Of Conflicting Goals (forthcoming in Organization Science), Vibha Gaba, INSEAD Associate Professor of Entrepreneurship and The INSEAD Fellow in Memory of Erin Anderson, and Henrich Greve, INSEAD Professor of Entrepreneurship and the Rudolf and Valeria Maag Chaired Professor of Entrepreneurship, look at the way organisations prioritise and pursue conflicting objectives.
Using empirical evidence from the airline industry they examine air carriers’ dual goals of safety and profitability, and the influence of both on the costly decision of whether to change the makeup of their fleet by selling off models perceived as being less safe following incidents that damage planes beyond repair.
When examining airlines’ behaviour, Gaba and Greve were particularly interested in how a firm’s financial performance affected its focus on safety.
“Given the intuitive theory that safety becomes less of a priority when it conflicts with profitability, it might be assumed that more profitable firms would be more likely to make decisions in the pursuit of safety,” Gaba said.
However, what the authors predicted, and found, was that airlines’ responsiveness to safety goals was strengthened by low profitability, due to safety concerns being more closely associated with a firm’s survival.
Less profitable firms are more focused on survival
To track aircraft sales and purchases the authors used fleet composition data from the website www.airfleets.net which includes full data on passenger aircraft across the industry as well as accident records of all global airlines. The authors narrowed these accident statistics down to those incidents in which an aircraft was deemed permanently unfit to fly (referred to as “hull loss accidents”)
An analysis of these statistics showed that following a hull loss accident among the group of airlines which boast above-average safety records, low-profit carriers increased aircraft sales by 55 percent compared to high-profit airlines which increased aircraft sales by 29 percent.
Profitability played an even more decisive role among airlines with relatively high accident rates. When considering airlines with a similar below-average safety record, firms with low profitability were 50 percent more likely to sell aircraft than those with higher profitability.
The study also assessed the tenor of media coverage for each aircraft model following an accident and found that public relations, while not as influential as accident rates was a consideration for decision-makers. Findings indicated that less profitable airlines were more inclined to sell when the media tenor regarding their fleet was least favourable.
In short, while underperforming airlines were more likely to replace aircraft in a bid to improve safety, prosperous firms were not so reactive, being less at risk and more able to survive a scandal.
While the results may fly in the face of general expectations they actually confirm Greve and Gaba’s premise that when companies perform below aspirations (ie. less profitably) managers will become more risk averse, and take actions aimed at improving their firm’s survival.
This is not to say less profitable firms are safer than their successful counterparts. In fact, the authors note that there is there is already good evidence that an airline’s safety record will decline when its margins or profitability are low.
“Aircraft sales and buys are made at the top level of an organisation, by individuals who are well aware of the safety consequences of their actions and of the consequences that any accident will have on the firm,” Greve said, noting that decision-makers further down the chain of command, who are neither fully aware of their actions’ safety consequences nor responsible for the strategic concern of firm survival, may not be so holistic in their approach. When profits are down, they may seek to streamline other areas of operations to cut costs; introducing actions that can reduce safety, even if just marginally.
“Top level managers may even suspect that cost-cutting elsewhere endangers safety and therefore attempt to compensate for that possibility when making their decisions to do with aircraft replacement,” he said.
The study’s findings are consistent with the general observation that organisations are “recalcitrant tools” that can be controlled to some degree, but also have independent decision making at lower levels that may be misaligned with the priorities of the top leadership.
What the authors show is that choices managers make in tough trade-offs such as safety versus profitability will change based on context, with the ultimate goal being the firm’s survival.
About INSEAD, The Business School for the World
As one of the world's leading and largest graduate business schools, INSEAD brings together people, cultures and ideas to develop responsible leaders who transform business and society. A global perspective and cultural diversity are reflected in all aspects of its research and teaching.
With campuses in Europe (France), Asia (Singapore) and the Middle East (Abu Dhabi), INSEAD's business education and research spans three continents. The school’s 154 renowned Faculty members from 40 countries inspire more than 1,400 degree participants annually in its MBA, Executive MBA, Executive Master in Finance, Executive Master in Change and PhD programmes. In addition, more than 11,000 executives participate in INSEAD's executive education programmes each year.
In addition to INSEAD's programmes on its three campuses, INSEAD participates in academic partnerships with the Wharton School of the University of Pennsylvania (Philadelphia & San Francisco); the Kellogg School of Management at Northwestern University near Chicago; the Johns Hopkins University/SAIS in Washington DC and the Teachers College at Columbia University in New York; and MIT Sloan School of Management in Cambridge, Massachusetts. In Asia, INSEAD partners with School of Economics and Management at Tsinghua University in Beijing, and China Europe International Business School (CEIBS) in Shanghai. INSEAD is a founding member in the multidisciplinary Sorbonne University created in 2012, and also partners with Fundação Dom Cabral in Brazil.
INSEAD became a pioneer of international business education with the graduation of the first MBA class on the Fontainebleau campus in Europe in 1960. In 2000, INSEAD opened its Asia campus in Singapore. In 2007, the school inaugurated a Centre for Research and Executive Education in the United Arab Emirates and officially opened the Middle East Campus in Abu Dhabi in 2010.
Around the world and over the decades, INSEAD continues to conduct cutting edge research and to innovate across all its programmes to provide business leaders with the knowledge and sensitivity to operate anywhere. These core values have enabled INSEAD to become truly "The Business School for the World”.