BYU Study Finds Link Between Airline Profitability and Risk

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A BYU professor has conducted a recent study that suggests an airline’s ability to meet financial goals may increase the likelihood of accidents.

Peter Madsen, assistant professor of organizational leadership and strategy in the Marriott School of Management, investigated 133 United States airlines between 1990 and 2007 and found a relationship between an airline’s ability to reach its financial aims and its number of accidents. According to Madsen, the study indicates as an airline exceeds or falls short of its financial aims, there is a decrease in the risk of accident.

Madsen based his study on a theoretical tradition called the ‘Behavioral Theory of the Firm.’

“Behavioral Theories of the Firm … focus more on the behavior that leads to outcomes. In other words, these theories are more concerned with why people do things,” said Mark Hansen, assistant professor of organizational leadership and strategy, in an email.

According to Madsen, the increased risk generated when companies are close to meeting their performance targets is caused largely by subconscious decisions.

“People pay a lot of attention to goals,” said Madsen. “If a company knows it’s close to a financial target and might miss it, there is a tendency to take a few more risks, or to not act as carefully. Whereas if you are far away from targets, there isn’t that emphasis on making sure you’re getting the company over the financial hump.”

Despite these findings, Madsen isn’t suggesting travelers check financial statements before booking their next vacation.

“Commercial aviation in the United States, and the first world, is so incredibly safe,” said Madsen. “The effects of this study were statistically meaningful, but still very small.”

In fact, the aim of his findings were not geared towards informing passengers of potential risks, but intended for those decision makers responsible for the safety of travelers.

According to a study used by Madsen, a traveler could fly every day for about 35,000 years before being killed in an accident.

“What I found, was that as profitability declines or increases relative to the target by 10 percent, you’ll see a drop-off in accident risk of 7 percent,” said Madsen. “Even a 7 percent increase in accident risk still means you could take a flight every day and still not be killed in a crash for over 32,000 years.”

The results of this study may also extend beyond aviation and be transferable to other industries.

“The theory I developed is very general,” said Madsen. “I have to be careful because I’ve only studied this in terms of aviation, but I expect that these findings could be even more defined in other industries only because aviation is so safe and so heavily regulated.”

The Federal Aviation Administration has also taken an interest in his findings and Madsen said he hopes as a result, his model could be used to help decision makers emphasize safety measures when companies are close to financial targets.

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