Safety is the most critical consideration in aviation. This must never be compromised. Financial considerations are often presented as being in conflict with safety, as evidenced through many accident investigations in the broader industry where short term perceptions of financial gain influenced safety. It is also evident in aviation human factors training, which actively and correctly encourages people to be mindful of the impact of financial pressures.
In this context, it is easy to frame a view that financial gain and safety are mutually exclusive. This article will, however, present an alternative view that holding aeronautical safety in its rightful place as the absolute priority delivers economic benefits. Through excellent maintenance, both safety and financial benefit can be delivered.
What will follow is therefore a financial view on aircraft incidents and their impact. This does not intend in any way to diminish or distract from the human and emotional impact of aviation incidents.
A primary consideration for any Board or top Executives will be protecting the share value of the organisations they represent. While flying has been reported as 29 times safer than driving a car, 20% of airline passengers suffer some degree of flight anxiety. Aviation incidents are widely reported, primarily because of the tragic nature and due to the relatability of air travel. In combination, incidents and the understandable coverage of them plays into this flight anxiety and does have a negative financial impact (Griest and Griest; Kaplanski and Levy).
The initial impact following an incident on the share price can last for up to 12 days. The peak negative impact, based on the cumulative average abnormal return, is -12.5% (Schmitz; Homar). While not maintenance related, the German Wings incident resulted in a single day market price response of -5%. It is reasonable to assume that an incident traceable to organisational or cultural factors would have an even greater impact.
The impact on market share will also be a consideration for Boards and Executives. Research illustrates that an aviation incident will result in a 10 week traffic decline that reduces total traffic by 22.1% for the affected airline, further impacted by a switching effect that sees consumers select other options in the market. Additionally, the industry as a whole sees an initial responsive decline in traffic of 5.6% (Wong and Yeh; Bosch et al).
Pushing back or avoiding certain maintenance tasks, while impacted in some instances by scheduling considerations, can also lead to cost blowouts in defect rectifications. As one specific example illustrates, a defect in a medium sized business jet had three options;
- Preventative measures against the potential defect for AUD$200;
- Early identification and rectification of the defect for AUD$5,000; or
- Late identification and rectification of the defect for $42,000.
This highlights the need and benefit to being proactive in the investment in excellent maintenance. This is reinforced further by the aircraft downtime considerations, which in the above example were:
- Preventative maintenance downtime for 2 hours;
- Early identification and rectification downtime for 20 hours; or
- Late identification and rectification downtime for 840 hours.
The impact of insurance costs must also be considered. Aviation premiums are driven by claims history, however, increases in future premiums are minimised with evidence of good practices. Strong risk management and robust quality controls should result in relatively consistent insurance costs in the face of isolated claims (Lockton Australia). As a major cost to any aviation business, the ability to stabilise this cost through excellent aircraft maintenance is notable.
The impact on Aircraft sales value and/or liquidity must also be considered. Excellent maintenance practices will ensure that maintenance records are impeccable, upgrades are consistent with Airworthiness Directives and Service Bulletins, life extension programs that improves depreciation schedules, and aircraft or fleet modernisation options have been undertaken, all will drive aircraft value and marketability. The impact is highly variable, and largely dependent on the type and scale of any margin between the optimal standard and the actual standard.
In one recent example, a pre-purchase inspection identified defects, and this resulted in a reduced sale price by 20%. In this instance, the investment in excellent maintenance would have been wise.
Consistent application of excellent maintenance also has the potential to create consistency in maintenance demand, and reduce the impact of defect rates and downtime. For the sake of illustration, the graph below illustrates an identical spend on maintenance for both reactive and proactive approaches, highlighting the gap between the proactive peak and the higher reactive peak. Meeting proactive peaks enables the potential reduction of inventory, engineering labour cost, and total fleet size, and has the potential to improve reputation, on-time performance, planning and shareholder value. It must be noted the data points in the graph below are theoretical and not based on actual data.
Excellent maintenance will also have an impact on On-Time Performance (OTP), a critical measurement for airlines. OTP will be driven by a number a factors including scheduling, fleet size, turn-around time, congestion and numerous other factors, but maintenance undoubtedly plays a role.
The four busiest routes in Asia and the variance in OTP are noted in the following table:
Source: OAG Aviation Worldwide
While not the only source of potential rectification of OTP, excellent maintenance can contribute to improved OTP. Any fractional improvement as a result of excellent maintenance will influence the airline brand, customer perceptions, and customer commitment.
It is therefore clear that a commitment to excellent maintenance and safety does have a financial benefit. Share value, market share, reputation, defect costs, aircraft downtime, operational consistency, insurance costs, and on-time performance can all be enhanced through this commitment.
Importantly, this proves that we must not consider finances and safety to be mutually exclusive. It is the best interests of the finances of the business to commit to excellent maintenance.
Airflite 2018, Maintenance Department Case Study.
Bosch, J., Eckard, E. & Singal, J. 1998, “The competitive impact of air crashes: stock market evidence”, Journal of Law and Economics.
Griest, J. & Griest, G. 1981, Fearless flying: a passenger guide to modern airplane travel, Nelson Hall, Chicago.
Homar, A. 2015, “The Effects of Airplane Crashes on Stock Performance of US Airlines and Airplane Manufacturers between 1983 and 2013”, University of Ljubljana.
International Air Transport Association, Another Strong Year for Airline Profits in 2017, Available from: https://www.iata.org/pressroom/pr/Pages/2016-12-08-01.aspx
Kaplanski, G. & Levy, H. 2010, “Sentiment and stock prices: The case of aviation disasters”, Journal of Financial Economics.
Lockton Australia, 2018, Correspondence with Manager of Corporate Risks, 21/09/18.
Schmitz, M. 2015, “How do plane crashes affect consumer markets?”, Buzzle, Available online: https://www.bustle.com/articles/71819-how-do-plane-crashes-affect-consumer-markets-ticket-sales-stock-prices-will-unsuprisingly-fall-if
Wong, J. & Yeh, W. 2003, “Impact of flight accident on passenger traffic volume of the airlines in Taiwan”, Journal of Eastern Asia Society for Transportation Studies.