Thomas Walker is Professor in the Department of Finance. Prior to his academic career, Walker worked in the German consulting and industrial sector at such firms as Mercedes Benz, Utility Consultants International, and KPMG. His research interests are in sustainability and climate change, aviation, corporate governance and risk management and he has published over fifty articles and edited books in these areas. He previously served as Director of the David O’Brien Centre for Sustainable Enterprise, as Laurentian Bank Professor in Integrated Risk Management, as chair of the Department of Finance and as Associate Dean, Research in the John Molson School of Business. He is Concordia University Research Chair in Emerging Risk Management (Tier 1) and academic lead and founder of Emerging Risks Information Center (ERIC).
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Airline safety: Why governance and finances matter
Photo by Suhyeon Choi on unsplash
Airline safety isn't just about dodging turbulent weather or ensuring your seat belt is fastened. External factors like political climates, internal practices and even the profitability of the airline itself play a crucial role. Amidst all these challenges, airlines are faced with the delicate balancing act of ensuring passenger safety and maximizing return to shareholders.
Studying airline safety poses many challenges as the low number of airline accidents makes it difficult to draw general conclusions about the link between financial health, corporate governance and safety.
But recent research based on large international samples of data sheds new light in this area.
In "Reducing airline accident risk and saving lives: Financial health, corporate governance and policy implications” from Emerald Publishing, John Molson School’s Thomas Walker and co-authors Miles Murphy and Hamed Khadivar examine how an airline’s financial performance and corporate governance affect its safety record.
Walker is a professor in the Department of Finance at the John Molson School of Business and Concordia University Research Chair in Emerging Risk Management. Murphy is a research assistant in the John Molson School of Business and Khadivar is a professor of finance at Université du Québec à Montréal (UQAM).
Almost 75% of all accidents are the result of factors that are within an airline’s control
Key findings:
The cause of accidents
The authors found that 53% of all accidents are a result of pilot error which can include issues related to supervision, flight planning, training, rule violations and corruption. Another 20% of accidents are due to mechanical failures often stemming from manufacturer errors and inexperienced ground crews. Adverse weather accounts for another 10% of accidents which can often been avoided with proper training, experience and adequate equipment. In summary, almost 75% of all accidents are the result of factors that are within an airline’s control.
Financial health
Not only do airlines have a significant amount of control over the causes of air accidents, Murphy, Walker and Khadivar found several links between financial health, corporate governance and safety. Airlines that are more profitable were found to have lower accident rates. Other factors such as liquidity, asset utilization and financial leverage may also play a role. Higher spending in the area of flight equipment maintenance and overhaul is also related to lower accident rates.
Corporate governance
This research also finds that poor corporate governance links to higher accident risks. Airlines with over-committed directors, especially those nearing succession, report more accidents. Younger, diverse board age profiles correlate with better safety records and airlines with a longer CEO tenure have lower accident rates. In addition, the national framework, including stringent legal systems and robust air transport infrastructure, plays a pivotal role in an airline's safety performance.
Recommendations
Even as technology is making the skies safer, pilot errors and mechanical failures are still the leading causes of air accidents. Airline financial health and governance play a key role in influencing these elements and leaves us with critical insights to further improve airline safety.
- Focused oversight: International regulatory bodies, including the International Civil Aviation Organization (ICAO), the International Air Transport Administration (IATA), and national entities like the Federal Aviation Administration (FAA), should prioritize supervising airlines in financial distress or with inadequate corporate governance. With limited resources, this targeted approach can heighten regulatory efficacy.
- Fiscal incentives: Governments might consider offering tax breaks on pivotal safety-enhancing airline expenditures like maintenance and training. This could help incentivize struggling airlines to prioritize safety. Corporate governance could also be further strengthened through practices like higher institutional ownership and independent external audits.
- Prioritize pilot wellness: Given that the majority of accidents can be attributed to pilot errors, regulatory and organizational strategies should be aimed at reducing work fatigue, enhancing work conditions and augmenting cockpit supervision.
- Vigilance for vulnerable airlines: Airlines in financial distress or with weaker governance might compromise on pilot hiring standards, leading to greater accident risks. Regulators need to be wary of these potential pitfalls.
- Careful board selection: For shareholders and investors, the emphasis should be on onboarding adept, diverse and focused directors. Additionally, recognizing the safety assurance brought by long-standing CEOs can shape hiring decisions.
In essence, airline safety goes beyond operational issues – it's about navigating the complexities of financial, corporate and training challenges. What happens in the boardroom can have dire consequences in the skies.
