Aviation Security and Terrorism: A Review of the Economic Issues

By Coughlin, Cletus C.; Cohen, Jeffrey P. et al. | Federal Reserve Bank of St. Louis Review, September-October 2002 | Go to article overview

Aviation Security and Terrorism: A Review of the Economic Issues


Coughlin, Cletus C., Cohen, Jeffrey P., Khan, Sarosh R., Federal Reserve Bank of St. Louis Review


"Protecting this system demands a high level of vigilance because a single lapse in aviation security can result in hundreds of deaths, destroy equipment worth hundreds of millions of dollars, and have immeasurable negative impacts on the economy and the public's confidence in air travel."

--Gerald L. Dillingham, United States General Accounting Office, in testimony before the Subcommittee on Aviation, Committee on Commerce, Science, and Transportation, U.S. Senate, April 6, 2000

The terrorist attacks exploiting weaknesses in U.S. aviation security on September 11, 2001, did indeed produce the catastrophic results identified in the prophetic testimony cited above. 1,2 Immediately after the attacks, security issues rose to paramount importance in the nation's policy agenda. (3) Despite general agreement on what aviation security entails and the goals of an aviation security system, public controversy abounds on how to regulate and provide this important activity.

If airplanes and passengers, as well as property and people on the ground, are to be protected, potential perpetrators of aviation terrorism must be prevented from breaching security checkpoints and gaining access to "secure" airport areas and to aircraft. Given the interconnectedness of the air transportation system, a sufficiently high level of security must be provided throughout the entire system. Flexibility to respond quickly to new information about aviation security threats is a must. Moreover, incentives must be offered to both the regulators and security providers so that aviation security improvements can be devised and implemented. At the same time, however, the costs associated with providing security must be incorporated in the decisionmaking process and weighed against the benefits.

In this paper we examine the economic issues relevant to airline and airport security in the United States, a topic that has received little attention from economists. Understanding the key economic issues is crucial in evaluating the various methods of regulating and providing aviation security and for appraising the conflicting positions over the appropriate scope of governmental involvement in this effort.

We begin our examination of the economics of aviation security by highlighting the key features of the airline industry, one of which is its network structure. As a result, security at one airport can affect security elsewhere--an example of a network externality. (4) Next, we use elementary economics to show that unregulated private markets will likely provide too little aviation security, which sets the stage for an examination of the alternatives for regulating and providing aviation security. We review the key features of the recently passed Aviation and Transportation Security Act and the characteristics of the resulting security policy. A summary of our major points completes the paper.

OVERVIEW OF THE AIRLINE INDUSTRY (5)

Prior to 9/11 the air transportation sector accounted for approximately 1 percent of U.S. employment. In 2000 there were 14 "major" certified carriers in the U.S. airline industry Total employment (including both full time and part time) in the major carrier group was about 672,000. The major passenger carriers with the highest number of total employees were American and United, each with slightly over 100,000. Although our primary focus is on the passenger carriers, freight transport is a significant factor for several reasons. A security breach at any one airport will undoubtedly affect the smooth movement of freight through the network as well. Federal Express, one of the 14 major carriers, employed more workers than either American or United. Freight revenues overall comprise about 10 percent of total operating revenues for the major carriers, with operating revenues exceeding $20 million for each carrier. Finally, the recently passed legislation states that cargo as well as passengers will need to be scr eened.

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Aviation Security and Terrorism: A Review of the Economic Issues
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