Academic journal article Academy of Accounting and Financial Studies Journal

Airline Safety Margins, Maintenance Expenditures, and Myopic Behavior: An Empirical Investigation

Academic journal article Academy of Accounting and Financial Studies Journal

Airline Safety Margins, Maintenance Expenditures, and Myopic Behavior: An Empirical Investigation

Article excerpt


The effects of deregulation of the airline industry have been profound. Eastern Airlines no longer exists, Continental Airlines and TWA filed for bankruptcy, and Pan Am has been politely carved up by the remaining gargantuan airlines that survive. The three healthiest domestic U.S. airlines, United, American, and Delta, controlled nearly half the market and all three were in the process of consuming the dismembered parts of disintegrating airlines (Dempsey, 1991).

Proponents of deregulation have cited more competition among airlines, lower ticket prices, and better service as advantages resulting from the 1978 Airline Deregulation Act. Opponents of deregulation have cited less competition among airlines, higher ticket prices, deteriorating service, and an erosion of safety as the effects of the 1978 Act. The effects of deregulation on safety are particularly important in view of the threat an erosion of safety could pose to the travelling public.

Proponents of deregulation argue that the Airline Deregulation Act of 1978 had no negative impact on the steadily improving safety record of U.S. air carriers. Bruggnick (1991) reports that U.S. air carriers experienced thirty fatal accidents during the period 1970-1979 while only 20 fatal accidents occurred during the period 1980-1989 (a decrease in fatal accidents of 33%). Aircraft occupant deaths for the 1970-1979 period were 2,088 while 1,438 aircraft occupant deaths occurred during the 1980-1989 period. The hours flown between fatal accidents increased from 1,930,000 during the 1970-1979 period to 3,970,000 during the 1980-1989 time period (an increase of 105%).

Opponents of deregulation have been concerned that increased competition would tempt airlines to reduce their commitment to safety by reducing time, money, and effort devoted to matters of safety.Henry A. Duffy (1986), a former president of the Air Line Pilots' Association, argues that "airline managers are pressed to cut costs to the bone in order to compete. They are being forced to decide between lower operating costs and maintaining their airline's safety status quo... The net effect has been a slow but steady erosion of the overall safety margins in the industry." Bruggnick (1991) supports this assertion by pointing out that while the best performance record of the industry occurred during the first five years of deregulation, this level of performance did not persist. Only five fatal accidents occurred during the period 1980-1984 and the hours flown between fatal accidents rose to 6,600,000 hours. He suggests that this commendable record occurred not as a result of but in spite of deregulation largely as a result of safety initiatives taken in the 1970s. Only one accident-free year (1986) occurred in the 1985-1989 period. The twenty fatal accidents of this period occurred evenly throughout the other four years (Bruggnick,1991). The number of hours flown between fatal accidents during this period declined from the 6,600,000 between 1980-1984 to 3,100,000 hours during the 1985-1989 period. There were five fatal accidents in 1985 alone involving aircraft with more than 30 seats (i.e., excluding most commuter airlines) (Gesell, 1990).

The concerns expressed by opponents of deregulation are not without some factual basis. USAir supervisors at two airports reportedly falsified records to cover plane repairs that were not done (Salt Lake Tribune, 1993). A USAir maintenance supervisor in Charlotte, NC, acknowledged that he allowed a jet to fly with a defective warning system--to save the airline money. The now-defunct Eastern Airlines was fined $3.5 million in 1991 after it was learned that its managers were forcing mechanics to falsify repair records to save money for the ailing company.

Reducing maintenance expenditures and the commitment to safety is an example of what is labeled in the management accounting literature as myopic behavior. Myopic behavior occurs when managers make decisions which, in the short-run, improve financial performance, but which, in the long-run, produce adverse effects. …

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