Why is aviation so safe?

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Safety is perhaps the single most defining feature of modern commercial aviation. It is absolutely top priority for every airline. Every CEO is the responsible manager.

Yet safety is one of those nebulous words that means everything, and therefore nothing, unless you carefully define it.

I like to think that safety is about ensuring that the risks of air travel are acceptable. People who know their stuff on this subject have told me that this is a pretty good definition.

Acceptable of course means acceptable to the aircraft operator and the competent regulatory authority, not to random passengers or analysts.

As an economist I am in no place to comment on the procedures, manuals and regulations that have made aviation so safe for so long.

But economics is all about understanding how market mechanisms and incentives combine to produce outcomes. Outcomes like hurtling thousands of tubes full of hundreds people through the air across vast distances over many decades, without many accidents.

So while I cannot write about exactly how the industry is so safe, I can have a stab at explaining why airlines have been so safe for so long.

In this article I will be writing about three things:

1. Market mechanisms – aviation has no market for “lemons”

2. Incentives – airline safety can be modelled as an anti-Prisoner’s Dilemma

3. Institutions – a large body of internationally recognised regulation is highly credible and has created five regulatory “super-apps” powering aviation safety.

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Market mechanisms – aviation has no market for “lemons”

“The Market for Lemons” idea was published by economist George Akerlof in the early 1970s.

He imagined a used car dealership. A visiting customer will find it hard to know which of the available cars are good (“peaches”) and which are duds (“lemons”).

The person selling the car though has had a chance to drive and use them. The seller knows which is the peach and which is the lemon.

The idea of the market for lemons is that because buyers do not know whether they are buying a peach or a lemon, they will not be willing to pay the price of a peach. So no seller of a peach will get a fair price and accordingly only lemons will be available for sale.

The problem with our imaginary used car dealer is that buyers and sellers do not have the same information available to them. The information is said to be “asymmetric”.

Aviation solves the problem by using a system of detailed aircraft records.

The value of an aircraft is literally in it’s records. Without records all you have is a pile of metal and plastic.

Needless to say, airlines make great efforts to take care of their records. They are stored carefully in well-labelled boxes in dry, well-ventilated spaces.

The records even contain hard to fake indicators of their provenance. When engineers and mechanics are working on a plane, their hands get dirty. So when they write down a new record the paper gets Dirty Finger Prints, or “DFPs” in the trade, on them.

Aircraft buyers look carefully for the DFPs to satisfy themselves that the records are genuine.

While a robust system of record-keeping ensures that there are no lemons, buyers still need to look out for what you might call “sour” peaches.

A sour peach (a term I made up) is a plane which is different at the point of delivery to the aircraft inspected earlier.

For example, aircraft buyers might inspect a plane and decide to buy it. Then when they come to take delivery again a wily seller might have, for example, taken off a set of wheels and brakes with 50 cycles left and put on a new set with only one cycle left.

The wheel change will be shown in the records and the buyer might request that the original wheels are re-installed or the price reduced accordingly.

Incentives – airline safety can be modelled as an anti-Prisoner’s Dilemma

The Prisoner’s Dilemma is a foundational model of a branch of maths used in economics called Game Theory.

The idea is that two criminals have been caught by the police and are being questioned in separate rooms. There are three possible outcomes:

1. Both prisoners stay silent and each get a year in prison due to the other evidence

2. One prisoner confesses as part of a plea bargain to gets set free while the other prisoner does three years

3. Both prisoners confess so they both go down for two years.

Outcome one (both stay silent) is not stable because each prisoner has an incentive to confess if they believe the other has not confessed.

Outcome two (one confesses, the other does not) is not stable either, since once one prisoner knows that the other has confessed against him, he will confess too as his sentence will be reduced by a year.

Outcome three (both confess) is the only stable outcome, known as a “Nash Equilibrium” after the mathematician John Nash.

In the traditional Prisoner’s Dilemma game, rational self-interest leads to worse collective results. Both prisoners together serve four years in outcome three. In outcome two, both prisoners together serve three years. In outcome one, they serve only two years collectively.

An anti-Prisoner’s Dilemma game is the opposite. Mutual co-operation leads to better outcomes for all. It will be encouraged and promoted within the group.

Airline safety is, from an economics perspective, an anti-Prisoner’s Dilemma.

Imagine there are two airlines in the world, both competing with each other. They have to decide whether or not to share safety information with each other and with the public. Again, there are three possible outcomes:

1. Both airlines do not share safety information so the public is sceptical about how safety they are, limiting demand, and they each earn one million Dollars in profit

2. One airline actively shares safety information, giving the public confidence about it’s commitment, so the sharing information attracts market share, earns three million Dollars in profit and the airline who does not share makes a loss

3. Both airlines actively share safety information giving the public extremely high levels of confidence in aviation safety, so more people fly than ever before and both airlines earn two million Dollars in profit.

As with the traditional Prisoner’s Dilemma and for the same reasons, outcome three is the only stable outcome.

While I appreciate that this analysis is simplistic, the core message stays the same – everybody benefits when airlines, their suppliers and national regulators are committed to safety.

Institutions – a large body of internationally recognised regulation is highly credible and has created five regulatory “super-apps” powering aviation safety

Economists often prize the role of institutions. The rule of law for example, which sets the ground rules that make agreements between people work. Or independent central banks, which help keep inflation down. The consumer society. Modern medicine. The work ethic. There are many more.

Aviation has it’s own set of rules and institutions which help make the industry safe and I will cover them in this section.

But institutions are not always guaranteed. They can fail or be pulled down. So in the last section of this article I will also pass on some shortcomings of the current safety frameworks that govern aviation.

Aviation is governed by ICAO’s Standards & Recommended Practices (SARPS).

Under SARPS, every (or almost every?) country in the world has agreed conformance to regulatory equivalence, covering both certification of airworthiness and continuing airworthiness for an aircraft.

An international standard Certificate of Airworthiness will state words to the effect that “in respect of the above mentioned aircraft which is considered to be airworthy when maintained and operated in accordance with the regulations”.

These words are taken from a standard Certificate issued by the UK’s Civil Aviation Authority (CAA).

The regulations refers to the aircraft’s Type Certificate, which is only issued following an Initial Airworthiness assessment covering a Type Design and Statement of Design, and generating a Type Certificate Data Sheet.

An aircraft meeting all of the above airworthiness criteria can fly in the airspace of all ICAO member states participating in SARPS.

Continuing airworthiness is carried out by a process called Continuing Airworthiness Management Organisation (CAMO). This creates the aircraft records

National laws and regulations all sit under SARPS. Regulatory authorities may also issue guidance under their regulations. Regulations represent the regulator’s view of the minimum standards for safe operations and operators are responsible for 100% compliance.

SARPS is the first of what I shall call five “super-apps” that together represent the highly credible institutional frameworks governing airline safety.

The second of the five “super-apps” is the worldwide group of national regulatory authorities. These may be in large countries, like the CAA in the UK, EASA in Europe and the FAA in the United States. Small country regulators like Guernsey’s 2-REG are equivalent under SARPS.

A regulator does three things in respect of safety: