Safety and Profits in the Airline Industry

Abstract

It has been argued that there is a positive relationship between profitability and safety in the transportation industries. This paper analyzes a model of safety provision under uncertainty and tests the model using data from the US airline industry. Theory suggests that the sign of the relationship between profits and safety is indeterminate and depends on risk preferences and the structure of costs and demand. The empirical investigation suggests that safety and profits have no significant relationship. Thus, it does not appear that profit-reducing changes in regulation will lead to less safe airlines.