Financial performance and safety in the aviation industry

Purpose - This paper investigates whether financial factors, which are presumed to influence an airline's maintenance, purchasing, and training policies, are associated with the air carrier's safety performance. Design/methodology/approach - In this paper, we employ a series of univariate and multivariate tests (OLS and Poisson regressions) to examine whether an airline's financial well-being as well as a country's legal and economic environment affect the airline's accident rate. Our study is the first to employ an international sample that covers 110 airlines in 26 countries over the period 1990–2009. Findings - We document an inverse relationship between the profitability of air carriers and their accident propensity. Other financial variables such as liquidity, asset utilization, and financial leverage also appear to affect an airline's safety record, although these findings do not reach significance in all models. Flight equipment maintenance and overhaul expenditures are negatively related to accident rates. In addition, our results show that country-level variables related to the legal and economic environment have a significant effect on airline safety. Specifically, airlines in countries with strong law enforcement, more stringent regulatory systems, and better economic performance have superior safety performance. A series of robustness tests confirms our results. Originality/value - The unique contributions of the study are (1) that it is the first to explore the drivers of safety performance in a cross-country context and (2) that it introduces a novel index of capacity when computing accident rates. By using data from 110 airlines in 26 countries, the study does not only provide insights into the firm-level but also the country-level determinants of an airline’s safety performance. The results of this research should be of interest both to academics and to regulators who develop, oversee, and implement policies targeted at improving aviation safety on a national and supranational level.