Airline Deregulation, Competitive Environment and Safety

Air traffic has substantially increased since the introduction of deregulation in both the USA and the European Union. Moreover, aircraft accidents involving fatalities have exhibited a downward trend over time. Still, a series of recently publicized accidents has raised again a serious issue, namely whether cost reduction in a deregulated aviation environment is achieved at the expense of safety standards. To address this question, the paper proposes a mathematical model, which highlights the relationship between competitive behaviour and tort liability. The model has important policy implications suggesting that the level of airline penalisation should be reduced when market rivalry is relaxed and conversely.