Market Punishes Airlines Which Crash
June 14, 1999
Businesses -- be they airlines or drug makers -- have a built in incentive to offer safe products, suggesting that government regulation may be redundant.
Claude Bosch and Woodrow Eckard of the University of Colorado and Vijay Singal of Virginia Tech looked at 25 crashes by major airlines that took place between 1978 and 1996.
- Both the airline which experiences a crash and the plane manufacturer experience a value loss of about 1.2 percent to 2.5 percent.
- By the tenth day after a crash, the airline's loss stabilizes at a "cumulative abnormal return" of 3.51 percent.
- Airlines that don't crash and whose routes overlap little with those of the crashing airline lose value.
- But airlines which don't crash and whose routes overlap those of the crashing airline gain value.
Source: Macroscope, "Time to Rein in Airlines?" Investor's Business Daily, June 14, 1999.
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