The Edge

Richard Northedge takes on corporate finance

Airlines should have decided whether to fly

If the volcanic cloud that grounded UK aviation for a week has any silver lining it may be to provide a better understanding of risk. A safe flight is one that never takes off: the question is how much risk we are prepared to accept.

Companies now employ risk officers with complex mathematical formula to calculate the probability of danger and the consequences. But at the end of the day, these people are doing what a racecourse bookmaker does when he accesses odds.

Government ministers, advised by the Civil Aviation Authority, say safety was their paramount concern in imposing the ban on flights because of the cloud of volcanic dust. But there cannot be 100 per cent safety, so the debate has to be whether the safe flying criterion is, say, 90 per cent or 99 per cent.

The issue is what degree of risk is acceptable – and different people, different airlines or different governments are entitled to have different views of acceptability.

The problem for the travelling public is that they can make no sensible assessment of risk so they rely on agencies such as the CAA or government ministers. They accept that 10 people a day die in car crashes on UK roads but would be appalled if one 300-passenger plane crashed each month.

However, the agencies to which risk is delegated have no incentive to encourage people to encounter danger, so they err on the side of caution. To them, the risk is the responsibility of allowing others to take a risk that happens. So meteorologists present a cautious view to the CAA, which presents a cautious opinion to ministers who enforce a cautious policy onto airlines.

But where in that nexus of decision-making is the cost that has to be balanced against that caution? Airlines lost real money by not flying; their passengers suffered huge inconvenience and cost because they could not travel. Companies were deprived of supplies; ancillary businesses from taxi drivers to airport retailers lost sales. If such costs had been taken into account it is likely that the ban would have been lifted earlier, even though the risk of flying was greater than normal.

An example of the correct compromise of risk and cost came in allowing the ferry companies to carry more passengers from Calais than safety considerations usually permit as prudent. The cross-channel travellers were not told that, but even if they had been, the bet must be that they were so desperate to return to Britain that they would have accepted the increased risk. And if airlines had been allowed to fly into Britain, the bet is that most travellers would prefer that extra risk to an indefinite stay abroad.

If any lesson is to be learnt from this episode it must be that cost in considered alongside risk and that the people who bear the cost are consulted and informed. Risk decisions cannot be taken by people have nothing to lose. If airlines had been given a free decision to fly we might have seen some preferring to keep planes grounded while others took to the skies, and that would have helped the travelling public to assess and understand risk.



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