Crash Shows Impact of Safety Shortcomings on Bottom Line

Air Safety Week,  July 10, 2000  

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Price of Alaska Airlines stock down 14 percent since January 31 crash

The object lessons keep rolling in, with Alaska Airlines [ALK] the unfortunate case study in what can happen when "culture creep" shifts the primary focus from maximizing safety to maximizing cost savings.

The latest criticism comes in a report chartered last March by the airline itself and made public late last week.

John Enders and William Hendricks headed the independent review by a team of outside experts, in which four company pilots and four maintenance experts also participated. Between them, Enders and Hendricks brought some 95 years of experience in the aviation industry to the effort. Their prestige, independence and long experience lent added weight to a report that offered some 170 recommendations for improving the safety and efficiency of the airline's operation.

Safety a core value

The Enders and Hendricks "Safety Assessment" follows hard on the heels of the June 29 release of the Federal Aviation Administration's (FAA) "Special Inspection" report, which scored the carrier for basic deficiencies in staffing, record keeping and trend monitoring (see ASW, July 3).

The assessment by Enders and Hendricks is perhaps more significant, as it addresses directly the intrinsic tension between economics and safety. In fact, the notion of any such tension is challenged outright. Safety, the Enders and Hendricks report declares in nearly a scolding tone, must a viewed as a "core production value" and, when it is not, "the satisfaction of the stockholders will be diminished."

Indeed, the performance of Alaska's stock over the last six months following the fatal January 31 crash of Flight 261 illustrates the old aphorism, "If you think safety is expensive, try an accident." Over the last six months, Alaska's stock has declined from about $32.50 per share the day before the crash to about $27.80 per share on July 6, the day the "Safety Assessment" was released. The drop of about $4.70 per share reflects a 14 percent decline. While 14 percent may not seem much in relative terms, in absolute terms the loss is more dramatic. Given the estimated 26.4 million shares available of Alaska stock, the carrier's market capitalization has declined by some $124 million since Flight 261 plummeted into the Pacific waters off Los Angeles. That figure outweighs by a large margin the cost of the comprehensive reform program the carrier is now undertaking, and which it must now execute under the shadow heightened FAA scrutiny. Safety, it appears, affects the bottom line directly.

Template for self-assessment

The Enders and Hendricks report also is significant in another respect beyond its apprehension that safety was accorded the equivalent of economy-class status while economics were given first-class priority. The report's many recommendations provide a window into what the carrier was not doing, or doing poorly. As such, the report serves as a sobering template for any airline wishing to compare its internal practices with those that Enders and Hendricks concluded were essential to safe practices, a self-correcting safety system and, ultimately, a safer operation.

(For the full text of the Enders and Hendricks report, see this website: http://www.alaskasworld.com. Editor's note: This is a hard-hitting report. Rather than hiding behind the skirts of the "proprietary" disclaimer, Alaska Airlines has courageously made this report available to one and all. In this respect, the report reflects a commendable willingness to share the lessons of harsh experience.)

"Culture Creep" and the Insidious Imbalance Between Safety & Economics

"In recent years, as the aviation industry has developed under deregulation, economic competition has sharpened, and marketing has generally gained a higher level of prominence in executive decision-making. While this is an understandable trend, the situation also brings with it an insidious potential for a high-risk imbalance between safety and economics.

The danger lies in creating an 'artificial culture' within the regulated system that permits a 'culture creep' away from safety emphasis. Such a 'creep' can evolve into a rationale for operating beyond regulatory intent with, for example, deferred maintenance, excusing 'minor' procedural non-compliance on the flight deck and in ground operations and other procedures, etc. Conformity with a company's own stated pollicies and procedures can also be insidiously eroded if 'culture creep' is permitted to persist."

Source: Safety Assessment for Alaska Airlines Inc., Enders Associates International, June 19, 2000, p. 10

When Safety is Shortchanged, So is Stockholder Satisfaction

"While the present times make the satisfaction of stockholders a primary goal of any viable organization, attention to the stakeholders in the process is also important and is sometimes overlooked. Without their full commitment and support, the ability of the organization to function effectively (i.e., meet safety and production goals) can be seriously hampered and satisfaction of the stockholders will be diminished....