Delay penalties have perverse effect - The Times

Turning back after engine failure would have left airline liable to pay out for delays under new rules on compensation

A BRITISH AIRWAYS jumbo jet carrying 351 passengers was forced to make an emergency landing after an 11-hour transatlantic flight with a failed engine.

The fault occurred on take-off from Los Angeles but the pilot declined all opportunities to land in the US and instead continued on three engines for 5,000 miles to Britain.

Check all that are true:

(1) People respond to incentives

(2) The Law of Unintended Consequences

(3) BA will rue this calculus -- customer backlash

Were it not for the emergency landing, we'd never have known BA was making the tradeoff between on-time arrival and safety. Now we know.

Regulators are sending conflicting signals to airlines. They want them to be safe and they want them to be on time. By introducing late arrival penalties they have created the incentive for airlines to increase the probability of accident -- small probability events, but catastrophic.

It is difficult to monitor safety. It is easy to monitor on-time arrival. Regulators have created very sharp incentives to be on time. That's a mistake when you want the airlines to put in effort in safety and being on time; for an accessible treatment of the equal compensation principle see Milgrom and Roberts.

Other questions come to mind. Why do regulators even need to be penalize lateness? Don't passengers monitor on time arrival rates and punish airlines with bad records?

Economists have also been known to argue that airlines have an overwhelming incentive to avoid accidents -- that accidents trigger a collapse of an airline's customer goodwill. It seems that here we have a case where the airline did risk an accident. Is this because airlines are close to being a breakeven proposition so there's less downside from an accident?