Increased Airline Safety, Who Really Pays? An Economic Analysis of the Recently Proposed Airline Safety Regulations

By Steve Balk

{1} Imagine yourself waiting interminable hours to board your international flight to Europe. The wait is due to the increased security measures due to the threat of terrorism, but still you are uneasy that even these new security measures will not be enough to deter potential terrorists. In addition, the time spent in line is wasted time, during which you cannot be productive to your business.

{2} You, the traveler, must balance the increased time and cost of traveling against the necessity of travel. If you found that there was a different, lower security airline on which you could travel more cheaply, would you choose the cheaper alternative and risk your security? Possibly you the traveler will choose to abstain entirely from traveling, instead using the ever-more sophisticated forms of communication to complete your business work. The analysis of which choice consumers will make as a whole, and the effect on the airlines and government, is a subject this Note will examine using the discipline of law and economics.

{3} This Note will discuss, using the discipline of law and economics as a framework, various proposals for increasing the safety of airline travel.¹ The Note will examine, in turn, the workings of each form of enhanced security and then will discuss the application of law and economics analysis to the proposed security improvements.² Finally, this Note will draw conclusions about the economic ramifications of the improvements.³

{4} The theory of law and economics encompasses a vast array of real world topics. "[E]conomics is the science of rational choice in the world--our world--in which resources are limited in relation to human wants."⁴ The scarcity of resources is a given in economics, and federal funding for any project is a resource.

{5} The discipline assumes that "man is a rational maximizer of his ends in life, his satisfactions--what we shall call his 'self-interest.'"⁵ This behavior need not rise to the level of conscious choice, for the behavior may be unconscious or assumed to be chosen.⁶ Finally, self-interest should not be confused with selfishness, for the interests of other people may well be a part of one's own self-interest.⁷ Having summarized the discipline's view of man, it is necessary to turn to the fundamental principles of economics.

{6} The first principle is known as the Law of Demand.⁸ When the price of a good rises relative to other goods, a rational consumer will look to substitute less preferred goods that are now more inexpensive. Many consumers will prefer the good, even at its raised price, but others will substitute other goods which are cheaper. As a result, the total quantity demanded by consumers will decrease:

{7} Dollars are shown on the vertical axis, increasing upward. The units demanded are shown on the horizontal axis, increasing to the right. A rise in price from p1 to p2 results in a reduction in the quantity demanded, from q1 to q2. Inversely, when quantity supplied falls, the effect is to raise the price.⁹

{8} The Law of Demand is not limited in applicability to goods with explicit prices.¹⁰ "Unpopular teachers sometimes try to increase class enrollment by raising the average grade of the students in their classes; for, other things being equal, hard graders have smaller class enrollments than easy graders."¹¹ These types of nonpecuniary prices, or prices which are not measured in money, are called "shadow prices" by economists.¹²

{9} A second law is that consumers are assumed to be trying to maximize their utility, which may be interpreted as happiness, profit, or pleasure.¹³ When sellers or buyers of goods with a pecuniary price are involved, it is customary to speak of "profit maximization" rather than utility maximization.¹⁴ Sellers seek to maximize the difference between their sales costs and revenues, but for the moment, one must consider the lowest price that a seller for which he would be willing to part with his goods. The minimum is the "price that the resources consumed in making the seller's product would command in their next best use," that is an alternate use for which the seller could achieve a profit.¹⁵ A corollary of the notion of alternative price is that the cost may only be incurred when someone else is denied use of the resource.¹⁶

{10} An "opportunity cost" to the economist is the cost of using a good in such a way that the benefit of an alternative use is denied to another.¹⁷ Economics is really about resources, "with money merely being a claim on those resources."¹⁸ The economist must distinguish between transfers that affect the use of resources, which is where the rights to use a scarce resource change hands, and the transactions in which merely money changes hands, called transfer payments.¹⁹ A transfer of purely money may diminish the purchase power of one, but it should increase the purchase power of another by an equal amount.²⁰ "Put differently, it would be a private cost, but not a social one. A social cost diminishes the wealth of society, a private cost merely rearranges the wealth."²¹ Those who wish to maximize the aggregate wealth of society are thus unconcerned with private costs, for any income distribution should contain the same amount of wealth, however social costs must be minimized thereby maximizing society's wealth.

{11} The forces of competition tend to make opportunity cost the maximum as well as the minimum price for a given good.²² "A price above opportunity cost is a magnet drawing resources into the production of the good until the increase in output drives price, by the Law of Demand, down to the level of cost."²³ Equilibrium means a stable point, and the equilibrium occurs when the amount supplied and demanded are equal, due to similar prices demanded and payable. At equilibrium, there is no incentive for sellers to alter price or output.24

{12} If some arbitrary limit is imposed on the market, the natural equilibrium will be disturbed, and a new equilibrium will be established, albeit one that will not reflect true opportunity costs. For example, suppose that the government imposed a price ceiling, a cap of cost below the equilibrium price:

{13} As a result of the market intervention, P will now intersect the supply curve to the left of the demand curve, meaning that supply will fall short of demand.²⁵ Equilibrium will eventually be reestablished, whether it be through waiting periods for the goods, or a black market in the regulated good.²⁶ In establishing market controls, governments may not always be entirely rational actors.27

{14} The third basic principle of economics is that resources tend to gravitate toward their most valuable uses if voluntary exchange is permitted.²⁸ In a free market, both parties enter into the exchange because each feels he is receiving more for his property than it is worth, otherwise the exchange would not occur.²⁹ By a process of voluntary exchange, resources are shifted to those uses in which the highest value to consumers, as measured by their willingness to pay, is achieved.³⁰ Resources are said to be employed efficiently when their value is highest.³¹ A rational actor may also place a price on life.³² With this background in economics, this Note will now turn to a description of several proposed security measures.

{15} In 1956, following public outcry to regulate flying safety after a crash between United and TWA flights over the Grand Canyon cost the lives of 128 people, Congress created the Federal Aviation Administration (FAA).³³ The FAA was given the task of regulating air traffic control and airline safety.³⁴ Recently, events have caused this agency to issue recommendations for improved airline safety.³⁵

{16} The airline industry was largely unregulated with regard to physical security, until the early 1970's.³⁶ During its lifetime, the airline industry has greatly expanded, and this trend will continue.³⁷ There are now 20,000 scheduled flights each day in the United States.³⁸ The Federal Aviation Administration (FAA) predicts 2.1 million domestic passengers per day by the year 2007, up from the current 1.5 million.³⁹ This growing number of passengers in the same amount of airspace must lead to larger planes, thus a greater cost for each airline crash or sabotage.⁴⁰

{17} The recent disasters involving ValuJet and Trans World Airlines have prompted heightened scrutiny and calls for more regulation or at least increased spending on safety.⁴¹ However, there are limits to the security which finite amounts of money may purchase. "When you're dealing with the highly innovative malevolence of humans," there is no dollar amount that will buy complete safety.⁴² Complete safety is not economically efficient, and therefore not desirable.43

{18} On September 10, 1996, President Clinton asked Congress to authorize more than $1 billion in new spending to counteract threats against the American public.⁴⁴ His proposal would "commit the government in the short term to expanding markedly its financial and operational role in assuring airline security in the name of overall national security."⁴⁵ However, the plan assumes that airlines will eventually pick up the bulk of the security costs. The administration said that over time the commercial airline industry would be expected to bear a significant fraction of the costs, perhaps running to billions of dollars.⁴⁶

{19} The proposal includes "immediate background security checks for workers with access to secure areas, [and] starting a test program to match each piece of luggage with its passenger on all domestic flights...."⁴⁷ Among other areas of emphasis, this proposal would also increase "profiling" of passengers.⁴⁸ Profiling involves assessing the probabilities of certain suspects to act in certain manners.

{20} In addition to the three areas of proposed regulation, this Note will also examine the proposed use of "sniffers" to detect the presence of plastic explosives. The bombing of Pan Am flight 103 over Lockerbie, Scotland in 1988 helped to raise public awareness of plastic explosives.⁴⁹ However the current system of x-raying baggage is vulnerable to plastic explosives, which will not register on a metal detector and are difficult to detect X-ray machines.⁵⁰ The proposed new system for detecting plastic explosives utilizes the "medical CT-scan technology."⁵¹

{21} Finally, the FAA and various outside safety experts have called for the airlines and airports to attract better personnel to man the security systems. Most security personnel can be considered low-skilled.⁵² However, the cost of training and maintaining this army is considered high by the airports and airlines.

{22} Under the President's recommendations, discussed by his new Aviation Safety and Security Commission, employees with access to secured areas would be subject to criminal background investigations.⁵³ This measure would subject airline and airport employees to the same checks as for example, day-care providers have.⁵⁴ However, this proposal is limited to workers; there is yet no attempt to broaden background checks to passengers.

{23} The proposal to match luggage utilizes experimental technology.⁵⁵ Micron Communications, Inc. is one leading company in the fast growing field of security technology.⁵⁶ However, even Micron's security products remain generally untested under field conditions.⁵⁷

{24} The proposed system would encode computer chips with information about travelers, including their name, destination, flight number, and originating airport.⁵⁸ The airlines would place an identical chip in the tag accompanying each piece of baggage.⁵⁹ Upon boarding, the passengers and their luggage would be matched using radio technology.⁶⁰ If a suitcase or other piece of baggage is found on the plane without an accompanying passenger, the luggage would be quickly removed and inspected.

{25} Profiling involves the use of data to form a picture of a suspicious passenger; one who fits at least some of the characteristics of a terrorist.⁶¹ The names, addresses, phone numbers, travel histories and billing records of passengers would be run through a database, controlled by a federal government agency, that might lead to a search of luggage of those deemed suspicious.⁶² This necessarily raises privacy concerns.⁶³ Previously, no national system had existed; the airport security agencies operated alone.⁶⁴

{26} In 1990, Congress mandated that the Federal Aviation Administration develop new technology to detect plastic explosives.⁶⁵ InVision Technologies, a California company has become the only company to achieve FAA certification for a plastic-bomb detection system.⁶⁶ Despite the limitations of metal detectors and x-ray machines, they are some airports' only line of inadequate defense against plastic explosives. InVision's CTX machine, however, can detect "tiny amounts of plastic explosive."⁶⁷ Unfortunately, the machines cost about $1 million apiece and have a low capacity in terms of bags being slowly processed.68

5. Increased Wages and Training for Security Personnel

{27} People must operate the security machines. No matter how sophisticated the machine, somebody has to sit by the machine and make a decision.⁶⁹ The more sophisticated the machine, the better the capability needed to operate it."

{28} Unfortunately, these types of jobs are often considered "dead-end" or low prestige positions. This means that these positions are unlikely to attract the more intelligent and motivated kinds of people necessary for good security work. An increase in pay and training might remedy some of these deficiencies.

{29} An in-depth cost and benefit analysis of all the proposals is impossible at this time. The proposals are just that, and their effectiveness cannot yet be judged. However, the merits of each individual idea may be subjected to a law and economics analysis, that is to an understanding of the costs and benefits involved, even without an exact dollar amount.

{30} All the costs of these proposed measures must be borne by some party, the airlines (and thus airline passengers), airline passengers directly, or the government (and thus taxpayers). If the passengers are directly affected, say by a change in the ticket price or increased waiting time, this will change the price from p1 to p2 and thus lessen demand for airline service from d1 to d2.⁷⁰ On the other hand, if the cost is borne by the government and the taxpayers, little change in demand is likely. The payment is made by a larger population and in a method by which the taxpayer does not notice the higher price for the product.

{31} The Fourth Amendment guarantees the right to be free of "unreasonable searches and seizures."⁷¹ However, barring other contractual or legal restrictions, there seems little limit on the background checks that an employer may perform on an employee. The President has proposed increased background checks on employees as a means of deterring further terrorism.⁷² That measure's effectiveness may be limited according to a law and economics analysis.

{32} Assume a hypothetical airline has instituted a complete background check in accordance with the President's recommendations. Further, this check obviously may only determine what actions the employee has taken in the past. If an employee is judged suspect, he will not be hired. What will the practical effect be on a terrorist?

{33} These measures will increase the cost of an employee being the responsible party for planting a bomb or committing some form of terrorist attack. A theoretically thorough background check would determine which employees would have terrorist connections, so any help from an employee would have to be gained after the employee was hired. This would force the terrorist to expend resources on recruitment of airline employees, possibly resulting in a change of attack methods.⁷³ A terrorist may decide that another method of attack would result in less risk, or have a lower cost. Thus instituting background checks will lead an economically rational terrorist to target another airline.

{34} Viewing the problems from the airlines' perspective, a complete background check may force a higher wage for airline employees.⁷⁴ If the pool of possible airline employees is limited, any attempt to shrink the pool would result in a smaller supply of employees, and thus a larger relative demand for those employees which remain qualified. As shown above, this will result in a higher price (wage) being paid for each employee.⁷⁵

{35} Finally, under a law and economics analysis, any employee who survives the background check will be in a better position than he would have been had there been no checks at all.⁷⁶ Because the pool is limited, any reductions will result in an increased wage for the employee.⁷⁷ This is based on an unrealistic assumption of a fixed labor pool.⁷⁸

{36} The security measure of completing background checks on employees will likely increase the costs to terrorists of using airline employees in their attacks, leading to the choice of a different means of attack. Employees who pass the test will benefit to an extent. Airlines will pay higher prices for workers, so the cost must be borne by the government or passengers.

{37} Luggage matching, as explained above, forces the airlines to ensure that the passenger matched with the bag boards the plane before his luggage is set aboard.⁷⁹ The drawbacks of this system include increased cost and delay. As a benefit, if the system works as intended, it should stop all non-suicidal terrorists from planting bombs in their luggage.

{38} An analysis of this system, assuming only the waiting time is varied, must determine if this measure should be mandated or if the airlines should be given free rein to implement it as they see fit. Of all the proposed measures, the one with the most dramatic impact is luggage matching, because it will affect all passengers.⁸⁰ If the plan is fully implemented, airlines would have to match millions of bags each day, an error regarding any one of which could cause hours of delays.⁸¹

{39} A simpler solution would allow the airlines to match the bags as they saw fit.⁸² Given that a change of plan or a mistake by any passenger might delay the flight, consumers may soon wish they could choose whether to accept the costs of the inevitable delays.⁸³ Consumers could also gauge the impact of the safety measures on their perceived safety by weighing the costs and benefits using the Hand Formula.⁸⁴

{40} Consumer have indicated they prefer to do without the frills on domestic flights. Note the rapid expansion of discount carriers such as Southwest Air at the expense of the mainstream, more expensive airlines. The only variable is the price consumers are willing to pay for the increased safety offered by luggage matching.⁸⁵

{41} From the airlines' point of view, luggage matching produces many costs. Because one passenger may negligently delay a flight, causing money to be spent as the plane waits on the runway, airlines will likely spend much money on advertising the system, hoping to change consumer behavior.⁸⁶ An airline which unilaterally implemented luggage matching may gain some passengers, but its expenses would rise dramatically without similarly increased revenue. For this reason, airlines are likely to wish for a government mandate which would make the system mandatory, so that no competitor could cut costs by refusing to implement the luggage matching system.

{42} Perhaps no part of the proposed regulations has been criticized as much as the proposal which calls for increased profiling of passengers.⁸⁷ Profiling is commonplace in the search for drugs, although it has not gone unchallenged in the courts.⁸⁸ The purpose of the profiling proposed here is merely to narrow the number of bags which airline employees must intensely scrutinize.⁸⁹ This profiling would reduce the amount of money needed for the purchase of bomb detection equipment.

{43} A law and economic analysis of the searches may use the Hand Formula to determine to what extent the searches need be regulated.⁹⁰ Another criticism of profiling is that the profiles may be skewed toward certain racial or ethnic groups.⁹¹ Support has also been forthcoming for the proposal from travel groups.⁹²

{44} Under a law and economic approach, the alleged discrimination in the profiles may be justified. If hypothetically the profiles omitted certain likely racial groups, the benefits of this decision would accrue only to the affected minority, but the costs would be borne by the majority and also the minority.⁹³ Another factor is the cost of information. To the extent that some attribute is correlated with the existence of a certain characteristic, it is rational for people to use the visible attribute as a proxy for information about the more expensive to discover characteristic.⁹⁴ Thus, it would be economically efficient to discriminate against a certain class of people who are likely to be criminals since determining if each individual in the group is a criminal would be much more expensive.

{45} Even discriminatory profiling may be justified because the costs of obtaining individual information is much greater than the costs imposed by searches based on a profile. While no one will object to stopping terrorism, many may object to a discriminatory profiling system. Both moral and constitutional objections may be raised. However, constitutional law is beyond the scope of this note--the practice is economically efficient.

{46} The analysis of explosives detection is rather simple. If the cost of implementing the system is less than the benefits of the system, airports should purchase the detection equipment.⁹⁵ X-ray detection technology is already in widespread use in the nation's airports, with little complaint from passengers.

{47} This is likely to be a hidden cost, as the federal government pays for the initial equipment, with the airports taking over the operation in the long term.⁹⁶ A better method would be to include a security surcharge on each ticket, allowing consumers to appreciate the true costs of safety. Under the plan by which general revenue funds would pay for the equipment, the benefits are spread to those who use the airlines, while the cost is borne by all. This may lead to a misallocation of resources, as no one directly pays for the security, so no market can be established as to how much security the public desires. This situation may call for the government to act to combat allocative inefficiencies.

{48} The personnel who are directly responsible for passenger security--those who screen the luggage--are often poorly motivated and compensated. A recent FAA study noted widespread problems with security personnel training.⁹⁷ Under the Federal Aviation Act, airlines are responsible for screening passengers and luggage.⁹⁸ This often results in airlines contracting out this service to the lowest bidder, which results in low-paid employees.⁹⁹

{49} Upgrading employee training and compensation will result in increased costs for travelers. Barring a government takeover of airport security, the airlines must improve security at their own expense.¹⁰⁰ As costs increase, demand will decrease, unless more passengers are willing to travel due to the apparent increased safety.101

{50} As more money is spent on preventative measures, terrorists will presumably spend more time and money to overcome these countermeasures, an example of rent-seeking. However, terrorists may also move their attacks to other forms of transportation or structures. As the Vice President acknowledged, "There is no silver bullet. We're facing new challenges, and we have to come up with new responses."¹⁰² The costs of air travel and the time involved will certainly increase. Travelers may choose to travel less by air given the worries that accompany this mode of travel. However, even economists may be uncertain as to the effects of certain measures.103

{51} Terrorists have forced consumers everywhere to pay more for security and countermeasures, not to mention lost opportunities. While few would dispute the need for increased security, there may be more efficient methods of delivering the same product--a safe airline trip. Security background checks on employees may be justified economically, but continued vigilance over employee contacts is prohibitively expensive. Luggage matching will deter at least one form of attack, but will certainly result in great costs in time and effort. Increased passenger profiling can be justified on its general effectiveness, despite those who question its fairness. Greater explosives detection should be implemented if the cost of the machines is less than the benefit they produce. Finally, increased wages and training will certainly result in increased effectiveness for airline security personnel, but the consumer may not be willing to pay the price. As the war on terrorism continues, America needs to implement tighter security measures, but these measures should not be adopted without analysis of the costs and benefits involved.