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Op-Ed: The True Danger of MH370 Might Be Overreaction

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Op-Ed: The True Danger of MH370 Might Be Overreaction

Op-Ed: The True Danger of MH370 Might Be Overreaction
March 18
12:55 2014

MIAMI I have mostly kept my silence on what happened to Malaysia Airlines Flight 370 (MH370) , preferring to allow Airways’ crack team of dedicated reporters take aim at the subject. However, this morning, I decided to break that silence to write this op-ed, as well as another piece summarizing my thoughts on the incident that has will be published later this week. My focus for this editorial is not about what happened on the flight, or the search that ensued thereafter, but rather about the issue of live data streaming in flight.

Since details have begun to emerge about the incident, the fact that communication data from the aircraft was significantly curtailed once the radar transponder and ACARS system were turned off has prompted several commentators to call for the implementation of live streaming of in-flight black box data. The costs involved with such a system are prohibitive, and not worth the modest benefit that that would emanate from such a system.

Let’s start with some math on the costs of the system. The costs of retrofitting existing aircraft with the equipment necessary to continuously transmit data is not necessarily prohibitive, but it is certainly not cheap. Depending on the specific system used the cost of installing equipment and reworking internal wiring could cost anywhere between $300,000 and $700,000. Let’s take the lower bound of that range and assume that the cost is $300,000. According to industry lobby Airlines For America, there were 6,185 commercial passenger aircraft in service in the US at the end of 2014, which means that the cost of retrofitting the aircraft alone would be roughly $1.85 billion in cash. Then you have to add in the costs of having to withdraw aircraft from the network, and the resultant operational challenges. These would easily add another $150-200 million (conservatively). So the overall cost of retrofit alone is $2 – 2.05 billion. That’s not an expense or more importantly a cash outlay that the US airline industry can easily stomach. In 2013, the US industry excepting Virgin America recorded a cumulative free cash flow of roughly $2.5 billion. The retrofit costs would require roughly 80% of the US airline industry’s current record level of free cash flow. Even spread out over four years at an annual cost of $500 million, the cash outlays required would have a major impact on the financial health of US airlines.

And the costs of retrofit pale in comparison to the costs of data streaming. In 2002, L-3 Aviation Recorders of Sarasota, Florida estimated that it would have cost a major US carrier roughly $300 million to live stream data for an entire year. DOT data indicates that the average US major carrier in 2002 carried roughly 58.8 million passengers, meaning that the average per passenger cost was $5.10. Of course since 2002, the cost of data streaming has decreased substantially, and adjusting for that (as well as other reverse factors such as increased average stage length), let’s assume that the cost per passenger today is roughly 28.5% of what it was in 2002 (cost 3.5 times as much in 2002). For the US industry, which carried 743.1 million passengers in 2013, the annual cost would be roughly $1.08 billion. In an industry that generated roughly $6.6 billion in adjusted net profits, that figure would cut profitability by 16.4%, creating major losses for airline shareholders and employees (who benefit significantly from profit-sharing checks). Moreover, the underrated effect of requiring live streaming of data would be to accelerate the decline of the US regional airline industry. The reason? The most important cost measure for carriers is cost per available seat mile or CASM, which is measured on a per seat basis. However, the cost of these new data reporting systems are done on a per-aircraft basis (it cost the same to transmit), which means that they will affect small aircraft operating costs the most relatively on a per-seat basis. At a time when the economics of many regional aircraft (and by extension the small communities that they service) are marginal at best, this added cost would only serve to accelerate the decline in air service in small communities around the US.

Every conclusion made for US airlines in the preceding paragraphs applies even more acutely for the rest of the world. The US is the single most profitable region in the world, and if the costs are prohibitive for US carriers, imagine what that entails for airlines around the world. The global commercial aviation fleet is somewhere in the range of 28-30,000 aircraft, meaning that the cost of retrofitting the entire world fleet would be $8.4 – $9.0 billion worth of cash outlays, plus annual operating outlays of roughly $4.6 billion (at the same cost per passenger as the US). For an industry projected to record a cumulative $18.7 billion net profit in 2014 by IATA, this figure is far too high.

And despite the myriad costs, it is unclear that there would be any large scale benefit. Clearly it would have created significant benefits in the case of MH370, just as it would have in the case of Air France 447. There are perhaps 10-20 other instances per year where this data would have significant benefits. But to put that in perspective (while in no way attempting to devalue the 239 souls on board MH370), you’re talking about a marginal benefit to something like 8,000 passengers in an industry that transports 3 billion passengers per year, at a marginal cost of billions of dollars. And just 14 aircraft have disappeared since 1980 out of millions of flights. As tragic as MH370 has the potential to turn out to be, it is an aberration, not a common occurrence. Especially considering the enormously positive role that air travel plays in the world economy, the benefits of live streaming black box data are simply outstripped by the enormous costs.

 

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A Global Review of Commercial Flight since 1994: the leading Commercial Aviation publication in North America and 35 nations worldwide. Based in Miami, Florida.

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