The influence of aviation disasters on engine manufacturers: An analysis of financial and reputational contagion risks

Erdinc Akyildirim,Shaen Corbet,John F O'Connell,Ahmet Sensoy

doi:10.1016/j.irfa.2020.101630

Abstract

One of the key sub-sectors in the aviation industry includes that of engine manufacturers, who have long led technological advancement and the battle to reduce airline carbon emissions. However, these same companies have been susceptible to a number of issues that have been central to international airlines due to higher costs and competition pressures. When an aviation disaster occurs, there is widespread allocation of blame and responsibility, which has left engine manufacturers exposed until the true cause is identified. This can generate many issues with regards to reputational damage and ability to generate finance. We set out to analyse such interactions over time and region. Our results indicate that engine manufacturers have had to contend with substantial income and financial leverage issues in the aftermath of a major aviation disaster, irrespective of whether they have been identified as a causation factor in the incident itself. Further, we clearly identify that there exists an average one day loss of 1.64% in the immediate aftermath of aviation incidents. Substantial corporate instability is found to persist without the company being in any way responsible for the incident. Shortly thereafter, contagion effects increase as speculation diminishes and more factual evidence arrives. The role of social media is examined as a potential contributory factor.

Highlights

In 2018, a record 4.4 billion passengers travelled by air worldwide on 46.1 million flights and the demand for air transport is apparent with almost 82% of all available seats being filled, with 22,000 city pairs connected by direct flights
The second stage of the research focuses on the calculation of cumulative abnormal returns that exist for engine manufacturers in the period after an aviation disaster, where we identify that there exists a sharp one day loss of 1.64% in the aftermath of aviation incidents, and is found to gradually extend such poor performance in each of the following analysed periods thereafter
Note: We develop on a combined search of LexisNexis, Bloomberg and Thomson Reuters Eikon, search for the keywords relating to aviation disasters

Summary

Introduction

In 2018, a record 4.4 billion passengers travelled by air worldwide on 46.1 million flights and the demand for air transport is apparent with almost 82% of all available seats being filled, with 22,000 city pairs connected by direct flights. Fatal accidents in commercial aviation remain rare and the safety of commercial passenger aviation services is of major concern for the travelling public and regulatory agencies. Airline accidents trigger instantaneous activity in the financial markets because of their unanticipated and cataclysmic nature This type of negative rhetoric has caused sharp reductions in the share price of companies throughout the world, but it significantly impacts the avia tion industry when compared to other consortiums of commercial en terprises (Kaplanski & Levy, 2010).

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Results

Conclusion