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Tuesday, 30 December 2014

Definitely, maybe

The title of this rom-com movie matches the information that we get with respect to missing airplanes (e.g., MH370). There is even a long Wikipedia list of all missing airplanes since 1856..........

I understand that technology in 1856 did not allow to locate missing airplanes but I fail to see why that would still be the case nowadays. Technology allows for nearly anything nowadays but not to find missing airplanes??

Missing airplanes similar to missing ships create mysteries and even famous names like the Bermuda Triangle. According to Wikipedia, the Bermuda Triangle, also known as the Devil's Triangle, is a loosely defined region in the western part of the North Atlantic Ocean, where a number of aircraft and ships are said to have disappeared under mysterious circumstances. According to the US Navy, the triangle does not exist. Yeah right, skeptics will say.

Rather than focusing on possible explanations (e.g., accident, alien abduction, or hijack) it strikes me that technology allows us monitoring an individual's trails to an extreme detail through GSM poles, internet location tracking, satellite tracking, and car navigation history but ships and aircraft may just disappear......

The cost of an aircraft or a ship could not be a reason for missing track and trace systems. Even cars now have such factory installed systems. Most likely as insurance companies more and more require such systems. So what is difference between cars and aircraft and ships? While the volume of cars is much and much bigger, their average value is much and much lower.

Perhaps an explanation may be found in credit risk management that uses the following formula: the Expected Loss (EL) equals the Probability of Default (PD) x Loss Given Default (LGD) x Exposure At Default (EAD).

This same formula has been used in the car manufacturing industry for not (!) recalling defective cars. There are some famous court stories about this phenomenon. Event recently another came to light in Japan regarding defective airbags. It is cheaper for manufacturers to deal with incidents than organise a massive recall provided that the PD ratio is very, very low.

Despite all recent major aircraft incidents, it is said to be the most safest way of transport. In other words the PD ratio is very low. It is safe to assume that the Loss Given Default ratio is 100%. The Exposure at Default is very high given casualties and cost of aircraft. Nevertheless, the very low PD ratio drives the ultimate Expected Loss.

The analogy with other types of industry (e.g., car manufacturing, tobacco, toxic waste) then suddenly becomes frightening. One could well argue that it is less expensive to miss an aircraft or ship rather than finding, rescuing or salvaging one. We will probably need another historic court case for showing the incompleteness of the Expected Loss formula.

Realising this makes me even more proud of the Dutch efforts with respect to MH317.