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Embry-Riddle Researchers Confirm Accuracy of Post-9/11 Airline Compensation

Daytona Beach, Fla., March 8, 2005 -- The $5 billion allocated by the federal government to compensate U.S. commercial airlines for lost revenue after the Sept. 11, 2001, terrorist attack was amazingly close to the actual financial setbacks the airlines sustained, according to two researchers in the College of Business at Embry-Riddle Aeronautical University.

In a study published in the Journal of Air Transport Management (2004, issue 10, pages 327-332), Drs. Notis Pagiavlas and Vitaly Guzhva separated the effect of the attack from other economic forces that impacted the airline industry. Using the statistical model of vector autoregression, they determined that the net effect of the attack was approximately $5.4 billion, caused mainly by the immediate grounding of flights and reduced schedules.

“We entered the study with mere academic curiosity and ended up finding strong evidence for an accurate financial allocation by the president and the Congress,” says Pagiavlas. “Our results were unexpected and very surprising, given the quickness with which the government decided on the relief packages of $5 billion in direct compensation and $10 billion in loan guarantees.”

In their study, the researchers first examined the quarterly revenue passenger miles (RPM is a standard measure of airline performance), for the period of 1977 to 2003 as reported by the U.S. Department of Transportation. Next, mathematical diagnostic evaluations of the data resulted in an estimated baseline historical performance that accounted for strong seasonal variations in the pattern of analysis. The net effect of the terrorist attack was then estimated by statistically isolating the effects of the broader macroeconomic conditions, reflected in the real gross domestic product, from the attack.

“The ‘detrended’ and seasonally adjusted data provided compelling statistical evidence for the economic impact of the terrorist event,” Pagiavlas says. “We also found that the financial shock on the airline industry diminished by the end of the data range in 2003.”

The title of the study is “U.S. Commercial Airline Performance after September 11, 2001: Decomposing the Effect of the Terrorist Attack from Macroeconomic Influences.”

Both researchers are assistant professors: Pagiavlas in the Management, Marketing, Strategy, and Operations Dept., and Guzhva in the Economics, Finance, Accounting, and Risk Management Dept.

Embry-Riddle Aeronautical University, the world’s largest, fully accredited university specializing in aviation and aerospace, offers more than 30 degree programs in its colleges of Arts and Sciences, Aviation, Business, and Engineering. Embry-Riddle educates more than 30,000 students annually in undergraduate and graduate programs at residential campuses in Prescott, Ariz., and Daytona Beach, Fla., through the Extended Campus at more than 130 centers in the United States, Canada, Europe, and the Middle East, and through distance learning.