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Risk Management Lessons From The Ash Cloud

. 2 min read

My first thought when I read about the flight bans following the volcanic ash cloud that spread across Europe last Thursday was that the gods are on the side of Iceland. They'll put the lid on as soon as there is a reasonable agreement with the UK and the Netherlands concerning the Icesave debacle. But that's just irony. It is a serious calamity that raises a number of issues.

One would have thought that after the heavy snow that wreaked havoc across much of Northern Europe in December and again in January and several other recent calamitous events that received wide media coverage, people's risk assessment would have shifted. But it appears that there is still an overall misperception of what counts as "normal" and an underestimation of the likelihood and impact of extreme events. I thus take a different view from social scientists such as Anthony Giddens, Ulrich Beck and Zygmunt Bauman who claim that we are living in a risk society, because the news of catastrophes around the world (Haiti January, Chile February, etc.) increases people's perception of risk.

It may be that, as in the case of last year's flu pandemic, authorities overreact. One may also ask what a few days matter within the scheme of things if it allows for a reassessment of the risks associated with the current situation. One of the questions that should be asked is how the situation in Europe differs from other parts of the world with more volcanic activity and whether the eruption of the Eyjafjallajoekull is different from other volcanoes. It may also be that the situation in the south of Germany is different from Scotland and the UK because the concentration of ash is lower.

Test flights by various airlines on Sunday revealed no damage. The question is how this information shifts one's prior probability. It was already known that not all planes are equally affected when they fly through an ash cloud, as it all depends on the nature of the cloud, the duration of the exposure and no doubt various other factors. The current ban is based on a number of individual cases in which there was a near crash. Should we go from a Bayesian assessment of the risks associated with flying through air with a high density of volcanic ash to a frequentist probability whereby the current situation will be an experiment to find out how many planes will incur damage and how many will crash? There is definitely a need for more data.

It would also be useful to distinguish between military flights, cargo flights and passenger flights. In the case of military and cargo flights the pilots may take a calculated risk. In the case of passenger flights the airline and aviation authorities have a responsibility for the safety of the passengers. Of course a cargo plane may also crash into a crowded area, but allowing cargo flights before allowing passenger flights to better assess the risks makes sense. Planes might also fly lower, but that will be less fuel efficient.

As to all the people and businesses that have been affected, from a risk management point of view you should always have a capital buffer to absorb possible adverse events. You should have both time and money to stay a few days longer at your destination and businesses should be able to fill the gap of missing personnel.

Having said so, airlines may reassess the risk and resume flights based on the current situation, but the air quality may worsen as the volcano continues erupting. It has also been pointed out that in the past an eruption of the Eyjafjallajoekull was followed by an eruption of the much bigger Katla.

It may therefore be wise to to take into account possible future flight restrictions. In the language of probability theory this means giving a non-zero prior probability to an event that was previously not even taken into consideration. It might also be wise to reckon with the economic consequences.

The Reith lecture by Anthony Giddens on risk.