Disruptive internet-based business models have upended traditional industries like recorded music, newspapers and retailing. The latest flurry of innovation involves start-ups that take a service traditionally provided by a regulated firm – such as a hotel or taxi company – transforming it into commission-paying transactions between buyers and sellers. Accessed via smartphone apps and ‘regulated’ by user reviews, these new services are compelling at first sight.
AirBnB is an example that is already alarming the hotel industry and local governments. Another is Uber, the online ride sharing firm that was recently valued at $4 billion. Uber has gained notoriety because its pricing of taxi rides skyrockets on high-demand days such as New Year’s Eve, but the company insists its market-clearing role absolves it of any opprobrium. Indeed, you might say that Uber’s growth and popularity speaks for itself.
However, one issue that is less well understood is that of safety and risk. Uber recently attracted its first lawsuit after one of its drivers ran over and killed a six-year old pedestrian, while another Uber driver reportedly attacked a passenger (of course the company says it doesn’t have any drivers as such – they are all freelancers). So does the disruption of traditional ways of providing services make us more or less safe?
A report into a plane crash in Ireland provides a potential answer. At first sight airlines ought to be a ripe target for disruptive business models. They house a multitude of functions under a single corporate roof – why not let the market experiment with new models of delivering plane flights?
This was the approach of Manx2, a company that provided regional flights between non-hub airports in the UK and Ireland. I write ‘provide’ but what Manx2 actually did was sell tickets. For each particular route, Manx2 then contracted with a plane operating company to fly the passengers.
On its route from Belfast to Cork, Manx2 used a Barcelona-based company called Flightline. Flightline provided the planes and pilots and was responsible for safety. Early on 10 February 2011, 10 Manx2 passengers boarded a turboprop plane in Belfast with two pilots. When they arrived at Cork, the runway was obscured by fog. After making two abortive attempts to land and considering going to an alternative fog-free airport, the pilots made a third attempt and crashed the plane, killing themselves and four passengers.
This week, Ireland’s Air Accident Investigation Unit published a lengthy report into the crash. It concludes that Flightline’s pilots were tired, were unprepared for the route they were flying on, and made some fundamental mistakes. Flightline’s ground crew also failed to spot a technical flaw in one of the plane’s engines that contributed to the crash.
The Spanish regulator that oversaw Flightline had no clue that the crew who had trained and been accredited in sunny Spanish climes were working remotely for Manx2, flying to fogbound Irish airports. And the passengers who bought tickets from Manx2, which the report says was ‘portraying itself as an airline’ had no clue about the risks they were taking by flying in such a plane run by a freelance operator. Reading the report, it’s hard not to get the impression that the virtual airline business model of Manx2 was partly to blame for what happened.
As disruptive start-ups like Uber continue to grow and transform traditional services, such questions of risk and regulation are likely to become more important. In virtual models, managing the risks of linkages becomes as important as those of institutions. The providers of start-up capital may reap the upside in this new world. It’s important that they share the additional costs of regulating the downside.