Clearly in an ideal world this terrorist should have been arrested, but Israel/Palestine isn't an ideal world and prosecuting those who killed the terrorist is probably unwise and unjust. Arab terrorists often end up being killed at the end of attacks by Jews and how many of those killings were investigated to see if they were necessary. Also, this guy was IDF. The IDF hardly ever convicts any of its members of serious crimes against Arabs, so the passengers may well have thought if they'd let this guy be arrested he'd end up on some minor charge like negligent discharge of a weapon.
from the article: 'Government knew of Jewish terrorist's plan to open fire on Shfaram bus'