Turbulent Tides - COVID-19's Aviation Impact
In discussion recently with Reuter’s Jamie Freed we revisited an issue we explored in October 2018. At that time our main concern was the impact of a rising sea level on global airport operators. There was a significant investment in measures to; raise runways, enhance seawalls and improve upon airport drainage systems in order to mitigate the risk of flood. This was soon after Japan’s Kansai International Airport’s defences had been breached by Typhoon Jebi. In that instance, runways were flooded and it was 17 days before the airport was able to re-establish operations, which came at considerable cost to the local economy. In the days that followed, aircraft damage claims were assessed and as it does so often, the aviation insurance market stepped up, both domestically and internationally to ensure the financial loss was met and operators were compensated accordingly. While damage to aircraft can be quantified, calculating the impact on the local economy is more complex but we know during that time it was high.
Aon Reinsurance Solution’s Impact Forecasting analysis found 2010-2019 to be “The Globe’s Costliest Decade” in modern record for global natural disasters on both a nominal and inflation-adjusted basis. Total direct economic damage and losses tallied USD2.98 trillion. This was USD1.1 trillion higher than the previous decade (2000-2009); USD1.8 trillion. The Asia-Pacific region accounted for USD1.3 trillion (44%) of the total.
Working towards a "New Better"
Fast forward to 2020 and the current challenges raised by the COVID-19 pandemic are widespread, impacting us unlike anything many of us have experienced in our lifetime and have found their way into all levels of society on a global scale. The economic impact is ongoing, still being assessed and it is difficult to predict outcomes next week let alone year end. At Aon, we know a return to ‘normal’ is unlikely anytime soon so we are working towards a ‘new better’ to borrow a phrase from our CEO and Chairman.
Nonetheless, our Reinsurance Solution’s Impact Forecasting analysis is as relevant today as it was when last Jamie (Freed) and I spoke and many of the concerns we had then, are now amplified by the recent pandemic and were revisited. It is estimated that at least 60% of the world’s airline fleet can currently be found grounded. As we enter into a period of the year usually frequented by powerful windstorms it is believed that in 2020 they will be above the average, therefore the potential for damage and the ensuing impact will likely be also. All the ingredients are there for the ‘Perfect Storm’, given a cursory look around the region’s airports and the high volume of assets parked within their boundaries presently.
Airport and indeed aircraft operators in the region are not unfamiliar to the precautions that need to be undertaken, however, the increased scale of this level of preparedness has never been so lofty. Usually, there is an element of notice afforded and operators are able to relocate aircraft out of harms way (often an insurable cost, albeit usually on an aggregated basis) to elsewhere in the region. However, with many airlines having to furlough staff and taking the decision to place many aircraft into active storage procedures that can vary from 7 to 30 days, the usual relocation process of parked aircraft is complicated somewhat.
Through Jamie’s enquiries it was welcome to learn that Hong Kong International Airport (HKIA), said it had around 150 planes parked and precautionary measures had already been carried out for most as part of typhoon season preparations. While, the airline fleet make up the majority of these aircraft, it is worth noting that HKIA is also home to a sizeable business jet community. These aircraft (aptly labelled ‘Time Machines’ considering the time saving they provide and the economic impact benefits they so often deliver) are invariably smaller and could be more vulnerable to a stronger windstorm. The Airport Authority advised that these measures include; fuelling up the planes to make them heavier, tying weights to nose gear, adding weight in the cargo hold, putting double chocks on aircraft wheels and (where possible) flying planes to other airports. Indeed Kansai International Airport have since raised the height of the seawall and enhanced waterproofing of their facilities. Welcome news to the insurance and reinsurance community.
“Things cannot get much worse than a 95% fall in traffic” Alexandre de Juniac, Director General, IATA
While the final global impact of the pandemic is far from clear presently, what is clear is that the entire aviation industry ecosystem, has never experienced the hardship that it currently does. IATA’s own economic assessments have progressively deteriorated on a monthly basis, with the industry hitting an all time low in April if not close to collapse. According to IATA’s Director General, Alexandre de Juniac in his recent briefing on 3rd June 2020, “Things cannot get much worse than a 95% fall in traffic” in reference to April’s data.
The aviation insurance market prior to 2020 had experienced seven unprofitable years
The aviation industry ecosystem is expansive; airlines, airports, OEM’s, MRO’s, FBO’s (do get in contact if you need assistance with the acronyms), ground handlers, refuellers (the energy sector is another story), retail outlets within airports, flying schools, rotor wing operators, charterers, recruitment and of course, insurers/reinsurers. Indeed; brokers, lawyers, loss adjusters also, are all impacted. The aviation insurance market prior to 2020 had experienced seven unprofitable years, resulting in insurance/reinsurance capacity withdrawing owing to a lack of return on investment and/or claims costs exceeding the premium pool. Aviation insurance (like all classes of insurance) is determined by supply and demand and in recent years with reducing capacity and unprofitability, premium rates have been escalating upwards. This was felt particularly in the final quarter of 2019 and to some degree in Q1 of 2020. With actual exposures now vastly decreased (presently) and likely to result in a reduced annual premium pool, it will be interesting to see how we all co-habit on a sustainable basis within the ‘new better’.