Airline industry insurance providers, after having been hit with airline insurance claims during past years, experienced a relatively calm 2011, with less insurance claims coming through the door.
By the end of July, the insurance industry paid out $471 million in claims to airline companies, which included claims filed for major and minor losses, versus $1.3 billion during the same period in 2010, according to a mid-2011 report from Aon Aviation, a risk management services, insurance, and reinsurance brokerage firm.
A report by Willis Group Holdings, a global insurance broker, suggests that by the end of the third quarter, losses were at $794 million, the lowest since 2006.
There were three major losses in 2011: An Asiana Airlines Boeing cargo aircraft, built in 2006 and valued at $122 million, crashed in South Korea at the end of July; an Egyptian Boeing aircraft, built in 1997 and valued at $60 million, caught fire while still at the airport; and a Caribbean Airlines Boeing passenger aircraft, built in 2007 and valued at $48 million, broke apart after landing.
Airline firm claims filed from January to September 2011 were 36 percent lower than those filed during the same period in 2010, without including claims filed for minor losses, and are 56 percent if claims filed for minor losses are included.
“After two years of very high claims, 2011 has so far been very positive from a claims point of view,” according to the September Aon Airline Insurance market news report.
Airline insurance brokers include a caveat in all their publications, stating that a calm period could be overshadowed by future major losses and thus do not recommend that airlines reduce or curtail their insurance coverage.
Aviation News Ltd., a daily newsletter regarding the latest aviation industry information, quoted Aon Aviation in July: “The airline industry still represents a considerable risk, however, a single loss could mean that the claims statistics for 2011 overtake the long term average. Equally, as we have seen in many other years, a string of incidents at the mid-point of the year can change the position significantly.”
Insurance Coverage Based on Past History
Given the low number of 2011 airline industry claims filed, “pressure on the price of insurance is likely to remain fairly even for the rest of the year, assuming that the level of losses remains below the long term average,” suggests the Aon report.
By September, the airline insurance sector experienced a 22 percent increase in insurance coverage, mainly because two airlines that already bought insurance coverage are adding to their fleets significantly.
Between 60 percent and 80 percent of the airlines will have to renew their insurance coverage before the end of 2011, although no information has come out of the airline industry concerning possible cutbacks or increases in their fleets, meaning buying or retiring aircraft.
Three airline companies have placed insurance policy renewals with insurance companies with two doubling their airline fleet and another increasing its fleet by about 40 percent.
Insurance premiums will remain relatively stable and insurance underwriters don’t predict major changes in the cost of insurance coverage, as airline insurance premiums are closely matched to claims filed by individual airlines.
“The reality is that the price of airline insurance is currently very closely aligned to both exposure and particularly claims,” said the Aon report.
Another caveat is that individual airlines may experience a price adjustment, which is mostly upward, based on the individual company’s prior years’ claims filing record, unless they can prove major improvements and have addressed the causes that led to prior years’ claims.
“Airlines that have suffered losses in the last couple of years will still be seeing their cost of insurance rise unless they take proactive steps to reduce the risk that they represent,” suggests Aon.
Airline Industry Economic Outlook
“For 2011, net profit is expected to decline to US$9.1 billion as higher fuel prices and the European debt crisis adversely impact the industry’s bottom-line,” according to a 2011 Deutsche Bank analysis of the global airline sector.
The airline industry experienced acceleration of costs between 2000 and 2010, with fuel per gallon increasing by 170 percent, wages and associated costs increasing by 35 percent, and airport landing fees per ton landed increasing by 70 percent, according to an Air Transport Association (ATA) mid-September economic evaluation.
Because of competitive forces, air travel passenger revenues have not kept pace with U.S. inflation, having increased by only 6.7 percent between 2000 and 2010, when compared to gasoline, food, and college tuition, which increased on the average of about 94.6 percent during those years.
Operating expenses were $9.7 billion, while operating revenue was $1.3 billion less at $8.4 billion, during the last 10 years.
As of September, domestic flights in the U.S decreased by 10.5 percent since 2007. Although international flights increased by 5.6 percent during the same period, they did not increase nearly enough to make up for revenue lost from decreased domestic flights.
While U.S. airlines are struggling, U.S. airports are considered in satisfactory financial condition and received investment grade ratings from Standard and Poors (S&P).
Overall, aviation helps drive the U.S. economy and accounts for between 4.9 and 5.2 percent of the U.S. Gross Domestic Product (GDP).
The GDP is the total market value of all goods and services produced in a country during a given time period. In 2010, the GDP in the U.S. amounted to $14.7 trillion, as reported by the U.S. Bureau of Economic Analysis. At the end of June, the current dollar GDP had increased to $15 trillion, an increase of 3.5 percent over the first quarter of 2011.
Airline economic activities contribute between $1.2 and $1.3 trillion a year to the U.S. GDP. At the same time, airline direct employment provided more than 10 million jobs in the U.S.
“Every day, the airline industry propels the economic takeoff of our nation. It is the great enabler, knitting together all corners of the country, facilitating the movement of people and goods that is the backbone of economic growth,” said the ATA economic evaluation.
Time to Update Airline Ratings
In early 2011, Deutsche Bank suggested in an airline industry analysis that airlines should be rated again if the past year’s airline mergers and structural changes resulted “in a more profitable, viable, and less volatile industry (i.e. higher returns), then share prices should be valued at higher multiples due to reduced equity risk premium.”
Only Qantas Airways Ltd., an Australian airline based in Sydney, Australia, enjoys an investment grade rating from S&P—BBB, one of the lowest investment grade ratings. The German airline Lufthansa AG and the U.S.-based Southwest Airlines Co. are just a smidgen below investment grade (BBB-).
An investment grade of BBB by S&P, Fitch’s Investors Service, and Moody’s Investors Service means that the particular rated firm will fulfill its payment obligations, and any bonds floated by said firms are of the risk quality a bank would consider a reasonable investment. Anything below investment grade is considered a Junk Bond.
Airline Traffic Trending Up
Although by only a small amount, domestic and international airline traffic increased by 1.6 percent to 66.1 million in June 2011 when compared to June 2010. During the first two quarters in 2011, 2.3 percent more passengers traveled by airplane versus the same period in 2010.
Among U.S. airlines, most passengers took Delta Air Lines Inc., followed by Southwest Airlines Co. and American Airlines Inc. Among the 10 top U.S. airlines, Alaska Airlines was in 10th position, with Skywest Airlines Inc. in ninth and AirTran Airways in eighth position.
“During the first six months of 2011, Delta carried more total system and Southwest carried more domestic passengers than any other U.S. airline. … American carried the most international passengers,” according a Sept. 15 U.S. Bureau of Transportation Statistics (BTS) press release.
According to the latest figures available from BTS, freight shipments by airplane increased in July by 3.8 percent over the same month in 2010 and by 1.6 percent from the same month in 2008.
“Long-term trend: Freight shipments are down 2.3 percent in the five years from July 2006. Shipments are up 10.0 percent in the 10 years from July 2001 despite recent declines,” according to a Sept. 14 press release by BTS.