By DAN REYNOLDS, senior editor of Risk & Insurance®
According to an annual aviation market report issued by London-based Aon Aviation & Aerospace, carriers that underwrote airline risks in 2007 and 2008 lost money and will have no choice but to continue to increase premiums in 2009.
Average hull and liability premiums already rose 7 percent in 2008, according to Aon's report. Combine that with an estimated 11 percent decrease in airline premiums in 2007 and you wind up with a not very pretty swing of 18 percent. The 2008 results are the first time since 2001 that lead hull and liability premium rose, according to the study's authors.
And risk managers for airlines can expect rates to rise even more sharply in 2009. According to the Aon study, the market will need to harden by an additional $1.84 million, or 15 percent, if those that provide capital to the market are going to at least reach the break-even point on their investment.
The report, which was shepherded by Simon Knechtli, the Aviation and Aerospace Practice leader for Aon Global U.K., concludes that insurance carriers that underwrote airlines in 2007 and 2008 suffered an estimated loss for those years of some $1 billion.
This contrasts sharply with the years 2004 through 2006, in which aviation underwriters saw underwriting profits of approximately $1.64 billion.
"Despite the harder market conditions, 2008 is likely to have been a second unprofitable year for the airline insurance markets," the authors wrote.
"It seems likely that 2009 will build on this trend, with underwriters under significant pressure from capital providers to improve returns," they continued.
THE NITTY-GRITTY NUMBERS
To arrive at their numbers, the Aon study group used metrics that estimate the average cost of reinsurance to aviation underwriters at 17 percent of net income and fixed costs at 10 percent of net premium.
Using 2008's numbers as an example, the study estimated that total lead hub and liability premium for 2008 for the airlines included in the study was around $1.6 billion. Losses for that group were estimated to be around $1.45 billion. The cost of reinsurance for the group was estimated to be $272 million, and fixed costs were estimated at $160 million.
The aviation underwriter's losses in 2008, following the above mathematics, were estimated to be around $284 million. Losses in 2007 were estimated to be even greater, at $838 million.
HEAPING BAD ON BAD
If a 15 percent hull and liability premium hike becomes a reality in 2009, it is going to amplify troubles that are already wracking not only carriers but airplane manufacturers. A machinist's strike at Boeing led to delays in the release of that manufacturer's 787 Dreamliner with first deliveries now expected in the first quarter of 2010.
As recently as late 2007, aircraft manufacturers were saying that they were going to have to increase capacity to keep up with demand. Now airframe manufacturers are said to be offering financial considerations to airliners in an attempt to stimulate demand.
As everyone is aware, fuel prices have fallen recently, but 2008's high fuel prices took their toll on airlines. The bankruptcies of Aloha Airlines, EOS Airlines, Gemini Air Cargo and Skybus Airlines, in addition to numerous smaller companies, were all attributed to 2008's high fuel costs, according to the Aon study authors.
March 20, 2009
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