By JONATHAN BERR, who has written for national media outlets for more than 15 years.
When it comes to insurance, there is nothing but blue skies ahead for the nation's airlines.
According to brokers, it's a buyer's market. Underwriters are willing to cut carriers plenty of slack to win their business because supply outstrips demand and because 2011 marked the safest year air travel on record, according to Ascend, a provider of data, analytics and advisory services to aerospace investors.
American Airlines?parent company AMR Corp.'s recent bankruptcy filing is not affecting rates much. Neither are plans by carriers to update their fleets.
Rates for insurers are depressed and will remain that way for a while, barring any catastrophic losses, which can cost airlines hundreds of millions of dollars.
The total value of airline industry premiums, which topped $4 billion in the wake of the Sept. 11 terrorist attacks, were around $2 billion last year and will probably be down by 5 percent to 6 percent this year, said Stephen E. Alexandris, senior vice president and U.S. airlines practice leader at Aon.
"There is a lot of overcapacity in the market," Alexandris said. "It's definitely a client's market."
William Willer, area president of Gallagher Aviation, agrees. "Raw rates" were down 5 percent to 12 percent in 2011 from the previous year, he said.
"I don't see anything on the horizon saying that would change," said Willer. "The underwriters just don't have the horsepower to force rates up at the moment.
This is a bright spot for an industry which has been under stress since the start of the economic downturn when high fuel prices forced many carriers to charge fees for handling bags or charge for in-flight food.
This year will not be easy either. The International Air Transport Association is predicting that worldwide industry profit will fall 49 percent this year because of high fuel prices and the debt crisis in Europe. Nonetheless, insurance executives are not concerned -- a striking change from years past.
"[Two decades ago], the insurance market viewed it [a bankruptcy] as a catastrophic event ? The first two or three cases it was just as if the sky is falling." said Willer. "[Now] they are a lot more comfortable with a Chapter 11 situation."
That's because there have been plenty of them in the years following Sept. 11. Delta, Northwest and United Airlines were all in bankruptcy protection in 2005. U.S. Airways left Chapter 11 in September of that year through a merger with America West Holdings Corp.
Airlines in bankruptcy continue to pay insurance companies. If an airline tried to skip payments on insurance premiums, a bankruptcy judge would convert the Chapter 11 filing into a Chapter 7 proceeding, which would involve the liquidation of the company, according to Willer.
Insurers are most concerned if bankrupt companies are making cuts that would affect safety, said Alexandris. It's imperative that airlines be "very open in their communications" with insurers to assure them that such a thing will not happen.
Airlines will be busy upgrading their fleets in the coming years.
Boeing hopes to introduce 33,500 new aircraft over the next 20 years, according to an internal report. The Chicago-based aerospace company is marketing its ultramodern and fuel efficient 787 Dreamliner, which it began selling last year after years of delay. The insurance market is in such a state of overcapacity that carriers that buy the Dreamliner or other new aircraft may not see their rates increase.
"The underwriters will be willing to absorb a certain amount of growth" in the value of the assets being insured and in the number of passengers being served, said Alexandris, "either at the same or slightly reduced rates."
January 17, 2012
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