Aviation sector faces fight for recovery

Insurers and risk managers are likely to face renewed challenges as the global aviation sector looks to get back to the skies broker McGill and Partners has warned.

As the vaccine rollout start to see a rise in the number of flights the broker has warned there are still issues to be faced as the industry had never been in the position it currently finds itself.

McGill’s report added: “With more planes grounded than in the skies, 2020 was an unprecedented challenge for aviation industry. As 2021 unfolds the near-term outlook still appears bleak for many airlines.

“The combination of differing efforts by Governments to vaccinate their population, with the geographically varied return of passenger demand and aircraft to service, shows signs of a varied recovery that remains largely uncertain. In this release, McGill and Partners look at the impact Covid-19 has had on the aviation industry and discuss the long-term impact this will have on airlines and their customers.”

The broker has warned many established airlines find themselves in tough financial positions and now face the further challenges of new entrants who are free from any legacy issues.

McGill added the figures are stark:

  • In 2020 the industry reported losses of $118 billion with demand down 65.9% vs 2019
  • Nearly 17,000 airliners were idled at the peak downturn due to the COVID-19 pandemic.
  • In the US Trade group Airlines for America (A4A) estimates that nearly 20% of airline fleets, nearly 1,000 aircraft, were in long-term storage as of October 25, 2020. In Q4 2020 revenues continued to fall faster than cost with the cash burn continuing,
  • In addition, 43 commercial airlines failed or suspended operations in 2020 including larger carriers.
  • The International Air Transport Association warned that the industry is likely to continue to lose around $5-6billion per month in 2021 and passenger numbers are only likely to fully recover by 2024.

Joe Trotti, Head of Aviation and Aerospace at McGill and Partners explained: “2020 was certainly a difficult year for airlines and their insurers. And it’s not over yet as many airlines continue to exist in survival mode in 2021. This is despite recent news of increasing domestic passenger demand in some countries such as the US which might suggest a recovery is beginning to take place.  However, restrictions and closed borders in many countries are making timeframes for a full recovery unclear.

“Recently, we’ve seen many of the world’s biggest commercial airlines post huge losses and with travel restrictions still in place internationally it’s expected that these financial losses will continue in 2021. With the challenges faced by legacy carriers we are also seeing a disproportion emergence of start-up airlines worldwide taking advantage of the availability of both quality aircraft at attractive rates and qualified pilots and staff who are not currently working.

“From a market perspective many insurers were already grappling with the ongoing lack of profitability of the airline class as well as significant manufacturers grounding losses over the past several years including the Boeing MAX loss. Given the magnitude of the loss it also had an impact on the aviation reinsurance market which began to implement price increases to the direct insurers creating further pressure.”

Trotti warned the return to normality will not come without its tests.

“The restart of operations will also pose challenges to the airlines and insurers alike,” he added. “The system was not built to accommodate the unprecedented number of aircraft grounded. Airlines have worked hard to maintain their fleets in the various forms of storage. As they prepare to bring them back into service they are working hard to ensure that both their fleets are restored to airworthiness, and that crews are prepared to get back in the air.  Underwriters are taking a keen interest in understanding these plans to return to service.

“Despite challenges the market continues to provide solutions, with ample capacity available from insurers. While the market remains challenging, there are underwriters who understand the environment and are working with brokers to provide a tailored approach to address these challenges.

“Broker selection is critical to the success of a renewal as clients need to have confidence that their brokers experience, relationships, use of analytics and innovative approach are suitably dynamic to overcome these challenges to deliver the best solution that meet the individual needs and differentiates them from the crowd.”

The broker has warned many established airlines find themselves in tough financial positions and now face the further challenges of new entrants who are free from any legacy issues.