Return to Flight

Russell Group’s Suki Basi considers the flight path through the Covid-19 pandemic risk for global aviation.

The Covid-19 pandemic grounded two-thirds of global airline carrier fleets during the international lockdown which although started in mid-March, did not reach its peak until the end of April of this year.  The week in which the end of April fell created major difficulties for the aviation industry. Aircraft were stored in multiple locations, airlines sought payment relief from leasing companies and they in turn sought debt relief from financial institutions.  

Manufacturers, just like the airlines, are concerned about the viability of future order books. Many airlines are delaying their orders, exchanging them for cheaper aircraft or simply refusing to take the orders.  

Suppliers including Spirit Aero Systems and Teledyne Technologies (owned by Teledyne Controls) have all suffered significant revenue and job losses. The global aerospace supply chain was already under considerable pressure coming into the lockdown with many suppliers operating at razor-thin profit margins to keep their prices competitive.

Yet, despite the unlocking of travel for short-haul leisure flights, many figures in the industry are rightly concerned about what the industry will look like in the coming years.

“The ‘return-to-flight’ is going to be difficult to discern because economies are unlocking at different rates”

Many of these fears were summed up by Warren Buffett who said that “the airline business, and I may be wrong, and I hope I’m wrong, changed in a major way”. Buffett was speaking after Berkshire Hathaway sold all its stocks in Delta Air Lines, American Airlines, Southwest Airlines and United Airlines.

He added: “We took money out of the business basically even at a substantial loss. We will not fund a company… where we think that it is going to chew up money in the future.”

The pandemic is truly a ‘connected risk’ that has paralysed both the service and supply chains.  An increased perception of this kind of connected risk exposure has elevated the discussion to the c-suite of companies around what we should now consider remote risks to be and the volatility associated with such risks.

For the insurance industry, underwriting has until now, tended to focus on data describing airline fleet risk and past losses for such fleets, rather than event exposures per se. These typically have been used to calculate a client’s share of historic losses on an annual basis. 

The pandemic heavily disrupted the aviation industry. At the time of writing, although there has been some recovery, we still have around 50% of the global fleet grounded. As airlines begin the ‘return-to-flight’ journey, they have had to cut non-performing routes and retire aircraft earlier than planned, in order to stay profitable and meet volatile demand in difficult trading conditions. 

To add further pain to airlines, Wall Street has devalued aircraft, which has resulted in global fleet values reducing from $850 to $600bn.  Consequently, the ‘return-to-flight’ is going to be difficult to discern because economies are unlocking at different rates, as will passenger demand, meaning that there is a need for better business insight and data collection on a more frequent basis, as economies emerge from their enforced paralysis.

Underwriters will need to assess exposure more frequently than they have in the past, possibly moving to a more near-time exposure assessment, which I can see moving towards real-time assessment as data collection and analysis improves.